Obligations and Contracts

Introduction
Our Civil Code follows the Gaian order which is of three parts: Persons, Things and
Obligations.
The title of Book IV of the Civil Code is inaccurate. While the title is “Obligations and
Contracts”, it should only be “Obligations” since by including “Contracts” in the title, it is putting
the latter on equal footing with the former; but this is not correct since contracts is only one of
the sources of obligations.
Obligations is the most important, most abstract and most difficult of all of civil law. It is
the entirety of private law. If you don’t know obligations and contracts, you will never understand
commercial law.
The term “obligations” was derived from the words “ob” and “ligare” which means “to bind
or tie together”. “Ligare” is the source of several common words such as “ligament” and
“ligation”. (Ligation and Vasectomy have the same purpose: to tie and to cut off, the fallopian
tube, for the former, and the vas deferens, for the latter.)
“Obligatio” was initially a physical act of being chained (with shackles). Before, under
Roman law, if the debtor cannot pay, the creditor can bring him to the magistrate and the
magistrate can authorize the creditor to cuff the debtor and offer him for sale for 3 days, the
proceeds of which go to the creditor. The debtor then becomes a slave. If he is not bought, the
creditor can have him chopped into little pieces or have him sold to the barbarians.
As time passed, cruelty softened. By the time of Cicero, “ligatio” does not mean vinculum
of chains but vinculum juris (bond of law). Obligation became metaphorical and not literal.

I. Obligations
A. Definition of Obligation

Art. 1156. An obligation is a juridical necessity to give, to do or not to do.

 This provision is the soul of brevity. It was borrowed from Sanchez Roman. However,
many commentators say it is incomplete because the “obligation” is only from the point
of view of the debtor. To make it complete, it must cover the points of view of both the
debtor and creditor. Obligations are bilateral. It should include what can be required,
the remedy and the means by which the creditor can take to pursue the remedy.
 An obligation is a juridical relation whereby a person should engage or refrain from
engaging in a certain activity for the satisfaction of the private interest of another who,
in the case of non-fulfillment of such duty, may obtain from the patrimony of the
former through proper judicial proceedings the very prestation due or in default
thereof, the economic equivalent that it represents (Diaz Piero).
 An obligation is a juridical relation whereby a person (called a creditor) may demand
from another (called the debtor) the observance of a determinate conduct, and, in case
of breach, may obtain satisfaction from the assets of the latter (Arias Ramos).
B. Characteristics of Obligations
It represents an exclusively private interest
It creates ties which are by nature transitory
 Because obligations are extinguished. But the period is relative – could be seconds
(e.g., buying coke) and could be years (e.g., partnership, lease)
It involves the power to make the juridical tie defective in case of non-fulfillment
through satisfaction of the debtor’s property
 C. Trends in the Modern Law of Obligations
Progressive spiritualization of the law on obligations
 Before, obligations were very formal and ritualistic. If it was not in the proper form,
no obligations will assume. Now, the emphasis is in the meeting of the minds, and
not on the specific form. There is even no need that it be in writing, as a General
Rule, since consensuality is the prevailing doctrine. As long as it can be manifest –
and any kind of manifestation will do – it is sufficient.
 Roman Law was formalistic. Vestiges of Roman Law in the Civil Code can be seen in
the law governing donations, which is very formal. Even for sales, the requirement
of form is only for enforceability and not for validity. This is to make it conducive to
business and facilitate commercial transactions.
 This is still an ongoing trend: e-commerce added another option in form and proof
of contracts (but this is not applicable to all, usually only for business, not
applicable to wills).

The principle of autonomy of will of the parties is now subject to several

restrictions
 While the principle still operates, the exceptions (prohibited areas) have grown
larger and larger.
 Article 1306 gives the five restrictions: not contrary to law, morals, good customs,
public order, or public policy. Those which are against these five restrictions are
void, as can be seen in Article 14091*. However, now we have restrictions such as
social justice, environmental preservation, etc. This is because of the rising tide of
social discontent, hence social legislation came to be for the underprivileged.

The mitigation of the principle that the debtor should answer with all his
property
 Before, the debtor had to answer his debts with all his property. Now, certain
properties are exempt and these can be found in substantive law (i.e., home) and in
procedural law (i.e. support, etc.)
 Also, the debtor may not be imprisoned for non-payment of debts.
 The theory is to leave the debtor something to live decently by.
The weakening of the principle that liability arises from responsibility
 This is basically the principle in quasi-delicts. Now, in many cases, a person may be
held liable even if not responsible.
 For example, under workman’s compensation, the employer is liable to compensate
the employee even if the employer was not negligent.
The tendency of unity in modern legislation
 This can be manifest in the rise of a “global village”. This can be seen particularly in
trade laws.
 The tendency now is to make things uniform especially in commerce. Different
rules would impede commerce.

* 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;
D. Essential Requisites of Obligations
Active subject
 The active subject is called a creditor if the obligation is to give. The active subject
is called an obligee if the obligation is to do.
 The active subject is always a person whether juridical or natural.
2. Passive subject
 The passive subject is called a debtor if the obligation is to give. The passive
subject is called an obligor if the obligation is to do.
 The passive subject must be determinate or determinable
 How can both subjects be determinate or determinable?
a. Obligations where the subjects are completely and absolutely determined at the
birth of an obligation.
 If A and B are parties to a contract of sale and B doesn’t comply. A cannot sue
C.
a. Obligations where one subject is determined at the moment of the birth of the
obligation and the other subject is to be determined subsequently at some fixed
criterion, which criterion is fixed at the start of the obligation.
 B makes a promissory note payable to M or order. In this case, the creditor is
not necessarily M. The creditor is either M or to whomever the promissory note
is endorsed.
 At the time of the birth of the obligation, the payee is not yet known but the
obligation is valid.
b. Obligations in which subjects are determined in accordance with its relation to a
thing.
 The ‘real’ rights
 A mortgaged property to X pursuant to a loan. The mortgage attaches to the
property. If A sells the property to B, the annotation in the TCT will follow and B
becomes the mortgagor. If A doesn’t pay, X goes against B.
 The obligor in this case is whoever owns the land. X doesn’t care whether its A
or B.
3. Object of the obligation
 The object of the obligation always consists in an activity or conduct to be observed
by the debtor towards the creditor. This conduct to be observed is also known as
the prestation.
 In a contract of sale for example, the object of the obligation is the conduct of the
vendor in delivering the car. The car, on the other hand, is the object of the
prestation.
  Sometimes, the commentators confuse the car as the object of the obligation, but
this is wrong. The object is not the car but the prestation.
 According to Professor Balane, the distinction between the object of the obligation
and the object of the prestation has been blurred by Articles 1347-1349.
 Requisites of the Object of the Obligation
a. Licit (Legal)
 Example: Can’t validly enter into a contract for sexual services
b. Possible both in fact and in law
 Determined by the rules of experience
c. Determinate or determinable
 Can’t say that “I promise to sell you something”.
 Example of determinate: I promise to sell you my car.
 Example of determinable: I promise to sell you my riceland in Bicol in
November (will become determinate when time comes).
d. Must have pecuniary value
4. Vinculum juris
 The vinculum juris is the legal tie. It consists of the enforceability of the obligation.
If the debtor does not conform, the creditor has the power to go to court to make
the debtor perform – coercive.
 What makes an obligation is the power of the creditor to haul the debtor before the
court, summoning powers of the state if needed.
 Voluntariness goes into entering into an obligation. But once you enter, it becomes
involuntary.
5. Causa
 Castan adds a 5th essential requisite – causa. Also known as causa debendi or
causa obligationes. Causa means the why of an obligation.
 The object of an obligation answers the question “What is owed?” (Quid). The
causa answers the question “Why is it owed?” (Cur).
 For example, A will deliver a car to B since A expects to get P300,000. The
P300,000 is the causa of the obligation.
 6. Form
 Another commentators say that the 6th essential requisite is form. Form means
some manifestation of intent. In some cases the manifestation is specific such as in
the case of donations.
 According to Professor Balane that the general rule is that there is no specific form
for a valid obligation. However, if form means that there is some external
manifestation, fine, since we are not telepathic after all. However, there should still
be no specific form.

E. Sources of Obligations (Article 1157)

Art. 1157. Obligations arise from:

(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.

 There is really only one source of obligations – just law. Without the law saying that a
particular contract is enforceable, the contract will not give rise to an obligation.
However, “source” can be understood in both the ultimate and immediate sense. In the
ultimate sense, law is the solitary source. In the immediate sense, there are 5, those
enumerated in Article 1157. Law is therefore both an immediate and ultimate source.
Examples of law being an immediate source are payment of taxes and accession.
 Is this enumeration of the sources of obligation exclusive? The Supreme Court in the
case of Sagrada Orden vs. NACOCO seem to answer it in the affirmative. However, this
is only by implication or indication. The Court did not make an explicit statement that
it is.
 Many commentators including Professor Balane believe that the list is not exclusive.
They criticize the case because it is not a good way of enumerating. At present, there
is one more possible source of obligations – public offer.
 Example: In commercials, there is an offer to replace 30 sachets of Tide for one
Venetian-cut glass until the end of the year. There is no contract or quasi-contract.
But if before the end of the year, you present your Tide sachets, you can demand for
your glass. Public offer is in fact a source of obligation under the BGB (the German
Civil Code), Article 657 which provides that a person who by public notice announces a
reward in the performance of the act is liable even if such person did not act in view of
such reward.
 Although public officers are supplemented by DTI regulations, Professor Balane thinks
that public offer should be made part of the law since regulations easily change.
Law (Article 1158)

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.

 There is only 1 ultimate source of obligations – law. However, there are 5

proximate sources of obligations (Article 1157).

Contract (Article 1159)

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

 Contract is only 1 of the sources of obligations.

 This provision combines two concepts of Roman law – equity or good faith (ius
gentium) and strict compliance by the parties (ius chinile).
 A contract is a meeting of minds between 2 persons whereby one binds himself,
with respect to the other, to give something or to render some service (Article
1305)
 Contractual obligations have the force of law between the contracting parties and
should be complied with in good faith (Article 1159).
 The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy (Article 1306).
 Contracts are perfected by mere consent, and from that moment the parties are
bound not only to the fulfillment of what has been expressly stipulated but also to
all the consequences which, according to their nature, may be in keeping with good
faith, usage and law (Article 1315).
 In case of doubt, the interpretation consistent with good faith is followed (People’s
Car vs. Commando Security).
 Party cannot excuse themselves on the ground that it has become unprofitable.
Law will not protect you from your own bad judgment.

Quasi-contract (Article 1160)

Art. 1160. Obligations derived from quasi-contracts shall be subject to

the provisions of Chapter 1, Title XVII, of this Book.

Delict (Article 1161)

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.

 General Rule: If you commit a crime, you are liable both criminally and civilly.
 Exception: No private offended party (e.g. contempt, etc.)
 The Civil Code deals with the civil aspect (i.e. indemnification for loss of earning
capacity).

Quasi-delict (Article 1162)

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.

 Quasi-delict is a civil law term while tort is a common law term.

 Difference between Contractual Liability and Quasi-Delict
 In quasi-delict, the obligation arises only when there is a violation. Without
violation, there is no obligation. It is the breach itself which gives rise to the
obligation.
  In contracts, there is already an obligation which exists prior to or even without
a breach. The breach of the contract is immaterial to the legal obligation.
 Example: Contract of sale of watch. If both parties perform their obligation, the
contract is extinguished. There is no breach, but there is an obligation.
(Compare the above example with the one below)
Example: Driving recklessly, A hits a child. When did the obligation came to
being? When there was injury due to negligence. (Negligence per se does not
give rise to a quasi-delict unless there is injury.)
Breach and quasi-delict are inseparable. But contract and breach may be
separable.
 Question: Are contracts and quasi-delicts mutually exclusive?
Answer: No.
In Gutierrez vs. Gutierrez, there was a collision between a bus and a car and a
passenger of the bus was injured. It was proven that the driver of the car was a
minor and an incompetent driver. The passenger sued against them all. The
Supreme Court held that the bus driver, bus owner and the driver of the car
(through his father) are jointly and severally liable to the passenger. The liability of
the owner of the bus and the bus driver rests on that of a contract. On the other
hand, the father is responsible for the acts of his son and is therefore responsible
for the negligence of the minor. Here, it is clear that breach of contract and quasi-
delict are separate.
However, they can overlap as can be seen in the following example: Bus driver
drives recklessly and the bus hits a tree. A passenger is injured. The passenger
and sue the driver for quasi-delict (due to negligence) or for crime or the bus
company for breach of contract of carriage or for quasi-delict (negligence in the
selection and supervision).
The cause of action one chooses determines the:
Parties involved
Degree of proof
Defenses
One can tailor his suit depending on the cause of action he chooses.

F. Nature and Effect of Obligations

1. Kinds of Prestations
a. To give (Articles 1163-1166)

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.

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.

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.

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.

i. To give a determinate thing

 Primary Obligation: Giving what is supposed to be given.
 3 Accessory Obligations:
1. After constitution of the obligation and before delivery, to take care of it
with the proper diligence of a good father of the family (Article 1163)
 General Rule: Diligence of a good father of the family
 Exception: Law or stipulation requires different standard of care
 If through negligence, something causes the thing damage, the
debtor is liable for damages.
 This is not applicable to a generic thing.
2. To account and deliver to the creditor the fruits if the thing bears fruits
upon the time the obligation to deliver it arises (Article 1164).
 However, ownership is transferred only by delivery. Hence, creditor’s
right over the fruits is merely personal.
 Example: A sold B a mango plantation to be delivered on January 1.
Come January 1, A did not deliver. A instead sold the fruits to C, a
buyer in good faith. B sues A for specific performance. Court awards
the plantation to B. Does B have a right to the fruits? Yes, as against
A. No, as against C, because B’s right over the fruits is only
personal. B’s remedy is to go against A for the value of the fruits.
3. To deliver the accessions and accessories (Article 1166)
 Don’t take accession in the technical sense (or else, it might overlap
with ii). Understand it to mean things that go with the thing to be
delivered (i.e. radio of the car).
 Remedies Available to the Creditor
1. Specific performance – the debtor must perform it personally
2. Equivalent performance – damages
 Damages may be obtained exclusively or in addition to the 1st action.
 Rules regarding Improvement, Loss or Deterioration (Articles 1189, 1190,
1194 )

Art. 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 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.

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.

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.

1. Requisites
a. Obligation has a suspensive condition, a resolutory condition or term
b. The obligor is obligated to deliver a determinate thing
c. There is improvement, loss or deterioration before the fulfillment of
the condition or the period
d. The condition is fulfilled or the period arrives
2. Rules Proper
a. If the thing is lost without the fault of the debtor, the obligation is
extinguished
b. If the thing is lost through the fault of the debtor, he must pay
damages
 The thing is lost when it perishes, goes out of commerce or
disappears in such a way that its existence is unknown or cannot
be recovered.
c. If the thing deteriorates without the fault of the debtor, the creditor
must accept the thing in its impaired condition
d. If the thing deteriorates through the fault of the debtor, the creditor
may choose between
i. Resolution (Article 1189) plus damages
ii. Fulfillment of the obligation plus damages
 e. If the thing is improved by nature or by time, the
improvement shall inure to the benefit of the creditor
f. If the thing is improved at the expense of the debtor, the debtor shall the
same rights as a usufructuary
ii. To give a generic thing
 Remedies Available to the Creditor
1. Specific performance – the debtor must perform it personally
2. Substitute performance – done by someone else (perform at the expense
of the debtor)
3. Equivalent performance – damages
 Damages may be obtained exclusively or in addition to the 1st 2
actions.
c. To do (Article 1167)

Art. 1167. If a person obliged to do something fails to do it, the

same shall be executed at his cost.
This same rule shall be observed if he does it in contravention of the
tenor of the obligation. Furthermore, it may be decreed that what has been
poorly done be undone.

i. Only the obligor can do (personalisimo)

 Remedies Available to the Creditor
1. Equivalent performances – damages
ii. Anyone else can do it (not personalisimo)
 Remedies Available to the Creditor
1. Substitute performance – done by someone else (perform at the expense
of the debtor)
2. Equivalent performance – damages
 Damages may be obtained exclusively or in addition to the 1st 2
actions.
b. Not to do (Article 1168)

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

 This includes the obligation not to give.

 Remedies Available to the Creditor
i. Substitute performance - done by someone else (perform at the expense of
the debtor)
ii. Equivalent performance - damages
 Damages may be obtained exclusively or in addition to the 1st 2 actions.
  Summary of the rules regarding remedies available to the creditor in obligations to give,
to do and not to do.
Specific Equivalent Substitute
Obligation Performance Performance Performance
1. To give
Determinate thing √ √ ×
Determinable thing √ √ √
2. To do
Very personal × √ ×
Not very personal × √ √
3. Not to do × √ √

 Specific performance is the performance of the prestation itself.

 In obligations to do or not to do, specific performance is not available since it
will go against the constitutional prohibition against involuntary servitude.
 Equivalent performance is the payment of damages
 Substitute performance is when someone else performs or something else is
performed at the expense of the debtor.
2. Irregularity in Performance
a. Attributable to the Debtor (culpable)
 Article 1170 provides that 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. According to Professor Balane, the
phrase “ who in any manner contravene the tenor thereof” is a catch-all
provision. However, such is unnecessary. Nothing will escape fraud, negligence
or delay.
i. Fraud (Articles 1170, 1171)

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.

Art. 1171. Responsibility arising from fraud is demandable in all

obligations. Any waiver of an action for future fraud is void.

 The problem with fraud is the term. It is used in different meanings in the
Code.
 Fraud may be defined as the voluntary execution of a wrongful act, or willful
omission, knowing and intending the effects which naturally and necessarily
arise from such act or omission. Fraud is the deliberate and intentional
evasion of the normal fulfillment of the obligation. It is distinguished from
negligence by the presence of deliberate intent, which is lacking in the latter.
(Legaspi Oil vs. CA)
 Fraud under Article 1170 is more properly called as malice.
 Fraud under Article 1170 must not be confused with fraud under Article
1338 . Fraud under Article 1338 is more properly called as deceit.
  In Article 1338, fraud preexists the obligation, thus the obligation is
voidable. Deceit vitiates consent in contracts. Deceit is antecedent fraud.
The deceit occurs by using insidious words machinations. Without this deceit,
the other party would not have entered into the contract.
In Article 1171, there was already an obligation before the fraud exists.
Malice is subsequent fraud.
Example of fraud as deceit under Article 1338: A and B entered into a
contract of sale of a diamond necklace. However, the necklace was really
made of glass. Fraud here is deceit. There was vitiation of consent hence
the contract is voidable.
Example of fraud as malice under Article 1171. A and B entered into a
contract. B will deliver furniture made of narra but B delivered one made of
plywood. Fraud here is malice. It will not affect the validity of the contract.
 Effects of Fraud (Articles 1170, 1171)
1. Creditor may insist on proper substitute or specific performance (Article
1233 ); or
2. Rescission/Resolution (Article 1191 )
3. Damages in either case (Article 1170)
ii. Negligence
 Negligence is the absence of due diligence (Article 1173)

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.
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.

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.

 Like fraud, negligence results in improper performance. But it is

characterized by lack of care, unlike fraud which is characterized by malice.

 Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting
parties, the other is induced to enter into a contract which, without them, he would not have agreed to.
 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.
 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.
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.
 Lack of care means lack of due diligence or the care of a good father of the
family (bonus paterfamilias) under Article 1163.
 In English law, due diligence is called the diligence of a prudent
businessman, since they are more commerce-oriented.
 2 Types of Negligence
1. Simple
2. Gross
 The determination of due diligence is always relative. It will depend on
1. The nature of the obligation
2. Nature of the circumstances of
a. Person
b. Time
c. Place
 Example: The diligence required in shipping hinges is different from
the diligence required in shipping the Pieta de Michaelangelo. The
shipper must observe the diligence of a good father of the family in
both cases but the standard of care is different. It is much higher for
the Pieta.
 The diligence of a good father of the family is the imaginary standard.
 Effects of Negligence (Articles 1170, 1172)
1. Creditor may insist on proper substitute or specific performance (Article
1233); or
2. Rescission/Resolution (Article 1191)
3. Damages in either case (Article 1170)
iii. Delay (Mora)

Art. 1169. Those obliged to deliver or to do something incur in

delay from the time the obligee judicially or extrajudicially demands
from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in
order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it
appears that the designation of the time when the thing is to be
delivered or the service is to be rendered was a controlling
motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has
rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner with what
is incumbent upon him. From the moment one of the parties fulfills his
obligation, delay by the other begins.

