REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

RFBT1-Obligation and Contracts

LECTURE NOTES

OBLIGATION

OBLIGATION – originate from the latin word obligatio, means tying or binding.

Civil obligations - is a juridical necessity to give, to do or not to do. It give a right of action to compel their
performance
 Juridical necessity to give, to do or not to do (1156)
 Right of action to compel their performance
 Right to enforce the obligation against the obligor in a court of law in case of breach

ELEMENTS:
1. Active subject (obligee/creditor/lender/plaintiff/he who has the right ) – the one in whose favor the obligation
is constituted
2. Passive subject - obligor/debtor/borrower/defendant/he who has the obligation) – the one who has the duty of
giving, doing or not doing
3. Object – prestation; the conduct which has to be observed by the debtor/obligor
4. Vinculum Juris/ juridical tie /legal tie/ causa/ causa debendi/ causa obligations – This arise form law, contract,
quasi contract, delict and quasi delict.

Natural obligations - not being based on positive law but on equity and natural law, do not grant a right of
action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of
what has been delivered or rendered by reason thereof. (Art. 1423)
 Based on equity and natural law
 Duty not to recover what has voluntary been paid although payment was no longer required.
 Basic understanding of right and wrong based on an understanding of a right and wrong.
 Based on conscience

Illustration of Natural obligation

 When a right to sue upon a civil obligation has lapsed by extinctive prescription, the obligor who voluntarily
performs the contract cannot recover what he has delivered or the value of the service he has rendered.
(1424)
 When without the knowledge or against the will of the debtor, a third person pays a debt which the obligor is
not legally bound to pay because the action thereon has prescribed, but the debtor later voluntarily
reimburses the third person, the obligor cannot recover what he has paid. (1425)
 When a minor between eighteen and twenty-one years of age who has entered into a contract without the
consent of the parent or guardian, after the annulment of the contract voluntarily returns the whole thing or
price received, notwithstanding the fact the he has not been benefited thereby, there is no right to demand
the thing or price thus returned. (1426)
 When a minor between eighteen and twenty-one years of age, who has entered into a contract without the
consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of
the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in
good faith. (1427)
 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. (1428)
 When a testate or intestate heir voluntarily pays a debt of the decedent exceeding the value of the property
which he received by will or by the law of intestacy from the estate of the deceased, the payment is valid and
cannot be rescinded by the payer. (1429)
 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. (1430)

Sources of obligation (1157)

1. Law (obligation ex lege)– Not presumed (1158)
a. Law
- Taxes, duty of husband and wife to support family, minimum wage, workmen compensation act.
b. Quasi contract (obligation ex quasi contractu) (Chapter 1, Title XVII) – juridical relation resulting from
lawful, voluntary and unilateral act to the end that no one shall be unjustly enriched or benefited at
the expense of another.
Rule: No meeting of the mind hence consent of the parties is not required. It is quasi contract not an
implied contract.
1. Nominate quasi contract
a. Solutio indebiti – Something is received when there is no right to demand it, and it was unduly
delivered thru mistake, the recipient has the duty to return it.
b. Negotiorum gestio – When a person voluntary takes charge of another’s abandoned business or
property without the owner’s authority where reimbursement must be made for necessary and
useful expenses.
Requisites:
a.) Property or business is abandoned or neglected

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 b.) The manager is unauthorized (express or implied)
c.) The unauthorized manger voluntary take charge the abandoned property.
2. Innominate quasi contract
Art. 2164. When, without the knowledge of the person obliged to give support, it is given by a
stranger, the latter shall have a right to claim the same from the former, unless it appears that he
gave it out of piety and without intention of being repaid.
Art. 2165. When funeral expenses are borne by a third person, without the knowledge of those
relatives who were obliged to give support to the deceased, said relatives shall reimburse the third
person, should the latter claim reimbursement.
Art. 2166. When the person obliged to support an orphan, or an insane or other indigent person
unjustly refuses to give support to the latter, any third person may furnish support to the needy
individual, with right of reimbursement from the person obliged to give support. The provisions of this
article apply when the father or mother of a child under eighteen years of age unjustly refuses to
support him.
Art. 2167. When through an accident or other cause a person is injured or becomes seriously ill, and
he is treated or helped while he is not in a condition to give consent to a contract, he shall be liable to
pay for the services of the physician or other person aiding him, unless the service has been rendered
out of pure generosity.
Art. 2168. When during a fire, flood, storm, or other calamity, property is saved from destruction by
another person without the knowledge of the owner, the latter is bound to pay the former just
compensation.
Art. 2169. When the government, upon the failure of any person to comply with health or safety
regulations concerning property, undertakes to do the necessary work, even over his objection, he
shall be liable to pay the expenses.
Art. 2170. When by accident or other fortuitous event, movables separately pertaining to two or
more persons are commingled or confused, the rules on co-ownership shall be applicable.
Art. 2171. The rights and obligations of the finder of lost personal property shall be governed by
articles 719 and 720.
Art. 2172. The right of every possessor in good faith to reimbursement for necessary and useful
expenses is governed by article 546.
Art. 2173. When a third person, without the knowledge of the debtor, pays the debt, the rights of the
former are governed by articles 1236 and 1237.
Art. 2174. When in a small community a nationality of the inhabitants of age decide upon a measure
for protection against lawlessness, fire, flood, storm or other calamity, anyone who objects to the plan
and refuses to contribute to the expenses but is benefited by the project as executed shall be liable to
pay his share of said expenses.
Art. 2175. Any person who is constrained to pay the taxes of another shall be entitled to
reimbursement from the latter.

c. Delict (obligation ex maleficio or delicto)

Governing rules:
1. Pertinent provisions of the RPC and other penal laws subject to Art 2177 Civil Code.
 Art 100, RPC – Every person criminally liable for a felony is also civilly liable
2. Chapter 2, Preliminary title, on Human Relations ( Civil Code )
3. Title 18 of Book IV of the Civil Code – on damages

Civil liability arising from crime includes:

1. Restitution – The thing itself must be returned or restored.
2. Reparation - The court shall determine the amount of damage, taking into consideration the price of
the thing, whenever possible, and its special sentimental value to the injured party
3. Indemnification - Indemnification for consequential damages shall include not only those caused the
injured party, but also those suffered by his family or by a third person by reason of the crime.

