College of Law, BATANGAS STATE UNIVERSITY

Obligations & Contracts

Course Outline
Atty. Ethel Andico Malabanan
Second Semester 2010-2011

This outline is based on the outline on the same subject of Professor E. Labitag of the UP College of Law.
OBLIGATIONS & CONTRACTS 2ND SEMESTER 2010-2011
BATANGAS STATE UNIVERSITY
COLLEGE OF LAW

OBLIGATIONS AND CONTRACTS

2ND Semester SY 2010-2011

Atty. Ethel R. Andico-Malabanan

Professor of Law

GENERAL INSTRUCTIONS:

a. Students must come to class prepared to recite the assignments for the day. Hard copies
of all the legal materials listed in this outline are available at the BSU Law Library. Soft
copies of the Supreme Court decisions may be downloaded from
http://sc.judiciary.gov.ph and/or www.lawphil.net. Queries could be sent by email at
bsulawdean@gmail.com.

b. The use of cellular phones is prohibited during class. Cellular phones must be turned off
or placed in silent mode during class. If a student needs to attend to an emergency call,
he/she may do so outside the classroom upon proper authorization from the professor.

c. REFRAIN FROM STEPPING OUT OF THE CLASSROOM DURING CLASS HOURS . Attend to
your personal needs before classes start and/or during breaktime.

d. Consultation hours are every Thursdays & Fridays from 1:00 p.m. to 5:00 p.m.

REFERENCE BOOKS:
Books on Obligations and Contracts by any of the following authors:
1. Paras
2. Tolentino
3. Jurado
4. De Leon

GRADING SYSTEM:

The final grade will be determined as follows:

Quizzes 15 %
Recitation 15 %
Midterm Exams 30 %
Final Exams 40 %
100 %

REQUIREMENTS:

1. Recitation – Every meeting or class day, students will be called randomly to recite on the provisions
or cases assigned for the day. In case the student is called, but he is absent then he will be given a
grade of “5” for that day.

2. Quizzes – Quizzes may be given on topics or cases assigned for the day or for topics discussed in
previous sessions. Generally, quizzes, surprise or otherwise, will be given at the start of the class.

3. Mid-term exam – The Mid-term exam is a two (2) hour exam to be given on the date assigned by
the College for the class exam. It is a comprehensive exam testing the ability of the student to apply
the knowledge of the law in practical situations. It will also include multiple choice questions,
objective type of questions & preparation of memorandum.
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4. Final Exam – The final exam is a two (2) hour exam to be given on the date assigned by the College
for the class exam.

Title I. OBLIGATIONS
Chapter I. General Provisions

CONCEPT OF OBLIGATIONS

Definition Art 1156 of the New Civil Code (unless otherwise provided, the provisions mentioned in this outline
refer to the New Civil Code of the Philippines)

Elements of Obligation

1. Subject
a. Active
b. Passive

2. Prestation or Object

KINDS OF PRESTATION
a. TO GIVE
b. TO DO
c. NOT TO DO
REQUISITES OF PRESTATION
a. Physically and juridically possible
b. Determinate or at least determinable according to pre-established elements or criteria
c. Possible equivalent in money

3. Efficient cause or juridical tie or vinculum juris – relation between obligor and oblige which is
established:
- By law (e.g. relation of husband and wife giving rise to the obligation to support)
- By bilateral acts (e.g. contracts giving rise to the obligations stipulated therein)
- By unilateral acts (e.g. crimes and quasi-delicts)
4. Form in which the obligation is manifested

Distinction between Natural and Civil Obligation

Study guide for recitation:

What is an obligation? Contract v. obligation. Definition in its totality.
What are the essential requisites of an obligation?
a. subject (passive or active) that must be determinate or at least determinable
b. object (prestation) that must be licit, possible, determinate or determinable, capable of pecuniary
estimation.
c. Vinculum juris or juridical tie
d. Form

SOURCES OF OBLIGATIONS Article 1157

A. LAW [Ex-Lege]
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.

B. CONTRACTS [Ex-Contractu, Culpa Contractual]

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

C. QUASI-CONTRACTS or DELICTS [Quasi Ex-Contractu]

Art 1160 Obligations derived from quasi-contracts shall be subject to the provisions of Chapter 1, Title XVII.
Art 2142 Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end
that no one shall be unjustly enriched or benefited at the expense of another.

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Kinds of Quasi-contracts
a. Negotiorum gestio (officious management) Art 2144
b. Solutio indebiti (payment not due) Art 2154
c. Other quasi-contracts (support given by strangers and other “Good Samaritans”) Art. 2164 to 2175

D. ACTS or OMISSIONS PUNISHED BY LAW [Ex-Delictu, Ex-Maleficio, Culpa Criminal]

Art 1161; Art 100, RPC Every person criminally liable for a felony is also civilly liable.

E. QUASI-DELICTS [Quasi Ex-Delicto, Quasi Ex-Maleficio, Culpa Aquilana, Tort (common law)]
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.
Art 2176 Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay
for the damage done. Such fault or negligence when there is no pre-existing contractual relation between the
parties, is called quasi-delict and is governed by the provisions of this Chapter.

ELEMENTS OF NEGLIGENCE
a) duty on the part of the defendant to protect the plaintiff from injury of which the latter complains
b) failure to perform such duty
c) an injury to the plaintiff through such failure

KINDS OF NEGLIGENCE
1. Culpa aquilana – or culpa extra-contractual; negligence as a source of obligation, a quasi-delict
2. Culpa contractual – negligence in the performance of a contract
3. Culpa criminal – criminal negligence

Distinction between Culpa Aquilana and Culpa Contractual

Distinction between Quasi-delicts and Crimes

STUDY GUIDE FOR RECITATION

 What are the sources of an obligation? (Art. 1157-1162)

 Is the enumeration in Art. 1157 exclusive ?

Cases :
Art. 1157
Sagrada Orden v. NACOCO, 91 Phil 503
Makati Stock Exchange v. Campos G.R. No. 138814 April 16, 2009

Art. 1159
People’s Car v. Commando Security, 51 SCRA 40
LRTA v. Natividad, GR No. 145804, February 6, 2003

 Can there be an overlap of sources of obligations?

Cases:
Art. 1162
Cangco v. MRR, 38 Phil 768
Araneta v. de Joya GR No L-25172, May 24, 1974
Gutierrez v. Gutierrez, 56 Phil 177

Chapter II: Nature and Effects of Obligations

KINDS OF PRESTATION

A. Obligation TO GIVE

Specific thing v. Generic thing

Specific thing (determinate)

DUTIES OF THE OBLIGOR

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a. to deliver thing itself
Art 1244
b. to preserve thing with due care
Art 1163
c. to deliver the accessions and accessories
Art 1166
d. to deliver the fruits
Art 1164 Par 1

CORRELATIVE RIGHTS OF THE OBLIGEE/CREDITOR

1. Right to compel delivery
a. Fruits (both industrial and natural from the time obligation to deliver arises), accessions and
accessories
b. No real right until delivery  personal action against debtor, no right against the world
2. Right to rescission or resolution
3. Right to damages
a. Failure to deliver
 Legal excuse for breach of obligation or delay: FORTUITOUS EVENT unless there is
o Law e.g. possession in bad faith (Art 552)
o Stipulation to the contrary
o Nature of obligation requires assumption of risk
 FE APPLICABLE TO:
o Nonperformance
o Delay
o Loss/deterioration of specific thing
Art 1189 Before happening of suspensive condition
Art 1190 Before happening of resolutory condition
 Debtor still liable despite FE:
o Expressly specified by law
Art 1942 Bailee liable for loss (commodatum)
Art 2001 Act of a thief
Art 2147 Negotiorum gestio
Art 1993 Loss of deposit
o Stipulation e.g. debtor becomes “insurer” of the obligation
o Assumption of risk
o Fraud or malice (bad faith)
Art 1165 Par 3 Delivers to two or more persons having different interest
o Debtor in delay already when FE happened (Art 1165 Par 3)
o Debtor guilty of concurrent negligence  in this case, no long FE
o Liability arises from criminal act except if debtor tenders thing and creditor
unjustifiably refuses to receive (Art 1268)
b. Fraud
c. Negligence in performance
d. Delay or default
e. Any manner in contravention of the tenor of obligation

Generic thing (indeterminate)

Art 1246; Art 1165;

LIMITED GENERIC THING – generic objects confined to a particular class, the class is considered in itself a
determinate object

CORRELATIVE RIGHTS OF THE OBLIGEE/CREDITOR

1. Right to ask for rescission or damages
2. Right to damages
a. Failure to deliver
b. Fraud (malice or bad faith)
c. Negligence
d. Delay
e. Any matter contravene the tenor of obligation

RIGHTS OF A CREDITOR

GENERIC
To ask for the performance of the obligation
To ask that the obligation be complied with at the
expense of the debtor

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To recover damages in case of breach of obligation

B. Obligation TO DO
Art 1244 Par 2 ; Art 1167

DUTIES OF OBLIGOR
1. To do it (Art 1167)
2. To shoulder the cost if someone else does it (Art 1167)
3. To undo what has been poorly done (Art 1167)
4. To pay damages (Art 1170-1172, 2201-2202)

 No action for compliance because that would be involuntary servitude which is prohibited by the
constitution.

C. Obligation NOT TO DO
Art 1244 Par 2; Art 1268

DUTIES OF OBLIGOR
1. Not to do what should not be done
2. To should the cost to undo what should not have been done (Art 1168)
3. To pay damages (Art 1170, 2201-2202)

BREACH OF OBLIGATION

CONCEPT

VOLUNTARY arises from the modes provided in Art 1170

INVOLUNTARY arises because of fortuitous events

Distinction between SUBSTANTIAL and CASUAL/SLIGHT breach

GENERAL RULE: Rescission will not be permitted for a slight or casual breach of the contract, but only for such
breaches as are so substantial and fundamental as to defeat the object of the parties in making the agreement.

MODES OF BREACH

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.

1 FRAUD (Dolo)

KINDS OF FRAUD
1. Fraud in the performance (Art 1171)
2. Fraud in the execution/creation/birth of the contract
a. Dolo causante (Art 1344)
b. Dolo incidente (Art 1338)

FRAUD (Art 1171) DOLO CAUSANTE (Art 1338) DOLO INCIDENTE (Art 1344)
WHEN During the performance of a pre- During the perfection of a contract During the perfection of a contract
PRESENT existing obligation
PURPOSE Evade the normal fulfillment of Secure the consent of another to Secure the consent of another to
obligation enter into contract enter into contract BUT fraud was
not the principal inducement in
making the contract
RESULTS IN Breach of the obligation Vitiation of consent; Does not result in the vitiation of
Voidable contract consent
GIVES RISE TO Right in favor of creditor to recover Right of the innocent party to annul Gives rise to a right of the innocent
damages the contract party to claim for damages

Non-waiver of Future Fraud Art 1171

Effects of Fraud - Liability for damages, a crime or a quasi-delict (Art 1170)

2 NEGLIGENCE (Culpa contractual)

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Art 1172 Responsibility arising from negligence in the performance of EVERY KIND OF OBLIGATION is also
demandable, but such liability may be REGULATED BY COURTS, according to the circumstances.

Concept – absence of due diligence

Art 1173 Par 1

Distinction between Culpa and Dolo

Distinction between Culpa Aquilana and Culpa Contractual

Standard of care required

Art 1173 Par 2 If law or contract does not state diligence which is to be observed in the performance, that which is
expected of a GOOD FATHER OF FAMILY is required.
 Extra-ordinary diligence required in:
o Art 1733 Common carriers
o Art 1744 Lesser than extraordinary
o Art 1998-2002 Inn keepers, hotel keepers

Exemption from Liability for Negligence

1. INSURANCE: A party to a contract is relieved from the effects of his fault or negligence by a 3 rd person
2. Party to a contract renounces in advance the right to enforce liability arising from the fault or negligence of
the other
a. VOID if gross negligence  Stipulations exempting from liability for that amount to a fraud
b. VALID if simple negligence only

Effects of Negligence
1. Damages are demandable, which the courts may regulate according to circumstances
2. Invalidates defense of fortuitous event

3 DELAY (mora)

Concept – non-fulfillment of obligation with respect to time

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 obligations.

However, the DEMAND by the creditor shall NOT be necessary in order that delay may exist:
1. When the OBLIGATION or LAW expressly so declares
2. When from the nature and the circumstances of the obligation it appears that the DESIGNATION OF THE
TIME when the thing to be delivered or the service is to be rendered was a controlling motive for the
establishment of the contract
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.

Kinds of Mora

a. Mora solvendi – default on the part of the debtor

 EX RE referring to obligations to give
 EX PERSONA referring to obligations to do

REQUISITES OF MORA SOLVENDI

1. PRESTATION is demandable and already liquidated
- There can be no delay if the obligation is not yet due. There is no mora in natural obligations because
performance is optional and voluntary
2. That the debtor delays performance
- Effects of mora only arise when the delay is due to the causes imputable to the debtor; hence there is
legally no delay if this is caused by factors not imputable to the debtor (e.g. fortuitous events)
3. That the creditor requires or demands the performance extrajudicially or judicially
- Mere reminder is not a demand because it must appear that the benevolence and tolerance of the
creditor has ended.

GENERAL RULE: Creditor should make demand before debtor incurs delay
 Default begins from the moment creditor demands the performance of obligation.
o If extrajudicial: date of demand

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o If uncertain: date of filing of complaint (for purposes of computing payment of interests or damages)
 Demand may be in any form, provided it can be proved. It is also generally necessary even if a period has been
fixed in the obligation. Burden of proof of demand on the creditor.
 Demand must refer to the prestation that is due and not another.
 But even if without demand, debtor incurs in delay if he acknowledges his delay. Request for extension of time for
payment is not sufficient though, the acknowledgement must be express.

EXCEPTION: When demand is not required

1. Express stipulation – Insertion of the clause “without further notice”
2. Law so provides - Not enough to merely fix date for performance, but also that default will commence after
the period lapses
3. Period is the controlling motive or the principal inducement for the creation of the obligation – in cases where
it appears that the obligation would not have been created for a date other than that fixed (Abella v.
Francisco)
4. Demand would be useless – performance has become impossible
a. Caused by some act or fault of the debtor, e.g. hiding or disposed of the thing to be delivered
b. Impossibility caused by fortuitous event but debtor bound himself liable in cases of such events

b. Mora accipiendi – default on the part of the creditor

 Delay in the performance based on the omission by the creditor of the necessary cooperation, especially
acceptance on his part.
 Generally, debtor can perform at any time after the obligation has been created, even before the date of maturity.
 It is necessary however that it be lawful for the debtor to perform, and that he can perform (e.g. when the period
is established for the benefit of the creditor or both of the parties).

REQUISITES OF MORA ACCIPIENDI

1. Offer of performance by the debtor who has the required capacity
2. Offer must be to comply with the prestation as it should be performed
3. Creditor refuses the performance without just cause

See also Art 1268

c. Compensatio morae – parties in a bilateral contract can regulate the order in which they shall comply with their
reciprocal prestations. Otherwise, the fulfillment must be SIMULTANEOUS and RECIPROCAL

GENERAL RULE: Fulfillment of parties should be simultaneous

EXCEPTION: Contrary stipulation (e.g. installment plans)

Effects of Mora

A. Mora solvendi
1. When it has for its object a determinate thing, the delay places the risk of the thing on the debtor
2. Debtor becomes liable for damages of the delay

B. Mora accipiendi
1. Responsibility of the debtor for the thing is reduced and limited to fraud and gross negligence
2. Debtor is exempted from the risks of loss of thing, which automatically pass to the creditor
3. All expenses incurred by the debtor for the preservation of the thing after the mora shall be chargeable to
the creditor
4. If the obligation bears interest, the debtor does not have to pay it from the moment of the mora
5. The creditor becomes liable for damages
6. The debtor may relieve himself of the obligation by the consignation of the thing

C. Compensation morae
1. Exceptio non adempleti contractus – one is not compelled to perform his prestation when the other
contracting party is not yet prepared to perform his prestation; default of one compensates the default of
the other

Cessation of effects of mora

1. Renunciation by the creditor
a. Express
b. Implied: when after delay has been incurred, the creditor grants an extension of time to the
debtor or agrees to a novation of the obligation
2. Prescription

4 CONTRAVENTION OF TENOR – any illicit act which impairs the strict and faithful fulfillment of the obligation or
every kind of defective performance

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5 ABSOLUTE NON-PERFORMANCE

CLASSIFICATIONS OF OBLIGATIONS

A. Primary Classification under the Civil Code

1. WHEN: Pure and Conditional (Art 1179-1192)  time of enforceability

 PURE: demandable at once
 CONDITIONAL: fulfillment or extinguishment depends upon a future and uncertain event

2. WHEN: With a period or term (Art 1193-1198)  time of demandability

 PERIOD: its fulfillment or extinguishment depends upon a future and certain event

3. WHAT: Alternative and Facultative (Art 1199-1206)  multiple objects

 ALTERNATIVE: multiple prestations but debtor will perform one or some but not all, depending on whose
choice it is
 FACULTATIVE: multiple prestations with a principal obligation and substitute prestations , choice is
generally given to the DEBTOR

4. WHO: Joint and Solidary (Art 1207-1222)  multiple subjects, focuses on the tie that bonds the parties
 JOINT: each can be made to pay only his share in the obligation
 SOLIDARY: one can be made to pay for the whole obligation subject to reimbursement

5. HOW: Divisible and Indivisible (Art 1223-1225)  performance of the prestation, not to the thing which is
object thereof, whether it can be fulfilled in parts or not

6. With a penal clause (Art 1226-1230)  accessory undertaking to assume greater liability in case of breach

B. Secondary Classification

1. Legal (Art 1158) from law

Conventional (Art 1159) from contracts
Penal (Art 1161) from commission of a crime

2. (As to subject matter) Real (to give) and Personal (to do or not to do)

3. (As to subject matter of obligation) Determinate and Generic

4. Positive (to give, to do) and Negative (not to give, not to do)

5. Unilateral – only one party bound to perform obligation, one debtor and one creditor (e.g. simple and
remuneratory donation, to give support)
Bilateral – OR synallagmatic contracts, emptio vendito; two parties are reciprocally bound thus debtor and
creditor of each other (e.g. purchase and sale, ease)

6. Individual – only one subject

Collective – several subject

7. Accessory – depends on the principal obligation e.g. pledge, mortgage

Principal – main obligation

8. As to object or prestation
a. Simple – only one prestation
b. Multiple – two or more prestation
i. Conjunctive – all must be performed
ii. Distributive – one or some must be performed
a. Alternative – more than one prestation but one party may choose which one; several are due but only
one must be fulfilled at the election of the debtor
b. Facultative – main prestation and a substitute prestation and it is the debtor who chooses; only one
thing is due but the debtor has reserved the right to substitute it with another

9. Possible – capable of being performed, either physically or legally Impossible – physically or legally incapable
of being done

REMEDIES OF CREDITOR IN CASE OF BREACH

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Action for performance (specific performance or obtain compliance)
Action for rescission
Action for damages (exclusively OR in addition to either of the first actions)

A. ACTION FOR PERFORMANCE

1. Action for specific performance

(in obligation to give specific thing)
Art 1165 Par 1

 Implies that the basis is a contractual relation between plaintiff and defendants.

2. Action for substituted performance

(in obligation to give generic thing)

Art 1165 Par 2

 Delivery of anything belonging to the species stipulated will be sufficient.

 Debtor cannot avoid obligation by paying damages if the creditor insists on the performance.