 Delay has nothing to do with quality but only with punctuality.

 Delay is the non-fulfillment of the obligation with respect to time. In fraud
and negligence, the question is the quality even if performed on time. In
delay, even if the quality is excellent but the performance is not in due time,
the debtor is liable.
 Requisites of delay (SSS vs. Moonwalk)
 Obligation is demandable and liquidated
 Delay is through fault or negligence
 Creditor requires performance either judicially (through court action) or
extrajudicially (any communication by the creditor to debtor).
 In reciprocal obligations (obligations with a counterpart prestation) which
require simultaneous performance, demand is still needed.
 What is the form of such demand? Any communication of a party that he
is ready and willing to comply with his obligation. If after receipt of
demand and the other party does not comply with his obligation, he is in
delay.
 3 Kinds of Delay
1. Mora solvendi
 Delay in performance incurred by the debtor.
 Requisites:
a. The obligation is demandable and liquidated
b. Debtor delays performance either because of dolo or culpa
c. The creditor demands the performance either judicially or
extrajudicially
 General Rule: Demand is necessary. (mora solvendi ex persona).
Thus, no demand, no delay.
 Exceptions: (mora solvendi ex re) – Article 1169
a. When the obligation or the law expressly so declares
  Mere setting of due date is not enough. This does not
constitute automatic delay.
 There must be an express stipulation to the following effect:
“Non-performance on that day is delay without need of
demand.” (Dela Rosa vs. BPI)
b. When it appears from the nature and circumstances of the
obligation that time was a controlling motive for the establishment
of the contract.
 Example: The wedding gown has to be ready before the
wedding.
c. When demand would be useless, when obligor has rendered it
beyond his power to perform.
 Example: A sold the fruits of the mango plantation he already
sold to B to C. B need not make a demand on A to deliver the
fruits since demand would be useless.
 Effects of Mora Solvedi
a. When the obligation is to deliver a determinate thing, the risk is
placed on the part of the debtor (Article 1165 )
b. Damages
c. Rescission/ Resolution (Article 1191)
2. Mora accipiendi
 The creditor incurs in delay when debtor tenders payment or
performance, but the creditor refuses to accept it without just cause.
 Mora accipiendi is related to payment (consignation).

 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.
  Requisites:
a. An offer of performance by the debtor who has the required
capacity
b. The offer must be to comply with the prestation as it should be
performed
c. The creditor refuses the performance without just cause.
 Effects of Mora Accipiendi:
a. Responsibility of debtor for the thing is limited to fraud and gross
negligence
b. Debtor is exempted from risk of loss of thing w/c automatically
pass to creditor
c. Expenses incurred by debtor for preservation of thing after the
delay shall be chargeable to creditor.
d. If the obligation has interest, debtor shall not have obligation to
pay the same from the time of the delay
e. Creditor becomes liable for damages
f. Debtor may relieve himself by consignation of the thing
3. Compensatio morae
 Delay on both sides in reciprocal obligations, cancel each other out.
b. Not Attributable to the Debtor (non-culpable)
 Fortuitous event

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.

 Also governed by Article 1221  but is called ‘loss’ there, a cause fo

extinguishment of obligation.
 Also called caso fortuioto, force marjeure, act of God.
 Requisites (Nakpil vs. CA)
1. The cause of the unforeseen and unexpected occurrence, or the failure to
comply with his obligations, must be independent of the human will
2. It must be impossible to foresee the event which constitute the caso
fortuito, 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

 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.
 4. The obligor must be free from any participation in the aggravation of the
injury resulting to the creditor
 General Rule: When a debtor is unable to fulfill his obligation because of a
fortuitous event or force majeure, he cannot be held liable for damages or
non-performance.
 Exceptions:
1. When the law so provides (i.e. Article 1165, ¶2 )
2. When there is express stipulation
 Fortuitous event yields to contrary stipulation.
3. When the nature of the obligation requires the assumption of risk (i.e.
insurance contracts)
3. Other Provisions

Art. 1175. Usurious transactions shall be governed by special laws.

 Article 1175 is dead letter law because of the lifting of the ceiling on interest rates.
Thus, usury has been decriminalized, but the decriminalization cannot be given
retroactive effect (with respect to the civil aspect).
 Some decisions have struck down high interests, not because they were usurious
but because such rates were unconscionable.
 Correlate Article 1175 with Articles 1957, 1413 and 1961 .

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.

 2 Presumptions regarding:
a. Interest bearing debt
 Presumption that interest has been paid if the principal has been received
without reservation regarding interest,
b. Debt payable in installments
 Presumption that earlier installments have been paid if the later installment
has been received without reservation regarding the previous installments.
 These are only rebuttable presumptions, you can prove through other evidence.
You can prove mistake.

 Article 1165, ¶2. 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.
 Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent
the laws against usury shall be void. The borrower may recover in accordance with the laws on usury.
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. 1961. Usurious contracts shall be governed by the Usury Law and other special laws, so
far as they are not inconsistent with this Code.
 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.

 Enforcement of Creditor’s Remedies

a. Levy and execution of the debtor’s non-exempt properties (Articles 1177, 2236
)
b. Accion subrogatoria
 Subrogatory action premised on the theory that “the debtor of my debtor is
my debtor.”
 Requisites:
Creditor has a right of credit against the debtor.
Credit is due and demandable.
Failure of debtor to collect his own credit from a
third person either through malice or negligence.
Insufficiency of assets of the debtor to satisfy
the creditor’s credit
Right (of account) is not intuitu personae
c. Accion pauliana (Articles 1380-1389)
 Right of creditors to rescind alienations by debtor which are prejudicial to
them to the extent of the prejudice.
 Example: A donates land to C but he owes B. A has no other property. B
can rescind the donation to C. The donation is rescissible to the extent of
the debt.
 Requisites:
There is a credit in favor of the plaintiff
The debtor has performed an act subsequent to
the contract, giving advantage to other persons.
The creditor is prejudiced by the debtor’s act
which are in favor of third parties and rescission will benefit the creditor.
The creditor has no other legal remedy.
The debtor’s acts are fraudulent.
d. Accion directa
 A direct (not subrogatory) action by the creditor against his debtor’s debtor,
a remedy which gives the creditor the prerogative to act in his own name,
such as the actions of the lessor against the sublessee (Article 1652 ),
the laborer of an independent contractor against the owner (Article 172911

 Art. 2236. The debtor is liable with all his property, present and future, for the fulfillment of his
obligations, subject to the exemptions provided by law.
 Art. 1652. The sublessee is subsidiarily liable to the lessor for any rent due from the lessee.
However, the sublessee shall not be responsible beyond the amount of rent due from him, in accordance with
the terms of the sublease, at the time of the extra-judicial demand by the lessor.
Payments of rent in advance by the sublessee shall be deemed not to have been made, so far
as the lessor's claim is concerned, unless said payments were effected in virtue of the custom of the place.
 *), the principal against the subagent (Article 1893 ), and the vendor-a-
retro against the transferee of the vendee (Article 1608 ).
 This is an exception to the relativity of contracts.
 Example 1:

There are two separate contracts here: The contract of lease between A and
B and the contract of sub-lease between B and C. C owes B P7000. B owes
A P5000.
Ordinarily, A cannot sue C since there is no relationship between them, but
in Article 1652, A can sue C for P5000.
 Example 2:

Again, there are two separate contracts here: The contract for a piece of
work between A and B and the contract of labor between B and C. A owes B
P10,000 which is not fully paid yet. B owes C P5000 for unpaid wages. C
can go after A directly for P5000.

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.

 Rights are transmissible unless the rights are personal.

G. Different Kinds of Obligations
1. According to Demandability (Articles 1179-1192)

Art. 1179. Every obligation whose performance does not depend upon a
future or uncertain event, or upon a past event unknown to the parties, is
demandable at once.
Every obligation which contains a resolutory condition shall also be
demandable, without prejudice to the effects of the happening of the event.

Art. 1180. When the debtor binds himself to pay when his means

* Art. 1729. Those who put their labor upon or furnish materials for a piece of work undertaken by
the contractor have an action against the owner up to the amount owing from the latter to the contractor at
the time the claim is made. However, the following shall not prejudice the laborers, employees and furnishers
of materials:
(1) Payments made by the owner to the contractor before they are due;
(2) Renunciation by the contractor of any amount due him from the owner.
This article is subject to the provisions of special laws.
 Art. 1893. In the cases mentioned in Nos. 1 and 2 of the preceding article, the principal may
furthermore bring an action against the substitute with respect to the obligations which the latter has
contracted under the substitution.
 Art. 1608. The vendor may bring his action against every possessor whose right is derived from the
vendee, even if in the second contract no mention should have been made of the right to repurchase,
without prejudice to the provisions of the Mortgage Law and the Land Registration Law with respect to
third persons.
permit him to do so, the obligation shall be deemed to be one with a period,
subject to the provisions of article 1197.

Art. 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.

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

Art. 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.

Art. 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.

Art. 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.

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

Art. 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.

Art. 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.

Art. 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 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.

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.

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.
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.

Art. 1192. In case both parties have committed a breach of the

obligation, the liability of the first infractor shall be equitably tempered by the
courts. If it cannot be determined which of the parties first violated the
contract, the same shall be deemed extinguished, and each shall bear his own
damages.

a. Pure
 A pure obligation is one which has neither a condition nor a term attached to it.
It is one which is subject to no contingency.
 A pure obligation is demandable at once (Article 1179).
b. Conditional
 A condition is a future and uncertain event.
 All conditions are future.
 Article 1179 mentions the term “past event unknown to the parties”. This has
been criticized by many commentators. This is a contradiction in terms. The
condition in a past even unknown to the parties is knowledge by the parties of
the past event.
 In conditional obligation, the happening of the condition determines its birth or
death. In term, the happening of the term determines its demandability.
 Types of Conditions
i. 1. Suspensive
 The fulfillment of a suspensive condition results in the acquisition of
rights arising out of the obligation.
 The condition that some event happen at a determinate time shall
extinguish the obligation as soon as the time expires or if it has
become indubitable that the event will not take place (Article 1184)
 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 (Article 1185).
 The moment the suspensive condition happens, the obligation
becomes effective and enforceable. However, the effects of the
obligation retroact to the moment when such obligation was
constituted or created. By the principle of retroactivity, therefore, a
fiction is created whereby the binding tie of the conditional obligation
is produced from the time of its perfection, and not from the
happening of the condition (Article 1187)
 The law does not require the delivery or payment of the fruits or
interests accruing before the happening of the suspensive condition.
The right to the fruits of the thing is not within the principle of
retroactivity of conditional obligations (Article 1187)
 If the obligation imposes reciprocal prestations, fruits and interest are
deemed mutually compensated.
Example: I promise to sell my mango plantation at P5000/hectare if
you pass the bar examination.
I do not have to give you the fruits from the time of the agreement to
the release of the bar exams.
 If the obligation is unilateral, debtor appropriates the fruits.
 In obligations to do and not to do, the courts shall use sound
discretion to determine the retroactive effect of the fulfillment of the
condition (Article 1187)
 The creditor may, before the fulfillment of the condition, bring the
appropriate actions for the preservation of his right (Article 1188, 1st
¶). JBL Reyes criticizes the use of the word “bring”. The 1st ¶ of
Article 1188 does not limit itself to judicial actions. Thus, the word
“take” is better.
 The debtor who paid before the happening of the condition may
recover only when he paid by mistake and provided the action to
recover is brought before the condition (Article 1188).
 2. Resolutory
 The fulfillment of the resolutory condition results in the
extinguishments of rights arising out of the obligation.
 If the resolutory condition is fulfilled, the obligation is treated as if it
did not exist. Thus, each party is bound to return to the other
whatever he has received, so that they may be returned to their
original condition before the creation of the obligation (Article 1190).
 Resolution (Article 1191) is found on the conditional obligations
because if there is a breach, the breach is a resolutory condition
which extinguishes the obligation.
 Article 1191 uses the term “rescission”. The better term is
“resolution”. The term rescission is also found in Article 1381 ,
rescissible contracts. Resolution is different from rescission.
Resolution is based on the non-fulfillment of the obligation.
Rescission is based on economic prejudice. Furthermore, the
character of resolution is principal and retaliatory while the character
of rescission is subsidiary. This means that in resolution there is no
need to show that there is no other remedy. In rescission, the
plaintiff must show that there is no other recourse.
 The right of resolution applies to reciprocal obligations.
 A reciprocal obligation has 2 elements
1. 2 prestations arising from the same source
2. Each prestation is designed to be the counterpart of the other
 An example of a reciprocal obligation is a contract of sale.
 Summary of Rulings on Resolution
1. The right to resolve is in inherent in reciprocal obligations.
2. The breach of the obligation must be substantial. Proof of
substantial breach is a prerequisite for resolution.
3. The right of resolution can be exercised extrajudicially and will
take effect upon communication to the defaulting party. This
notice of resolution is necessary.
4. The exercise of this right can be the subject of judicial review.
5. Upon resolution, there must be mutual restitution of the object
and its fruits
 The parties are returned to their original situation – status quo
ante.
6. If the aggrieved party has not performed the prestation and
resolves extrajudicially, then all the aggrieved party has to do is to

 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.
 refuse to perform his prestation.
7. If the aggrieved party has performed the prestation, the
aggrieved party can demand recovery. If the defaulting party
refuses to return it, the aggrieved party must go to court in order
to recover.
 In Ilingan vs.CA (September 26, 2001) case, there was an obiter
dictum that the operative act that resolves a contract is the decree of
court and the right should be exercised judicially. Professor Balane
says this is wrong. However, the ratio of the case said that the
communication must be a notarial notice.
ii. 1. Potestative
 In a potestative condition, the fulfillment of the condition depends
upon the will of a party to the obligation.
 If the condition depends upon the will of the creditor, then the
obligation is valid. In this case, there is a vinculum juris. The
creditor can compel the debtor to perform the obligation.
Example: I will give you my pomelo plantation if you establish
permanent residence in Davao.
This is a suspensive condition dependent on the sole will of the
creditor. It becomes pure and demandable at once.
 Article 1182 prohibits a suspensive potestative condition dependent
on the will of the debtor. The entire obligation is void.
Example: I will sell you my car if I want to.
Why does it annul the entire obligation?
Because there is no juridical tie. Remember, an obligation is one
which has to be performed regardless of the will of the debtor. There
is no element of compulsion. In the example above, the creditor can
never compel, can never have a cause of action.
 In reciprocal obligations, the law only talks about the first prestation,
the reciprocal prestation is not taken into consideration.
2. Casual
 In a casual condition, the fulfillment of the condition depends upon
chance and/or upon the will of a 3rd person and not on the will of a
party.
 Example: I will give you my house if the Philippines renounces its
foreign debt in 5 years. (Dependent solely on the will of a third
person or on chance).
 3. Mixed
 In a mixed condition, the fulfillment of the condition depends partly
upon the will of a party to the obligation and partly upon chance
and/or the will of a 3rd person.
 When the condition depends not only upon the will of the debtor, but
also upon chance or will of the others, the obligation is valid.
 Example: I will give you my house if you marry him within 3 years.
(The condition here is a mixed condition. In this case, the condition
of marriage depends partly on the creditor, a party to the obligation,
and partly on a 3rd person.)
 Doctrine of Constructive Compliance
 The condition shall be deemed fulfilled when the obligor voluntarily
prevents its fulfillment (Article 1186).
 The principle underlying constructive fulfillment of conditions is that a
party to a contract may not be excused from performing his promise
by the non-occurrence of an event which he himself prevented.
 Requisites
Intent of the debtor to prevent fulfillment of the obligation
 Where the act of the debtor, however, although voluntary, did
not have for its purpose the prevention of the fulfillment of the
condition, it will not fall under the doctrine of constructive
compliance.
Actual prevention of compliance
 The doctrine of constructive compliance applies to potestative
and mixed conditions.
iii. 1. Possible
 A condition is possible when it is capable of realization according to
nature, law, public policy or good customs.
2. Impossible
 A condition is impossible when it is not capable of realization
according to nature, law, public policy or good customs.
 The effect of an impossible condition is to annul the obligation (Article
1183). The effect of an impossible condition regarding donations and
succession is different. In donations and succession, an impossible
condition is simply disregarded. The distinction can be explained by
the fact that Article 1183 refers to onerous obligation whereas
donations and succession are gratuitous.
 However, if the obligation is divisible and that part of the obligation is
not unaffected by the impossible condition, then the obligation is valid
(Article 1183).
 Justice Paras distinguishes as follows:
1. Positive condition to do something impossible
 Void condition and obligation
2. Negative condition not to do something impossible
 Disregard the condition, the obligation is valid
3. Negative condition not to do something illegal
  Valid condition and obligation
1. Positive
 A condition is positive when the condition involves the performance of
an act.
2. Negative
 A condition is negative when the condition involves the non-
performance of an act.
v. 1. Divisible
 A condition is divisible when the condition is susceptible of partial
realization.
2. Indivisible
 A condition is indivisible when the condition is not susceptible of
partial realization.
1. Conjunctive
 A condition is conjunctive when there are several conditions, all of
which must be realized.
2. Alternative
 A condition is alternative when there are several conditions, only one
of which must be realized.
vii. 1. Express
 A condition is express when the condition is stated expressly.
2. Implied
 A condition is implied when the condition is tacit.
c. Term (Articles 1193-1198)

Art. 1193. Obligations for whose fulfillment a day certain has been
fixed, shall be demandable only when that day comes.
Obligations with a resolutory period take effect at once, but
terminate upon arrival of the day certain.
A day certain is understood to be that which must necessarily come,
although it may not be known when.
If the uncertainty consists in whether the day will come or not, the
obligation is conditional, and it shall be regulated by the rules of the
preceding Section.

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.

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.

Art. 1196. Whenever in an obligation a period is designated, it is

presumed to have been established for the benefit of both the creditor and
the debtor, unless from the tenor of the same or other circumstances it
should appear that the period has been established in favor of one or of the
other.

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.

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.