Effect of acquittal in criminal case:

 when acquittal is due to reasonable doubt – no civil liability
 when acquittal is due to exempting circumstances – there is civil liability
 when there is preponderance of evidence – there is civil liability

d. Quasi delict (obligation ex quasi maleficio or quasi delicto) (Chapter 2, Title XVII and special law) – Act or
omission causes damage to another, there being fault or negligence, is obliged to pay for the damage
done there being no pre existing contractual relation between the parties.
Elements:
a) There must be fault or negligence attributable to the person charged
b) There must be damage or injury
c) There must be a direct relation of cause and effect between the fault or negligence on the one hand
and the damage or injury on the other hand ( proximate cause )

 Culpa aquiliana (not synonymous with tort)

Obligation expressly arising from Quasi delict
1. The father and, in case of his death or incapacity, the mother, are responsible for the damages caused
by the minor children who live in their company.
2. Guardians are liable for damages caused by the minors or incapacitated persons who are under their
authority and live in their company.
3. The owners and managers of an establishment or enterprise are likewise responsible for damages
caused by their employees in the service of the branches in which the latter are employed or on the
occasion of their functions.
4. Employers shall be liable for the damages caused by their employees and household helpers acting

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 within the scope of their assigned tasks, even though the former are not engaged in any business or
industry.
5. The State is responsible when it acts through a special agent; but not when the damage has been
caused by the official to whom the task done properly pertains.
6. Teachers or heads of establishments of arts and trades shall be liable for damages caused by their
pupils and students or apprentices, so long as they remain in their custody.
 The possessor of an animal or whoever may make use of the same is responsible for the damage
which it may cause, although it may escape or be lost. This responsibility shall cease only in case the
damage should come from force majeure or from the fault of the person who has suffered damage.
(2183)

2. Contract (obligation ex contractus) – Meeting of mind between two (2) person whereby one binds himself with
respect to another to give something or render some service. (1306) It has a force of law between the
contracting party and must be complied with n good faith (1159)

Kinds of obligation according to subject matter

1. Real obligation
a. Specific or determinate object – particularly designated or physically segregated from all others of the
same class.
Loss of the object without fault of debtor – obligation extinguish
b. Generic or indeterminate – Thing refers to a class, to a genus and cannot be pointed out with
particularity.
Loss of the object without fault of the debtor – Obligation remain. Genus nunquam perit (Generic
never perishes)
2. Personal obligation
a. Positive personal obligation (to do)
b. Negative personal obligation (not to do)

Duty of debtor to deliver specific thing

1. Preserve the thing (1163)
Rule: Diligence of good father of a family (ordinary diligence)
Except:
a. Law (ex: common carrier)
b. Stipulation
2. Deliver the fruits (1164)
 Natural fruit – Spontaneous product of the soil, and the young and other products of animals. (No human
intervention)
 Industrial fruit - Produce by lands of any kind through cultivation or labor.
 Civil fruit – Rents of building, price of lease of lands and other property and the amount of perpetual or life
annuities or other similar income.

Rule: The creditor has the right to the fruits of the thing from the time the thing to deliver arises.
Exception: Obligation to deliver the fruits arises from:
a. Suspensive condition – fulfillment of the condition
b. Suspensive period – arrival of the period
c. Arise from law, quasi contract, delict, quasi delict – provision of law
3. Deliver of accessions and accessories (1166)
 Accessions - fruits of a thing/ addition/ improvement upon a thing. (i.e. House/trees on a land)
 Accessories – thing joined with the principal for embellishment, better use or completion (i.e. Key of
house, bracelet of a watch)
4. Deliver the thing itself
 Actual
 Constructive
a. Traditio symbolica – delivery of key
b. Traditio brevi manu – A possessor of a thing not as an owner, becomes the possessor as owner (i.e.
Lessor sells the thing leased to the lessee)
c. Taditio longa manu – mere consent or agreement of the parties. (pointing out the object)
d. Traditio constitutum possessorium – A possessor of a thing as an owner retains possession no longer
as an owner, but in some other capacity. This is the opposite of tradition brevi manu. (i.e. A
possessor vendor stay as tenant on the vendee)
e. Execution of a public instrument

Rule:
a. Before delivery of the thing – Creditor has personal right (jus in personam or jus ad rem). (1164)
b. Creditor acquires real right (jus in re) only at the time of delivery.

5. Damages in case of breach

With the fault of the debtor (1170)
I. Fraud (dolo)
a. Dolo causante - (consent is defective –voidable)
b. Dolo incidente (fraud in performance – damages)
Period
a. Future fraud – Responsibility arising from fraud is demandable in all obligation. Any waiver of an
action for future fraud is void. (1171) same rule in case of negligence which shows bad faith.
(1173)
b. Past fraud – can be waive

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 II. Negligence (culpa) – Omission of diligence required by the nature of the obligation and corresponds
with circumstances of the person, time and place. (1173) It is also demandable in every kind of
obligation but such liability may be regulated by the courts according to the circumstances. (1172)
a. Culpa contractual – performance of the contract
b. Culpa criminal – Result from criminal act
c. Culpa aquiliana – No pre existing contract

Degree of Culpa under the Roman Law are as follows:

1.) Culpa lata – grave negligence
2.) Culpa levis – ordinary negligence
3.) Culpa levissima – slight negligence

FRAUD DISTINGUISHED FROM NEGLIGENCE

FRAUD NEGLIGENCE
There is deliberate There is no deliberate intent to
intent to cause cause damage.
damage.
Liability cannot be Liability may be mitigated.
mitigated.
Waiver for future Waiver for future negligence may
fraud is void. be allowed in certain cases:
a) gross – can never be excused
in advance; against public
policy
b) simple – may be excused in
certain cases

III. Delay (mora)

a. Ordinary delay – Failure to pay on the period fixed by the parties without demand judicial or
extrajudicial
b. Legal delay – Failure to pay after demand by the creditor (judicial/extrajudicial)
1. Mora solvendi - Delay of debtor
1.1 Mora solvendi ex re – Debtor delay/default in real obligation
1.2 Mora solvendi ex persona – Debtor delay/default in personal obligation
2. Mora accipiendi – – default on part of creditor; Creditor is guilty of default when he unjustifiably
refuses to accept payment or performance at the time payment/performance can be done
3. Compensatio morae – both parties (debtor and creditor) are in default (in reciprocal obligations);
the effect: is as if there is no