3. Action for substituted performance or undoing of poor work

(in obligation to do)
Art 1167

 The court has no discretion to merely award damages to the creditor when the act can be done in spite of the
refusal or failure of debtor to do so.
 EXCEPTION: Imposition of personal force or coercion upon the debtor to comply with his obligation 
tantamount to involuntary servitude and imprisonment for debt

4. Action for undoing

(in obligation not to do)
Art 1168

 EXCEPTION: When the only feasible remedy is indemnification for the damages caused:
 If has become impossible to undo the thing physically or legally
 If the act is definite and will not cease even if undone

B. ACTION FOR DAMAGES

Art 1170

C. ACTION FOR RESCISSION

Art 1191
Art 1192
 Power to rescind:
o Pertains to the injured party, party who did not perform not entitled to insist upon the performance of the
contract by the defendant or recover damages by reason of his own breach
 Rights of injured party subordinated to the rights of a 3rd person to whom bad faith is not
imputable
o Not absolute, not permitted in casual/slight breach, may only be claimed in substantial breach
o Rescission requires judicial approval to produce legal effect
 EXCEPTION: object is not yet delivered AND obligation has not yet been performed
 If the obligation has not yet been performed: extrajudicial declaration of party willing to perform
would suffice; can refuse to perform if the other party is not yet ready to comply
 If the injured party has already performed: cannot extrajudicially rescind IF the other party
opposes the rescission (otherwise, rescission produces legal effect). In the case the other party
impugns rescission, the court comes in either to:
a. Declare the rescission as properly made
b. Give a period to the debtor in which to perform
Effects of Rescission
1. Extinguishes obligatory relation as if it had never been created, extinction has a retroactive effect. Equivalent
to invalidate the juridical tie, leaving things in their status before the celebration of the contract
2. Mutual restitution

SUBSIDIARY REMEDIES OF CREDITOR

1 Accion Subrogatoria (subrogatory action)

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Art 1177

REQUISITES OF ACCION SUBROGATORIA

1. Creditor has an interest in the right or action not only because of his credit but because of insolvency of the
debtor
2. Malicious or negligent inaction of the debtor in the exercise of his right or action of such seriousness as to
endanger the claim of the creditor
3. The credit of the debtor against a third person is certain, demandable and liquidated
o It is not essential that the creditor’s claim be prior to the acquisition of the right by the debtor
4. The debtor’s right against 3rd person must be patrimonial, or susceptible of being transformed to patrimonial
value for the benefit of the creditor

EXCEPTIONS TO ACCION SUBROGATORIA

1. Inherent rights of debtor
a. Right to existence, exempting from the reach of creditors whatever he may be receiving as support
b. Rights or relations of a public character
c. Rights of an honorary character
d. Rights consisting of powers which have not been used
i. Power to administer e.g. debtor fails to have some property leased the creditor cannot give it
in lease for him
ii. Power to carry out an agency or deposit because purely personal acts
iii. Power to accept an offer for a contract
e. Non-patrimonial rights e.g. action to establish the creditor’s status as a legitimate or natural child,
action for legal separation or annulment of marriage, and other rights arising from family relations
f. Patrimonial rights not subject to execution e.g. right to a government gratuity or pension
g. Patrimonial rights inherent in the persons of the debtor e.g. right to revoke a donation by reason fo
ingratitude, right to demand the exclusion of an unworthy heir
2. Art 772
3. Sec 13, Rule 39, Rules of Court

2 Accion Pauliana
Art 1177
Art 1381 Par 3

Concept Creditors have the right to set aside or revoke acts which the debtor may have done to defraud them. All
acts of the debtor which reduce his patrimony in fraud of his creditors, whether by gratuitous or onerous title, can be
revoked by this action.
 Payments of pre-existing obligations already due, whether natural or civil, cannot be impugned by an accion
pauliana.

REQUISITES OF ACCION PAULIANA

1. Plaintiff asking for rescission (subsidiary action) has a credit prior to the alienation, although demandable later
2. Debtor has made subsequent contract, giving advantage to a 3rd person
3. Creditor has no other remedy but to rescind the debtor’s contract to the 3rd person (last resort)
4. Act being impugned is fraudulent
o Presumption of fraud may be found in Art 1387 (gratuitous transfer without leaving sufficient funds
for obligations OR gratuitous transfers by a judgment debtor) More details in page __
5. 3rd person who received the property is an accomplice in the fraud
o See Rescissible Contracts for more detail discussion on the effects of good faith and bad faith of the
third party transferee (Page 82)

Distinction between accion subrogatoria and accion pauliana

ACCION SUBROGATORIA ACCION PAULIANA

Not essential that credit is prior to the acquisition of Credit must exist before fraudulent act
debtor’s right
Intent to defraud creditors is not required If contracts rescinded is onerous, there must be
fraudulent intent
No period of prescription Action prescribes within 4 years of the discovery of
the fraud

3 Other specific remedies (Accion Derecta)

Art 1652 Lessor vs. sub-lessee
Art 1729 Laborers vs. owner
Art 1608 Vendee a retro vs. vendee a retro’s transferee
Art 1893 Principal vs. substitution appropriated by princip
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EXTINGUISHMENT OF LIABILITY IN CASE OF BREACH DUE TO FORTUITOUS EVENT

Art 1174

Requisites of Fortuitous Event

1. Cause of the unforeseen and unexpected occurrence or the failure of the debtor to comply with his obligation
must be independent of human will
2. Impossible to foresee the event which constitute the caso fortuito (ordinary) OR if it can be foreseen, must be
impossible to avoid (extraordinary)
3. Occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner
4. Obligor must be free from any participation in the aggravation of the injury resulting to the creditor (no
concurrent negligence)

Effect of CONCURRENT FAULT of the Debtor

 When the negligence of a person concurs with an act of God in producing a loss, such person is not exempt
from liability by showing that the immediate cause of the damage was the act of God.
 If he creates a dangerous condition or negligence although the act of God was the immediate cause, he
cannot escape liability for the natural and probable consequence thereof.
 There must be NO fraud, negligence, delay or violation/contravention in any manner of the tenor of the
obligation.
 When the effect is found to be partly resulting from the participation of man, whether due to his active
intervention or neglect or failure to act, the whole occurrence is then humanized and removed from the rules
applicable to the acts of God (NPC v CA – the case of Welming and the exploding dam)

Extinguishment of Liability
GENERAL RULE: No liability if there fortuitous events intervene
SPECIFIC APPLICATION:
Non performance
Delay
Loss and deterioration of a specific thing
Art 1189 Loss without the fault of debtor in suspensive condition
Art 1190 Loss without the fault of debtor in resolutory condition
Art 1194 Loss without the fault of the debtor in suspensive period
Art 1204 Loss of all alternative prestations
Art 1205 In alternative obligations, in case of loss of one alternative, creditor chooses from remainder

EXCEPTIONS:

a. Cases specified by law

Art 552 Par 2 Possessor in bad faith Art 2001 Act of a thief
Art 1165 Debtor’s delay Art 2147 Officious management
Art 1942 Obligation of bailee in commodatum Art 2148 Negotiorum gestio
Art 1268 Proceeds in a criminal offense Art 2159 Accepts undue payment in bad faith
Art 1979 & Art 1993 Depositary Art 1198 Loss of benefit to make use period
b. Express stipulation by the parties
c. Assumption of risk
- The principle is based on social justice, an ethico-economic sensibility of modern society which has
noted the injustices which industrial civilization has created
- Applies to all kinds of public services but limited to risks and events that are typical of the business
concerned

USURIOUS TRANSACTIONS

Art 1175 Usurious transactions shall be governed by special laws.

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.

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INTEREST – the income produced by money in relation to its amount and to the time that it cannot be utilized by its
owner. It can either be moratory or compensatory.
o MORATORY – paid in contractual obligations to pay a sum of money, either as price for the use of the
money OR as stipulated advanced determination of the damages due to the delay in the fulfillment of the
obligation. *mora = delay
o COMPENSATORY – interests on obligations which have an extra-contractual or delictual origin

USURY – contracting for or receiving something in excess of the amount allowed by the law for the loan or
forbearance of money, good or chattels. It is also taking more interest for the use of money, goods or chattels or
credits than the law allows.

TWO CONCEPTS ON PAYMENT OF INTEREST

A. Interest for the use or loan or forbearance of money, goods or credit

No interest for use or forbearance

If no stipulation re: payment of interest: * No interest shall be due unless it has been expressly stipulated in
writing (Art 1956)

If there is express stipulation (which must be in writing to be Interest shall be 12% per annum (Sec. 2, Monetary Board
valid) for payment of interests, but no rate mentioned Circular 905, 10 Dec 1982)

If there is stipulation in writing and rate of interest is agreed Such interest shall not be subject to ceiling prescribed
upon (including commissions, premiums, fees and other under the Usury Law (Sec. 1, Monetary Board Circular 905, 10
charges) Dec 1982))

B. Interest as damages for breach or default in payment of loan or forbearance of money, goods, credit

In case of DEFAULT, loan or forbearance shall earn legal

No stipulation as to interest for use of money interest, at rate of 12% per annum from date of judicial
or extrajudicial demand, subject to Art 1169 (delay/mora)

Loan + stipulated interest, shall earn 12% per annum from

date of judicial demand
If rate of interest stipulated, e.g. 24% per annum * Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point (Art
2212)

C. If obligation NOT consisting of a loan or forbearance of money, goods or credit is breached, e.g.
obligation to give, to do, not to do

o Interest may be imposed at the discretion of court at the rate of 6% per annum.

o No interest adjudged on unliquidated claims or damages, until demand can be established with
reasonable certainty.

o After thus established with reasonable certainty , interest of 6% per annum shall begin to run from the
date of judicial or extrajudicial demand.

o But if obligation cannot be established with reasonable certainty at time of demand, 6% per annum
interest shall begin to run only from date of judgment – on amount finally adjudged by court.

D. When judgment of court awarding money becomes final and executory, money judgment is A, B and C
(above) shall earn 12% per annum from finality of judgment until full payment – money judgment shall
be considered as forbearance of credit (Eastern Shipping Lines vs. CA, 1994)

Monetary Board Circular # 905 lifting the interest rate ceiling vs. Art 2209

MB 905 Interest can now be charged as lender and borrower may agree upon. It shall not be subject to any
ceiling prescribed under or pursuant to the Usury Law as amended.

Art 2209 If the obligation consists in the payment of a sum of money, and the debtor incurs in DELAY, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.

FULFILLMENT OF OBLIGATIONS

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See Chapter 4: Payment

Presumptions in payment of interests and installments

Art 1176 The receipt of the principal by the creditor, without reservation with respect to the interest, shall give rise
to the presumption that 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.

 GENERAL RULE: If the debt produces interests, payment of the principal shall not be deemed to have been
made unless the interests have been covered.
 PRESUMPTIONS are rebuttable by evidence

TRANSMISSIBILITY OF RIGHTS
Art 1178

EXCEPTIONS:
1. Not transmissible by their very nature e.g. purely personal rights
2. There is a stipulation of the parties that they are not transmissible  not be easily implied but clearly
established or at the very least, clearly inferable
3. Not transmissible by law

STUDY GUIDE FOR RECITATION

 What are the accessory obligations to give a determinate thing? (Art. 1163-1168)
a. exercise due diligence
b. fruits
c. accessories and accessions

 What are the kinds of performance that the creditor can avail of if the debtor refuses to comply
with his obligation?
a. specific performance
b. substitute performance
c. equivalent performance

 What are the irregularities in the performance of obligation

A. Causes attributable to the debtor

1. Dolo (Fraud) (Art. 1170 and 1171)

a. Distinguish between malice and deceit

b. What are the remedies of the creditor in cases of fraud in obligation?
Cases :

Art. 1170
Arrieta v. Naric, 10 SCRA 79
Telefast v. Castro, 158 SCRA 445
NPC v. CA, 161 SCRA 334
Legaspi OIL v. CA, 224 SCRA 213
Go v. CA, 272 SCRA 752(unfinished)
RCBC v. CA, 305 SCRA 449

2. Culpa (Negligence) (Arts. 1172-1173)

a. What is negligence?
b. What are the remedies of the creditor?
Cases :

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Art. 1172
Metrobank v. CA, 237 SCRA 761
BPI v. Lifetime Marketing Corp. June 25, 2008 G.R. No. 176434

Art. 1173
Jimenez v. City of Manila, 150 SCRA 510
Mindanao Terminal & Brokerage Service v. Phoenix Assurance Company GR No. 162467 May 8, 2009

3. Mora (Delay) (Art. 1169)

a. What are the kinds of delay?

1. mora solvendi
2. mora accipiendi
3. compensation morae

b. When is demand not needed to put one in delay?

c. What are the remedies of the creditor?
Cases:

Art. 1169
Agcaoili v. GSIS, 165 SCRA 1
SSS v. Moonwalk, 221 SCRA 119 (unfinished)
Ek Lee Steel Works Corp. v Manila Casto Oil Corp. 557 SCRA 339 July 9, 2008
Autocorp Group v. Intra Strata Assurance Corp. GR No. 166662 June 27, 2008

4. Contravention of the tenor

Cases :
Arrieta v. Naric, GR No. L-15645, Jan. 31, 1964
Go v. CA, GR No. 114791, May 29, 1997

B. Cause not attributable to the debtor

1. Fortuitous event (Art. 1174)

a. What is a fortuitous event?

b. When is the debtor liable even for a fortuitous event?
c. What are the requisites for a fortuitous event to be an exempting cause?

Cases :
Art. 1174
Sicam et.al. vs. Jorge et.al. G.R. No. 159617 August 8, 2007
Nakpil & Sons v. CA, 114 SCRA 596, 160 SCRA 334
Quisumbing v. CA, 189 SCRA 605
Bachelor Express v. CA, 188 SCRA 216
NPC v. CA, 222 SCRA 415
Sia v. CA, 222 SCRA 24
NPC v. CA, 223 SCRA 649
Southeastern v. CA, 292 SCRA 422
Mindex v. Morillo, GR No. 138123, March 12, 2002
Saludaga v. FEU 553 SCRA 741

 What is the rule re receipt of principal without reservation as to the interest? Re later installment
without reservation as to prior installments?
 What are the auxiliary remedies available to the creditor? (Art. 1177)
a. attach and execute debtors properties
b. accion subrogatoria; requisites
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c. accion directa (cf Art 1729 and Art 1652)
d. accion pauliana (cf Arts. 1380-1389)

Cases:
Siguan v. Lim, 318 SCRA 725

 Transmissibility of rights acquired from obligations ( Art. 1178)

Chapter III. Different Kinds of Civil Obligations

I. Pure and Conditional obligations

A. PURE OBLIGATIONS
Art 1179 Par 1
 Contains no term or condition whatever upon which depends the fulfillment of the obligation contracted by the
debtor. Immediately demandable and nothing would exempt that debtor from compliance therewith.

B. CONDITIONAL OBLIGATIONS
Art 1181

CONDITION PERIOD/TERM
Determines existence of an obligation Determines demandability of an obligation

Kinds of Conditions

1. As to effect on obligation
Art 1181

SUSPENSIVE RESOLUTORY
When condition fulfilled Obligation arises Obligation is extinguished
When condition not fulfilled The juridical or legal tie does not appear Tie of law is consolidated, becomes absolute
Until it takes place Obligation is a mere hope The effect flow, but over it hovers possibility of
termination like Sword of Damocles
Effect Acquisition of rights Extinguishment or loss of those already acquired
Also known as Condition precedent/antecedent Condition subsequent

Art 1187

Republic v. Holy Trinity Realty Development Corp. 551 SCRA 303

OBLIGATION TO GIVE OBLIGATION TO DO or NOT TO DO

Bilateral (reciprocal obligation) Courts shall determine the retroactive effect of the
- deemed to have been condition
mutually compensated
Unilateral
- debtor shall appropriate fruits and interests
received, UNLESS there was a different intention

Rights of creditor and debtor before fulfillment of condition

Art 1188

2. As to cause or origin
Art 1182

POTESTATIVE – One which depends upon the will of one of the contracting parties; in the power of one of the
parties to realize or prevent

KINDS OF POTESTATIVE CONDITION

1. Simple potestative – presupposes not only a manifestation of will but also the realization of an external act

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-On the part of the debtor: Does not prevent formation of valid obligation because in part depends on
contingencies over which he has no control
2. Purely potestative – depends solely and exclusively upon the will

Debtor’s promise to pay when he can is not a conditional obligation

Art 1180

CASUAL – depends exclusively upon chance, will of a third person or other factors, and not upon the will of the
contracting parties

MIXED – depends upon the will of one of the contracting parties and other circumstances, including the will of third
persons

3. As to possibility
Art 1183

IMPOSSIBLE – may either be physical (contrary to the law of nature) or juridical (contrary to law, morals, good
customs, and public policy AND restricts certain rights which are necessary for the free development of human activity
i.e. political rights, family rights and constitutional rights and liberties e.g. condition not to change domicile, religion or
contract marriage)

Effect of Impossible Conditions

GENERAL RULE: Impossible condition annuls the obligation dependent upon them
EXCEPTIONS:
o Pre-existing obligation o Testamentary disposition
o Divisible obligation o Negative impossible things
o Simple or remuneratory obligation

4. As to mode

POSITIVE (suspensive)
Art 1184

NEGATIVE (suspensive)
Art 1185

LOSS, DETERIORATION or IMPROVEMENT pending happening of the condition

Art 1189

Art 1190

LOSS 1. Perishes
2. Goes out of the commerce of man
3. Disappears in such a way that its existence is unknown or it cannot be recovered
DETERIORATION Any reduction or impairment in the substance or value of a thing which does not amount to a loss. The
thing still exists at the time the condition is fulfilled, but it is no longer intact, OR is less than what it was
when the obligation was constituted.
IMPROVEMENT Anything added to, incorporated in, or attached to the thing that is due.

Effect of loss or deterioration

LOSS DETERIORATION
Without debtor’s fault Extinguished, unless there is a stipulation to the Not liable for damage, creditor must accept the
contrary. Mode of extinguishment Art 1262 Par 1 thing in impaired condition
With debtor’s fault Liable to damages upon fulfillment of condition May demand the thing OR ask for rescission, in
either case, creditor may recover damages

Effect of prevention of the fulfillment of the condition by the obligor - Art 1186

C. RECIPROCAL OBLIGATIONS
Art 1191 ;Art 1192

Amocera v. Ong Feb 18, 2008

Songcuan v. IAC 191 SCRA 28

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Concept RECIPROCITY arises from identity of cause and necessarily, two obligations are created at the same time.
Each party is a creditor and debtor of the other and they are to perform simultaneously.
 Recognized “implied or tacit resolutory condition” imposed exclusively by law, even if there is no
corresponding agreement between parties  it’s also called RESOLUTION
 Power to rescind is given to the injured party

Alternative remedies of injured party in case of breach  injured party should choose only one, cannot ask for
partial rescission and partial fulfillment

a. Action for Fulfillment  When fulfillment no longer possible, rescission takes place

b. Action for Rescission

 Requisites for rescission
a. One of the creditors failed to comply with what is incumbent upon him
b. Obligor who performed chose rescission over fulfillment or performance is impossible
c. The breach is substantial so as to defeat the object of the parties in making the agreement – it will
not be granted in slight or casual breach
 How made – Rescission requires judicial approval to produce legal effect
 EXCEPTION: object is not yet delivered AND obligation has not yet been performed
 If the obligation has not yet been performed: extrajudicial declaration of party willing to perform
would suffice; can refuse to perform if the other party is not yet ready to comply
 If the injured party has already performed: cannot extrajudicially rescind IF the other party
opposes the rescission (otherwise, rescission produces legal effect). In the case the other party
impugns rescission, the court comes in either to:
a. Declare the rescission as properly made
b. Give a period to the debtor in which to perform
 Effects of Rescission
1. Extinguishes obligatory relation as if it had never been created  Equivalent to invalidate the juridical
tie, leaving things in their status before the celebration of the contract
2. Mutual restitution

GG Sportswear v. World Class Properties March 2, 2010 GR No. 182720

Congregation of the Religious of the Virgin Mary v. Orola GR No. 169790 April 30, 2008
Francisco v. DEAC Construction Inc. February 4, 2008
Unlad Resources Development Corp. v. Dragon GR No. 149338 July 28, 2008
Phil. Leisure & Retirement Authority v. CA 541 SCRA 85
Pangilinan v. CA GR No. 83588 September 29, 1997; 279 SCRA 590
Palay, Inc. v. Clave 124 SCRA 638

Rescission Art 1380 Distinguished from Resolution Art 1191

Art 1191 Resolution Art 1380 Rescission

Similarities 1. Presuppose contracts validly entered into and existing
 Rescission v. Annulment: the latter there is a defect which vitiates/invalidates the contract
2. Mutual restitution when declared proper
Who may Only by a party to the contract Party to the contract suffering lesion
demand Third parties prejudiced by the contract
Grounds Non-performance (implied tacit condition in reciprocal Various reasons of equity provided by the grounds,
obligation) mainly economic injury or lesions
Scope of judicial Court determines sufficiency of reason to justify Sufficiency of reason does not affect right to ask for
control extension of time to perform obligation (whether slight rescission (cannot be refused if all the requisites are
or casual breach) satisfied)
Kind of obli Only to reciprocal Unilateral, reciprocal
applicable to Even when contract is fully fulfilled
Character Principal Remedy Secondary/Subsidiary

II. Obligation with a Period

Art 1193; Art 1180

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Concept A space of time which, exerting an influence on obligations a s a consequence of a juridical act, suspends
their demandability or determines their extinguishment.
o Requisites of Period
1. Future
2. Certain
3. Possible

Period/Term vs. Condition

AS TO TERM/PERIOD CONDITION
Fulfillment Event must necessarily come, whether known before Event is uncertain
hand OR at a time which cannot be predetermined
Influence on the No effect on the existence, but only on their Gives rise to an obligation or extinguishes one
obligation demandability or performance, HENCE, does not already existing
carry with it any retroactive effect
Time Always to the future May refer to past event not know to the parties
Will of the debtor If dependent on will of debtor, merely empowers If dependent on will of debtor, ANNUL
court to fix such period

Kinds of Period/Term

1. As to effect

SUSPENSIVE (Ex die)

Art 1193 Par 1

RESOLUTORY (In diem)

Art 1193 Par 2

2. As to expression

EXPRESS – when specifically stated

IMPLIED – when parties “intended a period”

E.g. Art 1197 Par 3

3. As to definiteness

DEFINITE – refers to a fixed known date or time

INDEFINITENESS – event which will necessarily happen but the date of its happening is unknown

4. As to source

CONVENTIONAL/VOLUNTARY – stipulated by the parties

LEGAL – period fixed by law; spread in the CC e.g. Art 1682 lease of rural land and Art 1687 lease of urban land;
Franchise agreement in the Constitution (for 25 years)

JUDICIAL – set by the courts in case of implied and indefinite periods (See: When courts may fix period)

Rules in case of loss, deterioration or improvement before arrival of period

Art 1194.