 A term is a length of time which, exerting an influence on an obligation as a

consequence of juridical acts, suspends its demandability or determines its
extinguishment.
 A term is a future and certain event (i.e. death)
 When the debtor binds himself to pay when his means permit him to do so, the
obligation is one with a term (Article 1180). Although Article 1180 looks like a
condition dependent on the sole will of the debtor, the law treats it as a term.
 If prepayment is made without the debtor being aware that the period had not
yet arrived, then the thing and the fruits can be recovered (Article 1195). If
prepayment is made and the debtor was aware that the period had not yet
arrived, then the debtor waives the benefit of the term.
 An obligation was entered on May 1, 2002 between A and B. The obligation
is to be performed on October 1, 2002. A delivers on September 1, 2002 by
mistake to B. A discovers his mistake and tells B to return the object and
the fruits delivered.
Article 1195 does not answer who is entitled to the fruits which have been
produced in the meantime (May 1, 2002 to October 1, 2002).
According to the Spanish Code, the debtor (A) can only fruits.
There are 2 views:
i. The debtor is entitled to the fruits produced in the meantime (Tolentino)
 This is because delivery is not required until October 1.
ii. The creditor is entitled to the fruits since the obligation is demandable
only when the period arrives
  This is because the obligation is already existing although it is not yet
demandable.
 Professor Balane believes that the fruits belong to the debtor. Why would
Article 1195 allow the debtor to recover the fruits if he should still give
them back after the term comes.
 Instances when the Fruits Cannot be Recovered
i. When the obligation is reciprocal and there has been prepayment of both
sides
ii. When the obligation is a loan and the debtor is bound to pay interest
iii. When the period is exclusively for the creditor’s benefit
iv. When the debtor is aware of the period and pays anyway – waiver
 The presumption is that the period is for the benefit of both the debtor and the
creditor (Article 1196). The effect of this presumption is that the creditor cannot
demand payment before the period arrives nor can the debtor demand the
creditor to accept payment before the period arrives.
Example: A issues a promissory note to B demandable on October 15. A
cannot insist on prepayment nor can B insist that he be paid on September.
 If the period is for the benefit of the creditor only, the creditor can demand
performance at any time, but the debtor cannot compel him to accept payment
before the period expires.
 If the period is for the benefit of the debtor only, the debtor can he may oppose
a premature demand for payment, but may validly pay at any time before the
period expires.
 When the obligation is worded such that payment it to be made “within 6
months”, the period is for the benefit of the debtor.
 When the obligation is worded such that payment is to be made “on or
before”, the period is for the benefit of the debtor.
 The debtor shall lose every right to make use of the period:
i. When after the obligation has been contracted, the debtor becomes insolvent
unless he gives a guaranty or security for the debt (Article 1198 (1))
 The insolvency here need not be judicial. It can be actual insolvency.
ii. When he does not furnish to the creditor the guaranties or securities which
he has promised (Article 1198 (2))
iii. When by his own acts he has impaired the said guaranties or securities
after their establishment, and when through a fortuitous event hey
disappear, unless he immediately gives new ones equally satisfactory
(Article 1198 (3))
iv. When the debtor violates any undertaking, in consideration of which the
creditor agreed (Article 1198 (4))
v. When the debtor attempts to abscond (Article 1198 (5))
vi. When the creditor is deceived on the substance or quality of the thing
pledged, the creditor may either claim another thing in its stead or demand
immediate payment of the principal obligation (Article 2109)
 Types of Periods
i. 1. Suspensive (ex die)
 The period is suspensive when the obligation becomes demandable
 only upon the arrival of the period.
2. Resolutory (in diem)
 The period is resolutory when the performance must terminate upon
the arrival of the period.
ii. 1. Legal
 A period is legal when it is granted by law.
2. Voluntary
 A period is voluntary when it is stipulated by the parties.
3. Judicial
 A period is judicial when it is fixed by the courts.
 If the obligation does not fix a period, but from its nature and the
circumstances it can be inferred that a period was intended, the
courts may fix the duration thereof (Article 1197, 1st ¶).
 2 steps involved in an action for fixing a period:
1. The court should determine that the obligation does not fix a
period but it can be inferred that a period is intended due to the
circumstances OR the period is dependent on debtor’s will.
2. Court shall decide what period was probably contemplated by the
parties.
 Court should make an educated guess.
 Court should not fix a period which it thinks is fair or
reasonable but rather the period which was probably
contemplated by the parties.
 Generally, you cannot ask for specific performance because fixing a
period contemplates something in the future, hence to ask for specific
performance would be illogical.
 Instances When Court May Fix a Period
1. Article 1197, ¶1

Art. 1197, ¶1. 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.

 Exceptions
Articles 1682 and 1687, 1st sentence

Art. 1682. The lease of a piece of rural land,

when its duration has not been fixed, is understood
to have been for all the time necessary for the
gathering of the fruits which the whole estate leased
may yield in one year, or which it may yield once,
although two or more years have to elapse for the
purpose.

Art. 1687, 1st sentence. If the period for the

lease has not been fixed, it is understood to be from
year to year, if the rent agreed upon is annual; from
 month to month, if it is monthly; from week to week,
if the rent is weekly; and from day to day, if the rent
is to be paid daily.

Pacto de retro sales (Article 1606)

Art. 1606. The right referred to in article

1601, in the absence of an express agreement, shall
last four years from the date of the contract.
Should there be an agreement, the period
cannot exceed ten years.
However, the vendor may still exercise the
right to repurchase within thirty days from the time
final judgment was rendered in a civil action on the
basis that the contract was a true sale with right to
repurchase.

Contract of services for an indefinite period

 Court cannot fix a period or else it would amount to
involuntary servitude.
2. Article 1197, ¶2

Art. 1197, ¶2. The courts shall also fix the duration
of the period when it depends upon the will of the debtor.

3. Article 1191, ¶3

Art. 1191, ¶3. The court shall decree the rescission

claimed, unless there be just cause authorizing the fixing
of a period.

4. Article 1687, 2nd, 3rd and 4th sentences

Art. 1687, 2nd, 3rd and 4th sentences. However, even

though a monthly rent is paid, and no period for the lease
has been set, the courts may fix a longer term for the lease
after the lessee has occupied the premises for over one
year. If the rent is weekly, the courts may likewise
determine a longer period after the lessee has been in
possession for over six months. In case of daily rent, the
courts may also fix a longer period after the lessee has
stayed in the place for over one month.

5. Article 1180

Art. 1180. When the debtor binds himself to pay

when his means permit him to do so, the obligation shall be
deemed to be one with a period, subject to the provisions
of Article 1197.

iii. 1. Express
 A period is express when the period is specifically stated.
2. Tacit
  A period is tacit when a person undertakes to do some work which
can be done only during a particular season.
1. Original
2. Grace
 A grace period is an extension fixed by the parties or by the court.
v. 1. Definite
 A period is definite when it refers to a fixed known date or time.
2. Indefinite
 A period is indefinite when it refers to an event which will necessarily
happen but the date of its happening is unknown (i.e. death)

2. According to Plurality of Object (Articles 1199-1206)

Art. 1199. A person alternatively bound by different prestations shall

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

Art. 1200. The right of choice belongs to the debtor, unless it has been
expressly granted to the creditor.
The debtor shall have no right to choose those prestations which are
impossible, unlawful or which could not have been the object of the
obligation.

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

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

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.

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.

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 obligation by delivering that which the creditor should choose
 from among the remainder, or that which remains if only one subsists;
(2) If the loss of one of the things occurs through the fault of the debtor,
the creditor may claim any of those subsisting, or the price of that
which, through the fault of the former, has disappeared, with a right
to damages;
(3) If all the things are lost through the fault of the debtor, the choice by
the creditor shall fall upon the price of any one of them, also with
indemnity for damages.
The same rules shall be applied to obligations to do or not to do in case
one, some or all of the prestations should become impossible.

Art. 1206. When only one prestation has been agreed upon, but the
obligor may render another in substitution, the obligation is called facultative.
The loss or deterioration of the thing intended as a substitute, through
the negligence of the obligor, does not render him liable. But once the
substitution has been made, the obligor is liable for the loss of the substitute
on account of his delay, negligence or fraud.

a. Alternative
 An obligation is alternative when several objects or prestations are due, but the
payment or performance of 1 of them would be sufficient.
 A promises to deliver either 500 kgs of rice or 1000 liters of gas. The obligation
is alternative. The debtor cannot perform the obligation by giving 250 kgs of
rice and 500 liters of gas unless the creditor agrees. In which case there is a
novation.
 General Rule: The right of choice the right to belongs to the debtor.
 Exceptions:
i. When it is expressly granted to the creditor
ii. When it is agreed upon by the parties that a 3rd person shall make the choice
 The act of making the choice is called concentration. Once the choice has been
made, then the obligation is concentrated in 1 object.
 Whoever has the right of choice must communicate it to the other party (Article
1201). The creditor has to communicate his choice to the debtor so that the
debtor will know. On the other hand, in Ong Guan vs. Century Insurance, the
Supreme Court said that the purpose for notice to the creditor is to give the
creditor the opportunity to express his consent or to impugn the election made
by the debtor. Professor Balane does not agree with this statement since the
creditor does not have the right to impugn, otherwise, the obligation would not
be an alternative obligation. A better reason according to Professor Balane is to
give the creditor time to prepare.
Example: The choice is either to give diamond ring or a Mercedes Benz. The
debtor should notify the creditor so the creditor can either rent a safety deposit
box or prepare a garage.
However, according to Professor Balane, the best reason is because once the
choice is communicated, the obligation ceases to be alternative. The risk of loss
belongs to the creditor now.
 Choice Belongs to the Debtor
When through fortuitous event or through the debtor’s acts, there is only 1
prestation left, the obligation ceases to be alternative (Article 1202).
 When the choice of the debtor is limited through the creditor’s own acts,
then the debtor has the remedy of resolution (Article 1191) plus damages
(Article 1203)
When all the things are lost due to the debtor’s fault, the creditor can sue for
damages (Article 1204)
When some things are lost due to the debtor’s fault but there are still some
things remaining, then the debtor can choose from what’s left
When all the things are lost due to a fortuitous event, the obligation is
extinguished
When all but 1 of the things are lost due to a fortuitous event and the last
object is lost through the debtor’s fault, then the creditor can sue for
damages
When all but 1 of the things are lost through the debtor’s own acts and the
last object is lost through a fortuitous event, the obligation is extinguished
 Choice Belongs to the Creditor (Article 1205)
When 1 or some of the objects are lost through fortuitous events, then the
creditor chooses from the remainder
When 1 or some of the objects are lost due to the
debtor’s fault, the creditor may choose from the remainder or get the value
of any of the objects lost plus damages in either case
When all of the things are lost due to the debtor’s fault,
the creditor can get the value of any of the objects lost plus damages
When some are lost through the debtor’s fault, the
creditor chooses from the remainder
When all the objects are lost due to a fortuitous event, then the obligation is
extinguished
When all the objects are lost due to the creditor’s fault,
the obligation is extinguished
 b. Facultative
 An obligation is facultative when only 1 object or prestation has been agreed
upon by the parties to the obligation, but the debtor may deliver or render
another in substitution.
 Facultative obligations bear a resemblance to alternative obligations particularly
when the choice in an alternative obligation is with the debtor.
 In a facultative obligation, the right of choice is always with the debtor.
 In an alternative obligation, if 1 of the prestations is impossible, then there are
other choices. In a facultative obligation, if the principal obligation is
impossible, then everything is annulled.
 In theory, it is easy to distinguish a facultative obligation from an alternative
obligation. In practice, it is difficult to do so since most of the time, the words
are ambiguous. For example, I promise to deliver my Honda Accord, but I
reserve my right to substitute this with my Gold Rolex. In this case, it is not
very clear whether the obligation is alternative or facultative. According to
Professor Balane, the rule is that one must look at the circumstances of the
obligation. If it is impossible to determine which one, then the doubt should be
resolved in the favor of an alternative obligation since its effects are less radical.

3. According to Plurality of Subject (Articles 1207-1222)

Art. 1207. The concurrence of two or more creditors or of two or more

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

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

Art. 1209. If the division is impossible, the right of the creditors may be
prejudiced only by their collective acts, and the debt can be enforced only by
proceeding against all the debtors. If one of the latter should be insolvent, the
others shall not be liable for his share.

Art. 1210. The indivisibility of an obligation does not necessarily give

rise to solidarity. Nor does solidarity of itself imply indivisibility.

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.

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.

Art. 1213. A solidary creditor cannot assign his rights without the
consent of the others.
 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.

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.

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.

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.

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.

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.

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.

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.

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 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.

a. Single
 An obligation is single when there is only 1 debtor and 1 creditor.
b. Joint
 An obligation is joint when each of the debtor is liable only for a proportional
part of the debt, and each creditor is entitled only to a partial part of the credit.
 A joint obligation is also called mancomunada, pro rata, mancomunada simple.
 General Rule: The obligation is joint since joint obligations are less onerous.
 Exceptions:
i. Agreement of the parties
ii. Law (i.e. tort feasors are solidarily liable)
iii. Nature of the obligation
 According to many commentators, this is superfluous since a solidary
obligation arises because of law.
 ESSENTIAL NATURE: There are as many obligations as there are creditors
multiplied by as many debtors.
 Types of Joint Obligations
i. Active joint
 In active joint, there are multiple creditors.
 A, B, and C are creditors, and X is the debtor. If the obligation is joint,
there are 3 obligations – X’s obligation to A, X’s obligation to B, and X’s
obligation to C.
 The demand of 1 creditor on 1 debtor will not constitute a demand on the
others.
 The prescription of 1 of the debts will not affect the other debts.
ii. Passive joint
 In passive joint, there are multiple debtors.
 X, Y, and Z are debtor, and A is the creditor. If the obligation is joint,
there are 3 obligations – X’s obligation to A, Y’s obligation to A, and Z’s
obligation to A.
 The demand of 1 creditor on 1 debtor will not constitute a demand on the
others.
 The prescription of 1 of the debts will not affect the other debts.
 The insolvency of 1 of the debtors will not affect the burden of the other
debtors.
iii. Mixed joint
 In mixed joint, there are multiple creditors and debtors.
 X, Y, and Z are debtors, and A, B, and C are the creditors. If the
obligation is joint, there are 9 obligations – X’s obligation to A, X’s
obligation to B, X’s obligation to C, Y’s obligation A, Y’s obligation to B,
Y’s obligation to C, Z’s obligation to A, Z’s obligation to B, and Z’s
 obligation to C.
c. Solidary
 An obligation is solidary when any of the debtors can be hled liable for the entire
obligation, and any of the creditors is entitled to demand the entire obligation.
 A solidary obligation is also called joint and several, joint and individual, and in
solidum.
 If a promissory says, “I promise to pay,” and it is signed by K, B, and M, then
the obligation is solidary.
 An obligation is solidary when
i. The parties so agree
ii. When the law so provides (i.e. tort feasors are solidarily liable)
iii. When nature of the obligation requires the obligation to be solidary
 According to many commentators, this is superfluous since a solidary
obligation arises because of law.
 Types of Solidary Obligations
i. Active solidary
 In active solidary, there are multiple creditors.
 Characteristics of Active Solidary
 A credit once paid is shared equally among the creditors unless a
different intention appears.
 The debtor may pay any of the creditors, but if any demand,
judicial or extrajudicial is made on him, he must pay only to the
one demanding payment (Article 1214).
 Article 1214 can be open to abuse. For example, if A writes Y
demanding the performance of the obligation and A takes no
further action, B and C cannot demand from Y. This is open to
collusion.
 Suppose A, B, and C are creditors of X. A demands the
payment of the loan worth P9,000. X instead pays to B. The
payment to B will be treated as a payment to a 3rd person.
Therefore, X must still pay A the amount of the loan minus the
share of B. So, X has to pay P6,000 to A.
ii. Passive solidary
 In passive solidary, there are multiple debtors.
 Characteristics of Passive Solidary
 Each debtor may be required to pay the entire obligation but after
payment, he can recover from his co-debtors their respective shares.
iii. Mixed solidary
 In mixed solidary, there are multiple debtors and creditors.
 Characteristics of Mixed Solidary
 A credit once paid is shared equally among the creditors unless a
different intention appears.
 The debtor may pay any of the creditors, but if any demand, judicial
or extrajudicial, is made on him, he must pay only to the one
 demanding payment (Article 1214).
 According to Professor Balane, Article 1214 is problematic. For
example, X owes A, B and C. B makes an extrajudicial demand
on X. X cannot pay A or C anymore. The problem is when B does
not follow up the demand, it can keep the obligation in suspension
indefinitely.
The rule in the Spanish Code was that the debtor cannot pay the
other non-demanding solidary creditors only if one of the solidary
creditor makes a judicial demand.
 Suppose the debtor upon whom the demand is made pays a
creditor who did not make a demand. The payment is considered
a payment to a third person. Therefore the debtor can still be
made to pay by the one who made the demand on him.
Example: X owes A and B. B demanded from X. X pays A. X
must still pay B P6000.
But the payment to the demanding creditor can be reduced by the
share of the paid creditor.
The debtor can still recover from the paid creditor (unjust
enrichment).
 Suppose A and B are creditors while X and Y are debtors. A
demands from Y. Now, X pays B. The payment of X to B
extinguishes the entire solidary obligation. X is not bound by the
demand by A on Y. There is no violation of Article 1214.
 Each debtor may be required to pay the entire obligation but after
payment, he can recover from his co-debtors their respective shares.
 Is there a conflict between Article 1212 and Article 1215 ? Article 1212
provides that each of the solidary creditors may do whatever may be useful to
the others, but not anything which may be prejudicial to the latter. But Article
1215 allows novation, compensation, confusion or remission on the part of the
solidary creditor. Why? According to Professor Balane, this is absurd.
One way of reconciling is that under Article 1215, any creditor can remit or
condone the obligation. But because the obligation is extinguished, the
condoning creditor must be liable for the other creditor’s share. Here, there is
no prejudice.
However, another problem arises if the condoning creditor later on becomes
insolvent.
 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

 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.
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. 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.
 paid by anyone of them before the remission was effected.
 A is the creditor of W, X, Y, and Z. W, X, Y, and Z owe A P6,000. The obligation
is solidary. A remits Y’s share – P1,500. A can go after X for only P4,500. The
remission benefits X initially since X only has to pay P4,500 instead of 6,000.
However, X can only recover P3,000 from W and Z.
 A is the creditor of W, X, Y, and Z. W, X, Y, and Z owe A P6,000. The obligation
is solidary. A remits Y’s share – P1,500. A can go after Y for the balance since Y
is still a solidary debtor for the balance. Otherwise, the effect of remission
would be extended. However, Y can recover P4,500 from W, X, and Z.
 A is the creditor of W, X, Y, and Z. W, X, Y, and Z owe A P6,000. The obligation
is solidary. A remits Y’s share – P1,500. Z becomes insolvent. A sues W for the
balance of P4,500. Art. 1217 must be applied. Thus, the insolvency of Z is
shouldered by W, X, and Y. So, W can recover P2,000 from X and P500 from Y
instead of collecting P3,000. W has to shoulder P500 as a loss due to Z’s
insolvency.
 3 Kinds of Defenses
i. Real defenses
 These are defenses derived from the nature of the obligation.
 A real defense is a total defense. It benefits all the debtors.
ii. Personal defenses
 Personal defenses may either be total or partial defenses.
 An example of a total personal defense is if the consent of the debtors
were all vitiated.
 An example of a partial defense is that a certain amount is not yet due.
It is partial since there may be amounts which are already due. Thus,
the debtor has to pay for those amounts which are due.
iii. Defenses which are personal to the other co-debtors
 The debtor can only avail himself of these defenses only with regard to
the part of the debt which his co-debtors are responsible for.
 These defenses are partial.
 The debtor sued can invoke all three kinds of defenses. The difference is
whether such defense would result in total or partial exculpation.

According to Performance (Articles 1223-1225)

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.

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.

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.

 Divisible and indivisible obligations have nothing to do with the object of the
prestation. A common misconception is if the object of the prestation is divisible,
then the obligation is also divisible.
a. Divisible
 An obligation is divisible when it is susceptible to partial performance.
b. Indivisible
 An obligation is indivisible when it cannot be validly performed in parts.
 General Rule: Obligations are indivisible.
 Exceptions:
When the parties provide otherwise (Articles 1225, 3rd ¶, 1248 )
When the nature of the obligation necessarily entails the
performance of the obligation in parts
 Example: Hiring a security guard to guard from 8pm to 2am daily for 6
months. This obligation cannot be performed indivisibly. You can’t compress
time.
 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 (Article 1225, 2nd ¶)
 Exception to the Exception: However, even though the object or service
may be physically divisible, an obligation is indivisible if
1. So provided by law; or
2. Intended by the parties.
iii. When the law provides otherwise
 There are provisions on payment which provide that performance may be
divisible.
 Divisibility of the object does not mean that the obligation is also divisible. But
indivisibility of the object necessarily means an indivisible obligation.
 The test of divisibility of an obligation is whether or not it is susceptible of partial
performance.
 For example, if X is supposed to deliver 1000 kilos of sugar, this does not mean
that X can deliver the sugar in installments.

 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.
 According to Sanction for Breach (Articles 1226-1230)

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.

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.

Art. 1228. Proof of actual damages suffered by the creditor is not

necessary in order that the penalty may be demanded.

Art. 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor.
Even if there has been no performance, the penalty may also be reduced by
the courts if it is iniquitous or unconscionable.