Elements of legal delay:

(1) The obligation must be due, enforceable and already liquidated or determinate in amount
(2) There must be non-performance
(3) There must be a demand, unless demand is not required

Effects of legal delay:

a. if determinate thing - debtor bears risk of loss (even when there is fortuitous event)
b. debtor liable for damages/interest
c. resolution (Art 1170, in proper cases)

Rule: No demand (judicial or extrajudicial) no delay (1169)

Exception:
1. Law
2. Stipulation
3. Time is of the essence
4. Demand would be useless
5. Performance of one party in case of reciprocal obligation
IV. Contravention of tenor of obligation

Without the fault of the debtor

Requisites of fortuitous event (Nakpil & Sons vs. CA):
1. The cause of the breach of the obligation must be independent of the will of the debtor
2. The event must be either unforeseeable or unavoidable
3. The event must be such as to render it impossible for the debtor to fulfill his obligation in a normal
manner
4. The debtor must be free from any participation in, or aggravation of injury to the creditor

Rule: Not liable in case of Fortuitous event (1174)

Exception:
1. Law
a. Delay
b. Promised to deliver the same thing to 2 or more person who do not have the same interest
c. Lost of generic thing
d. Obligation arising from crime
2. Stipulation

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 3. Assumption of risk

Duty of debtor (Generic thing)

1. Deliver the thing based on quality intended by the parties.
2. Damages in case of breach

Duty of debtor to do (Positive personal obligation)

 If a person obliged to do something fails to do it, the same shall be executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore,
it may be decreed that what has been poorly done be undone. (1167)

Duty of debtor not to do (Positive personal obligation)

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

3 kinds of Performance:
1. SPECIFIC PERFORMANCE - performance of the prestation itself
2. SUBSTITUTE PERFORMANCE - someone else performs or something else is performed at the expense of
debtor
3. EQUIVALENT PERFORMANCE - damages

Real Obligations to do
Remedies Obligation (Personal
Obligation)
Sp Gene To do Not to do
eci ric
fic
SPECIFIC undo the
PERFORMANCE Y Y NO things
already
done
EQUIVALENT Can only
PERFORMANCE Y Y be Y
demande
d if
obligatio
n is not
very
personal
SUBSTITUTE Undo the
PERFORMANCE N Y Y things
already
done at
debtor's
expense
RESCISSION/
CANCELLATION Y Y Y

Damages (MENTAL)
1. Moral – Include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation and similar injury.
2. Exemplary or corrective – imposed by way of example or correction for the public good. It may be awarded if
the defendant acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. (bad faith).
3. Nominal – Adjudicated in order that a right of the plaintiff, which has been violated or invaded by the
defendant, may be vindicated or recognized and not for the purpose of indemnifying the plaintiff for any loss
suffered by him. Awarded in every case where any property right has been invaded. (Damages awarded to
vindicate a right)
4. Temperate – More than nominal but less than actual. Awarded when some pecuniary loss have been suffered
but its amount can not, from the nature of the case be proved with certainty. (Exact amount of damage
cannot be ascertained)
5. Actual or compensatory – value of loss suffered but also include profits which the creditor failed to obtain.
Pecuniary loss must be duly proved.
6. Liquidated – those agreed upon by the parties to a contract to be paid in case of breach.(Damage
predetermined before hand)

 Usurious transaction shall be governed by special law. (1175)

 Presumption (1176)
a. Receipt of principal without reservation as to interest - interest is already paid
b. Receipt of a later installment of debt without reservation as to prior installment – later installment have
been paid.

REMEDIES OF CREDITORS - generally transmissible (except: law, stipulation, personal obligation):

1. Exact performance - specific, substitute, equivalent
2. Attach and execute debtor's property which is not exempt (art 2236)
3. Accion subrogatoria - Exercise all rights and actions except those inherent in the person (parental
authority, hold office, carry out agency
Requisites:
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 a. Creditor must have right of return against debtor
b. The debt is due and demandable
c. There is a failure of the debtor to collect his own debt from 3 rd persons either through malice or
negligence
d. Debtor's assets are insufficient
e. The right of account is not purely personal
4. Accion pauliana - (impugn or rescind acts or contracts done by the debtor to defraud the creditors.
Requisites:
a. There is a credit in favor of plaintiff
b. The debtor has performed an act subsequent to the contract, giving advantage to other persons
c. The creditor is prejudiced by the debtor's act which are in favor of 3rd parties and rescission will
benefit the creditor
d. The creditor has no other legal remedy
e. The debtor's acts are fraudulent

 All right by virtue of obligation are transmissible (1178)

Exception: Law and stipulation

Primary classification of obligation under the civil Code

1. Pure –without condition and period
 Immediately demandable
2. Conditional
a.) effect
 Suspensive – give rise to obligation
 Resolutory – extinguish the obligation
b.) Form
 Express – clearly stated
 Implied – merely inferred
c.) Possibility
 Possible – capable of fulfillment
 Impossible (1183)
a. Physically impossible – Nature of the thing
b. Legally impossible – contrary to law, moral, good customs, public order or public policy
d.) Cause or origin
 Potestatiive - depend upon will of one of the contracting parties (debtor/creditor) (1182)
 Casual – depend upon chance or will of a third person
 Mixed – partly upon chance and partly upon will of third person
e.) Mode
 Positive – performance
 Negative – omission
f.) Numbers
 Conjunctive – several conditions, all must be complied with
 Disjunctive – several conditions, one or some must be complied with
g.) Divisibility
 Divisible – susceptible of partial performance
 Indivisible – not susceptible of partial performance