Effect of loss or deterioration

LOSS DETERIORATION
Without debtor’s fault Extinguished, unless there is a stipulation to the Not liable for damage, creditor must accept the
contrary. Mode of extinguishment Art 1262 Par 1 thing in impaired condition
With debtor’s fault Liable to damages upon fulfillment of condition May demand the thing OR ask for rescission, in
either case, creditor may recover damages

Effect of improvement
MODE
By nature or time Inures to the benefit of the creditor by virtue of principle of retroactivity of conditional obligations
At debtor’s expense Only usufructuary rights; Governed by Art 579 (useful improvements or for mere pleasure, remove if
possible to remove without damage to property) and Art 580 (set off the improvements he may have

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made against any damage)

Effect of payment in advance

Art 1195
Note Art 1197 Par 3

Benefit of Period

1. For whose benefit and its effects

Credito May demand performance anytime, but not compelled to accept before period expires
r E.g. payment of interest, wants to keep his money safely invested instead of having it in his hands, protects
himself from sudden decline in purchasing power of the currency loaned
Debtor May oppose a premature demand, but may validly pay any time before period expires
E.g. time to raise money
Both Presumption in absence of stipulation or in case of doubt
Creditor must give consent first before debtor may pay in advance especially when creditor receives other
benefits by reason of the term

2. Presumption  for the benefit of BOTH the creditor and debtor

Art 1196
3. When debtor loses right to make use of period
Art 1198

When court may fix period

Art 1197

III. Alternative obligations – plurality of objects

Concept
1. Conjunctive – all prestations must be performed to extinguish obligation
2. Disjunctive – one or some prestations must be performed to extinguish obligation
a. Alternative – Debtor must perform one of several alternatives, choice belongs to debtor UNLESS
expressly given to creditor
b. Facultative – One principal prestation but one or more substitutes, choice belongs to DEBTOR ONLY

Art 1199

Right of choice  debtor unless expressly granted to creditor

Art 1200

Effect of notice of choice

 The effect of notice of choice is to limit the obligation to the object or prestation selected, with all the
consequences which the law provides.
 The obligation is converted to a simple obligation to perform the prestation chosen.
 Once the selection has been communicated, it becomes irrevocable.

When notice produces effect

Art 1201

Effect of loss or impossibility of one or all prestations

Art 1202; Art 1203; Art 1204; Art 1205

FACULTATIVE OBLIGATION
Art 1206

Concept Only one prestation is due, but the obligor reserved the right to render another in substitution

Distinguished from Alternative Obligation

AS TO ALTERNATIVE FACULTATIVE
Contents of Various prestations all of which constitute parts of the Only the principal constitutes the obligation , the
the obligation obligation accessory being only a means to facilitate payment
Nullity of Nullity of one prestation does not invalidate the Nullity of the principal prestation (e.g. when the object
prestation obligation which is still in force with respect to those is unlawful or outside the commerce of man)
which have no vice invalidates the obligation.

Creditor can choose from the remainder Creditor cannot demand the substitute even when this
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is valid.
Choice Right to choose may be given to the creditor Only the debtor can choose the substitute prestation
Effect of Loss Only the IMPOSSIBILITY OF ALL the prestations due Impossibility of the principal prestation is sufficient to
(fortuitous without fault of the debtor extinguishes the obligation extinguish the obligation, even if the substitute is
event) possible.

Loss of substitute does not make debtor liable, unless

substitution has been made
Effect of Loss Debtor not liable if other prestation still available Debtor is liable
(through fault) If choice belongs to creditor, loss of one alternative Loss of the substitute before substation does not
gives rise to liability render debtor liable

Effects of Substitution
o Before the substitution is effected, the substitute is not the prestation that is due.
o IF the substitute prestation becomes impossible due to the fault or negligence of the debtor  obligation
is not affected, and he cannot be held for damages, even if he acts with bad faith in rendering the
substitute impossible.
o From the time the debtor communicates to the creditor that he elects to perform the substitute prestation,
substitution is effective.

IV. Joint and Solidary obligation – plurality of subjects, the juridical tie that binds them

JOINT OBLIGATIONS
Concept Each of the debtors is liable only for a proportionate part of the debt, and each creditor is entitled only to a
proportionate part of the credit. Each creditor can recover only his share of the obligation and each debtor can be
made to pay only his part. Sir Labitag describes it as a “thin plastic rope or string” that binds the parties.
 Requisites of Joint Obligations
1. Plurality of subjects
2. Determination of the shares in the demandability of the fulfillment of the obligation

Presumptions in Joint Obligations

Art 1207; Art 1208;

Effects of Joint Obligation

SOLIDARY OBLIGATIONS
Concept Each of the debtors is liable for the entire obligation, and each creditor is entitled to demand the whole
obligation. Each creditor may enforce the entire obligation and each debtor may be obliged to pay it in full. Sir Labitag
describes it as a “solid steel cable” that binds the parties.
 Solidary obligations exist only by:
o Stipulation of the parties
o Law
o Nature of obligation
o Charge of condition is imposed upon legatees or heirs
o Imputed by final judgment upon several defendants
 Requisites of Joint Obligations
1. Plurality of subjects
2. Determination of the shares in the demandability of the fulfillment of the obligation

KINDS OF SOLIDARY OBLIGATIONS

a. As to source
Art 1208

LEGAL
Art 1915 Two or more principals appointed an agent for common transaction, solidarily liable to agent
Art 1945 Two or more bailees to whom a thing is loaned in the same contracts (commodatum)
Art 2194 Joint tortfeasors
Art 2146 Joint officious management, two or more managers
Art 2157 Joint payees in solutio indebiti (payment is not due)
Art 119, RPC

CONVENTIONAL by stipulation of parties

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REAL nature of the obligation requires

b. As to parties bound

ACTIVE – solidarity of creditors; each has right to collect the whole of the prestation from the common debtor

PASSIVE – solidarity of debtors; each is liable to pay the whole to the common creditor

MIXED – simultaneously active and passive

c. As to uniformity

UNIFORM – same terms and condition for all

VARIED/NON-UNIFORM
Art 1211

DEFENSES AVAILABLE TO A SOLIDARY DEBTOR AGAINST THE CREDITOR

Art 1222 A solidary debtor may, in actions filed by the creditor, avail himself of all defense which are of four types:

1. Those derived from the nature of the obligation

 Connected with the obligation and derived from its nature
 Constitutes a total defense
 E.g. non-existence of the obligation because of illicit cause, object or absolute simulation, nullity due to
defect in capacity or consent of all the debtors (minority, fraud or violence), unenforceability because of
lack of proper proof under the Statute of Fraud, non-performance of suspensive condition or non-arrival
of period affecting the entire obligation, extinguishment of the obligation such as by payment and
remission, all other means of defense which may invalidate the original contract
2. personal defenses
 Total defense e.g. minority, insanity, fraud, violence, intimidation (sufficient causes to annul consent)
 Partial defense e.g. special terms or conditions affecting his part of the obligation
3. Defenses pertaining to his share
 Partial defense
 E.g. may share is not yet due, so you can only compel me to give the share of the co-debtors
4. Those personally belonging to the other co-debtors  avail himself thereof only as regards that part of the
debt for which the latter are responsible
 Partial defense only for the debtor-defendant
 E.g. the co-debtor’s share is not yet due, so you can only compel me to give my share

JOINT INDIVISIBLE OBLIGATIONS

Concept Their tie is joint, but the performance is indivisible. One in which the object of the object or prestation is
indivisible, not susceptible of division; while the tie between the parties is joint, that is liable only to a proportionate
share. (Art 1209)

Indivisibility distinguished from solidarity

Art 1210 The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply
indivisibility.

INDIVISIBILITY SOLIDARITY
Each creditor cannot demand more than his share and each Each creditor may demand the full prestation and each debtor
debtor is not liable for more than his share has the duty to comply with the entire prestation
Indivisibility refers to the prestation that is not capable of Solidarity refers to the legal tie or vinculum defining the extent
partial performance of liability
Only the debtor guilty of breach of obligation is liable for All of the debtors is liable for the breach of obligation
damages, thereby terminating the agency committed by any one of the debtors
Can exist even if there is only one debtor or only one creditor Can only exist when there is at least creditor or debtors
(requires plurality of subjects)
The other debtors are not liable in case of insolvency of one The other debtors are proportionately liable in case of
debtor insolvency of one debtor

Effects of Joint Indivisible Obligation

Art 1209 If the division is impossible, the right of the creditors may be prejudiced only by their collective acts
1. Creditors prejudiced only by their collective acts
2. Co-debtors not liable for the share of the insolvent debtor
3. Creditor must proceed against all the joint debtors, because the compliance of the obligation is possible
only if all the joint debtors would act together.

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4. If one of the debtors cannot comply, the obligation is converted into monetary consideration (liability for
losses and damages). One who is ready and willing to comply will pay his proportionate share plus
damages when his financial condition improves.
5. Debtor must deliver to all the creditors. If he delivers to only one, liable for non-performance as to other
creditors. Damages are divisible and each creditor can recover separately his proportionate share.

Liability for damages in case of breach

Art 1224

V. DIVISIBLE AND INDIVISIBLE OBLIGATION – performance of the prestation and not

to the thing which is the object thereof

DIVISIBLE OBLIGATIONS
Concept One which is susceptible of partial performance; debtor can legally perform the obligation by parts and
the creditor cannot demand a single performance of the entire obligation.
 DIVISIBILITY OF THINGS different from DIVISIBILITY OF OBLIGATIONS
o Divisible Thing: When each one of the parts into which it is divided forms a homogenous and
analogous object to the other parts as well as to the thing itself
o Indivisible Thing: When if divided into parts, its value is diminished disproportionately
 Test of Divisibility
1. Will or intention of the parties
2. Objective or purpose of the stipulated prestation
3. Nature of the thing
4. Provisions of law affecting the prestation

Effects of Divisible Obligations

1. Art 1223
2. Art 1233

INDIVISIBLE OBLIGATIONS
Concept Whatever may be the nature of the thing which is the object thereof, when it cannot be validly performed in
parts.

Distinguished from Solidary Obligations

INDIVISIBILITY SOLIDARITY
Each creditor cannot demand more than his share and each Each creditor may demand the full prestation and each debtor
debtor is not liable for more than his share has the duty to comply with the entire prestation
Indivisibility refers to the prestation that is not capable of Solidarity refers to the legal tie or vinculum defining the extent
partial performance of liability
Only the debtor guilty of breach of obligation is liable for All of the debtors is liable for the breach of obligation
damages, thereby terminating the agency committed by any one of the debtors
Can exist even if there is only one debtor or only one creditor Can only exist when there is at least creditor or debtors
(requires plurality of subjects)
The other debtors are not liable in case of insolvency of one The other debtors are proportionately liable in case of
debtor insolvency of one debtor

Kinds of Indivisible Obligations

NATURAL
Art 1225

LEGAL
Art 1225 Par 3

CONVENTIONAL
Art 1225 Par 3

Effects of Indivisible Obligations

1. Art 1223
2. Art 1233
3. Art 1224

VI. OBLIGATIONS WITH A PENAL CLAUSE

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Concept An accessory undertaking to assume greater responsibility in case of breach. Attached to an obligation to
insure performance.
 Generally a sum of money, but can be any other thing stipulated by the parties, including an act or abstention
 Double function: (1) provide for liquidated damages and (2) strengthen the coercive force of the obligation by
the treat of greater responsibility in the event of breach
 Mere non-performance of the principal obligation gives rise to damages
 PENAL CLAUSE constitutes an exception to the general rules on the recovery of losses and damages.

PRINCIPAL OBLIGATION ACCESSORY OBLIGATION

Can stand alone, independent of other obligations Attached to the principal in order to complete it or take their
place in case of breach

OBLIGATIONS WITH A PENAL CLAUSE CONDITIONAL OBLIGATION

There is already an existing obligation (the principal) from the No obligation before the suspensive condition happens, it is the
very beginning fulfillment of the condition that gives rise to the obligation
Accessory obligation (penalty) is dependent upon non- Principal obligation itself is dependent upon an uncertain event
performance of the principal obligation

OBLIGATIONS WITH A PENAL CLAUSE ALTERNATIVE OBLIGATION

Only one prestation and it is only when this is not performed Two or more obligations are due, but fulfillment of one of them
that the penal clause is enforceable is sufficient
Impossibility of the principal obligation also extinguishes the Impossibility of one of the obligations, without the fault of the
penalty debtor, still leaves the other subsisting
He cannot choose to pay the penalty to relieve himself of the The debtor an choose which prestation to fulfill
principal obligation, unless that right is expressly granted to him

OBLIGATIONS WITH A PENAL CLAUSE FACULTATIVE OBLIGATION

Payment of the penalty in lieu of the principal can be made only Power of the debtor to make substitution is absolute
by express stipulation
Creditor may demand both prestation as long as such right is Creditor can never demand both prestations
granted to him (i.e. complementary penalty)

OBLIGATIONS WITH A PENAL CLAUSE GUARANTY

Contract by virtue of which a person, called the guarantor, binds
himself to fulfill the obligation of the principal debtor in case the
latter should fail to do so.
SIMILARITIES
1. They are both intended to insure the performance of the principal obligation.
2. They are both accessory and subsidiary obligations.
3. Can be both assumed by a third person.
To pay the penalty is different from the principal obligation The object of the obligations of the principal debtor and the
guarantor is the same.
Principal obligation and the penalty can be assumed by the Principal debtor cannot be the guarantor of the same obligation
same person.
Penalty is extinguished by the nullity of the principal obligation, Guaranty subsists even when the principal obligation is voidable
except when the penal clause is assumed by a third person or unenforceable or is a natural one. However, if the penal
clause is assumed by a third person, the same principle will
apply as in the case of a guaranty.

Kinds of Penal Clause

1. As to effect

SUBSIDIARY – only the penalty may be enforced

 Presumed in Art 1227: “Cannot demand the fulfillment of the obligation and the satisfaction of the
penalty at the same time”
COMPLEMENTARY – both principal obligation and penalty may be enforced
 Only occurs by express stipulation of the parties

2. As to source

CONVENTIONAL – by express stipulation of the parties

LEGAL – by law

3. As to purpose

PUNITIVE – the right to damages, besides the penalty subsists; the question of indemnity for damage is not
resolved, but remains subsisting
 Only occurs by express stipulation of the parties

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REPARATORY – substitutes the damages suffered by creditor; the matter of damages is generally resolved,
and it represents the estimate of the damages that a party might suffer from non-performance of the
obligation, thereby avoiding the difficulties of proving such damages
 Presumption in Art 1226, Par 1: “Shall substitute the indemnity for damages and the payment of
interests in case of non-compliance”

Demandability of penalty
Art 1226 Par 2

Effects of penal clause

1. Substitute for indemnity for damages and payment of interest (Art 1226)
EXCEPTION: Unless there is a stipulation to the contrary e.g. becomes a facultative obligation

2. Not exempt debtor from performance – penalty is not a defense for leaving obligation unfulfilled
Art 1227 The debtor cannot exempt himself from the performance of the obligation by paying the penalty
EXCEPTION: Where this right to substitute penalty has been expressly reserved for him

3. Creditor cannot demand both performance and penalty at the same time
Art 1227 Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the
same time”
EXCEPTION: Unless this right has been clearly granted him

4. Creditor cannot collect other damages in addition to penalty

Art 1226 Substitute the indemnity for damages and the payment of interest in case of non-fulfillment *
EXCEPTIONS:
1. There is an express provision to that effect
2. Debtor refuses to pay the penalty
3. Debtor is guilty of fraud in the non-fulfillment of the obligation

When penalty shall by equitably reduced

Art 1229

Effects of Nullity of Principal Obligation or Penal Clause

Art 1230

STUDY GUIDE FOR RECITATION

 Different kinds of obligations:

1. as to demandability – pure, conditional or with a term (Arts. 1179-1198)
2. as to plurality of objects – simple, alternative or facultative (Arts. 1199-1206)
3. as to plurality of subject – simple, joint or solidary (Arts. 1207-1222)
4. as to performance – divisible or indivisible (Arts. 1223-1225)
5. as to sanction for breach – with or without penal clause (Arts. 1225-1230)

 Kinds of obligations as to demandability (Arts. 1179-1198)

A. Pure and conditional obligations (1179-1192)
1. What is a pure obligation? A condition? A term? A conditional obligation?
2. What are the kinds of conditions?
a. Suspensive – what is the effect?
b. Resolutory – what is the effect?
Cases:
Art. 1179
Pay v. Palanca, 57 SCRA 618

Art. 1182
Taylor v. Uy Tieng Piao 43 Phil 873

Trillana v. Quezon Colleges 93 Phil 383

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Insular Life Assurance Co. v. Toyota Bel-Air GR No. 137884 Mar 28,2008

Chapter IV. Extinguishment of Obligations

I. Modes of Extinguishment

Art 1231

II. Payment or performance

CONCEPT Fulfillment of the prestation due, a fulfillment that extinguishes the obligation by the realization of the
purposes for which it was constituted.
 Juridical act which is VOLUNTARY, LICIT, and MADE WITH THE INTENT TO EXTINGUISH THE OBLIGATION
 Requisites of a Valid Payment
1. Person who pays
2. Person to whom payment is made
3. Thing to be paid
4. Manner, time and place of payment
 Kinds of Payment
a. Normal debtor voluntarily performs the prestation stipulated
b. Abnormal when debtor is forced by means of judicial proceeding, either to comply with the
prestation or pay indemnity

 What are the elements/characteristics of a valid payment?

1. Identity – what is to be paid, payment should be the very same obligation/prestation promised to be
performed/not performed
2. Integrity – how payment should be made, it should be complete (not only specific thing but all of its
accessions and accessories)

1. Who can pay

a. In general (creditor cannot refuse valid tender of payment)
1. Debtor
2. Anyone acting on his behalf
a. Duly authorized agent or representatives
b. Heirs (means that debtor is dead, if alive, they would be third persons interested in obligation)
c. Successors in interest and assignees

b. Third person who is an INTERESTED PARTY (creditor cannot refuse valid tender of payment)
Meaning of INTERESTED PARTY – interested in the extinguishment of the obligations such as
 Co-debtors  Guarantors
 Sureties  Owners of mortgaged property or pledge

Effects of Payment by 3rd Person – Interested

1. Valid payment; obligation extinguished
2. Debtor to reimburse fully 3rd person interested
3. 3rd person subrogated to the rights of the creditor

c. Third person who is NOT AN INTERESTED PARTY but WITH CONSENT of debtor
Art 1302 (2) When a third person, not interested in the obligations, pays with the express or tacit approval of
the creditor.
Art 1236 Par 1 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.