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.

a. No penal clause

b. With penal clause

 A penal clause is an accessory undertaking to assume greater liability in case of
breach (SSS vs. Moonwalk).
 Penal clauses are governed by Articles 2226-2228 , the provisions on
liquidated damages since a penal clause is the same as liquidated damages
(Lambert vs. Fox).
 Penal clauses may be reduced by the courts if unconscionable.
 2 Functions of a Penal Clause (SSS vs. Moonwalk)
i. To provide liquidated damages

 Art. 2226. Liquidated damages are those agreed upon by the parties to a contract, to be paid in
case of breach thereof.
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable.
Art. 2228. When the breach of the contract committed by the defendant is not the one
contemplated by the parties in agreeing upon the liquidated damages, the law shall determine the measure
of damages, and not the stipulation.
  The creditor can demand liquidated damages without having to prove
actual damages.
 The only limitation that the courts will reduce the liquidated damages if
the same is scandalously unconscionable.
ii. To strengthen the coercive force of the obligation by the threat of greater
responsibility in case of breach
 Stipulates a penalty which is greater than one without a penal clause.
Thus, Robes-Francisco states that 4% interest is not a penal clause.
 2 Characteristics of a Penal Clause
i. Subsidiary or alternative (Article 1227)
 General Rule: Upon breach of the obligation, the creditor has to choose
whether to demand the principal or the penalty.
 Exception: The principal obligation and the penalty can be demanded
when the penal clause is joint or cumulative. This occurs when it is the
creditor has been clearly granted such right (Article 1227, 2nd sentence),
either expressly or impliedly. The implied right must be one
ascertainable from the nature of the obligation. An example is in the
construction industry where the contractor must pay the penalty if the
work is completed after the stipulated time frame but must also finish the
agreed construction.
ii. Exclusive (Article 1226)
 General Rule: The penalty clause takes the place of other damages
(that’s why in imposing a penalty clause, make sure that the penalty is
stiff).
 Exception: Both the penalty and actual damages may be recovered in
the following:
1. Express stipulation
2. Refusal by the debtor to pay the penalty
3. The debtor is guilty of fraud (malice) in the performance of the
obligation.
 In Pamintuan vs. CA, the Supreme Court said that the excess of
damages absorbs the penalty. Professor Balane said that this is a
wrong application. You can demand both the excess and the
penalty.

H. Extinguishment of Obligations

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.

Payment or Performance (Articles 1232 – 1251)

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

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.

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.

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.

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.

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.

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.

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."

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.

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.

Art. 1242. Payment made in good faith to any person in possession of

the credit shall release the debtor.

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.

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.

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.

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.

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.

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.

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.

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.

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.

 Like obligee and creditor, payment and performance are twin terms. Payment
refers to obligations to give while performance refers to obligations to do.
 Payment and performance is the paradigmatic mode. When obligations are entered
into, the parties expect payment or performance. All other modes of extinguishing
obligations are abnormal modes.
 Requisites of Payment
a. As to prestation
i. Identity
 Identity means that the very prestation must be performed.
 For example, if the obligation is to give a car, one cannot fulfill the
obligation pay giving a house.
 If the prestation is specific, the debtor must give or deliver the specific
thing which was agreed upon (Article 1244 ).
 If the prestation is generic, the creditor cannot demand a thing of
superior quality. However, the debtor cannot give a thing of inferior
quality (Article 1246 ).
 The payment of debts in money shall be made in the currency stipulated,
and if it not possible to deliver such currency, then in the currency which
is legal tender in the Philippines (Article 1249 , 1st ¶).

 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.
 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.
 R.A. No. 529 has been repealed by R.A. No. 8183 which allows payment
in different currency. However, in the absence of an agreement, payment
shall be made in P.
 Negotiable papers and other commercial documents can be refused by
the creditor unless there is stipulation to the contrary.
 If the negotiable papers and other commercial documents are accepted
by the creditor, it has only a provisional effect. There is payment only in
the following (Article 1249, 2nd ¶).
When they have been honored and cashed; or
When through the fault of the creditor, they have been impaired
In the case of NAMARCO, the check must be the check of another
person, not a party, before there will be impairment.
For example, A gave B a check as payment for a loan. B did not encash
the check as a result of which, the check became stale. There is no
impairment here. B can still ask A for payment of the loan.
However, if B endorsed a check made by A to C as payment for a loan
and C did not encash the check which became stale, then C can no
longer ask B to pay him again.
 In the case of Pacific Timber, the Supreme Court said that a certified
check or a manager’s check is considered as good as cash. But newer
cases say that such instruments are not considered legal tender and
thus, the creditor can refuse to accept. For example, A gives B a
manager’s check and bank closes for a bank holiday.
 Article 125021* was applied only during the Japanese occupation.
 Exceptions to the Requirement of Identity
1. Dacion en pago (Article 1245)

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.

Novation
ii. Integrity
 Identity means that the entire prestation must be performed –
completeness (Article 1233 )
 Exceptions to Integrity

 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.
* 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.
 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.
Substantial compliance in good faith (Article 1234)

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.

Waiver (Article 1235)

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.

In application of payments if the debts are equally onerous (Article

1254, 2nd ¶)

Art. 1254, 2nd ¶. If the debts due are of the same nature
and burden, the payment shall be applied to all of them
proportionately.
iii. Indivisibility
 Indivisibility means that the obligor must perform the prestation in one
act and not in installments (Article 1248). The creditor can validly refuse
if the performance is not in one act.
 Exceptions to Indivisibility (Cases when the law allows installment
performance)
1. In case of express stipulation (Article 1248)

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.

2. In prestations which necessarily entail partial performance (Article

1225, 2nd ¶)

Art. 1225, 2nd ¶. 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.

3. If the debt is liquidated in part and unliquidated in part (Article 1248)

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.

In joint divisible obligations (Article 1208)

Art. 1208. If from the law, or the nature or the wording

of the obligations to which the preceding article refers the
contrary does not appear, the credit or debt shall be presumed
to be divided into as many shares as there are creditors or
debtors, the credits or debts being considered distinct from
one another, subject to the Rules of Court governing the
multiplicity of suits.

In solidary obligations when the debtors are bound under different

terms and conditions (Article 1211)

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.
 In compensation where there is a balance left (Article 1290)

Art. 1290. When all the requisites mentioned in article

1279 are present, compensation takes effect by operation of
law, and extinguishes both debts to the concurrent amount,
even though the creditors and debtors are not aware of the
compensation.

If the work is to be delivered partially, the price or compensation for

each part having been fixed (Article 1720)

Art. 1720. The price or compensation shall be paid at

the time and place of delivery of the work, unless there is a
stipulation to the contrary. If the work is to be delivered
partially, the price or compensation for each part having been
fixed, the sum shall be paid at the time and place of delivery,
in the absence if stipulation.

In case of several guarantors who demand the right of division

(Article 2065)

Art. 2065. Should there be several guarantors of only

one debtor and for the same debt, the obligation to answer for
the same is divided among all. The creditor cannot claim from
the guarantors except the shares which they are respectively
bound to pay, unless solidarity has been expressly stipulated.
The benefit of division against the co-guarantors ceases
in the same cases and for the same reasons as the benefit of
excussion against the principal debtor.

In case of impossibility or extreme difficult of a single performance

 For example, A is obligated to deliver 1 million bags of cement.
Under the circumstances, this may be extremely difficult.
b. As to the parties
i. Payor, Obligor, Debtor
 Who may be the Payor
1. Without the consent of the creditor
a. The debtor himself
b. The debtor’s heirs or assigns
c. The debtor’s agent
d. Anyone interested in the fulfillment of the obligation (e.g.
guarantor)
2. With the consent of the creditor
 Anyone can pay if the creditor consents
 Effect of Payment by a 3rd Person
1. Payment was with the Debtor’s Consent
 General Rule: The payor 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 which the creditor could have exercised –
subrogation (Articles 1236, 1237 ).
 There is no extinguishment of the obligation but a change in
the active subject.
 Exception: No subrogation if intended to be a donation (Article
1238 ).
2. Payment was without the Debtor’s Consent
 The 3rd person may demand repayment to the extent that the
debtor has benefited (Article 1236, 2nd ¶).
ii. Payee, Obligee, Creditor
 Who may be the Payee
1. The creditor himself (Articles 1240, 1626 )
2. The creditor’s successor or transferee (Article 1240)
3. The creditor’s agent (Article 1240)
4. Any third person subject to the following conditions:
a. Provided it redounded to the creditor’s benefit and only to the
extent of such benefit (Article 1241 , 2nd par)
b. If it falls under Article 1241 ¶2 (1), (2) and (3), the benefit is
total.
5. Anyone in possession of the credit (Article 1242 )
In all these 5 instances, it is required that the debt should not be
garnished (Article 1242). If there is payment despite garnishment,
then there is no payment.

 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.
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.
 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.
 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.
Art. 1626. The debtor who, before having knowledge of the assignment, pays his creditor
shall be released from 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.
 Art. 1242. Payment made in good faith to any person in possession of the credit shall release the debtor.
 c. As to the time and place of performance
i. When Payment Should be Made
 Payment should be made when it is due.
 Even if the payment is due, the General Rule is that demand is still
necessary.
 Article 1169  provides the instances when demand is not necessary
When the obligation or the law expressly so declares
Time is the controlling motive for the establishment of the contract
Demand would be useless
ii. Where Payment Should be Made:
 Primary Rule: Agreement of the parties
 Secondary Rule: Place where the thing was at the time the obligation
was constituted if the obligation is to deliver a determinate thing
 Tertiary Rule: Debtor’s domicile (not residence)
 4 Special Forms of Payment
a. Dacion en pago (Article 1245)

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.

 Dacion en pago is the act of extinguishing the obligation by the substitution

of payment. It is the delivery and transmission of ownership of a thing by
the debtor to the creditor as an accepted performance/payment of an
obligation.
 By agreement of the parties, the prestation is changed.
 Dacion en pago is a special form of payment since it does not comply with
the requisite of identity.
 Other terms for dacion en pago include dation in payment, dation en
paiement and datio in solutum.
 Dacion en pago is governed by the law on sales (Article 1245).
 There are 2 ways of looking at dacion en pago. The traditional way is to
view dacion en pago as a sale.
 Example: A owes B P100,000. A has no cash when the loan falls due but he

 Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the designation
of the time when the thing is to be delivered or the service is to be rendered was a controlling motive
for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to
perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins.
 offers the car if B wants it. B accepts.
 Here, the debt is in money but payment is in something else.
 According to the old traditional concept, it is like a sale because P100,000
seemed to be the purchase price and the car is the object.
 However, the modern view is to look at dacion en pago as a novation.
 Castan has another view of dacion en pago. He believes that it is neither a
sale nor a novation but a special form of payment. It is a species/variation
of payment implying an onerous transaction similar to but not equal to a
sale. It is not novation since there is no new obligation.
 Dacion en pago will take place only if the parties consent.
 Dacion en pago extinguishes the obligation up to the value of the thing
delivered unless the parties agree that the entire obligation is extinguished
(Lopez vs. CA).
b. Application of payments (Articles 1252-1254)

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.

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

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

Art. 1254. When the payment cannot be applied in accordance

with the preceding rules, or if application can not be inferred from other
circumstances, the debt which is most onerous to the debtor, among
those due, shall be deemed to have been satisfied.
If the debts due are of the same nature and burden, the payment
shall be applied to all of them proportionately.

 Application 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.
 The situation in application of payments is that a debtor owes his creditor.
There are several debts due, but the debtor cannot pay all of the debts due.
 Example: A owes B P2000, P3000 and P10,000. A gives B P15,000. There
is no application of payment here because it is equal to the total amount
due.
 The creditor can always not accept application of payments since the creditor
cannot be compelled to accept partial performance of the obligation.
However, this may not be wise since the debtor may have other creditors.
 The rules on application of payment solve the problem of distributing the
payment which is less than the total obligation.
 Rules in Application of Payment
  1st Rule: Apply in accordance with the agreement
 2nd Rule: If there is no agreement, the debtor has the right to apply
 3rd Rule: If the debtor does not choose, the creditor can choose.
 4th Rule: Apply to the most onerous debt (Article 1254, ¶1)
 Rules to Determine Which is the More Onerous Obligation
i. An interest bearing obligation is more onerous than a non-interest
bearing obligation.
ii. An older debt is more onerous than a recent debt
iii. An obligation where the party is bound as a principal is more
onerous than an obligation is bound as a surety
iv. An obligation which is secured is more onerous than an obligation
which is unsecured
v. An obligation with a penal clause is more onerous than an
obligation without a penal clause
 5th Rule: If equally onerous, apply proportionately (Article 1254, ¶2)
c. Payment by cession (Article 1255)

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

 The situation is contemplated here is that the debtor has several creditors
and several debts. He turns over property to his creditors who are given the
authority to sell the property and to apply the proceeds to his debt.
 In payment by cession, property is turned over by the debtor to the creditors
who acquire the right to sell it and divide the net proceeds among
themselves.
 In payment by cession, the creditors do not own the property to be sold.
The creditors only have the power to sell. The net proceeds of the sale will
be distributed according to the agreement.
 Payment by cession is a special form of payment because there is no
completeness of performance – integrity. In most cases, there will be a
balance due.
 Payment by Cession Distinguished from Dacion en Pago
 In dacion en pago, there is a transfer of ownership from the debtor to the
creditor. In payment by cesion, there is no transfer of ownership. The
creditors simply acquire the right to sell the properties of the debtor and
apply the proceeds of the sale to the satisfaction of their credit.
 Payment by cession does not generally terminate all debts due since
normally there is still a balance due. The balance will continue to be due
unless the parties agree otherwise. Usually, the termination is only to
the extent of the net proceeds. The extinguishment of the obligation is
pro tanto.
 Payment by cession must be distinguished from insolvency.
  2 Kinds of Insolvency
i. Extrajudicial or Voluntary
 In extrajudicial insolvency, if there is a balance left, the debtor
must still pay.
 However, the debtor may limit which properties will be sold by the
creditors since the agreement is contractual.
ii. Judicial
 In judicial insolvency, the obligation is totally extinguished even if
there’s still a balance.
 In judicial insolvency, every property which is not exempt from
attachment or execution is made available for sale.
d. Tender of payment and consignation (Article 1256-1261)

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.

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.

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.

Art. 1259. The expenses of consignation, when properly made,

shall be charged against the creditor.

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.
 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.

 Consignation is the act of depositing the thing due w/ the court or judicial
authorities whenever the creditor cannot accept or refuses to accept
payment and it generally requires a prior tender of payment.
 It is defined in the case of Soco vs. Militante as a deposit of the object of the
prestation in a competent court in accordance with the rules prescribed by
law, after tender of payment was refused or circumstances which render
payment impossible or inadvisable.
 According to Professor Balane, the title of the subsection is wrong. It should
have been consignation only because that is the special mode of payment
and not the tender of payment.
 Tender of payment is a manifestation made by the debtor of his willingness,
readiness and ability to pay.
 It is a special mode of payment because payment is made not to the creditor
but to the court.
 Consignation is an option on the part of the debtor because consignation
assumes that the creditor was in mora accipiendi when the creditor without
just cause, refuses to accept payment. Of course, if the creditor without just
cause refuses to accept payment, the debtor may just delay payment. But
something still hangs above his head. He is therefore, given the option to
consign.
 Requisites:
i. That there was a debt due
ii. That the consignation of the obligation had been made because of some
legal cause, either because
1. Tender of payment was unjustly refused by the creditor or
2. There is no need for tender of payment due to circumstances which
make tender of payment impossible or inadvisable
 Circumstances Which Make Tender of Payment Unnecessary
(Article 1256)
a. The creditor was absent or unknown, or does not appear at
the place of payment
b. The creditor was incapacitated to receive the payment at the
time it was due
 Payment made to an incapacitated person does not count
except to the extent that the incapacitated person is
benefited.
c. The creditor, without just cause refuses to give a receipt
 According to Professor Balane, this is wrong. This is not a
special case wherein you don’t need tender of payment.
This presupposes that there has been a prior tender of
payment.
d. Several persons claimed to be entitled to receive the amount
 due
 The debtor should file interpleader with consignation
e. The title of the obligation has been lost
iii. That previous notice of the consignation had been given to the person
interested in the performance of the obligation (Article 1257)
iv. That the amount due was placed at the disposal of the court
(consignation proper)
v. That after the consignation had been made the person interested was
notified thereof (second notice.)
 Failure of any of these requirements is enough ground to render a
consignation ineffective.
2. Loss of the Thing Due (Articles 1262-1269)

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.

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.

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.

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.

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.

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

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

 Loss of the thing here is not to be taken in the strict legal meaning of “loss”. Loss
can be applied in an obligation to give a determinate thing (Article 1262), in an
obligation to give a generic thing (Article 1263) and in an obligation to do (Article
1266).
  The term loss embraces all causes which may render impossible the performance of
the prestations – impossibility of performance .
 A thing is lost when it perishes, or goes out of commerce, or disappears in such a
way that its existence is unknown or it cannot be recovered.
 When the debt of a thing certain and determinate proceeds from a criminal offense,
the debtor shall not be exempted from the payment of its price, whatever may be
the cause for the loss, unless the thing having been offered by him to the person
who should receive it, the latter refused without justification to accept it (Article
1268).
 Kinds of Impossibility According to Time
a. Original Impossibility
 If the impossibility had already existed when the contract was made, then
the result is not extinguishments but inefficacy of the obligation under
Articles 1348 and 1493 . The contract is void.
b. Supervening Impossibility
 The impossibility of performance must be subsequent to the execution of the
contract in order to extinguish the obligation.
 Change in the Circumstances
 Rebus sic stantibus literally means “things as they stand.” It is short for
clausula rebus sic stantibus – agreement of things as they stand. Also
called Riesgo imprevisible (Spanish), Theorie d’imprevision (French) and
Verschuvinden des Grundgeschäftes (German).

Art. 1267. When the service has become so difficult as to

be manifestly beyond the contemplation of the parties, the
obligor may also be released therefrom, in whole or in part.

 In Roman law, no matter how difficult the obligation is, it has to be

performed or else the obligor may be liable for damages (pacta sunt
servanda). In Medieval times, although agreements should be complied
with, in certain extreme circumstances, the debtor can be released
because of the difficulty in performance.
 This is a principle of international law which holds that when 2 states
enter into a treaty, they enter taking into account the circumstances at
the time it was entered into and should the circumstances change as to
make the fulfillment of the treaty very difficult, one may ask for a
termination of the treaty. This principle of international law has spilled
over into Civil law.
 The underlying philosophy here is that when parties enter into an
agreement, the parties contemplate existing circumstances. When things
supervene, the parties may be discharged because they did not
contemplate such difficult circumstances.
 This doctrine is also called the doctrine of extreme difficulty and

 Art. 1348. Impossible things or services cannot be the object of contracts.

Art. 1493. If at the time the contract of sale is perfected, the thing which is the object of the
contract has been entirely lost, the contract shall be without any effect.
But if the thing should have been lost in part only, the vendee may choose between
withdrawing from the contract and demanding the remaining part, paying its price in proportion to the total
sum agreed upon.
 frustration of commercial object or enterprise.
 The attitude of the courts on this doctrine is very strict. This principle
has always been strictly applied. To give it a liberal application is to
undermine the binding force of an obligation. Every obligation is difficult.
The performance must be extremely difficult in order for rebus sic
stantibus to apply.
 Requisites
i. The event or change could not have been foreseen at the time of the
execution of the contract
ii. The event or change makes the performance extremely difficult but
not impossible
iii. The event must not be due to an act of either party
iv. The contract is for a future prestation.
 If the contract is of immediate fulfillment, the gross inequality of the
reciprocal prestation may involve lesion or want of cause.
 Obligation to Give
a. Obligation to give a determinate thing
 The happening of a fortuitous event in itself does not necessarily extinguish
an obligation to deliver a determinate thing. An obligation consisting in the
delivery of a specified thing, shall be extinguished when the said thing is lost
or destroyed without the fault of the obligor and before he is in default.
 Whenever the thing is lost in the possession of the debtor, it shall be
presumed that the loss was due to his fault, unless there is proof to the
contrary, and without prejudice to the provisions of Article 1165. This
presumption does not apply in case of earthquake, flood, storm or other
natural calamity (Article 1265)
b. Obligation to give a generic thing
 The happening of a fortuitous event does not extinguish the obligation to
deliver a generic thing Genus nunquam perit – “genus never perishes.” This
is the general rule. Sometimes, though, the entire genus perishes because it
becomes illegal.
 What is not covered by this rule is an obligation to deliver a limited generic.
Example: I promise to deliver to you one of my Amorsolos (I have 4). This
is not generic because I only have four but not specific because I did not
specify which one. This is governed by Article 1262. In this case, the
obligation may be extinguished by the loss of all the things through
fortuitous event.
 Obligation to do
 The debtor in obligations to do shall also be released when the prestation
becomes legally or physically impossible without the fault of the obligor (Article
1266).
 The impossibility here must be supervening. If it is original, then the contract is
void.
 Kinds of Impossibility According to Nature
a. Objective Impossibility
 In objective impossibility, the act cannot be done by anyone. The effect of
objective impossibility is to extinguish the obligation.
 b. Subjective Impossibility
 In subjective impossibility, the obligation becomes impossible only w/
respect to the obligor. There are 3 views as to the effect of a subjective
impossibility:
i The obligation is not extinguished. The obligor should ask another to do
the obligation.
ii. The obligation is extinguished.
iii. A third view distinguishes one prestation which is very personal and one
which are not personal such that subjective impossibility is a cause for
extinguishes a very personal obligation but not an obligation which is not
very personal.
 Effect of Loss on Creditor’s Rights
 The obligation having been extinguished by the loss of the thing, the creditor
shall have all the rights of action which the debtor may have against the third
person by reason of the loss.
 A common example of this is insurance.
3. Condonation or Remission of the Due

Art. 1270. Condonation or remission is essentially gratuitous, and

requires the acceptance by the obligor. It may be made expressly or impliedly.
One and the other kind shall be subject to the rules which govern
inofficious donations. Express condonation shall, furthermore, comply with the
forms of donation.