Conditional obligation
 Future and uncertain event or past event unknown to parties (1179)
 Resolutory condition immediately demandable
 When the debtor binds himself to pay when his means permit him to do so, the obligation shall be deemed
to be one with a period. (1180)
 Acquisition or extinguishment of obligation depend upon the happening of the condition (1181)
 Positive condition + determinate time = extinguish as soon as the time expire or become indubitable that
the event will not take place (1184)
 Negative condition + determinate time = Effective form the time indicated elapsed or evident that event
cannot occur. (1185)
 Constructive fulfillment - The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment. (1186)
 Retroactivity of the conditional obligation. (1187)
a. Reciprocal – fruit and interest deemed mutually compensated
b. Unilateral – Debtor appropriate the fruits an interest except Nature and circumstances of obligation
the intention of the person constituting the same was different.
c. Obligation to do or not to do – court shall determine the retroactivity.
 Before condition is fulfilled (1188)
c. Creditor bring action for the preservation of his right
d. Debtor may recover payment by mistake
 Loss, deterioration, improvement before condition is fulfilled

Without fault With fault

(Debtor) (Debtor)
Loss Extinguish Damages
Deterioration Impairment borne Rescission or
by the creditor fulfillment +
damages

Nature or Time Expense of the

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 debtor
Improvement Benefit of the Right only of a
creditor usufruct
 Condition for purpose of extinguishing obligation (resolutory) – return to each other what they have
received. In case of loss, deterioration or improvement – same rule above to the party bound to return
(1190)
 Power to rescind is implied in reciprocal obligation in case one of the obligor should not comply with what
is incumbent upon him. (1191)
a. Injured party may choose fulfillment or Rescission + damages.
b. Court decree the rescission unless there is just cause authorizing the fixing of a period.
 Both parties committed a breach(1192)
a. First infractor shall be equitably tempered.
b. If cannot determined the first infractor – Obligation extinguish and each shall bear own damages.

Art. 1189. When the conditions have been imposed with the intention of suspending the efficacy of an
obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration
of the thing during the pendency of the condition:
(1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished;
(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is
understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way
that its existence is unknown or it cannot be recovered;
(3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the
creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission
of the obligation and its fulfillment, with indemnity for damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the
creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the
usufructuary.

3. With a period - Future and certain. If uncertain it is conditional. (1193)

a.) Effect
1. Suspensive (Ex die) – arrival- give rise to obligation. Before arrival of the period no right to demand.
(1193)
 Payment before arrival of the period (Payment made by mistake), the debtor is unaware of the
period – may recover with the fruits and interests. (1195)
 Loss, deterioration, improvement before arrival of the period. Apply Art 1189.
2. Resolutory (In diem) – arrival- extinguish the obligation. The obligation is immediately demandable.
b.) Source
1. Legal – provided by law
2. Conventional/voluntary – by agreement
3. Judicial – fixed by the court
c.) Definiteness
1. Definite – fixed or known when it will come
2. Indefinite – not fixed or not known when it will come.

General Rule: The court is not authorized to fix a period: (Reason: The court cannot make a contract for the
parties)
Exception: Court authorizes to fix the period. (1197)
a.) No period fixed but period was intended (nature and circumstances)
b.) Period depend upon the sole will of the debtor.

 Court shall determine such period as probably contemplated by the parties. Once fixed by the courts, the
period cannot change by them. (by the court not party)

General Rule:
Whenever period is designated, it is presumed for the benefit of both creditor and debtor except when
expressly provided otherwise. (1196)
Hence, neither the creditor can demand performance nor the debtor pay before arrival of the period.

Exception:
The debtor shall lose every right to make use of the period: (1198) Hence, immediately demandable.
1. When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or
security for the debt;
2. When he does not furnish to the creditor the guaranties or securities which he has promised;
3. When by his own acts he has impaired said guaranties or securities after their establishment, and when
through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory;
4. When the debtor violates any undertaking, in consideration of which the creditor agreed to the period;
5. When the debtor attempts to abscond.

4. Alternative obligation
a. Simple – only one prestation is due
b. Compound
1. Conjunctive – Several prestation and all are due
2. Distributive – 2 or more prestation is due
a. Alternative – several prestation are due but performance of one is sufficient.
b. Facultative – Only one is due but debtor may substitute

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 Gen rule: Right of choice belong to the debtor (1200) except when expressly grated to the creditor.

Limitation on the right of choice:

a. Impossible
b. Unlawful
c. Not the object of obligation
d. Only one is practicable (1202). In this case the debtor loss the right of choice and the alternative
obligation is converted into a simple obligation.

 Choice produces no effect except from the time it has been communicated. (1201)
 Communication of choice convert alternative obligation to a simple obligation. (1205)
 Creditor fault , the debtor cannot make a choice = rescind the contract + damages (1203)
 All object loss – Debtor is liable for damages (last object)

Right of choice: General rule: right of choice belongs to debtor

a. The choice is with debtor
(1) If only 1 is left either because of fortuitous events or due to debtor's acts, perform what is left. The
effect is that the debtor loses the right of choice
(2) if the choice is limited because of the creditor's acts, the debtor has the right of resolution and
damages
(3) if all are lost due to debtor, the creditor is entitled to damages
(4) if some are lost, the debtor can choose from the remaining

b. The choice is with creditor

(1) if one or some are lost due to fortuitous event, the creditor chooses the remainder
(2) if one or some is lost because of the fault of debtor, the creditor may choose either the remainder or
the value of any which disappeared, and damages in either case
(3) if all is lost due to the debtor's fault, the creditor may choose the value of any if some is lost due to
debtor's fault, the creditor chooses the remainder
(4) if all is lost due to fortuitous event, obligation is extinguished
(5) if all is lost due to creditor's fault, the obligation is extinguished

Summary: Rule on loss

1. Debtor choice – Last item lost
2. Creditor’s choice - Any item lost through the fault of the debtor

Art. 1205. When the choice has been expressly given to the creditor, the obligation shall cease to be alternative
from the day when the selection has been communicated to the debtor.
Until then the responsibility of the debtor shall be governed by the following rules:
(1) If one of the things is lost through a fortuitous event, he shall perform the obligation by delivering that
which the creditor should choose from among the remainder, or that which remains if only one subsists;
(2) If the loss of one of the things occurs through the fault of the debtor, the creditor may claim any of those
subsisting, or the price of that which, through the fault of the former, has disappeared, with a right to
damages;
(3) If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the price of
any one of them, also with indemnity for damages.
The same rules shall be applied to obligations to do or not to do in case one, some or all of the prestations should
become impossible. (1136a)