Effects of Payment by 3rd Person – Not Interested – With Debtor’s Consent

1. 3rd person is entitled to full reimbursement
 Demand from the debtor what he has paid
2. Legal subrogation (novation) – 3rd person is subrogated/steps into the shoes of creditor
 Payor can exercise all the rights of the creditor arising from the very obligation itself,
whether against the debtor or third person
3. Creditor may refuse to accept payment

d. Third person who is NOT AN INTERESTED PARTY and WITHOUT THE KNOWLEDGE OR AGAINST
THE WILL OF THE DEBTOR
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Art 1236 Par 1
Art 1236 Par 2
Art 1237

Effects of Payment by 3rd Person – Not Interested – Without Knowledge or Against the Will
1. 3rd person can only be reimbursed insofar as payment has been beneficial to debtor
 Burden of proof of payment on the 3rd person
 Benefit to the creditor need not be proved in the following cases:
a. If after the payment, the third person acquires the creditor’s right
b. If the creditor ratifies the payment to the third person
c. If by the creditor’s conduct, the debtor has been led to believe that the third
person had authority to receive the payment
d. Assignment of credit without notice to debtor (Art 1626)
2. 3rd person cannot compel creditor to subrogate him in the latter’s rights

e. Third person who does NOT INTEND TO BE REIMBURSED  DEBTOR MUST GIVE CONSENT
Art 1238

Effects of Payment by 3rd person – Interested or not – Does not intend to be reimbursed
1. Payment is deemed as a donation/offer of donation
2. Donation must be in proper form (i.e. if above P5K it must be in writing)

2. To whom payment can be made

a. In general
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.

1. Creditor/person in whose favor obligation was constituted

2. His successor in interest
3. Any person authorized to receive it

Payment to a wrong third party

GENERAL RULE: Not valid, obligation is not extinguished, even if in good faith of the debtor
EXCEPTION:
3. Extinguished if the mistake is imputable to the fault or negligence of the creditor (PAL v CA)
4. Payment in good faith to person in possession of credit (Art 1242)

Allied Banking Corporation vs. Lim Sio Wan, et.al. G.R. No. 133179 March 27, 2008

Incapacitated person
Art 1241 Par 1 Payment to a third person 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.

GENERAL RULE: Payment not valid

EXCEPTION - When payment to an incapacitated person is valid:
a) If creditor has kept the thing delivered
b) Insofar as payment benefited creditor
 Benefit to the creditor need not be proved in the following cases:
e. If after the payment, the third person acquires the creditor’s right
f. If the creditor ratifies the payment to the third person
g. If by the creditor’s conduct, the debtor has been led to believe that the third
person had authority to receive the payment
h. Assignment of credit without notice to debtor (Art 1626)

b. Third person
Art 1241 Par 2 Payment to a third person shall also be valid insofar as it has redounded to the benefit of the
creditor.
GENERAL RULE: VALID if third person proves that it redounded to creditor’s benefit; otherwise VOID
EXCEPTION; When proof of benefit not required  also applicable to INCAPACITATED PERSONS
Art 1241 Par 3 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 right
2. If the creditor ratifies the payment to the third person

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3. If by the creditor’s conduct, the debtor has been led to believe that the third person had authority
to receive the payment
4. Assignment of credit without notice to debtor (Art 1626)
5. Payment in good faith to any person in possession of the credit shall release the debtor (Art 1242)
 EFFECT: Debtor is released

Art 1243 Debtor pays creditor after being judicially ordered to retain debt
EFFECT: Payment not valid if the property is attached or garnished

c. In case of active solidarity

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.
 If no demand is made, debtor may pay to any of the solidary creditors
 If any judicial/extrajudicial demand is made by any of the creditors who made the demand

3. What is to be paid (“identity”)

a. In general
 The very prestation (thing or service) due

b. In obligations to…

- GIVE a specific thing

Art 1244 Par 1 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 which is due.
1. Give specific things itself
2. Accessions and accessories
3. If with loss, improvements, deterioration  Apply Art 1189

- GIVE a generic thing

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 obligation and other circumstances shall
be taken into consideration.
GENERAL RULE: Creditor cannot demand a superior quality; Debtor cannot deliver a thing of inferior quality
EXCEPTION: Unless quality and circumstances have been stated, purpose and other circumstances of
obligation considered.

- Pay money
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 the legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
shall produce 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 abeyance.

EXCEPTION; RA 4100, RA 8183: Foreign currency if agreed to by parties

Art. 1249

Pacific Timber & Supply v. Judge Seneris 101 SCRA 686

Art 1250 In case of 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 the payment, unless there is an agreement to the contrary.

RA 529
RA 4100

- DO or NOT TO DO
Art 1244 Par 2 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.
 Substitution cannot be done against the will of creditor

c. Payment of interest
Art 1956 No interest shall be due unless it has been expressly stipulated in writing.
Art 1253 Interest must be satisfied first before capital

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4. How is payment to be made (“integrity”)

a. In general
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.

GENERAL RULE: Partial payment is not allowed  Creditor cannot be compelled to receive partial prestations; Debtor
cannot be compelled to give partial payments
EXCEPTIONS:
1. Contrary stipulation
o Art 1248 Par 1 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.
2. Debt is partly liquidated and partly unliquidated
o Art 1248 Par 2 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.
3. When there are several subjects/parties are bound under different terms and conditions
4. Compensation

b. Substantial performance in good faith

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 oblige.
 Requisites of Substantial Performance
1. Attempt in good faith to perform, without any willful or intentional departure
2. Deviation from the obligation must be slight
3. Omission or defect is unimportant and technical
4. Must not be so material that intention of the parties is not attained

c. Estoppel
Art 1235 When oblige accepts the performance, knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is deemed fully complied with.
- Constitutes a “waiver of defect in performance”  there must however be an intentional relinquishment of
a known right. Waiver will not result from mere failure to assert a claim for defective performance when
the thing or work is received
- Applies only when he knows the incompleteness or irregularity of the payment, obligation is deemed
extinguished. Estopped from complaining

d. Presumptions in payment of interests and installments

INTEREST
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.
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.

 If principal amount is received without reservation as to interest

 interest is presumed to have been paid

INSTALLMENTS
Art 1176 Par 2 The receipt of a later installment of debt, without reservation as to prior installments shall
likewise raise the presumption that such installments have been paid.

 If a latter installment is received without reservation to prior installments

 prior installments are presumed to have been paid

5. When is payment to be made

 When obligation is due and demandable but debtor may pay before due date if period is for the benefit
of debtor. If for the benefit of both the debtor and creditor, debtor may only prior to the due date if
creditor consents thereto.

a. In general
Art 1169 Debtor incurs in delay from the time creditor judicially or extrajudicially demands fulfillment of
the obligation

6. Where payment is to be made

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a. In the designated place in the obligation (Art 1251 Par 1)

b. If no place is expressly designated

Art 1251 Par 2 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.

Art 1251 Par 3 In any other case (not to deliver a determinate thing), the place of payment shall be at the
domicile of the debtor.

Art 1251 Par 4 If the debtor changes his domicile in bad faith, or after he has incurred in delay, the
additional expenses shall be borne by him. (Absent such circumstances, it will be borne by the creditor)

7. Expenses of making payment

Art 1247 Unless it is otherwise stipulated, the extra-judicial expenses required by the payment shall be for the
account of the debtor with regard to the judicial costs, the Rules of Court shall govern.

SPECIAL FORMS OF PAYMENT

APPLICATION OF PAYMENTS

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 that 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 consent.

Concept Designation of the debt which is being paid by a debtor who has SEVERAL OBLIGATIONS OF THE SAME
KIND, in favor of one creditor to whom payment is being made

Requisites for Application of Payment

1. Same debtor
2. Same creditor
3. Various debts are of same kind, generally monetary character
o Cannot apply to prestation to give specific thing
o Can apply to prestation to give generic thing
4. All obligations must be due
o EXCEPTIONS:
 Mutual agreement of parties
 upon consent of the party in whose favor the term was established
5. Payment is not enough to extinguish all debts
6. Debtor has preferential right to choose the debt which his payment is to be applied
o Not absolute; LIMITATIONS:
 Cannot make partial payments
 Cannot apply to unliquidated debts
 Cannot choose a debt whose period is for the benefit of the creditor, and period has not
yet arrived
 Right to apply debts must be exercised at the time when debt is paid

Rules in Application of Payment

1. Right to apply must be exercised at the time of the payment (Art 1252)
2. Creditor may undertake application, subject to the debtor’s approval. Once the latter accepts receipt of
application, he cannot complain UNLESS there is a cause for invalidating the contract. (Art 1252)
3. Apply to interest first. BOTH (1) interest stipulated and (2) interest due because of debtor’s delay
Art 1253 If debt produces interest, payment of the principal shall not be deemed to have been made until the
interest are covered.

If rules are inapplicable and application cannot be inferred

Art 1254 When payment cannot be applied in accordance with 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 are of the same nature and burden, the payment shall be applied to all of them proportionately.

Meaning of “MOST ONEROUS TO DEBTOR”

 Fundamentally a question of act, which courts must determine on the basis of circumstances of each case eg.
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o Co-debtor (especially if solidary) vs. sole debtor
o Same amount, younger vs. older
o Secured vs. unsecured

PAYMENT BY CESSION

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 law.

Concept Abandonment of the universality of the property of the debtor for the benefit of his creditors, in order that
such property may be applied to the payment of his credits.
 Debtor transfers all the properties not subject to execution in favor of creditors that the latter may sell them
and thus apply the proceeds to their credits
 Initiative comes from the debtor but must be accepted by the creditors in order to become effective
 Usually done by debtors in state of insolvency

Requisites for Payment by Cession

1. Plurality of debts
2. Plurality of creditors
3. Complete or partial insolvency of the debtor
4. Abandonment of all debtor’s property not subject to execution
5. Acceptance or consent on the part of the creditors

Effects of Payment by Cession

1. Creditors do not become the owner; they are merely assignees with authority to sell
2. Debtor is released up to the amount of the net proceeds of the sale, unless there is a stipulation to the
contrary  not total extinguishment
3. Creditor will collect credits in the order of preference agreed upon, or in default of agreement, in order
ordinarily established by law.

DATION IN PAYMENT (Dacion en Pago)

Art 1245
Concept Delivery and transmission of ownership of a thing by the debtor and to the creditor as an accepted
equivalent of the performance of the obligation.
 An onerous contract of alienation because object is given in exchange of credit
 Special form of payment because one element of payment is missing: “identity”

Distinguished from payment by cession

Requisites for Dation in Payment

1. Consent of creditor  sale presupposes the consent of both parties
2. Dacion will not prejudice of other creditors
3. Debtor is not declared judicially insolvent
4. Not a pactum commissorium (a stipulation entitling the creditor to appropriate automatically the thing given as
security in case debtor fails to pay)

TENDER OF PAYMENT AND CONSIGNATION

1. TENDER OF PAYMENT

Concept The act of offering the creditor what is due him together with a demand that the creditor accept the same
 When creditor refuses without just cause to accept payment, he is in mora accipiendi and debtor is released

Requisites of a Valid Tender of Payment

1. Made in lawful currency
2. Should include interest due
3. Must be unconditional; but the creditor cannot vary the terms of a tender accepted by him
4. Unaccepted offer in writing to pay is equivalent to actual production and tender of money or property

2. CONSIGNATION

Concept The act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept
or refuses to accept payment.
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Purpose Avoid performance of an obligation becoming more onerous to the debtor by reasons not imputable to him
 Duty of attending indefinitely to its preservation, without remedy to be relieved from the debt

Banco Filipino Savings & Mortgage Bank vs. Diaz G.R. No. 153134 June 27, 2006
Ramos vs. Sarao G.R. No. 149756 Feb 11, 2005

Requisites of Consignation
1. There is a debt due
2. The consignation of the obligation was made because of some legal cause
o Previous valid tender was unjustly refused
o Other circumstances making previous tender exempt
3. Prior notice of consignation had been given to the person interested in the obligation (1 st notice)
4. Actual deposit/consignation with proper judicial authority
5. Subsequent notice of consignation (2nd notice)
o May be complied with by the service of summons upon the defendant creditor together with a
copy of the complaint
o Given to all interested in the performance of obligations: passive (co-debtors, guarantors,
sureties) or active (solidary co-creditors, possible litigants)

a. When tender and refusal not required

Art 1256 Par 2 Consignation alone shall produce the same effect in the following cases:
1. Creditor is absent or unknown or does not appear at place of payment
2. Incapacitated to receive payment at the time it is due  need not be legally declared
3. Without just case, he refuses to give a receipt
4. Two or more persons claim the same right to collect
5. Title of the obligation has been lost

b. Two notice requirement

FIRST NOTICE: Art 1257 Par 1 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.
 Why?

SECOND NOTICE: Art 1258 Par 2 The consignation having been made, the interested parties shall also be
notified thereof.
 Why?

Effects of non-compliance
Art 1257 Par 2

c. Effects of Consignation  when properly made, charge against the creditor

Art 1260 Par 1 Once the consignation has been duly made, the debtor may ask the judge to order the
cancellation of the obligation.
1. The debtor is released in the same manner as if he had performed the obligation at the time
of consignation, because this produces the effect of a valid payment.
2. The accrual of interest on the obligation is suspended from the moment of the consignation.
3. The deteriorations or loss of a thing or amount consigned occurring without fault of the debtor must
be borne by the creditor, because the risks of the thing are transferred to the creditor from the
moment of deposit.
4. Any increment or increase in value of the thing after the consignation inures to the benefit of the
creditor.

d. Withdrawal by debtor BEFORE acceptance by creditor OR approval by the Court

- Before the consignation is effected, the debtor is still the owner and he may withdraw it. (TLG v Flores)

Art 1260 Par 2 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 sum deposited allowing
the obligation to remain in force.

Effects of withdrawal before consignation is final

1. Obligation remains in force
2. Debtor bears all the expenses incurred because of the consignation

e. Withdrawal by debtor AFTER proper consignation

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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.

f. Expenses of consignation

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

III. Loss or Impossibility

LOSS OF THE THING DUE

Concept Not limited to obligations to give but extends to those which are personal, embracing therefore all causes
which may render impossible performance of the prestation.
 Generally applies to determinate things
 Must be subsequent to the execution of the contract in order to extinguish the obligation
 If impossibility already existed when the contract was made, the result is not extinguishment but inefficacy of
the obligation under Art 1348 (impossible things or services cannot be object of contracts) and Art 1493
(Sales; loss object of contract, contract without any effect).

Art 1189 (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 loss when it:
a. Perishes
b. Goes out of the commerce of man
c. Disappears in such a way that its existence is unknown or it cannot be recovered

Kinds of Loss
a. As to extent
TOTAL
PARTIAL

Requisites of Loss of the Thing Due

Art 1262 In order to extinguish obligation:
1. Loss or destroyed without the fault of the debtor
2. Before the debtor incurs in delay
3. After the obligation is constituted

Presumption in Loss of the Thing Due

Art 1265; Art 1165

Effects of Loss of the Thing Due

a. In obligation to give a specific thing

Art 1262; Art 1268

EXCEPTIONS:
2. Debtor is at fault i.e. in bad faith, negligence, delay
3. Debtor is made liable for fortuitous event by law, contractual stipulation or nature of obligation
requires assumption of risk on part of debtor

b. In obligation to give a generic thing  not extinguished

Art 1263

c. In case of partial loss

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.

d. Action against third persons

Art 1269

IMPOSSIBILITY OF PERFORMANCE
Concept

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Art 1266; Art 1267

 Requisites for application of Art 1267

1. Event or change in circumstances could not have been foreseen at the time of the execution of the contract
2. Makes the performance of the contract extremely difficult but not impossible
3. Event must not be due to the act of any of the parties
4. Contract is for a future prestation

NagaTelephone Co. v. CA 230 SCRA 351

Kinds of Impossibility

1. As to extent

TOTAL
PARTIAL – significant in Art 1264 (extinguishment due to partial loss subject to the court’s determination)

2. As to source

LEGAL
a. Direct – prohibited by law
b. Indirect – prevented by supervening legal duty such as military service
PHYSICAL – By reason of its nature, cannot be accomplished

Requisites of Impossibility
Art 1266
1. Obligation used to be possible at the constitution of obligation
2. Subsequent impossibility
3. Without the fault of the debtor

Impossibility vs. Difficulty

 Manifest disequilibrium in the prestations, such that one party would be placed at a disadvantage by the
unforeseen event.

a. In case of partial impossibility

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.

IV. Condonation or Remission

Concept An act of liberality by virtue of which, without receiving any equivalent, the creditor renounces the
enforcement of obligation, which is extinguished in its entirety or in that part or aspect of the same to which the
remission refers.
 It is an essential characteristic of remission that it be gratuitous , that there is no equivalent received for the
benefit given; once such equivalent exists, the nature of the act changes

Kinds of Condonation

1. As to extent
TOTAL
PARTIAL – refer to the amount of indebtedness, or to an accessory obligation (such as pledge or interest) or
to some other aspect of the obligation (such as solidarity)

2. As to form

Art 1270 Par 1

EXPRESS – when made formally, accordance with the forms of ordinary donations
IMPLIED – inferred from the acts of parties

Requisites of Condonation
1. Debts must be existing and demandable at the time remission is made
2. The renunciation of the debt must be gratuitous or without any equivalent or consideration
3. Debtor must accept the remission
 Unilateral renunciation is possible under Art 6 and nothing prevents him from abandoning his rights
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 Parties must be capacitated and must consent; requires acceptance by the obligor, implied in mortis
causa (effective upon the death of the creditor) and express inter vivos (effective during the lifetime
of the creditor)

When formalities required

Art 1270 Par 2 One and other kind shall be subject to the rules which govern inofficious donation. EXPRESS
condonation, shall furthermore, comply with the forms of donation.
 Bilateral acts which requires acceptance by the debtor
 Subject to the rules on donations with respect to acceptance, amount and revocation
 Formalities of a donation are required in the case of an express remission
 Revocable – subject to the rule on inofficious donation (excessive, legitime is impaired), ingratitude and
condition not followed

Presumptions in Condonation

1. Art 1271 The DELIVERY of a private document evidencing a credit, made voluntarily by a creditor to the
debtor, IMPLIES the renunciation of the action which the former had against the latter.
 Not applicable to public documents because there is always a copy in the archives which can be used to prove
the credit.
 Surrender of weapon of enforcement of his rights

2. 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.
 Only prima facie and may be overcome by contrary evidence to show that notwithstanding the possession by
the debtor of the private document of credit, it has not been paid.

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

Effects of Condonation
1. In general  extinguishes either totally or partially
2. In case of joint or solidary obligations  affects the share corresponding to the debtor in whose benefit the
remission was given

Governing Rules in Condonation

Art 1270 Rules in inofficious donations

Effects of Renunciation of Principal or Accessory Obligation

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.
 Why? Accessory merely follows principal

V. Confusion or Merger of Rights

Concept Merger or confusion is the meeting in one person of the qualities of the creditor and the debtor with respect
to the same obligation.

Requisites for Confusion

1. Must take place between the creditor and the principal debtor (Art 1276)
2. Very same obligation must be involved, for if the debtor acquires rights from the creditor, but not
particular obligation in question, there will be no merger
3. Confusion must be total or as regards the entire obligation

Effects of Confusion
1. In general  extinguish the obligation
2. In case of
 Joint obligations - 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.
 Solidary obligations – Art 1215 “… confusion… made by any of the solidary creditors or with any of the
solidary debtors shall extinguish the obligation, without prejudice to the provisions of Art 1219.”
(Solidary co-debtor who has been remitted is still liable to co-debtors if one of the had paid the
obligation in full prior the remission)

Confusion in Principal or Accessory Obligation

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.
 Merger releases the guarantor because they are merely accessory obligations
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 Guarantor acquires the credit, his obligation as guarantor is extinguished, but the principal obligation subsists
which he can enforce against the debtor and other co-guarantors.
 When mortgaged property belongs to a third person, mortgagee acquires a part of the property, the same is
released from the encumbrance. The obligation merely becomes a partly (if the acquisition is not total)
unsecured obligation.