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.

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.

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.

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.

 Condonation or remission is an act of liberality by virtue of which, without receiving

any equivalent, the creditor renounces enforcement of an obligation which is
extinguished in whole or in part.
 Requisites
a. The debt must be existing
 You can remit a debt even before it is due.
Example: I owe A P1M. I promised to pay on July 31, 2002 with interest.
On May 31, A condones the obligation. The obligation is existing but not yet
due but it can be condoned.
b. The renunciation must be gratuitous
 If renunciation is for a consideration, the mode of extinguishment may be
something else. It may be novation, compromise or dacion en pago for
example.
c. There must be acceptance by the debtor
d. The parties must have capacity
 The creditor must have capacity to give away.
 The debtor must have capacity to accept.
  Form
a. If the renunciation is express, then it is a donation.
 The form of donation must be observed. If the condonation involves
movables, apply Article 748 . If it involves immovables, apply Article
749.
b. If the renunciation is implied, then it is tantamount to a waiver.
 There is no prescribed form in a waiver (Article 631*). For example, the
creditor can just refuse to collect the debt.
 According to Professor Balane, Articles 1271 and 1272  refer to a kind of
implied renunciation when the creditor divests himself of the proof credit.
 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 providing that the delivery of the
document was made in virtue of payment of the debt (Article 1271).
 Article 1271 has no application to public documents because there is
always a copy in the archives which can be used to prove the credit.
Private document refers to the original in order for Article 1271 to apply.
 By delivering the private document, the creditor deprives himself of
proof.
 The second paragraph of Article 1271 implies that the voluntary return of
the title of credit is presumed to be by reason of remission and not by
reason of the payment of debt. According to Professor Balane, this is
anomalous. This provision is absurd and immoral in that it authorizes
the debtor and his heirs to prove that they paid the debt, when the
provision itself assumes that there has been a remission, which is
gratuitous.

 Art. 748. The donation of a movable may be made orally or in writing.

An oral donation requires the simultaneous delivery of the thing or of the document
representing the right donated.
If the value of the personal property donated exceeds five thousand pesos, the donation and
the acceptance shall be made in writing, otherwise, the donation shall be void. (632a)
Art. 749. In order that the donation of an immovable may be valid, it must be made in a
public document, specifying therein the property donated and the value of the charges which the donee must
satisfy.
The acceptance may be made in the same deed of donation or in a separate public document,
but it shall not take effect unless it is done during the lifetime of the donor.
If the acceptance is made in a separate instrument, the donor shall be notified thereof in an
authentic form, and this step shall be noted in both instruments.
* Art. 6. Rights may be waived, unless the waiver is contrary to law, public order, public policy, morals, or
good customs, or prejudicial to a third person with a right recognized by law.
 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)
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.
  Whenever the private document in which the debt appears is found in the
possession of the debtor, it shall be presumed that the creditor delivered it
voluntarily, unless the contrary is proved (Article 1272).
 2 Presumptions:
i. If a private document is found in the possession of the debtor, then it is
presumed that the creditor voluntarily delivered it to him
ii. Since the creditor voluntarily delivered the private document, then there
is a presumption of remission
 Ways of Remission
a. By will
b. By agreement
 Effect of Partial Remission
 The renunciation of the principal debt shall extinguish the accessory obligations;
but the waiver of the latter shall leave the former in force (Article 1273).
Example: Loan secured by a mortgage. If I condone the loan, I condone the
mortgage. But if I condone the mortgage, I do not condone the loan which
merely becomes unsecured.
 The obligation of the guarantor is extinguished at the same time as that of the
debtor, and for the same causes as all other obligations (Article 2076).
 The guarantors, even though they be solidary, are released from their obligation
whenever by some act of the creditor they cannot be subrogated to the rights,
mortgages, and preferences of the latter (Article 2080).
 It is presumed that the accessory obligation of pledge has been remitted when
the thing pledged, after its delivery to the creditor, is found in the possession of
the debtor, or of a third person who owns the thing (Article 1274).
 According to Professor Balane, the accessory obligation of pledge is
extinguished because pledge is a possessory lien. The presumption in this
case is that the pledgee has surrendered the thing pledged to the pledgor.
However, this is not a conclusive presumption according to Article 2110, ¶2.
 This presumption is not applicable in a mortgage since there is no
possessory lien.
 In addition to the requisites prescribed in article 2085, it is necessary, in order
to constitute the contract of pledge, that the thing pledged be placed in the
possession of the creditor, or of a third person by common agreement (Article
2093)
 The debtor cannot ask for the return of the thing pledged against the will of the
creditor, unless and until he has paid the debt and its interest, with expenses in
a proper case (Article 2105).
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.

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

Art. 1277. Confusion does not extinguish a joint obligation except as

 regards the share corresponding to the creditor or debtor in whom the two
characters concur.

 Confusion is the meeting in one person of the qualities of the creditor and debtor
with respect to the same obligation.
 Confusion or merger of rights extinguishes the obligation because the creditor
becomes his own debtor. Therefore, how can the creditor sue himself.
 Requisites of Confusion
a. It must take place between the creditor and the principal debtor (Article 1276)
 A borrowed P 1M from B with C as guarantor. If C acquires the right to
collect the P 1M, there is no confusion since C is neither a principal debtor or
creditor. The effect is that the guaranty is extinguished. The principal
obligation remains.
b. The very same obligation must be involved (Article 1275)
 Usual Causes of Confusion
a. Succession (compulsory, testate, intestate)
b. Donation
c. Negotiation of a negotiable instrument
 Confusion can overlap with remission or payment.
Example of confusion overlapping with remission: X owes O P100,000. O bequeath
to X that credit. And then she died. In this case, there is extinguishment both by
merger. But in this case, merger could overlap with remission.
Example of confusion overlapping with payment. A makes a promissory note and
endorses it to B. B endorsed it to C. C to D. D endorsed it back to A.
5. Compensation

Art. 1278. Compensation shall take place when two persons, in their
own right, are creditors and debtors of each other.

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.

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.

Art. 1281. Compensation may be total or partial. When the two debts
are of the same amount, there is a total compensation.
 Art. 1282. The parties may agree upon the compensation of debts
which are not yet due.

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.

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.

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.

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.

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.

Art. 1288. Neither shall there be compensation if one of the debts

consists in civil liability arising from a penal offense.

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

Art. 1290. When all the requisites mentioned in article 1279 are
present, compensation takes effect by operation of law, and extinguishes both
debts to the concurrent amount, even though the creditors and debtors are
not aware of the compensation.

 Compensation is a mode of extinguishing, to the concurrent amount, the obligations

of those persons who in their own right are reciprocally debtors and creditors of
each other.
 Perhaps, next to payment, compensation is the most common mode of
extinguishing an obligation.
 Compensation Distinguished from Confusion
 In compensation, there are 2 parties and 2 debts, whereas in confusion, there
 are 2 debts and only 1 party.
 Kinds of Compensation
a. Legal (Article 1279)
 Legal compensation takes place automatically by operation of law once all
the requisites under Article 1279 are present.
 Requisites
i. The parties must be mutually debtors and creditors of each other in their
own right and as principals.
 There can be no compensation if 1 party occupies only a
representative capacity (i.e. agent). Likewise, there can be no
compensation if in one obligation, a party is a principal obligor and in
another obligation, he is a guarantor.
ii. The things due must be fungible
 Article 1279 uses the word “consumable”. This is wrong. The proper
terminology is “fungible” which refers to things of the same kind
which in payment can be substituted for another.
iii. The 2 debts must be due
iv. The 2 debts must be liquidated and demandable
 Demandable means that the debts are enforceable in court, there
being no apparent defenses inherent in them. The obligations must
be civil obligations, excluding those that are purely natural. Before a
judicial decree of rescission or annulment, a rescissible or voidable
debt is valid and demandable; hence, it can be compensated.
 A debt is liquidated when its existence and amount are determined.
And a debt is considered liquidated, not only when it is expressed
already in definite figures w/c do not require verification, but also
when the determination of the exact amount depends only on a
simple arithmetical operation.
v. Neither of the debts must not be garnished
vi. Compensation must not be prohibited by law
 Articles 1287, 1288 and 1794  are examples of when legal
compensation is not allowed.
 Legal compensation is not allowed when there is conventional or
facultative compensation.
 Effect of Legal Compensation
 If a person should have against him several debts which are susceptible
of compensation, the rules on the application of payments shall apply to
the order of the compensation (Article 1289)
 When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguishes both
debts to the concurrent amount, even though the creditors and debtors
are not aware of the compensation (Article 1290)

 Art. 1794. Every partner is responsible to the partnership for damages suffered by it through his fault,
and he cannot compensate them with the profits and benefits which he may have earned for the
partnership by his industry. However, the courts may equitably lessen this responsibility if through the
partner's extraordinary efforts in other activities of the partnership, unusual profits have been realized.
b. Facultative (Articles 1287, 1288)
 Facultative compensation takes place when compensation is claimable by
only one of the parties but not of the other.
 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 (Article 1287)
 The prohibition of compensation when one of the debts arises from a
depositum or commodatum is based on justice. A deposit is made or a
commodatum is given on the basis of confidence in the depositary or the
borrower. It is therefore, a matter of morality, that the depositary or the
borrower should in fact perform his obligation; otherwise, the trust or
confidence of the depositor or lender would be violated.
 With respect to future support, to allow its extinguishments by
compensation would defeat its exemption from attachment and execution
(Article 205, Family Code) and may expose the recipient to misery and
starvation. However, support in arrears can be compensated.
 The depositary cannot set up compensation w/ respect to the things
deposited to him. But the depositor can set up the compensation.
Example: A is a warehouseman. B deposits 1000 quedans of rice with
A. B also owes A 1000 kilos of rice. A cannot claim compensation but B
can set up compensation.
 Neither shall there be compensation if one of the debts consists in civil
liability arising from a penal offense (Article 1288)
 If 1 of the debts consists in civil liability arising from a penal offense,
compensation would be improper and inadvisable because the
satisfaction of such obligation is imperative.
 The person who has the civil liability arising from the crime cannot set up
compensation. However, the offended party is entitled to set up
compensation.
c. Conventional or Contractual (Article 1282)
 Contractual or conventional compensation takes place when parties agree to
set-off even if the requisites of legal compensation are not present.
 The parties may agree upon the compensation of debts which are not yet
due.
 The parties may compensate by agreement any obligations, in w/c the
objective requisites provided for legal compensation are not present.
d. Judicial (Article 1283)
 Judicial compensation is compensation decreed by the court in a case where
there is a counterclaim.
 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.
  Effect of Assignment (Article 1285)
Situation:

There are two credits – credit I and credit II. In credit I, A is the creditor and B is
the debtor. In credit II, B is the creditor and A is the debtor. A wants to assign
credit I to C. A cannot assign credit II since it is passive subjective novation. Can
B now invoke against C the compensation of credit II?
It depends:
a. If the assignment is with the debtor’s (B’s) consent
 Debtor cannot set up compensation at all unless the right is reserved.
b. If the assignment is with the debtor’s (B’s) knowledge but without consent
 The debtor can set up compensation with a credit already existing at the
time of the assignment.
c. If the assignment is without the debtor’s (B’s) knowledge
 Debtor can set up as compensation any credit existing at the time he
acquired knowledge even if it arose after the actual assignment.
6. Novation

Art. 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.

Art. 1292. In order that an obligation may be extinguished by another

which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other.

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 of the latter, but not without the consent of the creditor. Payment by
the new debtor gives him the rights mentioned in articles 1236 and 1237.

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.

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.

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.

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.

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.

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.

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.

Art. 1301. Conventional subrogation of a third person requires the

consent of the original parties and of the third person.

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.

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.

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.

 Novation is the extinguishment of an obligation by the substitution or change of the

obligation by a subsequent one which extinguishes or modifies the first, either by
changing the object of principal conditions, or by substituting the person of the
debtor, or by subrogating a third person in the rights of the creditor.
 Novation is the most unusual mode of extinguishing an obligation. It is the only
mode whereby an obligation is extinguished and a new obligation is created to take
its place. The other modes of extinguishing an obligation are absolute in the sense
that the extinguishment of the obligation is total. Novation, on the other hand, is a
relative mode of extinguishing an obligation.
 A compromise is a form of novation. The difference is that a compromise has some
judicial participation. The effect of compromise is the same as novation.
 Classification of Novation
a. Subjective or Personal Novation – change of one of the subjects
i. Active subjective
 This a change of creditor.
 This is also known as subrogation.
 2 Kinds of Subrogation
Legal (Article 1302)
 It is presumed that there is legal subrogation:
a. When a creditor pays another creditor who is preferred, even
without the debtor's knowledge;
b. When a third person, not interested in the obligation, pays
with the express or tacit approval of the debtor
c. When, even without the knowledge of the debtor, a person
interested in the fulfillment of the obligation pays, without
prejudice to the effects of confusion as to the latter's share;
2. Conventional
 Conventional subrogation of a third person requires the consent of
the original parties and of the third person (Article 1301)
 Effect of Subrogation
1. 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 (Article 1304)
2. Subrogation transfers to the person subrogated the credit with all the
rights thereto appertaining, either against the debtor or against third
persons, be they guarantors or possessors of mortgages, subject to
stipulation in a conventional subrogation (Article 1303)
ii. Passive subjective
 This is a change of debtor.
 Types of Passive Subjective
1. Expromission (Article 1293)
 In expromission the changing of the debtor is not upon the old
debtor's initiative. It could be upon the initiative of the creditor or
of the new debtor.
 This requires the consent of the creditor since the changing of the
debtor may prejudice him. This requires the consent of the new
debtor since he is the one who will pay.
 The consent of the old debtor is not required.
 The intent of the parties must be to release the old debtor. The
release of the old debtor is absolute even if it turns out that the
new debtor is insolvent.
 Cases of expromission are quite rare.
2. Delegacion (Article 1295)
  In delegacion the change is at the debtor’s initiative.
 The consent of the old debtor (delegante), the new debtor
(delegado), and the creditor (delegatario) are all required.
 The intent of the parties must be to release the old debtor.
However, release of the old debtor is not absolute. He may be
held liable
a. If the new debtor was already insolvent at the time of the
delegacion; and
b. Such insolvency was either known to the old debtor or of
public knowledge
b. Objective or Real Novation
 In objective novation there is a change in the object or in the principal
conditions.
 Novation by a change in the principal conditions is the most problematic kind
of novation because one has to determine whether or not the change in the
conditions is principal or merely incidental.
 If the amount of debt is increased, Castan thinks that there is a novation
while Caguioa thinks there is no novation. Professor Balane thinks that
Castan is correct. The old obligation is merged with the new.
 If the amount of the debt is decreased, according the SC in Sandico vs.
Piguing, there is no novation. One can look at the decrease of the amount as
a partial remission.
 In Millar vs. CA, there is no novation if the terms of the payment are
changed. In this case, there was a change from lump sum to installment
payments.
 In Fua vs. Yap, not only was the amount reduced, mode of payment was
changed from single payment to installment. Finally, a mortgage was
constituted. The SC said in Fua vs. Yap that there was a novation.
Therefore, a mere change in the amount or mode of payment if taken singly
is not a novation. But taken together, there is a novation.
 In Inchausti vs. Yulo, the SC said that the mere extension of time is not a
novation for the period does affects only the performance and not the
creation of an obligation. In another case, the SC said that the shortening of
the period is a novation.
c. Mixed Novation
 Mixed is a combination of both subjective and objective novation.
 Requisites of Novation
a. There must be a previous valid obligation
 The novation is void if the original obligation was void, except when
annulment may be claimed only by the debtor, or when ratification validates
acts which are voidable (Article 1298)
b. There must be an agreement of the parties to create the new obligation
 If the original obligation was subject to a suspensive or resolutory condition,
the new obligation shall be under the same condition, unless it is otherwise
stipulated (Article 1299)
c. There must be an extinguishments of the old obligation
 Professor Balane considers this as an effect rather than a requisite of
 novation.
 In order that an obligation may be extinguished by another which substitute
the same, it is imperative that it be so declared in unequivocal terms, or that
the old and the new obligations be on every point incompatible with each
other (Article 1292)
d. The new obligation must be valid
 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
(Article 1297)
 Effect of Novation
 Accessory obligations may subsist only insofar as they may benefit third persons
who did not give their consent, e.g., stipulation pour autrui
 General Rule: In a novation, the accessory obligation is extinguished.
 Exception: In an active subjective novation, the guarantors, pledgors,
mortgagors are not released.
 Under Article 1303, accessory obligations are not extinguished. So there is a
conflict? How do you resolve? According to commentators, Article 1303 is an
exception to Article 1296.
 B owes K P1 M. M is a guarantor of B. B is substituted by U. B is released. M is
also released under Article 1296. M is released since he guarantees B’s
performance and not B’s. B might have a good credit standing but U may not.
M might be prejudiced if he has to guarantee U’s performance.
 If there is a change in the creditor under Article 1303, the guarantor is not
released since it doesn’t make a difference. What the guarantor guarantees is
the integrity of the debtor.
Annulment
Rescission
Fulfillment of a Resolutory Condition
Prescription
Death in Certain Instances
For example, death extinguishes obligations which are purely personal (i.e.
obligations in marriage, obligation to support, obligations in a partnership, etc.)
Renunciation by the Creditor (Article 6)
 The creditor waives the obligation.
 The renunciation need not be in any specific form.
 Renunciation and remission are 2 different things. A renunciation is a refusal by the
creditor to enforce his claim with the intention of waiving it. A remission is in the
nature of a donation.
Compromise
Arrival of a Resolutory Term
Mutual Dissent or Desistance (Saura vs. DBP)
Unilateral Withdrawal
 General Rule: Unilateral withdrawals are not allowed.
 Exception: Partnership
 Change of Civil Status
 For example, if the marriage is annulled, certain obligations are extinguished, like
the obligations to live together and to support one another.
Rebus Sic Stantibus (Article 1267)
Want of Interest
 Example: A owns a peking duck restaurant with a secret recipe for preparing
peking duck. A disclosed the secret recipe to B, his cook. B is then prohibited in
his employment contract to work in another restaurant within 5 years from leaving
A’s restaurant. Two years after B left, A closes his restaurant and opens a hardware
store. B can now work in a restaurant.
Judicial Insolvency
 The effect of judicial insolvency is that all unpaid debts are written off for good.
Thus, even if the debtor has improved his financial situation because of judicial
insolvency, there is no need for the debtor to pay his unpaid debts.

II. Contracts
A. General Provisions
Definition

Art. 1305. A contract is a meeting of the minds between 2 persons

whereby one binds himself, with respect to the other, to give something or to
render some service.

 Professor Balane thinks that the definition in Article 1305 is inaccurate. The term
“persons” should be submitted by the term “parties”. Also, contracts may be
multilateral; there can be more than 2 parties involved (i.e. partnership).
Characteristics of Contracts
Obligatory force

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.