5. Facultative - When only one prestation has been agreed upon, but the obligor may render another in
substitution (1206)
Before substitution
 Loss of the object without fault – not liable
 Loss of the object with fault of the debtor - Liable
 Loss/deterioration of the substitute with or without fault of the debtor – Not liable

After substitution
 Loss of the object with or without fault – not liable
 Loss of the substitute with fault – liable
 Loss of the substitute without fault – not liable

Rule:
 Right of choice always to debtor
 Only one prestation is due but the debtor may substitute

DISTINCTIONS BETWEEN ALTERNATIVE AND FACULTATIVE OBLIGATIONS

ALTERNATIVE FACULTATIVE
a) Various things are due a) Only one thing is due but
but the giving a substitute may be given
principally of one is to render
sufficient payment/fulfillment easy
b) If one of prestations is b) If principal obligations is
illegal, others may be void and there is no
valid but obligation necessity of giving the
remains substitute; nullity of P
carries with it nullity of S

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 c) If it is impossible to give
all except one, the last one
must still be given
d) Right to choose may be
given either to debtor or
creditor
c) If it is impossible to
give the principal, the
substitute does not
have to be given; if it is
impossible to give the
substitute, the principal
must still be given
d) The right of choice is
given only to the debtor

6. Joint /Solidary
a.) Individual – one debtor and one creditor
b.) Collective – Two or more debtor and two or more creditor
1. Joint – 2or more debt/credit as there are debtor/creditor (mancomunada, mancomunadamente, pro
rata, proportionately, We promise to pay signed by 2 or more person)
2. Solidary - Each debtor/creditor is bound to pay/right to demand payment the entire compliance of the
obligation ( Joint and/or severally, solidaria, in solidum, juntos o separademente, Individually and/or
collectively, I promise to pay signed by 2 or more persons, each will pay the whole value)

Gen Rule: Joint obligation

Exception:
a. Law
b. Stipulation
c. Nature of obligation requires solidarity (real solidarity)

Solidarity imposed by law (under the New Civil Code)

1. 2 or more heirs take possession of the estate - loss or destruction of a thing devised or bequeathed, even
though only one of them should have been negligent. (Art. 927)
2. Death or injury is due to the negligence of a fellow worker, the latter and the employer shall be solidarily
liable for compensation. (Art. 1712)
3. The collapse of building or structure within fifteen years (15) from completion of the structure, the engineer or
architect who supervises the construction shall be solidarily liable with the contractor. (Art 1723)
4. Any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or
with the authority of co-partners, loss or injury is caused to any person. (Art. 1822 and 1824
5. Partner received money or property from 3rd person and misapplies it or Partnership receives money or
property of a 3rd person and such property was misapplied by any partner while in partnership custody. (Art
1823 and 1824)
6. Even when the agent has exceeded his authority, the principal is solidarily liable with the agent if the former
allowed the latter to act as though he had full powers. (Art. 1911)
7. Two or more persons have appointed an agent for a common transaction or undertaking, - Liable to the agent
for all the consequences of the agency. (Art. 1915)
8. Two or more bailees (Commodatum) to whom a thing is loaned in the same contract (1945)
9. The responsibility of two or more officious managers (negotiorum gestio) shall be solidary, unless the
management was assumed to save the thing or business from imminent danger. (Art. 2146)
10. The owner and his driver in a motor vehicle mishaps, if the former, who was in the vehicle, could have, by the
use of the due diligence, prevented the misfortune. (Art. 2184)
11. The responsibility of two or more persons who are liable for quasi-delict. (Art. 2194)

Solidarity under special Law (related law only)

1. Liability of directors for watered stocks. (Sec. 65, BP 68)
2. When the director or trustee who willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty (Sec 31 BP 68)
3. Workmen compensation act
4. Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are
deemed to be jointly and severally liable thereon. (Sec 17, g, Act 2031)
5. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally. (Sec 68, Act 2031)

Kinds of solidarity
1. Parties bound
a. Passive solidarity – Debtor
b. Active solidarity – Creditor
c. Mixed solidarity – both creditor and debtor
2. Source
a. Conventional – by agreement
b. Legal solidarity – imposed by law
c. Real solidarity – nature of the obligation
3. Legal tie
a. Uniform – bound by the same stipulation
b. Non-uniform or varied – not subject to the same stipulation

Invisibility vs solidarity
1. Prestation vs. juridical tie or legal tie
2. Debtor guilty of breach is only liable vs. all debtor are liable
3. Exist even only 1 debtor and 1 creditor vs. at least 2 debtor/creditor
4. Other debtor not liable in case of insolvency of one debtor vs. other debtor are proportionately liable

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 Solidarity creditor
 Can do useful to but not prejudicial to other solidary creditor
 Cannot assign without the consent of the other solidary creditor
 Novation, compensation, confusion or remission by solidary creditor extinguish the obligation but liable to
the other solidary creditor
 Debtor may pay any one of the solidary creditor. Except when one of the solidary creditor demand judicial
or extrajudicial payment must be made to him.

Solidary debtor
 Creditor can proceed to any solidary debtor as long as the debt has not been fully collected
 Payment by one of solidary debtor extinguishes the obligation. If 2 or more debtor offers, the creditor may
choose which offer to accept.
 Solidary debtor who pay, may claim from his co-debtor + interest from the date of payment (except
when not yet due, no interest for intervening period)
 Insolvency of one of solidary debtor – to be borne by all his co-debtor in proportion to the debt of each.
Payment by solidary debtor after the obligation has prescribed or become illegal – Not entitled to
reimbursement.
 Remission made by the creditor of the share of one of the solidary debtor – Does not release such solidary
debtor toward other co-debtor when the debt was totally paid before remission.
 Remission of whole obligation obtained by one of the solidary debtors – not entitled for reimbursement
 Loss without fault of any debtor– obligation extinguished
 Loss with fault of any debtor – All debtor are liable without prejudice to the action against guilty or
negligent debtor.
 Loss due to fortuitous event after delay by any of the solidary debtor – same all debtor are liable.
 Claim for Compensation under Workmen’s compensation law. (Sec 2, workmen compensation law)
 Article 19, 20, 21, 22 of the Civil code (Human relations)

Defense of solidary debtor

a. Nature of the obligation – payment , fraud, prescription, remission, illegality, absence of consideration, res
judicata, non performance of suspensive condition
b. Those personal to him - incapacity, mistake, violence, minority. (personal or complete defense)
c. Those personal to the other.