VI. Compensation

Concept It is a mode of extinguishing the obligation to the concurrent amount, the obligations of those persons who
in their own right are reciprocally debtors and creditors of each other.
 Distinguished from payments

PAYMENT COMPENSATION
Capacity to dispose of the thing paid and capacity to Such capacity is not necessary, because it takes place
receive are required for debtor and creditor by operation of law and not by the acts of parties
Performance must be complete There may be partial extinguishment of an obligation

Advantage of Compensation over Payment

1. Simple, taking effect without action by either party to extinguish their respective obligations
2. More guaranty in making the credit effective, because there is less risk of loss by the creditor due to
insolvency or fraud of the creditor

Art 1278

Distinguished from Confusion

CONFUSION COMPENSATION
Involves only one obligation There must always be two obligations
There is only one person in whom the characters of Two persons who are mutually debtors and creditors of
creditor and debtor meet each other in two separate obligations, each arising
from a different cause

Kinds of Compensation

1. As to extent

TOTAL – when two obligations are of the same amount

PARTIAL – when the amounts are not equal

2. As to origin

LEGAL – takes place by operation of law because all the requisites are present

VOLUNTARY/CONVENTIONAL – when the parties agree to compensate their mutual obligations even if
some requisite is lacking, such as that provided in Art 1282
Art 1279 Requisites of legal compensation is inapplicable
Art 1282 The parties may agree upon the compensation of debts which are not yet due.
 Requisites of Voluntary Compensation
1. Each of the parties can dispose of the credit he seeks to compensate
2. They agree to the mutual extinguishment of their credits

JUDICIAL – when decreed by the court in a case where there is a counterclaim e.g. defendant is the creditor
of the plaintiff for an unliquidated amount, sets up his credit as a counterclaim against the plaintiff and his
credit is liquidated by judgment, thereby compensating it with the credit of the plaintiff. Legal compensation is
not possible because the claim is unliquidated

FACULTATIVE – when it can be claimed by one of the parties who, however, has the right to object to it,
such as when one of the obligations has a period for the benefit of one party alone and who renounces that
period so as to make the obligation due

LEGAL COMPENSATION
Requisites for Legal Compensation
Art 1279 In order that compensation may be proper it is necessary that:

1. Each one of the obligors be bound principally and that at the same time a principal creditor of the other

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 “Principals” not applicable if only a guarantor
 Solidary debtor cannot set up the obligation of the creditor in favor of a co-debtor, except as
regards the share of the latter
2. That both debts consists 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 are 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

BPI vs.CA G.R. No. 142731 June 8, 2006

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.
 Liability of the guarantor is only subsidiary; it is accessory to the principal obligation of the debtor
 If debtor’s obligation is compensated, it would mean the extinguishment of the guaranteed debt and benefits
the guarantor

Effects of Legal Compensation

1. Both debts are extinguished to the concurrent amount (Art 1290)
2. Interests stop accruing on the extinguished obligations or the part extinguished
3. Period of prescription stops with respect to the obligation or part extinguished
4. All accessory obligations of the principal which has been extinguished are also extinguished
5. If a person should have against him several debts which are susceptible of compensation , the rules on
application of payments shall apply to the order of the compensation. (Art 1289)

When compensation is not allowed

1. Depositum (Art 1287)
2. Commodatum (Art 1287)
3. Support due gratuitous title (Art 1287)
4. Civil liability arising from a penal offense (Art 1288)

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 a 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 Art 301 (support in arrears can be compensated).
 Why? A deposit is made or a commodatum is given on the basis of confidence of the owner. It is
therefore, just that the depositary or borrower should in fact perform his obligation; otherwise the trust of
the depositor or lender would be violated.

Art 1288 Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense.

No compensation may occur even when all the requisites concur:

1. When there is renunciation of the effects of compensation by a party  rests upon a potestative right
and unilateral declaration of renunciation is sufficient
2. When the law prohibits compensation
a. Art 1287
b. Art 1288

Compensation of debts payable in different places

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.
 Applies to legal compensation but not to voluntary compensation

Effects of Nullity of debts to be compensated

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.

Effects of Assignment of Credit

A. Made AFTER compensation took place: no effect; compensation already perfected, nothing to assign at all
- Assignee is left with an action for eviction or for damages for fraud against assignor

B. Made BEFORE compensation took place

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1. With consent of debtor  cannot set up against assignee UNLESS debtor reserved his right to
compensation when he gave his consent

Art 1285 Par 1 The debtor who has consented to the assignment of rights made by a creditor in favor of a third person,
cannot set up against the assignee the compensation which would pertain to him against the assignor, UNLESS the
assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation.

2. With knowledge but without consent of debtor  only debts prior to assignment, not subsequent

Art 1285 Par 2 If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may
set up the compensation of debts previous to the cession, but not of subsequent ones.

3. Without the knowledge of debtor  all debts maturing prior to his knowledge

Art 1285 Par 3 If the assignment is made without the knowledge of the debtor, he may set up the compensation of all
credits prior to the same and also later ones until he had knowledge of the assignment.

Rationale: As far as the debtor is concerned, the assignment does not take effect except from the time he is
notified thereof.

VII. Novation

Concept 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:
1. Changing the object or principal conditions
2. Substituting the person of the debtor
3. Subrogating a third person in the rights of the creditor
 Unlike other acts of extinguishing obligation, novation is a juridical act of dual function in that at the time
it extinguishes an obligation , it creates a new one in lieu of the old.
 Does not operate as absolute but only as a relative extinction.

Art 1291 Obligations may be modified by:

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

Kinds of Novation

1. As to form

EXPRESS – parties declare that the old obligation is extinguished and substituted by the new obligation
IMPLIED – incompatibility between the old and the new obligations that they cannot stand together

2. As to origin

CONVENTIONAL – by express stipulation of the parties

LEGAL – by operation of law

3. As to object

OBJECTIVE/REAL – change in the cause, object or principal

SUBJECTIVE/PERSONAL – modification of obligation by the change of the subject
o passive - substitution of debtor
o active - subrogation of a third person in the rights of the creditor
MIXED – both objective and subjective novation

4. As to effect

PARTIAL – only a modification or change in some principal conditions of the obligation

TOTAL – obligation is completely extinguished

Art 1292 In order that obligation may be extinguished by another which substitutes the same, it is imperative that
1. It be so declared in unequivocal terms (express)
2. Old and the new obligations be on every point incompatible with each other (implied)

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Uraca v. CA G.R. No. 115158 September 5, 1997

 Test of incompatibility: If the two contracts can stand together and each one having independent existence
 The change must refer to the object, the cause or the principal conditions of the obligations. Accidental
changes do not produce novation.

Requisites of Novation
1. Previous valid obligation
2. The agreement of all parties to the new contract
3. Extinguishment of the old contract
4. Validity of the new one
5. Animus novandi or intent to novate (especially for implied novation and substitution of debtors)

Fabrigas et.al v. San Francisco del Monte G.R. No. 152346 Nov 25, 2005

Effects of Novation
1. In general  extinguishment of the original obligation and creation of a new one
2. When accessory obligation may subsist  only insofar as they may benefit third person who did not give the
consent to the novation
 Why? Mortgage, pledge, guaranty was given to any for a particular obligation or for the insolvency
of a particular debtor; any change in either of this destroys the basis of the consent of the
mortgagor, pledgor, surety or guaranty

Effect of the Status of the Original or the New Obligation

1. Nullity of the original obligation  new obligation is VOID

 One of the requisites of novation is a previous valid obligation
 Also applies to voidable that are already annulled/extinguished

Voidability of the original obligation

 new obligation is VALID if ratified before novation
 new obligation is VALID even if not ratified, but voidable at the instance of the debtor
 Consent of debtor constitutes implied waiver of the action for nullity
 Defect is not completely cured in expromision wherein debtor has not intervened or
consented

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.

2. Nullity of the new obligation  original SUBSISTS, UNLESS intends extinguishment of former in any event

Voidability of the new obligation  new obligation is VALID

 BUT if new obligation is annulled and set aside, original SUBSISTS

Art 1297 If the new obligation is void, the original one shall subsist, unless the parties intended that the former one shall
be extinguished in any event.

3. Suspensive or resolutory condition of original obligation  New is pure

 If intention is merely to suppress the condition, no novation
 If intention is extinguish the original obligation itself by the creation of a new obligation, the novation
does not arise except from fulfillment of the condition from original obligation.

Original obligation is pure  New obligation is conditional

 If the intention is merely to attach the condition to the original obligation, there is no novation.
 If the new conditional obligation is intended to substitute the original and pure obligation,
novation (and consequent extinguishment of the original) is subject to the condition.
 Pending the happening of the condition, the old obligation is enforceable

Art 1299

OBJECTIVE NOVATION – change in the object of prestations

SUBJECTIVE NOVATION
 In all kinds of subjective novation, the consent of the creditor is required.

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1. By change of debtor
 CONSENT OF THE THIRD PARTY ALWAYS REQUIRED.
 CONSENT OF THE CREDITOR IS LIKEWISE INDISPENSABLE.

a. EXPROMISION
- May be done at the instance of the creditor or the third party himself

Requisites of Expromision
1. Consent of two parties (new debtor and creditor)
2. Knowledge or consent of the debtor is not required

Art 1293
Art 1236 Par 2
Art 1237

Effects of Expromision
1. The debtor is released from obligation
2. Creditor generally cannot recourse from the old debtor if the new debtor is insolvent
3. If substitution is without his knowledge or consent
a. Old debtor is not liable for the insolvency or non-fulfillment of the new debtor (Art 1294)
b. The new debtor can only compel old debtor to reimburse inasmuch as the payment has been
beneficial to him  No subrogation takes place (Art 1237)
4. If substitution is with knowledge and consent
a. New debtor is entitled to full reimbursement of the amount paid and subrogation

Art 1294

b. DELEGACION
 Debtor offers and the creditor accepts a third person who consents to the substitution so that the
consent of the three is necessary
 Delegante (old debtor), delegatario (creditor) and delegado (third person new debtor)

Requisites of Delegacion (vs. Art 1293)

1. Initiative for substitution must emanate from the old debtor
2. Consent of the new debtor
3. Acceptance by the creditor

Effects of Delegacion
a. Original debtor is released from the obligation
b. The new debtor is subrogated in the rights of the creditor. He may demand from the old debtor the entire
amount of what he has paid for the obligation. (Art 1302 Par 2)
c. GENERAL RULE: Old debtor is not liable for the insolvency or non-fulfillment of the new debtor (Art 1295)
EXCEPTION:
i. He is aware of the insolvency at the time he delegated his debt (Art 1295)
ii. At the time of the delegation, the new debtor’s insolvency is already existing and of public
knowledge (Art 1295)

2. By change of creditor: subrogation of a third person in the rights of the creditor

Art 1300

a. CONVENTIONAL SUBROGATION - Takes place by agreement of the parties

Distinguished from Assignment of Credits

CONVENTIONAL SUBROGATION ASSIGNMENT OF CREDITS

Debtor’s consent is necessary Debtor’s consent not required
Extinguishes the old obligation and gives rise to a new one Refers to the same right which passes from one person to
another
The nullity of an old obligation may be cured by subrogation Nullity of an obligation is not remedied by the assignment of the
such that the new obligation will be perfectly valid creditor’s right to another

Ledonio vs. Capitol Development Corporation GR No. 149040 July 4, 2007

Requisites of Legal Subrogation

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When is Legal Subrogation presumed

Art 1302

Effects of Legal Subrogation

Art 1303; Art 1304

Title II. CONTRACTS

Chapter I. General Provisions

A. DEFINITION
Art 1305 A contract is a meeting of minds between two persons whereby one binds himself, with respect to the
other, to give something or to render some service.

Traders Royal Bank vs. Cuison Lumber Co., Inc., et.al. G.R. No 174286 June 5, 2009

B. ELEMENTS OF A CONTRACT
1. Essential elements
a. Consent
b. Object
c. Cause
2. Natural elements – exist as part of the contract even if the parties do not provide for them, because the
law, as suppletory to the contract, creates them. E.g. warranty against hidden defects or eviction in the
contract of purchase and sale
3. Accidental elements – agreed upon by the parties and which cannot exist without being stipulated e.g.
mortgage, guaranty, bond

C. CHARACTERISTICS OF A CONTRACT

1. Obligatory force – constitutes the law as between the parties

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

Kuwait Airways Corp. v PAL G.R. No. 156087 May 8, 2009

2. Mutuality – validity and performance cannot be left to the will of only one of the parties
 Purpose is to render void a contract containing a condition which makes fulfillment dependent
exclusively upon the uncontrolled will of the one of the contracting parties.

Art 1308 The contracts 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.

Art 1473 The fixing of the price can never be left to the discretion of one of the contracting parties .
However, if the price fixed by one of the parties is accepted by the other, the sale is perfected.

G.F. Equity Inc. vs. Valenzona G.R. No. 156841 June 30, 2005

3. Relativity – binding only upon the parties and their successors

a. Contracts take effect only between the parties, their assignments and heirs

Art 1311 Par 1 Contracts take effect only between the parties, assigns and heirs EXCEPT in case
where the rights and obligations arising from the contract are no transmissible by their nature or by
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stipulation or by provision of law. The heir is not liable beyond the value of property he received from
the decedent.
INTRANSMISSIBLE CONTRACTS:
a. Purely personal e.g. partnership and agency
b. Very nature of obligation that requires special personal qualifications of the
obligor
c. Payment of money debts not transmitted to the heirs but to the estate

b. No one may contract in the name of another

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.
 Unenforceable unless ratified expressly or impliedly (Unenforceable Contracts, Art 1302 Par 1)

Two more general principles of contracts that were not included in your book/syllabus

4. Consensuality
5. Freedom – entering into contracts is a guaranteed right of the citizens. They are free to do so as long as it’s
not contrary to law, good morals, customs, public order and public policy.

D. PARTIES IN A CONTRACT

1. Auto-contracts
o Necessary for the existence of a contract that two distinct persons enter into it
o No general prohibitions, only special prohibitions such as Art 1491 (Persons who cannot acquire by
purchase, even at a public or judicial auction)
o Auto-contracts are generally VALID  Existence of a contract is not determined by the number of
persons who intervene in it, but by the number of parties. Not by the number of individual wills but
by the number of declarations of will.
o As long as there are two distinct patrimonies, even if they are represented by the same person.

2. Freedom to contract
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 and public policy.

Special disqualifications:
o Art 87, FC inter vivos donation between spouses
o Art 1490 husband and wife generally cannot sell property to each other, subject to exceptions
o Art 1491 special prohibition as to who cannot acquire by purchase
o Art 1782 persons prohibited from giving each other any donation or advantage, cannot enter into
universal partnership

Daisy Tiu vs. Platinum Plans G.R. No. 163512 February 28, 2007

3. What they may not stipulate

Art 1306 “… contrary to law, morals, good customs, public order and public policy”

a. Contrary to law
Laws a contract must not intervene:
1. Expressly declare their obligatory character
2. Prohibitive
3. Express fundamental principles of justice which cannot be overlooked by the contracting parties
4. Impose essential requisites without which the contract cannot exist

i. Pactum commissorium – automatic foreclosure

Art 2088 The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose
of them. Any stipulation to the contrary is null and void.

ii. Pactum leonina – one party bears the lion’s share of the risk
Art 1799 A stipulation including one or more parties from any share in the profits or losses is void

iii. Pactum de non alienado – not to alienate

Art 2130 A stipulation forbidding the owner from alienating the immovable mortgaged shall be void

b. Contrary to morals

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 Man’s innate sense or notion of what is right and wrong. More or less universal.

c. Contrary to good customs

 Custom pertains to certain precepts that cannot be universally recognized as moral, sometimes they
only apply to certain communities or localities

d. Contrary to public order

 Consideration of the public good, will or weal (welfare), peace and safety of the public and health of
the community

e. Contrary to public policy

 Court must find that the contract contravenes some established interest of the society

E. CLASSIFICATION OF CONTRACTS

1. According to subject matter

a. Things
b. Services

2. According to name

a. NOMINATE – have their own individuality (names) and are regulated by special provisions of law,
b. INNOMINATE – without particular names
Art 1307 Innominate contract 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
customs of the place.

i. Do ut des I give, you give

ii. Do ut facias I give, you do
iii. Facio ut facias I do, you do
iv. Facio ut des I do, you give

3. According to perfection

a. By MERE CONSENT (consensual) – e.g. purchase and sale

Art 1315 Contracts are perfected by mere consent, and from that moment, the parties are bound not
only to 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.
b. By DELIVERY OF THE OBJECT (real) – commodatum
Art 1316 Real contracts such as deposit, pledge and commodatum, are not perfected until the delivery of
the object of obligation.

4. According to its relation to other contracts, degree of dependence

a. Preparatory – e.g. agency
b. Principal – e.g. lease or sale
c. Accessory – e.g. pledge, mortgage or suretyship

5. According to form
a. Common or informal – e.g. loan
b. Special or formal – e.g. donations and mortgages of immovable property

6. According to purpose
a. Transfer of ownership – e.g. sale or barter
b. Conveyance of use – e.g. commodatum
c. Rendition of services – e.g. agency

7. According to the nature of the vinculum produced, nature of obligation produced

a. Unilateral - e.g. commodatum or gratuitous deposit
b. Bilateral or sinalagmatico – e.g. purchase and sale
c. Reciprocal

8. According to cause
a. Onerous
b. Gratuitous or lucrative

9. According to risk
a. Commutative
b. Aleatory
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F. STAGES OF CONTRACTS
a. Preparation – period of negotiation and bargaining, ending at the moment of agreement of the parties
b. Perfection – moment when the parties come to agree on the terms of the contract
c. Consummation or death – fulfillment or the performance of the terms agreed upon in the contract

Central Cement Corporation vs. Mines Adjudication Board G.R. No. 173562 Jan 22, 1008
Province of Cebu vs. Heirs of Rufina morales G.R. No. 170115 Feb 19, 2008

G. WITH RESPECT TO THIRD PERSONS

1. Stipulations in favor of third persons (stipulation pour autrui)  may demand its fulfillment provided the
acceptance is made prior to revocation

Art 1311 Par 2

Test of beneficial stipulation - A mere incidental interest of a 3rd person is not within the doctrine; it must be
the purpose and intent of the stipulating parties to benefit the third person
 Requisites of stipulacion pour autrui
a. Stipulation in favor of third person is a part, not the whole of the contract
b. Favorable stipulation not conditioned or compensated by any kind of obligation whatever
c. Neither of the contracting parties bear the legal representation or authorization of the third party
d. Benefit to the 3rd person was clearly and deliberately conferred to by parties
e. Third person communicated his acceptance to the obligor before the latter revokes the same

2. Possession of the object of contract by third persons  only for real rights
Art 1312 In contracts creating real rights, third persons who come into possession of the object of the contract
are bound thereby, subject to he provisions of the Mortgage Law and the Land Registration laws.

3. Creditors of the contracting parties

Art 1313 Creditors are protected in cases of contracts intended to defraud them.
 Art 1387 - in rescissible contracts, presumption of fraudulent alienation when debtor does leave sufficient
property to cover his obligations
 Creditor may ask for rescission – Art 1177 (accion subrogatoria) and Art 1381 (accion pauliana)

4. Interference by third persons

Art 1314
Requisites of Interference With Contractual Relation by Third Person
a. Existence of a valid contract
b. Knowledge by a third person of the existence of a contract
c. Interference by the third person in the contractual relation without legal justification

Chapter II. Essential Requisites of Contracts

CONSENT

Art 1319

REQUISITES OF CONSENT
1. Plurality of subjects
2. Capacity
3. Intelligent and free will
4. Express or tacit manifestation of will
5. Conformity of the internal will and its manifestation

Tan v. Planters Products, Inc. G.R. No. 172239 March 28, 2008

1. Must be MANIFESTED by the concurrence of the offer and acceptance  with respect to object and cause

OFFER – unilateral proposition which one party makes to the other for the celebration of the contract. It must be:

a. Must be certain (Art 1319)

 DEFINITE – so that upon acceptance an agreement can be reached on the whole contract; not definite if
object is not determinate

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 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
 INTENTIONAL – should be serious and not made for fun or in jest

b. What may be fixed by the offeror  time, place and manner of acceptance
Art 1321 The person making the offer may fix the time, place and manner of acceptance, all of which must
be complied with.
 Acceptance not made in the manner provided by the offeror is ineffective.

c. When made through the agent  accepted from the time acceptance communicated to the agent
Art 1322 An offer made through an agent is accepted from the time acceptance is communicated to him.

d. Circumstances when offer becomes defective  death, civil interdiction, insanity or insolvency
Art 1323 An offer becomes ineffective upon the death, civil interdiction, insanity or insolvency of either
party before acceptance is conveyed.

e. Business advertisements of things for sale  not definite offers

Art 1325 Unless it appears otherwise, business advertisements of things for sale are not definite offers, but
mere invitation to make an offer.

f. Advertisement for bidders

Art 1326 Advertisements for bidders are simply invitations to make proposals, and the advertiser is not
bound to accept the highest of lowest bidder, UNLESS the contrary appears.