 General Rule: Contracts are perfected by mere consent – the principle of

consensuality (Article 1315)
 Exception: Real contracts, such as deposit, pledge, and commodatum are not
perfected until the delivery of the object of the obligation (Article 1316)
 Obligations arising from contracts have the force of law between the parties and
should be complied with in good faith (Article 1159)
Art. 1314. Any third person who induces another to violate his
contract shall be liable for damages to the other contracting party.

 It is not clear whether Article 1314 is a tortious liability or a contractual liability.

Professor Balane considers it as only a tortious liability so it is not violative of
the rule on relativity of contracts.
 Article 1314 is really a quasi-delict.
 Requisites
i. Existence of a valid contract
 ii. Knowledge by the 3rd person of the existence of the contract
iii. Interference by the 3rd person in the contractual relation without legal
justification
Mutuality

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

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.

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.

 An example of a determination made by a 3rd person (Article 1309) is the fixing

of the price by the 3rd person.
 The contract may be revoked if there is mutual dissent.
Relativity

Art. 1311, ¶1. 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.

 General Rule: The contract is binding only upon the parties and their
successors (Article 1311). However, if the contract is purely personal (intuitu
personae), then the contract will not bind assigns and heirs.
 Exception: 3 parties are affected by the contract in the following instances and
can take appropriate action
i. Accion pauliana (Article 1177)

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.

 An rescissory action involving a contract in fraud of creditors.

Art. 1313. Creditors are protected in cases of contracts

intended to defraud them.

ii. Accion directa

 A direct (not subrogatory) action by the creditor against his debtor’s
debtor, a remedy which gives the creditor the prerogative to act in his
own name, such as the actions of the lessor against the sublessee
(Article 1652 ), the laborer of an independent contractor against the

 Art. 1652. The sublessee is subsidiarily liable to the lessor for any rent due from the lessee.
 owner (Article 1729 ), the principal against the subagent (Article
1893 ), and the vendor-a-retro against the transferee of the vendee
(Article 1608 ).
iii. Article 1312

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.

iv. Stipulation pour autrui – stipulation in favor of a 3rd person

Art. 1311, ¶2. 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.

 Requisites
1. There must be a stipulation in favor of a 3rd person
2. That stipulation in favor of a 3rd person should be a part and not the
whole of the contract
3. A clear and deliberate intent to confer a benefit on a 3rd person and
not merely incidental
 In the case of Mandarin Villa vs. CA, the credit card holder was
held to have a right to sue under the contract between the
establishment and the bank. The Supreme Court said that it’s a
stipulation pour autrui to confer benefit on the customer to
purchase on credit.
 However, Professor Balane believes that it is debatable whether an
agreement between a credit card company and establishment is a
clear and deliberate conferment of benefit on a third party. He
would have concurred with the decision in Mandarin Villa if the

However, the sublessee shall not be responsible beyond the amount of rent due from him, in accordance with
the terms of the sublease, at the time of the extra-judicial demand by the lessor.
Payments of rent in advance by the sublessee shall be deemed not to have been made, so far
as the lessor's claim is concerned, unless said payments were effected in virtue of the custom of the place.
 Art. 1729. Those who put their labor upon or furnish materials for a piece of work undertaken by
the contractor have an action against the owner up to the amount owing from the latter to the contractor at
the time the claim is made. However, the following shall not prejudice the laborers, employees and furnishers
of materials:
(1) Payments made by the owner to the contractor before they are due;
(2) Renunciation by the contractor of any amount due him from the owner.
This article is subject to the provisions of special laws.
 Art. 1893. In the cases mentioned in Nos. 1 and 2 of the preceding article, the principal may
furthermore bring an action against the substitute with respect to the obligations which the latter has
contracted under the substitution.
 Art. 1608. The vendor may bring his action against every possessor whose right is derived from the
vendee, even if in the second contract no mention should have been made of the right to repurchase,
without prejudice to the provisions of the Mortgage Law and the Land Registration Law with respect to
third persons.
 basis was quasi-delict.
4. That the favorable stipulation should not be conditioned or
compensated by any kind of obligation whatever
5. Neither of the contracting parties bears the legal representation of
authorization of the 3rd parties
 If the 3rd parties is represented, then the principles of agency
apply.
6. The 3rd person must have communicated his acceptance to the obligor
before its revocation

d. Autonomy of will

Art. 1306. The contracting parties may establish such stipulations,

clauses, terms and conditions as they may deem convenient, provided they
are not contrary to law, morals, good customs, public order, or public
policy.

Elements of a Contract
Essential Elements

Art. 1318. There is no contract unless the following requisites

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

 The essential elements are those without which there can be no contract. These
elements are, in turn, subdivided into common (communes), special
(especiales), and extraordinary (especialisimos). The common elements are
those which are present in all contracts, such as consent, object certain, and
cause. The special elements are present only in certain contracts, such as
delivery in real contracts or form in solemn ones. The extraordinary elements
are those which are peculiar to a specific contract (i.e. price in sales).
i. Consent
1. Consent in General
 Definition of Consent

Art. 1319, 1st sentence. Consent is manifested by the

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

 Elements of Consent
a. Plurality of subjects
b. Capacity
c. Intelligent and free will
d. Express or tacit manifestation of the will
e. Conformity of the internal will and its manifestation
2. Offer
  An offer is a unilateral proposition which 1 party makes to the other
for the celebration of a contract.
Art. 1321. The person making the offer may fix the
time, place, and manner of acceptance, all of which must be
complied with.
 Requisites of Offer
a. Definite
 The offer must be definite, so that upon acceptance, an
agreement can be reached on the whole contract.
b. Complete
 The offer must be 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 desired by the offeror.
c. Intentional
 An offer without seriousness, made in such manner that the
other party would not fail to notice such lack of seriousness, is
absolutely without juridical effects and cannot give rise to a
contract (i.e. must not be made in jest, or a prank).
3. Acceptance
a. Requisites of Acceptance
i. Unequivocal
ii. Unconditional
 If the acceptance is qualified, then that is a counter-offer
(Article 1319, 3rd sentence).
 An amplified acceptance may or may not be an acceptance of
the original offer. It depends on the circumstances.
Example: A offers to sell 1000 kilos of cement. B says he
wants to buy 2000 kilos of cement. Is the 1000 kilos
accepted? It depends. If buyer wants a block sale, that is,
only 2000 kilos and nothing less, then it is a counter-offer.
b. Manifestation of Acceptance
Art. 1320. An acceptance may be express or implied.
 Silence is ambiguous. Silence in itself is neither acceptance nor
rejection. Can it mean acceptance? One must look at the
circumstances.
Examples: A and B are own stalls which sell rice. C delivers 1000
kilos of rice to A every Sunday. If A is not there, C just leaves it
with A’s assistant. C tries to do business with B. B is not there
though. C leaves rice with B’s assistant. B does not call C. Both A
and B are silent. A accepted the rice because of the arrangement.
If A did not want to accept the rice, then A should have called.
B’s silence is not acceptance.
c. Cognition Theory
Article 1319, 2nd ¶. Acceptance made by letter of
telegram does not bind the offerer except from the time it
came to his knowledge.
  This is known as the Cognition Theory. Commercial law uses the
Theory of Manifestation.
 Offer and acceptance takes effect only from the time knowledge is
acquired by the person to whom it is directed. If during
intervening time, the offer or acceptance is extinguished by
death/insanity, such offer or acceptance has no more effect.
Example: Offeror gave offer on March 1. The offer reached the
offeree on March 5. From the point of view of the offeror, offer is
counted from March 5. He can still countermand before March 5.
 If the parties are face to face, then there is no problem since
there is no time gap.
 The problem arises when there is a time gap. Under Article 1319,
there is perfection of the contract when there is knowledge of the
other party’s acceptance. This has serious consequences.
Example 1. The offer was made in Davao on February 1. The
offer was sent through mail which is received in Manila on
February 5. On the same day, the offer is accepted. Mail is sent
to Davao on February 5 signifying acceptance. On February 8, the
party in Manila becomes insane. On February 13, the mail reaches
Davao. According to Professor Balane, under Article 1323, there
is no contract since there was no contractual capacity.
Example 2. The offer was made in Bacolod on March 1. It was
received in Quezon City on March 3. On March 4, the offeree
sends his acceptance. On March 5, the offeror countermands
offer. Now, both acceptance and countermand of offer are in the
mail. Whichever reaches the destination first will be counted.
d. Offers Through Agents
Art. 1322. An offer made through an agent is accepted
from the time acceptance is communicated to him.
e. Effect of Death, Insanity
Art. 1323. An offer becomes ineffective upon the death,
civil interdiction, insanity or insolvency of either party before
acceptance is conveyed.
f. Withdrawal of the Offer
Art. 1324. When the offeror has allowed the offeree a
certain period to accept, the offer may be withdrawn at any
time before acceptance by communicating such withdrawal,
except when the option is founded upon consideration,
something paid or promised.
 Article 1324 is related to Article 1479, ¶2 . They actually say
the same thing.
 S offers to sell a car to B for P300,000. B needs to think about it,
and so B asks for 30 days and pays S P5,000. The payment of
P5,000 is a distinct consideration from the price of the car. This
distinct consideration of P5,000 is payment for the 30 days. B is
paying for time. The option contract is separate from the contract
of sale. S cannot sell the car to anybody else within that 30-day

 Art. 1479, ¶2. An accepted unilateral promise to buy or to sell a determinate thing for a price certain is
binding upon the promissor if the promise is supported by a consideration distinct from the price.
 period. If S sells the car to someone else within the 30-day
period, he is guilty of contractual breach. But B can buy the car
before the end of the 30-day period and such will be a valid sale.
 S offers to sell a car to B for P300,000. B needs to think about it,
and so B asks for 30 days. B does not pay S for time, but S
promises to give B 30 days. In this case there is no option
contract. However, in Sanchez vs. Rigos, the Supreme Court said
that even if there was no option contract, S must still
communicate the withdrawal of the offer to B. If S does not
communicate his withdrawal, that is tantamount to a continuing
offer. Professor Balane does not agree with this. According to
him, if there is no valid option contract, there should be no
continuing offer. According to Professor Balane, the Supreme
Court should have explained that.
 S offers to sell a car to B for P300,000. B needs to think about it,
and so B asks for 30 days and pays P5,000 to S. B decides to buy
the car within 30 days. The car is not sold to anybody else. S
does not want to sell the car to B. B can sue S for specific
performance – compel S to sell him the car.
 S offers to sell a car to B for P300,000. B needs to think about it,
and so B asks for 30 days and pays P5,000 to S. B decides to buy
the car within 30 days. Before B is able to buy the car, S sells the
car to X. B can sue S for damages. B cannot sue for specific
performance since the car has been sold to an innocent purchaser.
 A right of first refusal is different from an option contract. A right
of first refusal is the right to have first opportunity to purchase or
the right to meet any other offer. On the other hand, an option
contact limits the promissor’s power to revoke an offer. The right
of first refusal is not covered by the Civil Code.
 A right of first refusal is a statement by a person to another that if
the former decides to sell the object, the latter will have the first
offer. Here, the object is determinable. But the exercise of the
right to buy is conditioned on the seller’s decision to sell on terms
which are not yet certain.
 According to Equatorial vs. Mayfair, the requirement of separate
consideration is not applicable in a right of first refusal. According
to Professor Balane, this is peculiar since an option contract is
more firm and yet it requires the payment of separate
consideration but a right of first refusal does not. However, in
Litonjua vs. CA, the Supreme Court said that in a right of first
refusal, the consideration for the loan or mortgage is already a
part of the consideration for the right of first refusal.
 In Ang Yu vs. CA, the SC said that an action for specific
performance will not lie against the promissor. However, a
complaint under Article 19 for damages may be filed if the actions
of the promissor are whimsical. In Equatorial vs. Mayfair the right
of first refusal was violated when the vendor sold the object to
another person. The SC in Equatorial vs. Mayfair said that an
action for specific performance may be filed. Equatorial vs.
Mayfair is totally inconsistent with Ang Yu vs. CA.
 The Supreme Court has held (Equatorial vs. Mayfair, Parañaque
Kings vs. CA, Litonjua vs. CA, PUP vs. CA) that the right of first
 refusal is enforceable by an action for specific performance. And
that the actual vendee may be required to sell the property to the
holder of the right of first refusal at the price which he bought it.
 However, in a recent case, Rosencorr vs. CA (March 8, 2001), the
Supreme Court has held that the right of first refusal need not be
written to be unenforceable since it is not included in the Statute
of Frauds. Also, if the vendee is in good faith, he may not be
compelled by specific performance since he relied on a title which
is clean. The remedy is to go after the vendor.
 In a right of first refusal, there is no definite offer since the vendor
has to option of deciding not to sell the object. Also, in a right of
first refusal, there is no need for a separate consideration. In an
option contract, there is a definite offer. According to Professor
Balane, the right of first refusal is inferior to an option contract
since there is no definite offer. Professor Balane does not
understand why an action for specific performance is allowed in
violations of rights of first refusal but not in the case of option
contracts when the object is sold to another person. Why is the
SC giving greater legal effect to a right of first refusal which is
more tentative? Also, where the SC get these rules since the
right of first refusal is not covered by the Civil Code.
g. Advertisements
Art. 1325. Unless it appears otherwise, business
advertisements of things for sale are not definite offers, but
mere invitations to make an offer.
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.
 Most advertisements are simply invitations to make an offer and
are not offers in themselves since not all the necessary terms can
fit in the advertisement.
 Even if the ad had all the necessary terms, it’s still an invitation to
make offer since there is no definite person to whom the offer is
being made (public offer).
h. Simulated Contracts
Art. 1345. Simulation of a contract may be absolute or
relative. The former takes place when the parties do not
intend to be bound at all; the latter, when the parties conceal
their true agreement.
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 any purpose contrary to
law, morals, good customs, public order or public policy binds
the parties to their real agreement.
i. Absolutely Simulated (contrato simulado)
 Absolute simulation of a contract takes place when the parties
do not intent to be bound at all (Article 1345).
 For example, X pretends to sell his car to avoid tax liability.
However X has no real intention to sell the car.
  An absolutely simulated or fictitious contract is void (Article
1346)
ii. Relatively Simulated (contrato disimulado)
 Relative simulation of a contract takes place when the parties
conceal their true agreement (Article 1345).
 In a relatively simulated contract, the parties enter into a
contract but disguise it as another.
 For example, X has many creditors, and they are going after
X’s car. X cannot donate his car to Y since the creditors will
just resort to accion pauliana. So, X antedates a contract of
sale, selling his car to Y, except that X’s intention is to donate
his car to Y.
 A relatively simulated contract, when it does not prejudice a
3rd person and is not intended for any purpose contrary to law,
morals, good customs, public order or public policy binds the
parties to their real agreement (Article 1346).
 The law will apply the rules of the true contract and not the
ostensible contract.
ii. Object

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.

Art. 1348. Impossible things or services cannot be the object

of contracts.

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.

 The object of the contract is the prestation. Thus, it is always the

conduct which is to be observed. It is not a concrete object like a car. In
a contract of sale, the object is the delivery of the object and not the
object itself.
 The provisions on object however blur the distinction between the object
of the contract, the prestation, and the object of the prestation.
According to Professor Balane, these provisions are not fatal though.
 Requisites of Object
1. The object must be within the commerce of man, either already
existing or in potency (Article 1347)
 Within the commerce of man means that the object is capable of
 appropriation and transmission.
 The term “in potency” means that the object will come into
existence in the future.
 Generally in reciprocal contracts particularly sales, the sale of
future things is allowed. For example, it is possible to sell the
future harvest of a farm.
 The coming into being of the future thing is a suspensive
condition.
 Emptio rei speratae is a conditional sale. There is a suspensive
condition. If the future thing does not come into existence, then
there is no contract of sale.
 Emptio spei is the sale of a hope. Even if the future thing does
not materialize, the buyer must pay since the buyer is taking a
chance. (i.e. sale of lotto ticket). Hope is a present thing.
 Some future things are not allowed to be objects of the
prestation. The law does not allow contracts on future
inheritance.
2. The object must licit, or not be contrary to law, morals, good
customs, public policy or public order (Article 1347)
3. The object must be possible (Article 1348)
 If the object is impossible, then the contract is void for lack of
cause.
 Article 1348 does not talk of supervening impossibility which is a
mode of extinguishments.
 Impossibility under Article 1348 must be actual and
contemporaneous with the making of the contract.
4. The object must be determinate as to its kind and determinable as to
its quantity (Article 1349)
 The object need not be individualized. It must be determinate as
to its kind or species.
 The quantity of the object may be indeterminate, so long as the
right of the creditor is not rendered illusory.
5. The object must be transmissible
 This is actually a redundancy since this is already in the requisite
of being within the commerce of man.
iii. Cause

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.

Art. 1351. The particular motives of the parties in entering

into a contract are different from the cause thereof.

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.

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.

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.

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.

 The cause of a contract is the “why of the contract,” the immediate and
most proximate purpose of the contract, the essential reason which
impels the contracting parties to enter into it and which explains and
justifies the creation of the obligation through such contract.
 The cause is different from consideration. Consideration in the Anglo-
American sense must always be valuable or capable of pecuniary
estimation. Cause, on the other hand, need not be material at all, and
may consist in a moral satisfaction for the promissor.
 Requisites of Cause
1. It must exist
2. It must be true
3. It must be licit
 Cause is different from motive. Cause is the proximate why while motive
is the ultimate why. For example, A wants to sell his house for P60 M
because A is moving to Canada. B is willing to buy the house for P60 M.
In this case, the cause for A is the P60 M while the cause for B is the
house. A’s motive is to dispose of the house which he does not need
since A is going to Canada.
 Like failure of or lack of object, the failure of cause has an effect on the
contract. If there is no cause or the cause is illegal, then the contract is
void. This is unlike the lack of consent. When consent is lacking, the
contract is not void. The contract is merely voidable.
 General Rule: Failure of motive as a General Rule does not affect the
contract.
 Exception: Motive affects the contract when
1. The motive becomes a suspensive condition; or
2. The realization of the motive is the cause for the contract and there is
an intervening serious mistake of fact
 In onerous contracts, the cause is the prestation or promise of a thing or
service by the other party.
 It has been held that, as a mortgage is an accessory contract, its
cause or consideration is the very cause or consideration of the
principal contract, from which it receives its life, and without which it
cannot exist as an independent contract (China Bank vs. Lichauco).
 In remuneratory contracts, the cause is the service or benefit which is
 remunerated .
 A remuneratory contract is one where a party gives something to
another because of some service or benefit given or rendered by the
latter to the former, where such service or benefit was not due as a
legal obligation.
 In gratuitous contracts, the cause is the mere liberality of the benefactor.
 Delivery – for real contracts
 Form – for formal contracts
b. Natural Elements
 The natural elements are those which are derived from the nature of the
contract and ordinarily accompany the same. They are presumed by law,
although they can be excluded by the contracting parties if they so desire.
i. Right to resolve (Article 1191)
ii. Warranties in sales contracts
 c. Accidental Elements
 The accidental elements are those which exist only when the parties expressly
provide for them for the purpose of limiting or modifying the normal effects of
the contract (i.e. conditions, terms, modes)
Stages of a Contract
Preparation, conception, or generation, which is the period of negotiation and
bargaining, ending at the moment of agreement of the parties
Perfection or birth of the contract, which is the moment when the parties come to
agree on the terms of the contract
 General Rule: Contracts are perfected by mere consent – the principle of
consensuality (Article 1315)
 Exception: Real contracts, such as deposit, pledge, and commodatum are not
perfected until the delivery of the object of the obligation (Article 1316)
Consummation or death, which is the fulfillment or performance of the terms
agreed upon
5. Classification of Contracts
a. According to Degree of Dependence
i. Preparatory
 A preparatory contract is one which has for its object the establishment of a
condition in law which is necessary as a preliminary step towards the
celebration of another subsequent contract (i.e. partnership, agency).
ii. Principal
 A principal contract is one which can subsist independently from other
contracts and whose purpose can be fulfilled by themselves (i.e. sales,
lease).
iii. Accessory
 An accessory contract is one which can exist only as a consequence of, or in
relation with, another prior contract (i.e. pledge, mortgage).
b. According to Perfection
i. Consensual
 A consensual contract is one which is perfected by mere agreement of the
parties (i.e. sales, lease).
ii. Real
 A real contract is one which requires not only the consent of the parties for
their perfection, but also the delivery of the object by 1 party to the other
(i.e. commodatum, deposit, pledge).
c. According to their Form
i. Common or informal
 An informal contract is one which does not require some particular form (i.e.
loan, lease).
ii. Special or formal
 A formal contract is one which requires some particular form (i.e. donation,
chattel mortgage).
d. According to Purpose
 i. Transfer of ownership (i.e. sale)
ii. Conveyance of use (i.e. commodatum)
iii. Rendition of service (i.e. agency)
e. According to Subject Matter
i. Things (i.e. sale, deposit, pledge)
ii. Services (i.e. agency, lease of services)
f. According to the Nature of the Obligation
i. Bilateral
 A bilateral contract is one which gives rise to reciprocal obligations for both
parties (i.e. sale, lease).
ii. Unilateral
 A unilateral contract is one which gives rise to an obligation for only 1 of the
parties (i.e. commodatum, gratuitous deposit).
g. According to Cause
i. Onerous
 An onerous contract is one in which each of the parties aspires to procure for
himself a benefit through the giving of an equivalent or compensation (i.e.
sale).
ii. Gratuitous
 A gratuitous contract is one in which one of the parties proposes to give to
the other a benefit without any equivalent or compensation (i.e.
commodatum).
h. According to Risk
i. Commutative
 A commutative contract is one in which each of the parties acquires an
equivalent of his prestation and such equivalent is pecuniarily appreciable
and already determined from the moment of the celebration of the contract
(i.e. lease).
ii. Aleatory
 An aleatory contract is one in which each of the parties has to his account
the acquisition of an equivalent prestation , but such equivalent, although
pecuniarily appreciable, is not yet determined, at the moment of the
celebration of the contract, since it depends upon the happening of an
uncertain event, thus charging the parties with the risk of loss or gain (i.e.
insurance).
i. According to Name
i. Nominate
 A nominate contract is one which has a name and is regulated by special
provisions of law (i.e. sale, lease)
ii. Innominate

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.
  An innominate contract is one that does not have a name and is not
regulated by special provisions of law.
 A contract is not void just because it has no name. It is not a requisite for
validity. A contract may have no name but it can be valid provided it has all
the elements of a contract and all the restrictions are respected.
 4 Classes of Innominate Contracts
 do ut des (“I give that you give”)
 do ut facias (“I give that you do”)
 facio ut des (“I do that you give”)
 facio ut facias (“I do that you do”)
B. 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.