7. Divisible – Capable of partial fulfillment

8. Indivisible – Not capable of partial fulfillment
Kinds of division
a. Qualitative division – based on quality
b. Quantitative division – based on quantity
c. Ideal or intellectual division – exist only in mind of the parties

Kinds of indivisibility
a. Legal indivisibility – by law
b. Conventional indivisibility - by agreement
c. Absolute or natural indivisibility – nature of the object/prestation

 Divisibility or indivisibility is determined by the purpose or intention of the parties not the possibility or
impossibility of partial performance. (except of nature indivisibility)
 Divisible or indivisible refer to the object of he obligation not on the cause or legal tie.
 Joint indivisible obligation give rise to indemnity for damages – one debtor does not comply with his
undertaking.
a. Effect – Obligation is converted into one for damages. Specific performance or rescission is not a
remedy because the other debtors are willing to fulfill.
 Obligation to give definite thing and not susceptible of partial performance – Indivisible
 Object the execution of a certain number of days of work – Divisible
 Accomplishment of work by metrical units or analogous things
 Nature are susceptible of partial performance – Divisible
 Obligation not to do – Determined by the character of the prestation in each particular case.

9. Obligation with a penal clause – Penalty shall substitute the indemnity for damages and the payment of
interests in case of non-compliance (absence of agreement).
a. Principal
b. Accessory

Kinds of penal clause

a. Origin
1.) Legal penal clause - by law
2.) Conventional penal clause – by agreement
b. Purpose
1.) Compensatory penal clause – take the place of damages (1226)
2.) Punitive penal clause – imposed as punishment for breach
c. Demandability or effect
1.) Subsidiary or alternative penal clause - only penal clause can be enforce.
2.) Joint or cumulative – both principal and penal clause can be enforce

1. The penal clause shall substitute the indemnity for damages and the payment of interest in case of non
compliance. (1226) However, Penalty may be enforced only when it is demandable.
2. Proof of actual damages suffered by the creditor not necessary to enforce the penalty. (1228)
However damages shall be paid

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 a. There is stipulation
b. Obligor refuses to pay the penalty
c. Guilty of fraud in the fulfillment of the obligation.
3. Debtor cannot exempt himself from performance and to pay only the penalty (except when expressly
granted to him). Neither can the creditor demand the fulfillment of the obligation and the satisfaction of
the penalty at the same time, unless this right has been clearly granted him. (1227) However, if creditor
choose performance but become impossible without his fault, the penalty may be imposed.

Causes for reduction of penalty:

a. Principal obligation has been partly or irregularly complied with;
b. Penalty is iniquitous or unconscionable

 Nullity of the penal clause does not carry of the principal obligation but the nullity of the principal carries
with that of the penal clause. (Rule: Accessory follows the principal)

Extinguishment of Obligation
Art. 1231. Obligations are extinguished:
(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.

Other causes of extinguishing an obligation

a. Annulment
b. Rescission
c. Fulfillment of a resolutory condition
d. Prescription
e. Arrival of resolutory period
f. Death of the party
g. Mutual desistance/withdrawal
h. Compromise
i. Impossibility of performance
j. Happening of a fortuitous event

1. Payment or performance – not only delivery of money but also the performance in any other manner of an
obligation. (1232)
Gen rule: There must be total performance. Partial or irregular performance does not extinguish obligation.
(1233)
Exception:
a. Substantial performance in good faith. (1234)
Requisites of Substantial Performance
1. Attempt in Good Faith to perform without willful or intentional departure
2. Deviation is slight
3. Omission/Defect is technical or unimportant
4. Must not be so material that intention of parties is not attained
Effect of Substantial performance in good faith
1. Obligor may recover as though there has been strict and complete fulfillment, less damages suffered
by the obligee
2. Right to rescind cannot be used for slight breach
b. Creditor accepts performance knowing its incompleteness or irregularity without expression of protest.
(principle of estoppels)(1235)

 Creditor may refuse to accept payment

1. Payment by 3rd person
2. Partial performance
3. When the debtor has no capacity to alienate or free disposal of the thing

 General rule: Creditor not bound to accept performance by 3 rd person. (1236) The creditor is bound to
accept payment only by:
1. Debtor
2. Has interest in the performance of obligation (guarantor, surety)
3. 3rd person if there is stipulation.
But the payment in any case valid if the creditor accepts. The option to accept is granted to the creditor.

 Payment by 3rd person to creditor may recover to the debtor

a.) With knowledge of the debtor – right of reimbursement (amount paid, not amount of debt) +
subrogation (acquire all the right of the creditor) (1236 par 2)
b.) Without knowledge/against the will of the debtor – only benefit to the debtor. 3rd person cannot
compel the creditor to subrogate in his rights such as those arising from mortgage, guaranty or
penalty. (1237)
c.) No recovery - Payment by 3rd person who does not intend to be reimburse is deemed donation which
requires debtor’s consent.

 Payment by one who does not have free disposal of the thing due and capacity to alienate – Not valid
without prejudice to natural obligation. (1239)

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  Payment must be to the person in whose favor the obligation has been constituted. (creditor , creditor
successor in interest, any person authorized to receive payment) (1240)
a. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the
thing delivered or insofar as the payment has been beneficial to him.
b. Payment to 3rd person shall also be valid insofar as it has redounded to the benefit of the creditor.
(1241)

Payment to 3rd person : Presumed that it redounded to the benefit of the creditor:
a. 3rd person acquires the creditor’s right (subrogation)
b. Creditor ratifies the payment to the 3rd person (ratification)
c. Creditors' led to believe that the 3rd person had authority to receive the payment (Estoppels)

 Payment made in good faith to any person in possession of the credit shall release the debtor. (1242)
Requisites:
1. Payment by debtor must be made in good faith
2. Creditor must be in possession of the credit & not merely the evidence of indebtedness
 Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt
shall not be valid. (1243)
 Debtor cannot compel the creditor to receive a different one although of the same value or more valuable
than that which is due. (1244)
 Obligation to do or not to do, an act or forbearance cannot be substituted by another act or forbearance
against the obligee’s will. (1242 par 2)
 Obligation to deliver an indeterminate or generic thing whose quality and circumstances have not been
stated. (1246)
a. Creditor cannot demand a thing of superior quality.
b. Debtor cannot deliver a thing of inferior quality.
 Extrajudicial expense – account of the debtor
 Judicial expense – The Rules of court apply. Judicial expense is shouldered by the losing party.