ACCEPTANCE – an unaccepted offer does not give rise to consent

 Contract is perfect when the offeror or counter-offeror learns about the acceptance!

a. Must be absolute (Art 1319)

b. Kinds of acceptance
EXPRESS (Art 1320)
IMPLIED (Art 1320) arise from acts or facts which reveal the intent to accept such as the consumption
of things sent to the offeree, or the fact of immediately carrying out the contract offered
QUALIFIED (Art 1319) not an acceptance but constitutes a counter-offer

c. If made by letter or telegram

Art 1319 Par 2 Acceptance made by letter or telegram does not bind the offerer except from the time it
came to his knowledge.

Four theories on when the contract is perfected

1. Manifestation theory – counterofferee manifest his acceptance
2. Expedition Theory – sending of the letter, mailing if by letter
3. Reception Theory – receipt of the message of acceptance
4. Cognition Theory – knowledge of offeror of the acceptance
Art 1319 Par 2 “… except from the time of his knowledge”

d. Period of acceptance
Art 1324 “When the offerer has allowed the offeree a certain period to accept…”
 Offeree may accept any time until such period expires.
 Acceptance beyond the time fixed is not legally an acceptance but constitutes a new offer.
 Acceptance not made in the manner provided by the offeror is ineffective.
 If offeror has not fixed the period, the offeree must accept immediately within a reasonable tacit period.
 Offer implies an obligation on the part of the offeror to maintain it for such a length of time as to permit
the offeree to decide whether to accept it or not.
 Extinguishment or annulment of offer
o Withdrawal by the offeror
o Lapse of the time for option period
o Legally incapacitated to act
o Offeree makes counter-offer
o Contract becomes illegal

e. Contract of option
Art 1324 “… the offer may be withdrawn at any time before acceptance by communicating such
withdrawal, EXCEPT when the option is founded upon a consideration, as something paid or promised.”
 Preparatory contract in which one party grants to the other, for a fixed period and under specified
conditions, the power to decide whether or not to enter into a principal contract
 Must be supported by an independent consideration and the grant must be exclusive

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 If the option is not supported by an independent consideration, offeror can withdraw the privilege at any
time by communicating the withdrawal to the other party, even if the “option” had already been accepted.

2. Necessary LEGAL CAPACITIES of the parties

Who cannot give consent

Art 1327 The following cannot give consent to a contract:
1. Unemancipated minors
2. Insane or demented persons
3. Deaf-mutes who do not know how to write

3. The consent must be INTELLIGENT, FREE, SPONTANEOUS and REAL

Art 1330 A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is
VOIDABLE.
 Mistake and violence – spontaneous and intelligence

Effect of Defects of Will: Contract is VOIDABLE (Art 1330)

VICES OF CONSENT

a. Mistake or Error – a wrong or false notion about such matter, a belief in the existence of some
circumstance, fact or event which in reality does not exist.

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 qualifications 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.

KINDS OF MISTAKE

1. Mistake of fact - generally not a ground for annulment of contracts

Mistakes that do not affect the validity of the contract

a. Error with respect to accidental qualities of the object of the contract
b. Error in the value of thing
c. Error which refers not to conditions of the thing, but to accessory matters in the contract, foreign to
the determination of the objects

2. Error of law – mistake as to the existence of a legal provision or as to its interpretation or application

GENERAL RULE: Ignorantia legis neminem excusat

Art 3 Ignorance of the law excuses no one from compliance therewith.

EXCEPTION: Mutual error of law

Art 1334 Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated ,
may vitiate consent.
 Requisites for mutual error of law
a. Error must be as to the legal effect of an agreement includes rights and obligations of the
parties, not as stipulated in the contract but as provided by alw
b. Must be mutual
c. Real purpose of the parties is frustrated

Inexcusable mistake  knew the doubt, contingency or risk

Art 1333 There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the
object of the contract.

b. Violence and Intimidation

Art 1335

VIOLENCE
 Physical force or compulsion

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 External and generally serve to prevent an act from being done
 Requisites of Violence
1. Physical force employed must be irresistible or of such a degree that the victim has no other course, under
the circumstances, but to submit
2. That such force is the determining cause in giving the consent to the contract

INTIMIDATION
 Moral force or compulsion
 Internal operating upon the will and induces the performance of an act
 Influences the mind to choose between two evils, between the contract and the imminent injury
 Requisites of Intimidation
1. Intimidation must be the determining cause of the contract, or must have caused the consent to be given
2. That the threatened act be unjust or unlawful
3. That the threat be real and serious, there being an evident disproportion between the evil and the
resistance which all men can offer, leading to the choice of the contract as the lesser evil
4. That it produces a reasonable and well-grounded fear from the fact that the person from whom it come
has the necessary means or ability to inflict the threatened injury

“Person” not limited to life and physical integrity but also includes liberty ad honor, covers all injuries which are not
patrimonial in nature

“Reasonable fear” fear occasioned by the threat must be reasonable and well-grounded; it must be commensurate
with the threat

Effect of Violence and Intimidation

Art 1336 Violence or intimidation shall ANNUL the obligation, although it may have been employed by a third
person who did not take part in the contract.

c. Undue Influence – any means employed upon a party which, under the circumstances, he could not well
resist, and which controlled his volition and induced him to give his consent to the contract which otherwise he
would not have entered into.

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
confidential, 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.

 In some measure destroy the free agency of a party and interfere with the exercise of that independent
discretion which is necessary for determining the advantages and disadvantages of a contract.
 Distinguished from intimidation

UNDUE INFLUENCE INTIMIDATION

There need not be an unjust or unlawful act Unlawful or unjust act which is threatened and
which causes consent to be given
Moral coercion

d. Fraud or Dolo – every kind of deception whether in the form of insidious machination, manipulations
concealments, misrepresentation, for the purpose of leading a party into error and thus execute a particular act.
 Must have a determining influence on the consent of the victim
 Compared with error

ERROR FRAUD
Vitiate the consent only when it refers to the Mistake induced by fraud will always vitiate consent
matters mentioned in Art 1331 when fraud has a decisive influence on such
consent

 Requisites of Fraud
1. Must have been employed by one contracting party upon the other (Art 1342 and Art 1344)
 If both party, they cannot have action against each other, fraud is compensated
2. Induced the other party to enter into a contract (Art 1338)
3. Must have been serious (Art 1344)
4. Must have resulted in damage or injury to the party seeking annulment

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.

“Insidious words and machinations” constituting deceit includes false promises, exaggeration of hopes or
benefits, abuse of confidence, fictitious names, qualifications or authority, all the thousand and one forms of deception
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which may influence the consent of a contracting party, without necessarily constituting estafa or some offense under
the penal laws.

KINDS OF FRAUD

1. Dolo causante – determines or is the essential cause of the consent; ground for annulment of contract
Art 1338 “…without them, he would not have agreed to.”

2. Dolo incidente – does not have such a decisive influence and by itself cannot cause the giving of consent, but
only refers to some particular or accident of the obligation; only gives rise to action for damages
Art 1344 Par 2 Incidental fraud only obliges the person employing it to pay damages.

Failure to disclose facts; duty to reveal them  FRAUD

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.
 GENERAL RULE: Silence or concealment does not constitute a fraud
 EXCEPTIONS:
1. There is a special duty to disclose certain facts
2. According to good faith and usages of commerce the communication should have been made

Usual exaggeration in trade; opportunity to know the facts  NOT FRAUD

Art 1340 The usual exaggerations in trade, when the other party had an opportunity to know the facts , are NOT
in themselves fraudulent
 Aka “tolerated fraud” or lawful misrepresentation (dolus bonus) as long as they do not go to the extent of
malice or bad faith such as changing the appearance of the thing by false devices and of preventing all
verification or discovery of truth by the other party
 Caveat emptor! Do not give rise action for damages because of their insignificance OR because the stupidity of
the victim is the real cause of his loss.  import of “opportunity to know facts”

Mere expression of an opinion  NOT FRAUD, unless made by an expert and relied upon by the plaintiff
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.

Effects of Fraud
1. Nullity of the contract
2. Indemnification for damages

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.

e. Misrepresentation

1. By a third person
Art 1342 Misrepresentation by a third person does NOT vitiate consent, unless such misrepresentation
has created substantial mistake and the same is mutual.

GENERAL RULE: Fraud by third person does not vitiate the contract
EXCEPTIONS:
a. If 3rd person is in collusion with one of the parties, he is considered an accomplice to the fraud and
contract becomes VOIDABLE
b. If 3rd person not in connivance with any of the parties but leads them both into error (mutual error),
the consent is vitiated, contract is VOIDABLE.

VIOLENCE AND INTIMIDATION BY 3RD PERSON: annuls the contract

FRAUD BY 3RD PERSON: does not annul unless it produces substantial mistake on the part of both parties
JUSTIFICATION FOR THE DIFFERENCE:
 Party has nothing to do with fraud by a third person and cannot be blamed for it
 Intimidation can be more easily resisted than fraud

2. Made in good faith  not fraudulent but may constitute error

Art 1343 Misrepresentation made in good faith is not fraudulent but may constitute error.

3. Active/passive
o Applicable to legal capacity especially age

f. Simulation of Contracts – declaration of a fictitious will, deliberately made by agreement of the parties in
order to produce, for the purposes of deception the appearance of a juridical act which does not exist or is
different from that which was really executed.
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Kinds of 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.

Valerio vs. Refresca G.R. No. 163687 March 28, 2006

Effects of simulation of contracts

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.

ABSOLUTE (simulados) RELATIVE (disimulados)

Color of contract, without any substance thereof, the Parties have an agreement which they conceal under the
parties not having intention to be bound guise of another contract
VOID - Does not legally exist. Illusory, mere phantom, VALID except when it prejudices 3rd persons or has an illicit
injuring 3rd persons, generally fraudulent purpose
1. Ostensible acts – apparent or fictitious; contract that
the parties pretend to have executed
2. Hidden act – real; true agreement between the
parties

Recovery under simulated contract in absolute simulation

1. If does not have illicit purpose – prove simulation to recover what may have been given
2. If simulated has illegal object – IN PARI DELICTO rules apply

OBJECT OF CONTRACTS
 Thing, right or service which is the subject-matter of the obligation arising from the contract
 Object of the contract and object of the obligation created thereby are identical

What may be the Object of Contracts

Art 1347

Requisite of Object of Contracts

1. Within the commerce of man (Art 1347)
2. Licit, not contrary to law, morals, good customs, public policy or public order (Art 1347)
3. Possible (Art 1348)
4. Determinate as to its kind
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.

What may NOT be the Objects of Contracts

1. Contrary to law, morals, good customs, public policy or public order
2. Indeterminable as to their kind
3. Outside the commerce of man
4. Intransmissible rights
5. Future inheritance, except when authorized by law
Art 1347 Par 2 No contract may be entered into upon future inheritance except in cases expressly authorized by law.
 The succession must not have been opened at the time of the contract
 Exception to “future things”

JLT Agro INC.v. Balansag et.al G.T. No. 141882 March 11, 2005

6. Impossible things or services

Art 1348 Impossible things or services cannot be the object of contracts.
 E.g. of impossible things:
o Not susceptible of existing
o Outside the commerce of man
o Beyond the ordinary strength of power of man
 Liability for damages
o Debtor knew of impossibility – liable for damages

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o Debtor is ignorant of impossibility and ignorance is justifiable – no liability for damages
o Both parties have knowledge of impossibility – no liability for damages
 Impossibility must be actual and contemporaneous with the making of the contract and not subsequent
o ABSOLUTE or objective: nobody can perform it
o RELATIVE or subjective: due to the special conditions or qualification of the debtor it cannot be
performed
 TEMPORARY – does not nullify the contract
 PERMANENT – nullifies the contract

CAUSE OF CONTRACTS

Meaning of “CAUSE”
 Why of a 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
 Essential reason that moves the parties to enter into a contract
 Requisites of Cause
1. Exist
2. True
3. Licit
 As distinguished from object
o Object is the starting point of agreement, without which the negotiations or bargaining between the
parties would never have begun
o Object may be the same for both of the parties
o Cause is different with respect to each party
 As distinguished from consideration CONSIDERATION < CAUSE

CONSIDERATION CAUSE
Reason or motive or inducement by which a man is Why of contracts; essential reason that compels
moved into bind himself by agreement contracting parties to celebrate the contract
Requires a legal detriment to the promisee more than a Never rejects any cause as insufficient; need not be
moral duety material at all and may consist in moral satisfaction for
the promissory

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.

a. Onerous Contracts
 Prestation or promise of a thing or service by the other
 Need not be adequate or an exact equivalent in point of actual value especially in dealing with objects
which have rapidly fluctuating price

b. Remuneratory Contracts
 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
 E.g. bonuses

c. Contracts of pure beneficence (Gratuitous)

 Essentially agreements to give donations

As distinguished from motive

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

CAUSE MOTIVE
Objective, intrinsic and juridical reason for the existence of Psychological, individual or personal purpose of a party to
the contract itself the contract
Essential reason for the contract Particular reason for a contracting party, which does not
affect the other and which does not impede the existence
of a true distinct cause
Objective of a party in entering into the contract Person’s reason for wanting to get such objective
Always the same for both parties Differs with each person

GENERAL RULE: Motive does not affect the validity of the contract.
EXCEPTIONS:
1. When the motive of a debtor in alienating property is to defraud his creditors, alienation is rescissible
2. When the motive of a person in giving his consent is to avoid a threatened injury, in case of intimidation the
contract is voidable.

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3. When the motive of a person induced him to act on the basis of fraud or misrepresentation by the other party,
the contract is likewise voidable.

Defective causes and their effects

a. Absence of cause and unlawful cause  produces no effect whatever

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.
 E.g. simulated contracts

b. Statement of a false cause in the contract  VOID if there is no other true and lawful cause
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.

c. Lesion or inadequacy of cause  VALID unless fraud, mistake or undue influence is present
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.
 Gross inadequacy suggest fraud and is evidence thereof

Presumption of the existence and lawfulness of a cause, though it is not stated in the contract
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.

Chapter III. Form of Contracts

A. GENERAL RULE: Contracts shall be obligatory, in whatever form they may have been entered into, provided all
essential requisites for their validity are present.
(“Spiritual system” of the Spanish Code)

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.

B. EXCEPTION: When the law requires that a contract be in some form in order that it may be VALID or
ENFORCEABLE
(Anglo-American principle in Statutes of Fraud)  indispensable and absolute; parties

Art 1356 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.

C. KINDS OF FORMALITIES REQUIRED BY LAW

1. Ad esentia, ad solemnitatem  Those required for the validity of contracts, such as those referred to in
(Sir refers to these as formal contracts)
Art 748 Donation of movable
Art 749 Donation of immovable
Art 1874 Sale of piece of land through an agent
Art 2134 Contract of antichresis; amount of principal and of the interst
Art 1771 Partnership; immovable property or real rights are contributed
Art 1773 Partnership; inventory of immovable property contributed
Art 1956 Interest for using someone else’s money
Art 2140 Chattel mortgage

2. Those required, not for the validity, but to make the contract effective as against third persons, such
as those covered by Art 1357 (if law requires a special form, parties may compel each other to observe that
form upon perfection of the contract) and Art 1358 (documents which must appear in a public document; it
also constitutes constructive dellivery)

(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.

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3. Ad probationem  Those required for the purpose of proving the existence of the contract, such as those
under the Statute of Frauds in Art 1403

Chapter IV. Reformation of Instruments

Art 1359

Reason for Reformation of Instruments

 Equity dictates the reformation of instrument in order that the true intention of the contracting parties may be
expressed. Unjust and unequitable to allow the enforcement of a written instrument which does not reflect or
disclose the real meeting of the minds of the parties
 Court do not attempt to make a new contract for the parties, but only to make the instrument express their
real agreement
 Statute of Frauds is no impediment to the reformation of an instrument
 Distinguished from Annulment

REFORMATION ANNULMENT
Action presupposes a valid existing contract between the parties No meeting of the minds or the consent of either one was
and only the document or instrument which was drawn up and vitiated by mistake or fraud
signed by them does not correctly express the terms of
agreement
Gives life to the contract upon certain corrections Involves a complete nullification of contracts

Requisites for Reformation of Instruments

1. Meeting of the minds upon the contract
2. The true intention of the parties is not expressed in the instrument
3. The failure of the instrument to express the true agreement is due to mistake, fraud, inequitable conduct or
accident

Multi-Ventures Capital & Management Corp. v. Stalwart Management Services Corpor.

526 SCRA 420

Causes for Reformation

1. Mutual – instrument includes something which should not be there or omit what should be there
a. Mutual
b. Mistake of fact
c. Clear and convincing proof
d. Causes failure of instrument to express true intention
2. Unilateral
a. One party was mistaken
b. Other either acted fraudulently or inequitably or knew but concealed
c. Party in good faith may ask for reformation
3. Mistake by 3rd persons – due to ignorance, lack of skill, negligence, bad faith of drafter, clerk or typist
4. Others specified by law – to avoid frustration of true intent

Example of cases where reformation is allowed

1. 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.
2. 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.
3. 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.

Cases where no reformation is allowed

1. Oral contracts – there’s nothing to reform at all!
2. 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.

Implied ratification
Art 1367 When one of the parties has brought an action to enforce the instrument, he cannot subsequently
ask for its reformation.
 There has been election between two inconsistent remedies, one in affirmance, the other in disaffirmance
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Who may ask for reformation

 MUTUAL MISTAKE: either party or successor in interest
 MISTAKE BY ONE: injured party, heirs or assigns
1. 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.
2. 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.

Procedure of reformation
Art 1369 The procedure for the reformation of instrument shall be governed by ROC to be promulgated by the
Supreme Court.

Chapter V. Interpretation of Contracts

(Compare with Rules on Statutory Construction)

Primacy of intention

 “Verba intentione non e contradebent inservare” - words ought to be subservient to the intent, not the intent
to the word
 Look for the contractual intent

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.

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.
 “Generalia verba sunt generaliter intelligencia ”  general things are to understood in a general sense

How to determine intention

Art 1371 In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts
shall be principally considered.
 Also take note of the usage and customs of the place

How to interpret a contract

1. When it contains stipulations that admit of several meanings

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.

2. When it contains various stipulations, some of which are doubtful

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.

3. When it contains words that have different significations

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.

4. When it contains ambiguities and omission of stipulations

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.

5. With respect to the party who caused the obscurity

Art 1377 The interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the obscurity.
o Contracts of adhesion – resolved against the party who prepared the contract and in favor of the
one who merely adhered to it

6. When it is absolutely impossible to settle doubts by the rules above

Art 1378 Par 1 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 .

a. In gratuitous contracts, incidental circumstances  least transmission of rights and interests

b. In onerous contracts  greatest reciprocity of interests

7. When the doubts are cast upon the principal objects so that the intention cannot be known
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Art 1378 Par 2 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.