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.

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.

 General Rule: There is no need for a specific form, but there must still be some
manifestation of consent.
 Exception: When the written form is required
1. For validity
 If it not written, the same is void.
 Examples are donations (Articles 748, 749), antichresis (Article 2134), interest
in a loan (Article 1956), sale of land by an agent (Article 1874), contribution of
 immovables in a partnership (Article 1773)
2. For enforceability
 The contract is unenforceable if it is not written.
a. An agreement that by its terms is not to be performed within a year from the
making thereof (Article 1403 (a))
b. A special promise to answer for the debt, default or miscarriage of another
(Article 1403 (b))
c. An agreement made in consideration of marriage, other than a mutual
promise to marry (Article 1403 (c))
d. An agreement for the sale of goods, chattels or things in action, at a price
not less than P500, unless the buyer accepts and receives part of such goods
and chattels, or the evidence, 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 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 (Article 1403 (d))
e. An agreement of lease for a period of more than 1 year, or the sale of real
property or of an interest therein (Article 1403 (e))
f. A representation as to the credit of a 3rd person (Article 1403 (f))
g. No express trusts concerning an immovable or any interest therein may be
proved by parol evidence (Article 1443)
3. For registrability
 The following must appear in a public instrument:
a. 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 governed by Articles 1403 (2) and
1405
b. The cession, repudiation or renunciation of hereditary rights or of those of
the conjugal partnership of gains
c. 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 3rd person
d. The cession of actions or rights proceeding from an act appearing in a public
document
 Contracts enumerated in Article 1358 are valid as between the contracting
parties even when they have not been reduced to public or private writings.
 Except in certain cases where public instruments and registration are required
for the validity of the contract itself, the legalization of a contract by means of a
public writing and its entry in the register are not essential solemnities or
requisites for the validity of the contract as between the contracting parties, but
are required for the purposes of making it effective as against 3rd person.
 Article 1357 gives the contracting parties the coercive power to reciprocally
compel the execution of the formalities required by law, as soon as the
requisites for the validity of the contracts are present.
C. Reformation of Instruments
 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.

Art. 1369. The procedure for the reformation of instrument shall be

governed by rules of court to be promulgated by the Supreme Court.

 Once the minds of the contracting parties meet, a valid contract exists, whether the
agreement is reduced to writing or not. There are instances however, where in
reducing their agreements to writing, the true intention of the contracting parties are
not correctly expressed in the document, either by reason of mistake, fraud, inequitable
conduct or accident. It is in such cases that reformation of instruments is proper. The
action for such relief rests on the theory that the parties came to an understanding, but
 in reducing it to writing, through mutual mistake, fraud or some other reason, some
provision was omitted or mistakenly inserted, and the action to change the instrument
so as to make it conform to the contract agreed upon.
 Reformation Distinguished from Annulment
 The action for reformation of instruments presupposes that there is a valid existing
contract between the parties, and only the document or instrument which was
drawn up and signed by them does not correctly express the terms of their
agreement. On the other hand, if the minds of the parties did not meet, or if the
consent of either one was vitiated by violence or intimidation or mistake or fraud, so
that no real and valid contract was made, the action is for annulment.
 Annulment involves a complete nullification of the contract while reformation gives
life to it upon certain corrections.
 Operation and Effect of Reformation
 Upon reformation of an instrument, the general rule is that it relates back to, and
takes effect from the time of its original execution, especially as between the
parties.
 Requisites of Reformation
1. There must have been a meeting of the minds upon the contract
2. The instrument or document evidencing the contract does not express the true
agreement between the parties
3. The failure of the instrument to express the agreement must be due to mistake,
fraud, inequitable conduct or accident
 Requisites of Mistake
a. That the mistake is one of fact
 Whenever an instrument is drawn with the intention of carrying an
agreement previously made, but which, due to mistake or inadvertence
of the draftsman or clerk, does not carry out the intention of the parties,
but violates it, there is a ground to correct the mistake by reforming the
instrument.
b. That it was common to both parties
 A written instrument may be reformed where there is a mistake on 1 side
and fraud or inequitable conduct on the other, as where 1 party to an
instrument has made a mistake and the other knows it and conceals the
truth from him.
 The mistake of 1 party must refer to the contents of the instrument and
not the subject mater or the principal conditions of the agreement. In
the latter case, an action for annulment is the proper remedy.
 If 2 parties agree upon the mortgage or pledge of real property or
personal property, but the instrument states that the property is sold
absolutely or with a right of repurchase, reformation is proper.
c. The proof of mutual mistake must be clear and convincing
 Limitations of Reformation
1. Reformation is not proper in the following cases:
a. Simple donations inter vivos wherein no condition is imposed
b. Wills
c. When the real agreement is void
2. Who may ask for reformation
a. If the mistake is mutual
 Reformation may be ordered at the instance of either party or his successors
in interest
b. If the mistake is not mutual
 Reformation may be ordered upon petition of the injured party or his heirs
and assigns
3. Effect of enforcing an action
 When one of the parties has brought an action to enforce the instrument, he
cannot subsequently ask for its reformation.
D. Interpretation of Contracts
 Where the parties have reduced their contract into writing, the contents of the writing
constitutes the sole repository of the terms of the agreement between the parties.
Whatever is not found in the writing must be understood as waived and abandoned.
Generally, therefore, there can be no evidence of the terms of the contract other than
the contents of the writing, unless it is alleged and proved that the intention of the
parties is otherwise.

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.

 When the terms of the agreement are so clear and explicit that they do not justify an
attempt to read into it any alleged intention of the parties, the terms are to be
understood literally just as they appear on the face of the contract.
 When the true intent and agreement of the parties is established, it must be given
effect and prevail over the bare words of the written agreement.

Art. 1371. In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered.

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.

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.

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.

 Where the instrument is susceptible of 2 interpretations, 1 which will make it invalid

and illegal, and another which will make it valid and legal, the latter interpretation
should be adopted.
 In the construction of an instrument where there are several provisions or particulars,
such a construction is, if possible, to be adopted as will give effect to all.

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.

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.

 When there is doubt as to the meaning of any particular language, it should be

determined by a consideration of the general scope and purpose of the instrument in
which it occurs.
 An instrument may be construed according to usage in order to determine its true
 character.

Art. 1377. The interpretation of obscure words or stipulations in a contract shall

not favor the party who caused the obscurity.

 The party who draws up a contract in which obscure terms or clauses appear, is the one
responsible for the obscurity or ambiguity; they must therefore be construed against
him.

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.

Art. 1379. The principles of interpretation stated in Rule 123  of the

Rules of Court shall likewise be observed in the construction of contracts.

Rule 130, Rules of Court

Sec. 10. Interpretation of a writing according to its legal meaning. — The language of a
writing is to be interpreted according to the legal meaning it bears in the place of its execution,
unless the parties intended otherwise.

Sec. 11. Instrument construed so as to give effect to all provisions. — In the construction
of an instrument where there are several provisions or particulars. such a construction is, if
possible, to be adopted as will give effect to all.

Sec. 12. Interpretation according to intention; general and particular provisions. — In the
construction of an instrument, the intention of the parties is to be pursued; and when a general
and a particular provision are inconsistent, the latter is paramount to the former. So a particular
intent will control a general one that is inconsistent with it.

 When a general and a particular provision are inconsistent, the particular provision will
control.

Sec. 13. Interpretation according to circumstances. — For the proper construction of an

instrument, the circumstances under which it was made, including the situation of the subject
thereof and of the parties to it, may be shown, so that the judge may be placed in the position of
those whose language he is to interpret.

Sec. 14. Peculiar signification of terms. — The terms of a writing are presumed to have
been used in their primary and general acceptation, but evidence is admissible to show that they
have a local, technical, or otherwise peculiar signification, and were so used and understood in
the particular instance, in which case the agreement must be construed accordingly.

Sec. 15. Written words control printed. — When an instrument consists partly of written
words and partly of a printed form, and the two are inconsistent, the former controls the latter.

Sec. 16. Experts and interpreters to be used in explaining certain writings. — When the
characters in which an instrument is written are difficult to be deciphered, or the language is not

 Now, Rule 130, §§10-19.

 understood by the court, the evidence of persons skilled in deciphering the characters, or who
understand the language, is admissible to declare the characters or the meaning of the language.

Sec. 17. Of two constructions, which preferred. — When the terms of an agreement have
been intended in a different sense by the different parties to it, that sense is to prevail against
either party in which he supposed the other understood it, and when different constructions of a
provision are otherwise equally proper, that is to be taken which is the most favorable to the
party in whose favor the provision was made.

Sec. 18. Construction in favor of natural right. — When an instrument is equally

susceptible of two interpretations, one is favor of natural right and the other against it, the
former is to be adopted.

Sec. 19. Interpretation according to usage. — An instrument may be construed according

to usage, in order to determine its true character.

E. Defective Contracts
 The remaining chapters deal with defective contracts. The Civil Code made major and
important improvements on this topic. Unlike the Spanish Code, the defective
contracts were ambiguous and had unclear classifications. They were simply void or
voidable. Here, in our present code, there are for types of defective contracts, from the
serious to less serious, in the following order:

 However, our Code still has some imperfections. As pointed out by Tolentino, there
must be a “relatively void” contract. For example, in an assignment of lease without
authority, this is void as to third parties, but valid as between the parties.
 There have been several cases decided by our Supreme Court wherein a chattel
mortgage over real property was declared void as to third parties but valid as between
the parties.
 Whatever imperfections the Code has, it still is better than other codes on this topic.
Rescissible Contracts
Art. 1380. Contracts validly agreed upon may be rescinded in the cases
established by law.

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.

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.

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.

Art. 1384. Rescission shall be only to the extent necessary to cover the
damages caused.

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.

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.

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.

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.

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.

 This is not be to confused with resolution, discussed in Article 1191. This chapter
on rescissible contracts is the proper rescissible. According to Scaevola, rescission
 is a process designated to render inefficacious a contract validly entered into and
normally binding, by reason of external conditions, causing an economic prejudice
to a party or to his creditors.
 A rescissible contract is a contract which is valid because it contains all the essential
requisites prescribed by law, but which is defective because of injury or damage to
either of the contracting parties or to 3rd persons, as a consequence of which it may
be rescinded by means of a proper action for rescission.
 Rescission is a remedy granted by law to the contracting parties, and even to 3rd
persons, to secure the reparation of damages caused to them by a contract, even if
the same should be valid, by means of the restoration of things to their condition
prior to the celebration of the contract.
 Requisites of Rescission
a. The contact must be a rescissible contract under Article 1381 or Article 1382
 The following contracts are rescissible
i. Those entered into by guardians whenever the whom they represent
suffer lesion by more than ¼ of the value of things which are the object
thereof (Article 1381 (1))
 Rescission shall not take place with respect to contracts approved by
the court (Article 1386).
 As a rule, when a guardian enters into a contract involving the
disposition of the ward’s property, the guardian must secure the
approval of the guardianship court. A guardian is only authorized to
manage the estate of the ward. A guardian has no power to dispose
of any portion of the estate without approval of the court. If more
than acts of mere administration are involved, judicial approval is
necessary.
 In case of sale, mortgage, or other encumbrance of any portion of the
estate which does not have judicial approval is an unenforceable
contract (Article 1403 (1)).
 Therefore, Article 1381 (1) is limited to contracts which constitute
mere acts of administration (i.e. the purchase of equipment for the
cultivation of lands, purchase of materials for repair of buildings,
etc.).
 Lesion is very difficult to apply in practice.
 For example, A is the agent of B. B owns land worth P10 M. A sells
the land for P7 M. From the facts, the lesion suffered by B is 30%.
In practice, are you sure that P10 M is the fair market value of the
land. What if the situation is urgent and that property must be
disposed of right away?
 Another example, A is the agent of B. B owns land worth P10 M. C
wants to buy the land. C is willing to pay P 7 M – lump sum
payment. D is willing to pay P 10 M but on installments.
ii. Those agreed upon in representation of absentees, if the absentee
suffers lesion by more than ¼ of the value of things which are the object
thereof (Article 1381 (2))
 Rescission shall not take place with respect to contracts approved by
the court (Article 1386).
 As a rule, when the legal representative of an absentee enters into a
contract involving the disposition of the absentee’s property, he must
 secure the approval of the court. A legal representative is only
authorized to manage the estate of the absentee. He has no power
to dispose of any portion of the estate without approval of the court.
If more than acts of mere administration are involved, judicial
approval is necessary.
 In case of sale, mortgage, or other encumbrance of any portion of the
estate which does not have judicial approval is an unenforceable
contract (Article 1403 (1)).
 Therefore, Article 1381 (2) is limited to contracts which constitute
mere acts of administration (i.e. the purchase of equipment for the
cultivation of lands, purchase of materials for repair of buildings,
etc.).
 Lesion is very difficult to apply in practice.
 For example, A is the agent of B. B owns land worth P10 M. A sells
the land for P7 M. From the facts, the lesion suffered by B is 30%.
In practice, are you sure that P10 M is the fair market value of the
land. What if the situation is urgent and that property must be
disposed of right away?
 Another example, A is the agent of B. B owns land worth P10 M. C
wants to buy the land. C is willing to pay P 7 M – lump sum
payment. D is willing to pay P 10 M but on installments.
iii. Those undertaken in fraud of creditors when the creditors cannot in any
other manner collect the claims due them (Article 1381 (3))
 This is an exception to the principle of relativity of contracts.
 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 (Article 1177).
 Creditors are protected in cases of contracts intended to defraud
them (Article 1313).
 In determining whether or not a certain conveyance is fraudulent, the
question in every case is whether the conveyance was a bona fide
transaction or trick and contrivance to defeat creditors, or whether it
conserves to the debtor a special right.
 All contracts by virtue of which the debtor alienates property by
gratuitous tile are presumed to have been entered into in order to
defraud creditors, when the donor did not reserve sufficient property
to pay all debts contracted before the donation (Article 1387, 1st ¶).
 Alienations by onerous title are also presumed fraudulent when made
by persons against whom some judgment has been rendered in any
instance or some writ of attachment has been issued. The decision or
attachment need not refer to the property alienated, and need not
have been obtained by the party seeking the rescission (Article 1387,
2nd ¶).
 Badges of Fraud
The fact that the consideration of the conveyance is inadequate
A transfer made by a debtor after suit has begun and while it is
pending against him
A sale upon credit by an insolvent debtor
Evidence of large indebtedness or complete insolvency
The transfer of all or nearly all of his property by a debtor,
especially when he is insolvent or greatly embarrassed financially
The fact that the transfer is made between father and son when
there are present any of the above circumstances
The failure of the vendee to take exclusive possession of all the
property
iv. 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 (Article 1381 (4))
 Article 1381 (4) refers to a contract executed by the defendant in a
suit involving the ownership or possession of a thing, when such
contract is made without the knowledge and approval of the plaintiff
or court.
 As in the case of a contract in fraud of creditors, the remedy of
rescission in this case is given to a 3rd person who is not a party to
the contract. The purpose is to protect the plaintiff.
v. All other contracts specially declared by law to be the subject of
rescission (Article 1381 (5))
  The following provision in sales are examples of rescissible contracts
declared by law – Arts 1526, 1534, 1538, 1539, 1540, 1556, 1560,
1567, 1659.
 Payments made in a state of insolvency for obligations to whose
fulfillment the debtor could not be compelled at the time they were
effected (Article 1382)
b. The person asking for rescission must have no other legal means to obtain
reparation for the damages suffered by him (Article 1383)
c. The person demanding rescission must be able to return whatever he may be
obliged to restore if rescission is granted (Article 1385, 1st par)
 This requisite is only applicable if the one who suffers the lesion is a party to
the contract.
 This requisite does not apply when a defrauded creditor resorts to accion
pauliana.
d. The things which are the object of the contract must not have passed legally to
the possession of a 3rd person acting in good faith (Article 1385, 2nd ¶)
 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 (Article 1388,1st ¶).
 If there are 2 or more alienations, the 1st acquirer shall be liable 1st, and so
on successively (Article 1388, 2nd ¶).
e. The action for rescission must be brought within the prescriptive period of 4
years (Article 1389)
2. 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.

Art. 1391. The action for annulment shall be brought within four years.
This period shall begin:
In cases of intimidation, violence or undue influence, from the time the
defect of the consent ceases.
In case of mistake or fraud, from the time of the discovery of the same.
And when the action refers to contracts entered into by minors or other
incapacitated persons, from the time the guardianship ceases.

Art. 1392. Ratification extinguishes the action to annul a voidable

contract.

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.

Art. 1394. Ratification may be effected by the guardian of the

incapacitated person.

Art. 1395. Ratification does not require the conformity of the

contracting party who has no right to bring the action for annulment.

Art. 1396. Ratification cleanses the contract from all its defects from
the moment it was constituted.

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.

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.

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.

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.

Art. 1401. The action for annulment of contracts shall be extinguished

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

Art. 1402. As long as one of the contracting parties does not restore
what in virtue of the decree of annulment he is bound to return, the other
cannot be compelled to comply with what is incumbent upon him.