Place of payment (1251)

1. Place designated in the obligation
2. No express stipulation
a. Determinate thing – Place where the thing was, at the perfection of the contract
b. Generic thing – domicile of the debtor.

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 Gen Rule: The creditor cannot be compelled to receive partial performance. Neither may the debtor be
required to make partial payment.(1248)
Exception:
1. Express stipulation
2. Debt is part liquidated and in part unliquidated.
3. Different prestation are subject to different terms or conditions which affect some of them.

 The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in the Philippines. (1249)
 The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
shall produce the effect of payment only when they have been cashed, or when through the fault of the
creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in the abeyance.
 In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value
of the currency at the time of the establishment of the obligation shall be the basis of payment,
unless there is an agreement to the contrary(1250)

Nota Bene:
Section 52. Legal Tender Power. - All notes and coins issued by the Bangko Sentral shall be fully guaranteed by
the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both
public and private: Provided, however, That, unless otherwise fixed by the Monetary Board, coins shall be
legal tender in amounts not exceeding Fifty pesos (P50.00) for denominations of Twenty-five centavos and above,
and in amounts not exceeding Twenty pesos (P20.00) for denominations of Ten centavos or less. (R.A. 7653)

Hence, Philippine currency notes have no limit to their legal tender power. However, pursuant to BSP Circular
No. 537, Series 2006 (Dated: July 18, 2006), coins in denomination of 1-,5- and 10-piso shall be legal tender in
amounts not exceeding P1,000.00 while coins in denomination of 1-,5- and 10- and 25 sentimo shall be legal
tender in amounts not exceeding P100.00.

Special forms of payment

a. Dation in payment / Adjudication or dacion en pago – governed by law on sales
 Property is alienated to the creditor in satisfaction of debt in money
b. Application of payment
1. One debtor and one creditor
2. Two or more debts
3. Debt must be of the same kind
4. The payment for the debt applied must be due
5. Payment must not sufficient to cover all the debts
Note: Not really a special form of payment

 Debtor has the 1st choice – must indicate at the time of payment
 If the debtor does not apply, the creditor may make the designation. Specify in the receipt which debt
is being paid
 In the absence of above, debt which is most onerous to the debtor
 If the same nature and burden – applied to all of them proportionately.
 Payment applies to interest, then to principal.

c. Payment by cession
1. Two or more creditors
2. Debtor must be partially insolvent
3. Assignment/cession must be accepted by the creditors.

d. Tender of payment (extrajudicial) and consignation (judicial) – Creditor refuse to accept payment without
just cause
 Must comply with the rules on payment (must be total)
 Unconditional and total
 Actual. Manifestation of a desire or intention to pay is enough.
 The debtor must show possession of the thing at the time of the offer (tender).
 Before creditor accepts the consignation or before judicial declaration, the debtor may withdraw the
thing deposited.
 Should the creditor authorize to withdraw the thing consigned – He lose every preference over the
thing (co-debtor, guarantors and sureties are released)
Tender of payment alone cannot extinguish valid debt. However, consignation alone when allowed
extinguished obligation.

Requisites:
1. Existence of valid debt which is due and demandable
2. Tender of payment by the debtor
3. Refusal without justifiable reason by the creditor to accept it.
4. Previous notice of consignation to persons interested in the fulfillment of the obligation. (guarantor,
mortgagee, solidary debtors, solidary creditors).
5. Consignation of the thing
6. Subsequent notice of consignation to in interested parties.

When tender of payment not required

1. Creditor is absent or unknown or does not appear in the place of payment
2. Creditor is incapacitated at the time of payment

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 3. Creditor refuse to give receipt without just cause
4. Two or more person claim the same right to collect
5. Title of the obligation has been lost

Dation in payment vs. Payment by cession

1. One creditor vs. several creditor
2. Debtor not insolvent vs. debtor insolvent
3. Not all property of the debtor vs. all property of the debtor
4. Creditor become the owner vs. creditor acquire only the right to dispose the thing and apply the
proceeds to their credit proportionately.
5. Act of novation vs. not act of novation

2. Loss of determinate thing

Kinds of loss
a. Physical loss – perishes
b. Legal loss – goes out of commerce
c. Civil loss – thing disappears in a such way that its existence is unknown.

Loss of a thing due

1. Obligation to give specific thing
a. Total loss
1. Loss with the fault of the debtor – (Liable)
2. Loss without the fault of the debtor - Fortuitous event (not liable)
Exception:
1. Law
a. Delay
b. Promised to deliver the same thing to 2 or more person who do not have the same
interest
c. Lost of generic thing
d. Obligation to deliver a specific thing arises from crime. (1268)
2. Stipulation
3. Assumption of risk
b. Partial loss – Court shall determine under the circumstances (importance of the partial loss of the
object) whether partial loss is as to be equivalent to a complete or total loss. (i.e. Broken leg - horse
for race or horse to be slaughtered)
2. Obligation to do
 The debtor in obligations to do shall also be released when the prestation becomes legally or
physically impossible without the fault of the obligor. (1266)
a. Impossibility at the beginning - void
b. Impossibility after the constitution of the obligation
 When the service has become so difficult as to be manifestly beyond the contemplation of the parties,
the obligor may also be released therefrom, in whole or in part. (1267)

Kinds of impossibility
 Physical impossibility – (Accident/death)
 Legal impossibility – Ordinance declaring an area residential zone (i.e. obligation to construct
commercial building; Lawyer appointed as judge)