DEFECTIVE CONTRACTS
1. RESCISSIBLE – contract that has caused a particular damage to one of the parties or to a third person and
which for EQUITABLE REASONS may be set aside even if valid
2. VOIDABLE OR ANNULLABLE (contrato nulo) – contract in which CONSENT of one of the parties is
defective, either because of WANT OF CAPACITY or because it is VITIATED , but which contract is VALID until
JUDICIALLY set aside
3. UNENFORCEABLE – contract that for some reason CANNOT BE ENFORCED, UNLESS RATIFIED in the
manner PROVIDED BY LAW
4. VOID AND NON-EXISTENT (contrato inexistente) – contract which is an ABSOLUTE NULLITY and
produces NO EFFECT, as if it had never been executed or entered into

Chapter VI. Rescissible Contracts

Kinds of Rescissible Contracts

Art 1381 The following are rescissible contracts:

1. Entered into by guardians whenever the wards suffer lesion by more than ¼ of value of things object
 Guardian: authorized only to “manage” ward’s property, no power to dispose without prior approval of
court. Only includes those which are “ordinary course” of management of estate of the ward, because if
sale, mortgage and other encumbrance AND not approved by court, it becomes unenforceable.
 Sir Labitag: “thin band of contracts”

2. Agreed upon in representation of absentee, suffer lesion by more than ¼ of the value of things object
 Same principle in relation to contracts by guardians

3. In fraud of creditors who cannot collect claims due them

 Requisites of Accion Pauliana
1. Plaintiff asking for rescission (subsidiary action) has a credit prior to the alienation
2. Debtor has made subsequent contract, giving advantage to a 3rd person
3. Creditor has no other remedy but to rescind the debtor’s contract to the 3rd person (last resort)
4. Act being impugned is fraudulent
5. 3rd person who received the property is an accomplice in the fraud
 Credit must be existing at the time of the fraudulent alienation , although not yet due. But at the time of
accion pauliana, the credit must already be due because it presupposes a judgment and unsatisfied
execution which cannot exist when the debt is not yet demandable at the time the rescissory action is
brought.
 GENERAL RULE: Credit is prior to the alienation
 EXCEPTION: Credit is after alienation but entitled to accion pauliana because of some prior right
1. Claims were acknowledged by the debtor after alienation, but origin of which antedated the
alienation
2. Those who become subrogated, after the alienation, in the rights of a creditor whose credits were
prior to the alienation
 Even secured creditors are entitled to AP
 Conveyance was intentionally fraudulent which may be established by the presumption in Art 1387
 TEST OF FRAUD: Whether the conveyance was a bona fide transaction or a trick and contrivance to
defeat creditors or whether it conserves to the debtor a special right; founded on good consideration or is
made with bona fide intent.  Does it prejudice the right of creditors??
 Good consideration: creditor is not prejudiced becomes the property was merely replaced or substituted
 Badges of fraud applicable

4. Things under litigation, without knowledge and approval of litigant or of competent judicial authority
 To secure the possible effectivity of a claim
 Transferee of property in good faith who acquires property for valuable consideration, without knowledge
of the litigation or claim of the plaintiff, cannot be deprived of property.

5. Specially declared by law to be subject of rescission

Characteristics of Rescissible Contracts

1. Their defect consist in injury or damage either to one of the contracting parties or to third persons

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LESION: injury which one of the parties suffers by virtue of contract that is disadvantageous to him; must be
known or could have been known at the birth of contract and not due to subsequent thereto or unknown to
the parties
E.g.
Art 1098 Partition, judicial and extra-judicial may be rescinded on account of lesion
Art 1539 Sale of real estate of inferior thing
Art 1542 Sale of real estate made for a lump sum
2. They are valid before rescission
3. They can be attacked directly only, not collaterally
4. They can be attacked only either by a contracting party, or by a third person who is injured or defrauded
5. They can be convalidated only by prescription and not by ratification

RESCISSION
Art 1380 Contracts validly agreed upon may be rescinded in the cases established by law

Definition Remedy granted by law to the contracting parties and even to third persons, to secure the reparation of
damages caused to them by a contract, even if this should be valid, by means of the restoration of things to their
condition at the moment prior to the celebration of said contract.

Rescission Art 1380 Distinguished from Resolution Art 1191

Art 1191 Resolution Art 1380 Rescission

Similarities 1. Presuppose contracts validly entered into and existing
 Rescission v. Annulment: the latter there is a defect which vitiates/invalidates the contract
2. Mutual restitution when declared proper
Who may Only by a party to the contract Party to the contract suffering lesion
demand Third parties prejudiced by the contract
Grounds Non-performance (implied tacit condition in reciprocal Various reasons of equity provided by the grounds,
obligation) mainly economic injury or lesions
Scope of judicial Court determines sufficiency of reason to justify Sufficiency of reason does not affect right to ask for
control extension of time to perform obligation (whether slight rescission (cannot be refused if all the requisites are
or casual breach) satisfied)
Kind of obli Only to reciprocal Unilateral, reciprocal
applicable to Even when contract is fully fulfilled
Character Principal Remedy Secondary/Subsidiary

Requisites for Rescission

1. The contract is rescissible

Art 1381 Kinds of rescissible contracts
Art 1382 Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not
be compelled at the time (has not yet matured) they were effected, are also rescissible.

2. The party asking for rescission has no other legal means to obtain reparation
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.

3. He is able to return whatever he may be obliged to restore if rescission is granted

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…”

4. The object of the contract has not passed legally to the possession of a third person acting in good faith
Art 1385 “…consequently, it can be carried out only when he who demands rescission can return whatever
he may be obliged to restore.”
Art 1385 Par 3 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.

5. The action for rescission is brought within the prescriptive period of four years
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.
o Period commences on the termination of the ward’s incapacity or absentee’s domicile is known

Effect of Rescission
 If in fraud of the creditors: Property alienated reverts to the patrimony of the debtor and becomes liable to
creditor who sought rescission, under its original liability as a guaranty of the debtor’s obligation

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 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.

With respect to third persons who acquired the thing in good faith
 Transferee of property in good faith who acquires property for valuable consideration, without knowledge of the
litigation or claim of the plaintiff, cannot be deprived of property.
 Art 1385 Par 2 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.
 Art 1385 Par 3 In this case, indemnity for damages may be demanded from the person causing the loss.
 Right of transferee to retain alienation:
 Nature of transfer
o ONEROUS
 Good faith – no rescission
 Bad faith – rescissible because of his complicity in the fraud  not entitled for reimbursement
because in pari delicto; if not possible to return, indemnify the plaintiff;
o GRATUITOUS
 Good faith – does not protect him because he gave nothing; rescissible, though not required
to restore the fruits
 Bad faith – rescissible because of his complicity in the fraud; if not possible to return,
indemnify the plaintiff

Who may bring action for rescission

1. Creditor injured
2. Heirs of creditor injured
3. Creditors of creditor injured (by virtue of accion subrogatoria)

Extent of Rescission
Art 1384 Rescission shall be only to the extent necessary to cover the damages caused.
 As to the excess, alienation is maintained even if transferee is in bad faith
 Benefits only the plaintiff creditor, not everyone
 BUT if transferee is willing to pay, no rescission

Presumptions of Fraud
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.
 Rebuttal by evidence that conveyance was made:
o In good faith
o For a sufficient cause
 Effect of Fraud: Does not necessarily make the alienation rescissible. It is only one of the requisites for accion
pauliana. Can be overruled by a transferee in good faith and for valuable consideration

Badges of Fraud (indicia of fraud) – rules by which fraudlent character of transaction may be determined
1. Fictitious/insufficient consideration
2. Conveyance is after suit is filed and while it is pending
3. Sale on credit by insolvent debtor
4. Evidence of insolvency or large indebtedness
5. Transfer of All or nearly all of debtor’s property
6. Transfer is between father and son when some of above is present
7. Failure of vendee to take exclusive possession of the property

Liability for acquiring in bad faith the things alienated in fraud of creditors
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 .

Chapter VII. Voidable or Annullable Contracts

Kinds of Voidable/Annullable Contracts

Art 1390 Although no damage to contracting parties:

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1. Want of capacity
2. Vitiated consent

Characteristics of Voidable/Annullable Contracts

1. Their defect consists in the vitiation of consent of one of the contracting parties
2. They are binding until they are annulled by a competent court
3. They are susceptible of convalidation by ratification or by prescription

ANNULMENT

Annulment distinguished from Rescission

NULLITY (Voidable) RESCISSION (Rescissible)

Declares inefficiency which contract already carries in itself Merely produces inefficiency, which did not exist essentially
(intrinsic defect) in the contract (external defect i.e. pecuniary damages or
prejudice to one of the contracting parties or 3rd persons)
Requires act of ratification to be cured Needs no ratification to be effective
Based on a vice of the contract which invalidates it Compatible with the perfect validity of the contract
Annulment is a sanction based on law Rescission is a remedy based on equity
Demanded only by the parties to the contract Demanded even by third parties affected by it
Public interest predominates Private interest predominates

Grounds for Annulment Art 1390

1. Incapacity to consent
 Not a requisite sine qua non of the contract; want is only a ground for annulment
2. Vices of consent: violence, intimidation, undue influence, mistake or fraud

Who may and may not institute an Action for Annulment Art 1397
A. MAY: All who are obliged principally or subsidiarily
Art 1395: action does not require conformity of the other party who has no right to bring action for annulment
Requisites:
a. Interest in the contract – there must be legal capacity by being bound to the contract either principally or
subsidiarily
b. Victim and not the party responsible for the defect – he who comes to the court must come with clean
hands (so not applicable to the successor in interest of one who has contracted with a minor)
B. MAY NOT:
1. Capable parties cannot allege the incapacity of those with whom they contracted
2. Parties who exerted intimidation, violence or undue influence or employed fraud or caused mistake
3. Third person who is a stranger to the contract. UNLESS he can prove that the contract prejudiced his rights
with respect to one of the contracting parties, he may ask for annulment e.g. guarantors and sureties

Prescription of Action for Annulment – after prescription, contract can no longer be set aside
Art 1391 - Within 4 years
Period shall begin:
1. Intimidation, violence or undue influence: from the time consensual defect ceases
2. Mistake or fraud: from the time of discovery of the same
3. Incapacity: from the time guardianship ceases
* Extinctive prescription applies not only to action for annulment, but also to the defense of nullity
* Applies to the parties of to the contract, but NOT to third persons

Effects of Annulment– cleanses the contract from all its defect from the moment it was constituted (retroactive
effect), but does not prejudice rights of 3rd persons acquire before the ratification Art 1396

a. MUTUAL RESTITUTION Art 1398 Restore to each other things which have been the subject matter of the
contract, together with fruits and the price with interest,
 EXCEPT in cases provided by law (principle of unjust enrichment): compensation, services rendered in
contracts of service
 ELIMINATES AWARD FOR DAMAGES. But when there is loss or suffered damages, injured party may be
entitled to recover indemnity for damages.

b. Art 1402 as long as one does not restore what he is bound to return, the other cannot be compelled to return
 LOSS THROUGH PLAINTIFF’S (party entitled to bring action) FAULT or FRAUD: Action is extinguished,
even if at the time of the loss the plaintiff is still a minor or insane (Art 1401)
 LOSS THROUGH FORTUITOUS EVENT, BUT PLAINTIFF WILLING TO PAY: Apply Art 1400, defendant
should return but not including the interest because loss not due to his fault.
 LOSS OF FRUITS AND ACCESSIONS: Apply Art 1400, pay value if cannot return (both plaintiff and
defendant)

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1. When one of the parties is incapacitated
Art 1399 not obliged to make any restitution EXCEPT insofar as he has been benefited by the price/thing
received
 Benefit not necessarily a material and permanent increase in fortune
 Proof of benefit incumbent upon the defendant, in the absence of such proof, the presumption is there is
no benefit/profit to the incapacitated person
 If still in the patrimony at the time incapacity ceases, deemed to have been benefited. If he asks for
annulment, he must return it to the other party. If he squanders, it is ratification.

2. When the thing is lost through the fault of the party obliged to return the same (i.e. defendant)
Art 1400 return the fruits received AND the value of thing at the time of loss, with interest from same date
LOSS THROUGH FORTUITOUS EVENT: pay the value of the thing lost but not fruits and interests

Extinguishment of the Action

a. Art 1392 By ratification
Confirmation/ratification: cures a defect of nullity
Acknowledgment: remedies deficiency of proof
b. Art 1401 When the thing is lost through the fault of the person who has the right to file the action
 LOSS NOT THROUGH THE FAULT, e.g. fortuitous event: not extinguished because extinguishment limited only
to the loss by fault of plaintiff. Unjust enrichment if the loss is returned for the defendant to bear. Hence, the
defendant cannot be obliged to make restitution to the plaintiff because of Art 1402 (cannot compelled to
return if the other party does not return)
 Cannot extinguish action for annulment by any event not imputable to the fault or fraud of the plaintiff

RATIFICATION

Requisites of Ratification
a. Contract is voidable/annullable (i.e. consent of one party is defective)
b. Ratification is made with the knowledge of the cause for nullity
c. At the time of the ratification, the cause of nullity has already ceased to exist

Forms of Ratification
a. Art 1393 Express or tacit: execute an act which necessarily implies an intention to waive his rights
E.g. of EXPRESS: any oral or written manifestation of the person entitled to ask for annulment that he agrees to
be bound by the contract or that he will not seek its annulment
E.g. of IMPLIED:
 silence or acquiescence
 acts showing approval or adoption of the contract
 acceptance and retention of benefits flowing therefrom
b. Art 1394 By the parties themselves or by the guardian in behalf of an incapacitated party
- During the existence of incapacity
- Right to ratify is transmitted to the heirs of the party entitled to such right.

Effects of Ratification
a. Art 1392 Action to annul is extinguished
b. Art 1396 The contract is cleansed retroactively from all its defects from the time it was constituted
EXCEPTION: Right of 3rd persons prior to ratification

Chapter VIII. Unenforceable Contracts

Characteristics of Unenforceable Contracts

1. They cannot be enforced by a proper action in court
2. They are susceptible of ratification
3. They cannot be assailed by third persons Art 1408

Unenforceable distinguished from Rescissible and Annullable

UNENFORCEABLE RESCISSIBLE AND ANNULLABLE

Produces NO legal effect unless ratified by competent court Produce legal effects unless set aside by competent court

Kinds of Unenforceable Contracts

1. Entered into in the name of another person by one who has no authority or no legal representation OR acted
beyond his powers
2. Do not comply with Statute of Frauds, which are agreements unenforceable unless in written memorandum and
subscribed by the party charged
a. Not to be performed within 1 year from the making  If no time is fixed and nothing to show that it
cannot be performed within a year, then not within SoF; Partial performance also takes it out of SOF

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b. Special promise to answer for the debt, default or miscarriage of another Default or Miscarriage
include liability for tort and are not to be restricted to defaults and miscarriages arising out of contracts;
Must be collateral only and not primarily liable for the debt
c. Agreement made in consideration of marriage other than “mutual” promise to marry  not limited to
marrying parties but also to promises by a third person to one of the parties contemplating the marriage
d. Sale of goods, chattels or things in action, priced > P500 unless buyer accept and receive part of
such goods and chattels or the evidences or some of them or pay at the time some part of the purchase
money. EXCEPTION: sale is by auction and entry is made by auctioneer in his sales book (because it
constitutes sufficient memorandum)
e. Leasing for period longer than one year OR sale of real property or of an interest therein
f. Representation to the credit of a 3rd person
3. Both parties are incapable of giving consent to contract

Art 1403 Par 1: Unauthorized contracts

Governing rules in Unauthorized Contracts: Art 1404 Governed by Art 1317 (no one may contract in the name of
the other without being authorized or unless he has by law a right to represent him; representation without authority
or legal representation makes the contract unenforceable) and principles of Agency in Title X of this Book
- Does not having binding effect on the principal, UNLESS principal ratifies it which cures the unauthorized contract.
- Agent who binds his principal without authority to do so is liable to 3 rd persons.

Art 1403 Par 2: Contracts covered by the Statute of Frauds

Statute of Frauds: descriptive of statutes which requires certain classes of contracts to be in writing. Merely
regulates the formalities of the contract necessary to render it enforceable.
 NOT APPLICABLE TO: (1)Action for specific performance, (2) Violation of the contract
 APPLICABLE TO: Executory and not to complete or executed contracts  intention of the parties become
apparent by their execution. However, partial performance must also be proven.
 Exclusive list of agreements/contracts enumerated; Rule of exclusion
 A personal defense (hence cannot be raised by 3rd persons) and the same may be waived
 Does not determine credibility or weight of the evidence, merely concerned with the admissibility thereof

Purpose of Statute: Prevent (and not to encourage it) fraud and perjury in the enforcement of obligations
depending for their evidence upon the unassisted memory of witnesses, by requiring certain enumerated contracts
and transactions to be evidenced by a writing signed by the party to be charged.

WRITTEN MEMORANDUM OR NOTE evidence of the agreement and is used to show the intention of the parties
Minimum requirement for written memorandum:
1. Names of the parties
2. Terms and conditions of the agreement
3. Description of the subject matter sufficient to render it capable of identification
4. Date and place of the making of the agreement
5. Signature of the party assuming the obligation

How to ratify contracts under Statute of Frauds? Art 1405

1. Failure to object to the presentation of oral/parole evidence to prove the same
2. Acceptance of benefits under them  SoF cannot be invoked when the contract has been partly executed

Right of the parties when a contract is ENFORCEABLE BUT a public document is NECESSARY for its registration
Art 1406  may avail of their rights under Art 1357 (parties may compel each other to observe the necessary form
once the contract has been perfected)

Art 1403 Par 3: Contracts executed by parties who are both incapable of giving consent to a contract
Art 1407
a. Effect of ratification by the parent or guardian of one of the parties: (express or implied)
o Converts the contract into a voidable contract, at the option of the party who has not ratified.
o The non-ratifying party may: enforce the contract OR ask for the annulment
b. Effect of ratification by the parents or guardians of both parties: validated from the inception

Chapter IX. Void or Inexistent Contracts

Characteristics of Void/Inexistent Contracts

1. Void from the beginning
2. Produces no effect whatsoever  nullity exist ipso jure, judgment of nullity is merely declaratory
3. Cannot be confirmed or validated (by prescription OR ratification), neither can the right to set up the defense
of illegality be waived Art 1409

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ACCION REIVINDICATORIA – any person may invoke the inexistence of the contract whenever juridical effects
founded thereon are asserted against him

Action to Declare Nullity

- necessary because nobody can take the law into his own hands
- if the void contract is still executory, no party need to bring an action; but if one party brings action to
enforce it, nullity can be set up as defense

Void/inexistent contracts distinguished from other defective contracts

VOID RESCISSIBLE
Defect is inherent in the contract itself Defect is in their effects, either to one of the parties or to a 3rd
party
Matter of law and public interest Based on equity and more a matter of private interest
No legal effects even if no action is taken to set it aside No action, remains valid and produces all its effects
Action to declare nullity of void contracts never prescribes Action to rescind prescribes in 4 years
VOID UNENFORCEABLE
Cannot be the basis of actions to enforce compliance
Can never be ratified and become enforceable Can be ratified and thereafter enforced
There is no contract at all There is a contract which, however, cannot be enforced unless
properly ratified
VOID VOIDABLE
One of those essential requisites is wanting, either in fact or in Essential requisites for validity is present, BUT consent is
law or is declared void by statute vitiated
No contract, but only appearance of one, produces no effect Valid until set aside, validity may only be assailed directly, never
even if not set aside by direct action (collateral attack allowed) by a 3rd person
Not susceptible of ratification May be rendered perfectly valid by ratification
Action to declare nullity does not prescribe, permanent, even if Action for annulment prescribes in 4 years
the cause of nullity ceased to exist

Kinds of Void/Inexistent Contracts Art 1409

Contracts that are VOID

Art 1409 1. Those whose cause, object or purpose is contrary to law, morals, good customs, public order, or public
Par 1 policy

a. Art 1411 When the act constitutes a criminal offense (illegality of cause or object)

IN PARI DELICTO RULE

1. BOTH are in pari delicto
 No action against each other
 BOTH will be prosecuted
 RPC provision relative to the disposal of effects/instruments of a crime shall apply
2. ONLY ONE is guilty
 INNOCENT PARTY may claim what he has given
 INNOCENT PARTY not bound to comply with his promise

b. Art 1412 When the act is unlawful but does not criminal offense

IN PARI DELICTO RULE

1. BOTH parties at fault
 Neither party may recover what he has given by virtue of the contract
 Neither party may demand the performance of the other’s undertaking
2. ONLY ONE is guilty
 INNOCENT PARTY may demand the return of what he has given without obligation to comply
with his promise
 PARTY AT FAULT cannot recover what he has given by reason of the contract
 PARTY AT FAULT cannot ask for the fulfillment of what has been promised to him

 Not applicable to fictitious contracts because they refer to contracts with an illegal cause or subject-matter
(criminal offense OR only illegal), OR to contracts that are null and void ab initio. Fictitious or simulated
contracts don’t have cause.