 A voidable contract is a contract in which all of the essential elements for validity
are present, but the element of consent is vitiated either by lack f legal capacity of
1 of the contracting parties or by mistake, violence, intimidation, undue influence,
or fraud.
 Voidable contracts are binding unless they are annulled by a proper action court.
They are susceptible to confirmation.
  There is a difference between confirmation and ratification. Confirmation is the
process of curing the defect of a voidable contract. Ratification is the process of
curing contracts which are defective because they were entered into without
authority.
 The following contracts are voidable or annullable, even though there may have
been no damage to the contracting parties
a. Those where one of the parties is incapable of giving consent to a contract
 The following cannot give consent to a contract (Article 1327):
i. Unemancipated minors
 Where necessaries are sold and delivered to a minor or other person
without capacity to act, he must pay a reasonable price therefore.
Necessaries include everything that is indispensable for sustenance,
dwelling, clothing, and medical attendance.
 Contracts effected by minors who have already passed the age of
puberty and adolescence and are near the adult age, when they
pretend to have already reached the age of majority, while in fact
they have not, are valid, and cannot be permitted afterwards to
excuse themselves from compliance with obligations assumed by
them or seek their annulment. This is in consonance with the rules of
estoppel. (Mercado vs. Espiritu).
 However in Braganza v, De Villa, the SC said that the
misrepresentation of an incapacitate 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. According to Professor
Balane, this view is very logical. If the minor is too young to enter
into contracts, he is too young to be estopped.
ii. Insane or demented persons, and deaf mutes who do 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.
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.
b. Those where the consent is vitiated by mistake, violence, intimidation, undue
influence or fraud
Art. 1330. A contract where consent is given through mistake,
violence, intimidation, undue influence or fraud is voidable.
i. Mistake
Art. 1331. In order that mistake may invalidate consent, it
should refer to the substance of the thing which is the object of the
contract, or to those conditions which have principally moved one or
both parties to enter into the contract .
Mistake as to the identity or qualification of one of the parties
will vitiate consent only when such identity or qualifications have
been the principal cause of the contract.
A simple mistake of account shall give rise to its correction.
 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.

Art. 1333. There is no mistake if the party alleging it knew the

doubt, contingency or risk affecting the object of the contract.

Art. 1334. Mutual error as to the legal effect of an agreement

when the real purpose of the parties is frustrated, may vitiate
consent.

Art. 1342. Misrepresentation by a third person does not

vitiate consent, unless such misrepresentation has created
substantial mistake and the same is mutual.

Art. 1343. Misrepresentation made in good faith is not

fraudulent but may constitute error.

ii. Violence

Art. 1335, 1st ¶. There is violence when in order to wrest

consent, serious or irresistible force is employed.

 Violence shall annul the obligation, although it may been employed by a

3rd person who did not take part in the contract (Article 1336).
 Requisites of Violence
1. Irresistible physical force is employed
2. The force is the determining cause for giving consent
iii. Intimidation

Art. 1335, 2nd ¶. There is intimidation when one of the

contracting parties is compelled by a reasonable and well-grounded
fear of an imminent and grave evil upon his person or property, or
upon the person or property of his spouse, descendants or
ascendants, to give his consent.

 Requisites of Intimidation
The threat must be the determining cause for giving consent
The threatened act is unjust and unlawful
 A threat to enforce one’s claim through competent authority, if the
claim is just or legal, does not vitiate consent (Article 1335, 4th ¶).
 The threat to enforce a right, should not be aimed at a result
which is contrary to law or morals, or which is unjust and contrary
to good faith. Although it is lawful to exercise rights, it is not
always lawful to use them for purposes different from those for
which they were created. Thus, although it is lawful to report
crimes, the threat to report it may be illicit if the purpose is not to
cooperate in the discovery and prosecution of the crime, but to
obtain some prestation from the culprit which otherwise could not
be obtained and which does not constitute indemnity for damages
for the crime committed.
  Thus, the rule is, generally, a threat to do something lawful does
not constitute intimidation.
Example: If you don’t marry my daughter, I’ll report you to the
IBP. This is not unlawful because the person did commit
immorality.
Sometimes, though, it may constitute intimidation.
Example: A saw B commit murder. A threatened B that he will
report him to the police unless B gives A his house. This is
intimidation because there is no connection between the crime
and the contract.
The threat is real and serious
 For example the threat must be to kill you or burn your house and
not merely to pinch you.
The threat produces a well-grounded fear that the person making it
can and will inflict harm
 To determine the degree of intimidation, the age, sex, and
condition of the person shall be borne in mind (Article 1335, 3rd ¶).
 For example, a 75year old man who is bed ridden and says that
he will kill you does not produce a well-grounded fear.
 Intimidation shall annul the obligation, although it may have been
employed by a 3rd person who did not take part in the contract
(Article 1336).
iv. Undue influence

Art. 1337. There is undue influence when a person takes

improper advantage of his power over the will of another, depriving
the latter of a reasonable freedom of choice. The following
circumstances shall be considered: the confidentiality, family,
spiritual and other relations between the parties, or the fact that the
person alleged to have been unduly influenced was suffering from
mental weakness, or was ignorant or in financial distress.

v. Fraud

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.

Art. 1338. There is fraud when, through insidious words or

machinations of one of the contracting parties, the other is induced
to enter into a contract which, without them, he would not have
agreed to.
 This is known as deceit or dolo causante. This is different from dolo
incidente which means fraud on things which would not prevent you from
entering into a contract but may hold the other liable for damages.
 Requisites of Fraud
1. Fraud is employed by 1 party on the other (Articles 1342, 1344)
2. The other party was induced to enter into the contract (Article 1338)
 3. The fraud must be serious (Article 1344)
4. There is damage or injury caused
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.

Art. 1340. The usual exaggerations in trade, when the other

party had an opportunity to know the facts, are not in themselves
fraudulent.

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.

Art. 1342. Misrepresentation by a 3rd person does not vitiate

consent, unless such misrepresentation has created substantial
mistake and the same is mutual.

Art. 1343. Misrepresentation made in good faith is not

fraudulent but may constitute error.

Art. 1344. In order that fraud may make a contract voidable,

it should be serious and should not have been employed by both
contracting parties.
Incidental fraud only obliges the person employing it to pay
damages.

 If a 3rd person should commit violence or intimidation on 1 of the

contracting parties and this vitiates the contracting party’s consent, then
the contract may be annulled (Article 1336). By analogy, if a 3rd person
should exert undue influence on 1 of the contracting parties and this
vitiates the consent of the contracting party, then the contract may be
annulled. However, if the 3rd party commits fraud, damages is the only
remedy unless the fraud committed by the 3rd person has created a
mutual substantial mistake (Article 1342).
 Rules Regarding Voidable Contracts
a. Voidable contracts are effective unless set aside (Article 1390).
b. The validity of a voidable contract can only be assailed in a suit for that purpose
(i.e. complaint or counterclaim).
 The action for 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 (Article 1397).
 The action for annulment shall be brought within 4 years. This period shall
begin
i. Intimidation – from the time the defect of the consent ceases
ii. Violence – from the time the defect of the consent ceases
iii. Undue influence – from the time the defect of the consent ceases
 iv. Mistake – from the time of the discovery of the mistake
v. Fraud – from the time of the discovery of the fraud
 The 4 year prescription period to annul contracts entered into by minors or
other incapacitated persons shall begin from the time the guardianship
ceases (Article 1391, 4th ¶).
 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 (Article 1398, 1st ¶).
 In obligations to render service, the value thereof shall be the basis for
damages (Article 1398, 2nd ¶).
 When the defect of the contract consists in the incapacity of 1 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 (Article 1399).
 What if the Thing to Be Returned is Lost
i. Loss due to Fault of Defendant
 Defendant has to pay the plaintiff
Value of the thing loss
Fruits if any
Interest
ii. Loss due to a Fortuitous Event or due to a 3rd party
 Defendant has to pay the plaintiff
1. Value of the thing loss
2. Fruits if any
iii. Loss due to Fault or Fraud of Plaintiff
 The plaintiff loses the right to annul (Article 1401).
 There is fault on the part of the plaintiff once the plaintiff regains
capacity.
iv. Loss without Fault on the Plaintiff’s Part
 Commentators have a difference of opinion
1. The right to annul is extinguished unless the plaintiff offers to
pay the value of the object at the time of loss
2. The plaintiff is entitled to annul without having to pay
anything.
 As long as 1 of the contracting parties does not restore what in virtue of
the decree of annulment he is bound to return, the other cannot be
compelled to comply with what is incumbent upon him (Article 1402).
 The action for annulment will not prosper in the following:
i. If the contract has been confirmed (Article 1392)
ii. If the action to annul has prescribed (Article 1391)
iii. When the thing which is the object of the contract is lost through the
fault or fraud of the person who has a right to institute the proceedings
(Article 1401, 1st ¶)
 iv. Estoppel
c. Voidable contracts can be confirmed.
 Confirmation extinguishes the action to annul a voidable contract (Article
1392).
 Confirmation is the proper term for curing the defect of a voidable contract.
 Confirmation cleanses the contract from all its defects from the moment it
was constituted (Article 1396).
 Requisites of Confirmation
1. That the contract is a voidable or annullable contract
2. That the ratification is made with knowledge of the cause for nullity
3. That at the time the ratification is made, the cause of nullity has already
ceased to exist
 Confirmation may be effected expressly or tacitly. It is understood that
there is tacit confirmation if, with knowledge of the reason which renders the
contract voidable and such reason having ceased, the person who has a right
to invoke it should execute an act which necessarily implies an intention to
waive his right (Article 1393).
d. Voidable contracts can be confirmed only by the party whose consent was
vitiated
 Confirmation does not require the conformity of the contracting party who
has no right to bring the action for annulment (Article 1395).
 Confirmation may be effected by the guardian of the incapacitated person
(Article 1394).
3. Unenforceable Contracts

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.

 An unenforceable contract is a contract which cannot be enforced by a proper action

in court, unless they are ratified, because either they are entered into without or in
excess of authority or they do not comply with the Statute of Frauds or both the
contracting parties do not possess the required legal capacity.
 The following contracts are unenforceable unless they are ratified (Article 1403)
a. Those entered into in the name of another person by 1 who has been given no
authority or legal representation, or who has acted beyond his powers

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.

 When a person enters into a contract for and in the name of another, without
authority to do so, the contract does not bind the latter, unless he ratifies the
same.
 The agent, who has entered into the contract in the name of the purported
principal, but without authority from him, is liable to 3rd persons upon the
 contract.
 The proper term for this case is “ratification”.
 Example: In a sale, Y claimed that he was an agent of X, even if not. The
contract cannot be enforced against X. Another example is when the agent
is authorized to lease the property but the agent instead sells the property.
The principal is not bound.
b. Those that do not comply with the Statute of Frauds
 This is the most famous variety.
i. An agreement that by its terms is not to be performed within a year from the
making thereof
 In Babao vs. Perez, the Supreme Court interpreted the phrase “not be to
performed within a year” to mean that the obligation cannot be finished
within 1 year. Professor Balane does not agree with this interpretation.
According to Professor Balane the phrase “not to be performed within a
year” should mean that the obligation cannot begin within a year. For
practical reasons, the contract must be in writing since the parties might
forget. This rule was made to guard against fallibility (forgetfulness) of
man and fraud.
 According to Professor Balane, the Supreme Court’s interpretation is
incorrect. If the obligation cannot be finished within 1 year, the contract
is not within the Statute of Frauds because of partial performance.
ii. A special promise to answer for the debt, default or miscarriage of another
 The test as to whether a promise is within the statute has been said to lie
in the answer to the question whether the promise is an original or
collateral one. If the promise is an original one or an independent one,
that is, if the promisor becomes thereby primarily liable for the payment
of the debt, the promise is not within the statute.
 If the promise is collateral to the agreement of another and the promisor
becomes merely a surety or guarantor, the promise must be in writing.
iii. An agreement made in consideration of marriage, other than a mutual
promise to marry
 A mutual promise to marry does not fall within the Statute of Frauds
since they are not made in writing.
 Agreements made in consideration of marriage other than the mutual
promise to marry are within the Statute of Frauds.
 In Cabague vs. Auxilio, the father of the groom promised to improve his
daughter-in-law’s father’s house in consideration of the marriage. The
father of the groom made improvements on the house. The wedding did
not take place. The Supreme Court said that the father of the groom
could not sue on the oral contract which as to him is not “mutual promise
to marry”. Professor Balane disagrees with the Supreme Court.
According to Professor Balane, the father of the groom should be able to
sue since there was partial performance.
iv. An agreement for the sale of goods, chattels or things in action, at a price
not less than P500, unless the buyer accepts and receives part of such goods
and chattels, or the evidence, 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 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
 The requirement of a written instrument or a memorandum for sales of
personal property for a price not less than P500, covers both tangible
and intangible personal property. It also covers the assignment of
choses in action.
 Where a contract for the sale of goods at a price not less than P500 is
oral, and there is neither partial payment or delivery, receipt, and
acceptance of the goods, the contract is unenforceable, and cannot be
the basis of an action for the recovery of the purchase price, or as the
basis of an action for damages for breach of the agreement.
 Where there is a purchase of a number of articles which taken separately
does not have a price of P500 each, but taken together, the price exceeds
P500, the operation of the statute of frauds depends upon whether there
is a single inseparable contract or a several one. If the contract is entire
or inseparable, and the total price exceeds P500, the statute applies. But
if the contract is separable, then each article is taken separately.
v. An agreement of lease for a period of more than 1 year, or the sale of real
property or of an interest therein
 As long there is a sale of real property, the sale must be in writing.
There is no minimum.
 An oral contract for a supplemental lease of real property for longer
period than 1 year is within the Statute of Frauds.
 An agreement to enter into an agreement is also within the Statute of
Frauds.
vi. A representation as to the credit of a 3rd person
 A wants to borrow money from C. C does not know A. C goes to B to
ask about A’s credit standing. B says that A’s credit standing is
satisfactory even though B knows that A is insolvent. Under Article
1403, C can go after B if B’s representation was in writing.
 Professor Balane thinks that this does not belong in the Statute of
Frauds. There is no contract between C and B. B did not bind himself to
pay C. What we have here is an unenforceable tort.
 According to Professor Balane, “a representation as to the credit of a 3rd
person” should be replaced by Article 1443. Article 1443 provides that
no express trusts concerning an immovable or any interest therein may
be proved by parol evidence.
 When the express trust concerns an immovable or an interest therein, a
writing is necessary to prove it. This writing is not required for the
validity of the trust. It is required only for purposes of proof. When the
property subject to the express trust, however is not real estate or an
interest therein, then it may be proved by any competent evidence,
including parol evidence.
c. Those where both parties are incapable of giving consent to a contract
 Neither party or his representative can enforce the contract unless it has
been previously ratified. The ratification by 1 party, however, converts the
contract into a voidable contract – voidable at the option of the party who
has not ratified; the latter, therefore, can enforce the contract against the
party who has ratified. Or, instead, of enforcing the contract, the party who
 has not ratified it may ask for annulment on the ground of his incapacity.
 The proper term is “acknowledgement” (and not ratification).
 2 Principles in the Statute of Frauds
a. Parol evidence is not admissible. However, there are 2 ways of bringing it out.
 2 Ways in Which Parol Evidence is Admissible
i. Failure to object by the opposing lawyer when parol evidence is used
(Article 1405)
 If there is no objection, then parol evidence is admitted.
ii. Acceptance of benefits (Article 1405)
 If there has been performance on 1 side and the other side accepts,
then the Statute of Frauds is not applicable. Also, estoppel sets in so
by accepting performance, the defect is waived.
b. The Statute of Frauds applies only to executory contracts and not to those which
have been executed in whole or in part.
 “Executed” here means there has been performance in part and acceptance
by the other.
4. Void 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.

 A void contract is an absolute nullity and produces no effect, as if it had never been
executed or entered into.
 The following contracts are inexistent and void from the beginning (Article 1409)
a. Those whose cause, object or purpose is contrary to law, morals. Good customs,
public order or public policy
b. Those which are absolutely simulated or fictitious
c. Those whose cause or object did not exist at the time of the transaction
 According to Professor Balane, Article 1409 (3) should not be “did not exist”.
Rather, the correct phrase should be “could not come into existence” because
there can be a contract over a future thing.
  Examples of “could not come into existence” are tangerine flying elephants
and cars running on urine.
d. Those whose object is outside the commerce of men
e. Those which contemplate an impossible service
 Here, there is no object.
f. Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained
 This is similar to being void for vagueness under the Constitutional law.
g. Those expressly prohibited or declared void by law
 An example of this is sale between husband and wife, subject to exceptions.
The Supreme Court has held that contingent fees of lawyers wherein the
latter receive part of the property subject of litigation are valid, unless
unconscionable in amount.
 Characteristics of Void Contracts
a. The contract produces no effect whatsoever either against or in favor of anyone
b. A judgment of nullity would be merely declaratory. There is no action for
annulment necessary as such is ipso jure.
 Even when the contract is void or inexistent, an action is necessary to
declare its inexistence, when it has already been fulfilled. Nobody can take
the law into his own hands.
 The intervention of a competent court is necessary to declare the absolute
nullity of the contract and to decree the restitution of what has been given
under it.
 The judgment of nullity will retroact to the very day when the contract was
entered into.
c. It cannot be confirmed, ratified or cured.
d. If it has been performed, the restoration of what has been given is in order,
except if pari delicto will apply.
e. The right to set the contract’s nullity cannot be waived
f. The action for nullity is imprescriptible (Article 1410)
 As between the parties to a contract, validity cannot be given to it by
estoppel if it is prohibited by law or is against public policy.
g. Any person can invoke the contract’s nullity if its juridical effects are felt as to
him
 The defense of illegality of contracts is not available to 3rd persons whose
interests are not directly affected (Article 1421).
 Pari Delicto (in equal guilt)
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.
 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.

 Articles 1411 and 1412 refer to the pari delicto rule, which literally means “in equal
kind”, or also “in equal guilt” – in pari delicto oritur actio and sometimes “in equal
guilt, the position of the defendant is stronger” – in pari delicto potior est condicio
defendentis. The position of the defendant is stronger because the plaintiff’s claim
is not really granted.
 The pari delicto rule applies only to contracts which is void for illegality of subject
matter. Thus, if the contract is void for simulation, the pari delicto rule does not
apply so a party can claim the object back through reconveyance.
 Outline:
a. If it constitutes a criminal offense
i. If both parties are in pari delicto
 No action for specific performance can prosper on either side (Article
1411, 1st ¶).
 No action for restitution can prosper on either side (Article 1411, 1st ¶).
 Example: A shabu supplier supplies shabu to the shabu dealer. If the
shabu supplier does not deliver the shabu, the dealer cannot file an
action for specific performance.
ii. If only 1 party is guilty
 No action for specific performance can prosper on either side.
 An action for restitution will be allowed only if the innocent party
demands. The guilty party is not entitled to restitution.
b. If it does not constitute a criminal offense
i. If both parties are in pari delicto
 No action for specific performance can prosper on either side (Article
1411, 1st ¶).
 No action for restitution can prosper on either side (Article 1411, 1st ¶).
ii. If only 1 party is guilty
 No action for specific performance can prosper on either side.
 An action for restitution will be allowed only if the innocent party
demands.
 Exceptions to Pari Delicto
a. Interest paid in excess of the interest allowed by the usury laws may be
recovered by the debtor, with interest therefrom from the date of payment
 (Article 1413)
b. When money is paid or property delivered for an illegal purpose, the contract
may be repudiated by 1 of the parties before the purpose has been
accomplished, or before any damage has been caused to a 3rd 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 (Article 1414).
c. Where 1 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 (Article 1415).
d. When the agreement is not illegal per se but is merely prohibited, and the
prohibition by law is designed for the protection of the plaintiff, he may, if public
policy is enhanced, recover what he has paid or delivered (Article 1416).
e. 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 (Article 1417).
f. 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 (Article 1418).
g. 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 (Article 1419).
 The above contracts are void but there is some remedy for policy considerations.
An example is the minimum wage law under Article 1419 wherein the employer
and the employee freely agree to the terms of employment below the minimum
wage. Although they are in pari delicto, you don’t follow the rules of pari
delicto. There is a policy consideration of social justice involved. This is similar
to the preferential option for the poor of churches.
 Final Provisions
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.
Dear Fellow Bar Examinees,

I’m sorry the editing of this “reviewer” took longer than I expected.
I hope this “reviewer” would help you make sense of the rather confusing world
of civil law.
The notes here are from Professor Ruben F. Balane’s lectures in his UP Civil Law
Review class (I’m not sure from what year), I just added the codal provisions and
reformatted the notes for easier reading. I also included parts of the Obligations and
Contracts Reviewer made by 4A Class 2000 and my notes in Civil Law Review 2 on
Obligations and Contracts (also under Professor Balane) last semester (2001-2002).
If you find this helpful, please share with another examinee.
If you see any mistake, please share with me. Thanks.
God bless and good luck to all of us.

Dot
Ateneo Law 2002

Thank you to Professor Ruben F. Balane