EXCEPTIONS TO THE IN PARI DELICTO RULE

General Statement of the Exception (Art 1416): Agreement is not illegal per se, but merely prohibited
 Prohibition is designed for the protection of the plaintiff
 Plaintiff may recover what he paid or delivered if public policy is enhanced
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 ILLEGAL PER SE – one that by universally recognized standards is inherently or by its very nature
bad, improper, immoral or contrary to good conscience.

OTHER SPECIFIC EXCEPTIONS

c. Art 1414 When the PURPOSE is illegal and money is paid or property delivered therefore  maybe repudiated by
one of the parties before the purpose has been accomplished OR before any damage has been caused
to a 3rd person. Courts may allow the party repudiating the contract to recover the money or property, if the
public interest will thus be subserved.

d. Art 1415 When the CONTRACT is illegal and one of the parties is INCAPABLE of giving consent  courts may
allow recovery of money/property delivered by the incapacitated person, if interest of justice so demands

e. Art 1417 When the amount paid exceeds the maximum fixed by law  any person paying in excess of the
maximum price may recover such excess

f. Art 1418 When by virtue of contract a laborer undertakes to work longer than the maximum number of hours of
work fixed by law  worked may demand additional compensation for service rendered beyond the limit

g. Art 1419 When a laborer agrees to accept a lower wage than that set by law  entitled to recover deficiency

h. Art 1420 When the contract is divisible  if illegal terms can be separated from legal ones, enforce latter
 In case of doubt, contract is considered as divisible or separable.
 EXCEPTIONS:
1. Nature of contract requires indivisibility e.g. contract of compromise
2. Intention of the parties is that the contract be entire e.g. if what is void be the essential part, void
the entire contract. Divisibility will only be followed when the nullity affects only the secondary or
accessory obligations.

i. Art 1422 When the contract is the DIRECT RESULT of a previous illegal contract  also void and inexistent

Art 1409 2. Those whose object is outside the commerce of man

Par 4
Art 1409 3. Those which contemplate an impossible service
Par 5
Art 1409 4. Those where the intention of the parties relative to the principal object of the contract cannot be
Par 6 ascertained
Art 1409 5. Those expressly prohibited are declared void by law
Par 7

Contracts that are INEXISTENT

Art 1409 1. Those which are absolutely simulated or fictitious
Par 2
Art 1345 Simulation of contracts may be ABSOLUTE (parties do not intend to be bound at all) or
RELATIVE (parties conceal their true agreement)
Art 1346 Absolute or Fictitious: void
Art 1409 2. Those whose cause or object did not exist at the time of the transaction
Par 3

Right to set up defense of illegality cannot be waived Art 1409

The action or defense for the declaration of the inexistence of a contract

1. Art 1410 Does not prescribe, defect is permanent and incurable
2. Art 1421 Is NOT available to 3rd persons whose interest is not directly affected
* Ratification may take the form of a new contract, in which case its validity shall be determined only by the
circumstances at the time of the execution of the new contract. However, the same does not retroact to the
constitution of the first contract.

See Table of Defective Contracts in the next page.

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DEFECTIVE CONTRACTS
Professor E. A. Labitag

DEFECTIVE AS TO NATURE OF EFFECT ON ASSAILABLE? WHO CAN WHEN TO

CURABLE? HOW? WHO CAN CURE? WHEN TO CURE?
CONTRACTS DEFECT CONTRACT HOW? ASSAIL? ASSAIL?
Contracts of YES but only through By ward
guardians (acts of DIRECT action for
RESCISSIBLE rescission Within 4 years from YES
(Arts 1381 – 1389) administration) when Or by guardian ad
VALID No rescission if: gaining (minor) or By ratification Within 4 years from
Economic prejudice or wards they represent litem of ward during By ward
until rescinded a. plaintiff has other regaining (insane) (Confirmation by the (re)gaining capacity
damage to: suffer lesion of more incapacity of ward in
legal means to obtain capacity ward)
- owner than 25% of the value action against original
- 3rd person of thing reparation (subsidiary) guardian
- litigant b. plaintiff cannot
Contracts in return what must be
Can generally be restored
ASSAILED and CURED
representation of Within 4 years from
c. object in the hands Within 4 years from
by: Injured Party absentees when VALID YES knowledge of domicile
of 3rd persons in good By absentee knowledge of domicile By absentee
latter suffers lesion of until rescinded By prescription or knowledge of
faith of absentee
EFFECTS: more than 25% of fraudulent contract
Mutual restitution value of thing d. Contract approved
by court (Art 1386)
By plaintiff-creditor
Contracts entered into By heirs of creditor
by debtor who is a BY creditors of
Within 4 years from Within 4 years from
state of insolvency, i.e. VALID creditors injured YES
YES but only through knowledge of By creditor knowledge of
contracts entered into until rescinded (accion subrogatoria) By By prescription
DIRECT action for fraudulent contract fraudulent contract
in fraud of creditors other third parties
rescission
(Accion Pauliana) prejudiced by the
No rescission if:
contract
a. plaintiff has other
Contracts which refer legal means to obtain
to things in reparation (subsidiary)
litigation without the b. plaintiff cannot Within 4 years from Within 4 years from
VALID YES
knowledge and return what must be By party litigant knowledge of By party litigant knowledge of
until rescinded By prescription
approval of litigants or restored fraudulent contract fraudulent contract
competent judicial c. object in the hands
authority of 3rd persons in good
All other contracts faith
declared by law to VALID
be subject of rescission until rescinded
E.g. Art 1098 Partition

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DEFECTIVE AS TO NATURE OF EFFECT ON ASSAILABLE? WHO CAN WHEN TO

CURABLE? HOW? WHO CAN CURE? WHEN TO CURE?
CONTRACTS DEFECT CONTRACT HOW? ASSAIL? ASSAIL?
Want of capacity All who are obliged Within 4 years from YES Within 4 years from
- age principally or cessation of By ratification cessation of
VOIDABLE - insanity subsidiarily (i.e. (re)gaining capacity By prescription (re)gaining capacity
(Arts 1390 – 1402)
guarantors and
Vitiated consent YES
sureties) By parties themselves
YES. Both through 1 By ratification
EFFECT:
VALID direct and collateral Within 4 years from: - Express Within 4 years from:
Cleanses defect of Consent is vitiated by: Incapacitated party; - cessation of By guardian in behalf - cessation of
until annulled by court attacks. - Implied
contract - mistake or error not the party with intimidation, violence, of an incapacitated intimidation, violence,
action (silence or acquiescence,
Does not prejudice right - violence and capacity party during existence
Action for annulment undue influence acts showing approval or undue influence
of 3P prior to ratification intimidation (duress)
(consensual defect) adoption of contract, of incapacity (consensual defect)
Mutual restitution - undue influence
Victim; not the party - discovery of mistake acceptance and retention - discovery of mistake
- fraud, misrepresentation
who cause the defect or fraud of benefits) or fraud

2 By prescription

YES. Not by direct

UNENFORCEABLE action but by
(Arts 1403 – 1408)
VALID DEFENSE of At any time one party
Contract entered into
but cannot be unenforceability of attempts to enforce Person in whose name
name of another
ENFORCED contract through By owner of property contract against the By ratification the contract was
without authority or in
by a proper action in motion to dismiss other through a court entered into
excess of authority
court complaint on the action
ground that contract is
unenforceable

YES. Not by direct

action but by By acknowledgement
DEFENSE of By performance of oral
unenforceability of contract
contract either
Contracts covered by VALID At any time one party
through: By other party By failure to object
Statute of Frauds but cannot be attempts to enforce By party against whom
1. motion to dismiss By his privies (heirs, seasonably to
and not complying ENFORCED contract against the the contract is being
complaint on the representatives and presentation of oral
with requirement of a by a proper action in other through a court enforced
ground that contract is assigns) evidence
written memo court action
unenforceable
2. objection to By acceptance of
presentation of oral benefits under the
evidence to prove contract
contract

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YES. Not by direct

By other party
action but by By parents or
VALID DEFENSE of At any time one party guardians of both
By his privies (heirs,
Both parties are but cannot be unenforceability of attempts to enforce parties
representatives and
legally incapacitated ENFORCED contract through contract against the By confirmation
assigns)
to act by a proper action in motion to dismiss other through a court Both parties after
court complaint on the action (re)gaining capacity to
By guardian
ground that contract is act
unenforceable

VOID or By innocent party

INEXISTENT Cause, object or
(Arts 1409 – 1422) YES.
purpose of contract By 3rd persons whose
DOES NOT CREATE By an action for
contrary to law, good interest are directly
RIGHTS AND CANNOT declaration for Imprescriptible Cannot be cured -- --
customs, morals, affected
IMPOSE OBLIGATION nullity
public order or public (If in pari delicto,
By defense of nullity
policy (Art 1401, Par 1) neither has an action
against each other)

One or some of
essential requisites
of valid contract
lacking in fact or in law
a. Absolutely
simulated
b. Those whose cause YES. By any of the
or object did not exist DOES NOT CREATE By an action for contracting parties
c. Object outside the RIGHTS AND CANNOT declaration for By 3rd persons whose Imprescriptible Cannot be cured -- --
commerce of man IMPOSE OBLIGATION nullity interests are directly
d. Contemplate an By defense of nullity affected
impossible service
e. Where intention of
parties re: principal
object of contract
cannot be ascertained
(Art 1402 Pars 2 to 6)
By party whose
YES. protection the
Contracts expressly DOES NOT CREATE By an action for prohibition of the law
prohibited by law RIGHTS AND CANNOT declaration for is designed Imprescriptible Cannot be cured -- --
(Art 1409 Par 7) IMPOSE OBLIGATION nullity By 3rd party whose
By defense of nullity interests are directly
affected

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Title III. NATURAL OBLIGATIONS

Four types of obligations in juridical science  reduced to two by jurisprudence
1. Moral obligations – duties of conscience completely outside the field of law
2. Natural obligations – duties not sanctioned by any action but have a relative judicial
effect
3. Civil obligations – juridical obligations that are in conformity with positive law but are
contrary to juridical principles and susceptible of being annulled; enforceable by action
4. Mixed obligations – full juridical effect; falls under civil obligations

Definition Art 1423 Not being based on positive law but on equity and natural law, do not grant
a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they
authorize the retention of what has been delivered or rendered by reason thereof.
 Midway between civil and the purely moral obligation. “Obligation without a sanction,”
susceptible of voluntary performance, but not through compulsion by legal means.
 Real obligation which law denies action, but which the debtor may perform voluntarily.
 Patrimonial and presupposes a prestation.

Requisites of Natural Obligation

1. Juridical tie between two persons.
2. Tie is not given effect by law but instead by the conscience of man  distinguishes it
from civil obligations.

As distinguished from Civil Obligations

NATURAL CIVIL
As to enforceability Not by court actions, but by good Court action or the coercive power
conscience of debtor of public authority
As to basis Equity and natural justice Positive law

As distinguished from Moral Obligations

NATURAL PURELY MORAL

There is a juridical tie There is no juridical tie
Performance by the debtor is a legal fulfillment Act is purely liberality
of the obligation
A true obligation with a legal tie between Matter is entirely within the domain of morals
debtor and creditor

Conversion to Civil Obligation

GENERAL RULE: Partial payment of a natural obligation does not make it civil; the part paid
cannot be recovered but the payment of the balance cannot be enforced.  applicable only to
natural obligation because of prescription or lack of formalities (nullity due to form e.g. Art 1430)
and NOT to natural obligation subject to ratification or confirmation.
 Payment by mistake is not voluntary and may be recovered. Payment is voluntary when
the debtor knew that the obligation is a natural one. One who pays a natural obligation,
believing it to be civil, does not thereby recognize the natural obligation; and there being
no civil obligation either, he can recover what he has paid. The debtor however has the
burden of proving the mistake.

1. By novation
2. By confirmation or ratification

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Examples

Art 1424 When the right to sue upon a civil obligation has lapsed by extinctive prescription, the obligor
who voluntarily performs the contract cannot recover what he has delivered or the value of the
service he has rendered.

Art 1425 When without the knowledge OR against the will of the debtor, a 3rd person pays a debt which
the obligor is not legally bound to pay because the action thereon has prescribed, but the
debtor later voluntarily reimburses the third peson the obligor cannot recover what he has paid.

Art 1426 When a minor 18-21 entered into a contract without the consent of the parent or guardian,
after the annulment of the contract, voluntarily returns the whole thing or price received,
notwithstanding that he has not been benefited thereby, there is no right to demand the thing
or price thus returned.

Art 1427 When a minor 18-21 entered into a contract without the consent of the parent or guardian,
voluntarily pays a sum of money or delivers a fungible thing in fulfillment of an obligation, there
shall be no right to recover the same from the oblige who has spent or consumed it in good
faith.
- Not the voluntary payment that prevents recovery, but the consumption or spending of the
thing or money in good faith.
- This article creates an exception to the rule of mutual restitution. Minor would have been
required to return whatever he received upon annulment of contract.
- Good faith: belief that debtor has capacity to deliver the object of contract
- Fungible thing: consumable
- Non-consummable: debtor cannot recover if no longer in the possession of the creditor,
because the right to recover presupposes existence of thing.

Art 1428 When after an action to enforce a civil obligation has failed, the defendant voluntarily performs
the obligation, he cannot demand the return of what he has delivered or the payment of the
value of the service he has rendered.

Art 1429 When a testate or intestate heir voluntarily pays a debt of a decedent exceeding the value of
the property which he received by will or by the law of testacy from the estate of the deceased,
the payment is valid and cannot be rescinded by the payer.

Art 1430 When a will is declared void because it has not been executed in accordance with the
formalities required by law, but one of the intestate heirs, after the settlement of the debts of
the deceased, pays a legacy in compliance with a clause in the defective will, the payment is
effective and irrevocable.

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Title IV. ESTOPPEL

Definition Art 1431 Admission or representation is rendered conclusive upon the person making
it, and cannot be denied or disproved as against the person relying thereon.

EQUITABLE ESTOPPEL WAIVER

May arise even when there is no intention on Voluntary and intentional abandonment or
the part of the person estopped to relinquish relinquishment of a known right
any existing right
Frequently carries implication of fraud No implication of fraud
Involves the conduct of both parties Involves the act or conduct of only one of the
parties

ESTOPPEL RATIFICATION
Bound notwithstanding the fact that there was Bound because he intended to be
no such intention, because the other party will
be prejudiced and defrauded by his conduct
unless the law treats him as legally bound

Kinds of Estoppel – Art 1433: Estoppel may be in pais or by deed

A. TECHNICAL ESTOPPEL
1. By record – preclusion to deny the truth of matters set forth in a record, whether
judicial or legislative, and also to deny the facts adjudicated by a court of competent
jurisdiction
i. E.g. conclusiveness of judgment (estoppel by judgment) on the parties
to a case, which according to Sir is broader than res judicata
2. By deed – bar which precludes on party to a deed and his privies from asserting as
against the other party and his privies any right or title in derogation of the deed, or
from denying the truth of any material facts asserted in it  usually written
documents

B. EQUITABLE ESTOPPEL (estoppel in pais) – because of something which he has done or

omitted to do, a party is denied the right to plead or prove an otherwise important act
 Essential elements of estoppel in pais in relation to the party sought to be estopped:
1. Conduct amounting to false representation or concealment of material facts, or at
least calculated to convey the impression that the facts are otherwise than and
inconsistent with, those which the party subsequently attempts to assert
2. Intent, or at least expectation that this conduct shall be acted upon by or at least
influence, the other party
3. Knowledge, actual or constructive, of the real facts
 Essential elements of estoppel in pais in relation to the party claiming the estoppel:
1. Lack of knowledge or of the means of knowledge of the truth as to the facts in
question
2. Reliance, in good faith, upon the conduct or statements of the party to be estopped
3. Action or inaction based thereon of such character as to change the position or
status of the party claiming the estoppel, to his injury, detriment or prejudice

POSITIVE ESTOPPEL IN PAIS

1. Estoppel by representation or misrepresentation (Art 1437 or estoppel against
owners)  When a contract between 3rd persons concerning immovable property, one of
them is misled by a person with respect to the ownership or real right over real estate,
the latter is precluded from asserting his legal title or interest therein, provided all these
requisites are present:

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1. Fraudulent representation or wrongful concealment of facts known to the

party estopped
2. Party precluded must intent that the other should act upon the facts as
misrepresented
3. Party misled must have been unaware of the true facts
4. Party defrauded must have acted in accordance with the misrepresentation

2. Estoppel by acceptance of benefits (Art 1438 or estoppel from benefits) One who
has allowed another to assume apparent ownership of personal property for the purpose
of making any transfer of it, cannot, if he received the sum for which a pledge has been
constituted, set up his own title to defeat the pledge of the property, made by the other
to a pledge who received the same in good faith and for value.

3. Promissory estoppel  An estoppel may arise from making of a promise, even

though without consideration, if it was intended that the promise should be relied upon
and in fact it was relied upon, and if a refusal to enforce it would be virtually to sanction
the perpetuation of fraud or would result in other injustice.
b. A promise cannot be the basis of an estoppel if any other essential element is
lacking.
c. Justifiable reliance or irreparable detriment to the promise are requisite factors.
d. Came from Anglo-American Law, by virtue of Art 1432 which adopts principle of
estoppel

NEGATIVE ESTOPPEL IN PAIS

1. Estoppel by laches – failure or neglect, for an unreasonable and unexplained length of
time, to do that which, by exercising due diligence, could or should have been done
earlier.
 Public policy requires for the peace of society, discouragement of stale claims and
laches, unlike statute of limitations, is not a mere question of time but principally a
question of inequity or unfairness of permitting a right or claim to be enforced or
asserted.
 Discretionary on the part of the court.
 Requisites of laches:
a. Conduct on part of the defendant, or one under whom he claims, giving rise
to the situation complained of
b. Delay in asserting complainant’s right after he had knowledge of the
defendant’s conduct and after he has had an opportunity to sue
c. Lack of knowledge or notice on the part of the defendant that the
complainant would assert the right on which he bases his suit
d. Injury or prejudice to the defendant in the event relief is accorded to the
complainant
 Distinguished from prescription

LACHES PRESCRIPTION
Concerned with effect of delay Concerned with fact of delay
Principally question of inequity of permitting a claim Matter of time
Not based on statute but on equity Statutory
Not based on fixed time Fixed time

2. Estoppel by silence - “One who is silent when he ought to speak will not be heard to
speak when he ought to be silent.” Mere innocent silence will not work an estoppel, there
must also be some element of turpitude or negligence connected wit the silence by which
another is misled to his injury. Closely connected to ESTOPPEL BY ACQUIESCENCE: a

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person is prevented from maintaining a position inconsistent with one in which he has
acquiesced.

Persons bound Art 1439 Effective only as between the parties thereto or their successors in
interest (privies in blood like heirs, and in estate like grantees).
 Why? Mutuality is an essential element of an estoppel, an estoppel must bind both
parties or neither is bound.
 No estoppel against government. It is not estopped by mistake or error on the part of its
officials or agents, the erroneous application and enforcement of the law by public
officers does not prevent a subsequent correct application of the statute.

Cases where estoppels applies

Art 1434 When a person who is not the owner of a thing sells or alienates and delivers it, and later
Subsequent the seller or grantor acquires title thereto, such title passes by operation of law to the
acquisition of buyer or grantee.
title

Art 1435 If a person in representation of another sells or alienates a thing, the former cannot
subsequently set up his own title as against the buyer or grantee.

Art 1436 A lessee or a bailee is estopped from asserting title to the thing leased or received, as
Tenant against the lessor or bailor.

Art 1437 When a contract between 3rd persons concerning immovable property, one of them is
Estoppel misled by a person with respect to the ownership or real right over real estate, the latter is
against precluded from asserting his legal title or interest therein, provided all these requisites are
owner present:
1. Fraudulent representation or wrongful concealment of facts known
to the party estopped
2. Party precluded must intent that the other should act upon the facts
as misrepresented
3. Party misled must have been unaware of the true facts
4. Party defrauded must have acted in accordance with the
misrepresentation

Art 1438 One who has allowed another to assume apparent ownership of personal property for the
Estoppel purpose of making any transfer of it, cannot, if he received the sum for which a pledge has
from benefits been constituted, set up his own title to defeat the pledge of the property, made by the
other to a pledge who received the same in good faith and for value.

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