General rule: When a thing is loss in possession of the debtor it is presumed that it was loss due to his fault.
(1265)
Exception:
1. Earthquake
2. Flood
3. Storm
4. Other natural calamity

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

3. Condonation/remission of debt - Condonation or remission is essentially gratuitous, and requires the

acceptance by the obligor. It may be made expressly or impliedly. One and the other kind shall be subject
to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the
forms of donation (1270)

Kinds of remission
a. Extent
1. Complete – cover the entire obligation
2. Partial – Not cover the entire obligation
b. Form
1. Express – verbal or in writing
2. Implied – Inferred from conduct
Voluntary delivery of private document evidencing the credit by the creditor to the debtor (Art 1271)
c. Date of effectivity
1. Intervivos – take effect during lifetime of the donor
2. Mortis cause – effective upon death of the donor

 The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor,

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 implies the renunciation of the action which the former had against the latter.
If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold
it by proving that the delivery of the document was made in virtue of payment of the debt. (1271)
 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. (1272)
 The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the
latter shall leave the former in force. (1273) (accessory follows the principal)
 It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its
delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing.
(1274)

4. Merger/confusion – The character of creditor and debtor are merged in the same person. (1275)
 Merger which takes place in the person of the principal debtor or creditor benefits the guarantors.
(principal obligation is extinguish as well as accessory obligation) Confusion which takes place in the
person of any of the latter does not extinguish the obligation. (Only accessory obligation is extinguished)
(1276)
 Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor
or debtor in whom the two characters concur. (1277)

5. Compensation - When two person, in their own right, are creditors and debtors of each other, (1278)

Confusion vs. Compensation

1. Only one person who is a debtor and creditor of himself vs. two person involved, each of whom is a debtor
and a creditor of the other
2. Only one obligation vs. 2 obligation
3. Impossiblity of payment vs. indirect payment

Kinds of compensation
1. Effect or extent
a. Total – Both obligation are of the same amount
b. Partial – Two obligation are of different amount
2. Cause or origin
a. Legal – Takes place by operation of law
b. Voluntary – by agreement
c. Judicial – takes place by order from a court in a litigation.
d. Facultative – can be set up only by one of the parties.

Art. 1279. In order that compensation may be proper, it is necessary: (Legal compensation)
1.) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;
2.) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;
3.) That the two debts be due;
4.) That they be liquidated and demandable;
5.) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor. (1196)

 The parties may agree upon the compensation of debts which are not yet due.(1282)
 If one of the parties to a suit over an obligation has a claim for damages against the other, the former may
set it off by proving his right to said damages and the amount thereof. (1283)
 When one or both debts are rescissible or voidable, they may be compensated against each other before they
are judicially rescinded or avoided. (1284)
 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. (1285)
 If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up
the compensation of debts previous to the cession, but not of subsequent ones.
 If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits
prior to the same and also later ones until he had knowledge of the assignment. (1198a)
 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. (1286)
 If a person should have against him several debts which are susceptible of compensation, the rules on the
application of payments shall apply to the order of the compensation. (1289)

Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the
obligations of a depositary or of a bailee in commodatum.
Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without
prejudice to the provisions of paragraph 2 of article 301. (1200a)
Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal
offense. (n)

6. Novation – Obligations may be modified by: (1) Changing their object or principal conditions; (2)
Substituting the person of the debtor; (3) Subrogating a third person in the rights of the creditor. (1291)

Kinds of novation
1. Origin

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 a. Legal – operation of law
b. Conventional – agreement of the parties
2. How it s constituted
a. Express – Declared in unequivocal term
b. Implied – Old and new obligation are essentially incompatible with each other
3. Extent or effect
a. Total or extinctive – Old obligation is completely extinguished
b. Partial or modificatory – Old obligation is merely modified
4. Subject
a. Real or objective – Object or principal condition are changed
b. Personal or subjective – person of the debtor is substituted/ or when a third person is subrogated in
the right of the creditor.
1. Substitution – Person of the debtor is substituted
1.1.Expromision – 3rd person on his own initiative and without the knowledge or against the will of
the original debtor assumes the latter’s obligation with the consent of the creditor. (Only the
consent of the creditor and 3rd person is made)
1.2.Delegacion – Creditor accepts a third person to take the place of the debtor at the instance of
the latter. It requires that the old debtor be release from the old obligation. (all parties, old
debtor, new debtor and the creditor must agree)
2. Subrogation – Third person is subrogated in the rights of the creditor.
c. Mixed – Combination of real and personal novation.

 Novation is never presumed.

 Test: Is the old and new obligation having an independent existence. Positive - compatible (No novation);
Negative – incompatible - Novation.
 Conventional subrogation be clearly establish (1300) and it requires the consent of the original parties and
of the third person. (1301)
 Legal subrogation is not presumed except in cases provided for by law. (1300)
 When the principal obligation is extinguished in consequence of a novation, accessory obligations may
subsist only insofar as they may benefit third persons who did not give their consent. (1296)
 If the new obligation is void, the original one shall subsist, unless the parties intended that the former
relation should be extinguished in any event. (1297)
 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. (1298)
 If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be
under the same condition, unless it is otherwise stipulated. (1299)
 Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining, either
against the debtor or against third person, be they guarantors or possessors of mortgages, subject to
stipulation in a conventional subrogation. (1303)
 A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he
shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of
the same credit. (1304)

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 Art. 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge;
(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the
debtor;
(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation
pays, without prejudice to the effects of confusion as to the latter's share. (1210a)

CONTRACTS

Contract - meeting of minds between two persons whereby one binds himself, with respect to the other, to give
something or to render some service.

Kinds of contract
1. Formation or perfection
a. Consensual – perfected by mere consent (1315)
b. Real – perfected by delivery (i.e. depositum, pledge, commodatum) (1316)
c. Formal or solemn (i.e. Interest must be in writing (1956); Contribution of immovable property must be in
a public instrument, donation of personal property where the value exceed P5,000 must be in writing;
Donation of immovable property must be in a public instrument, Sale of land or interest therein, the
authority of the agent must be in writing)
2. Cause or equivalence of value of prestation
a. Onerous – equivalent value of prestation
b. Gratuitous or lucrative – no equivalent prestation
c. Remunerative - the prestation is the benefit or service that had been rendered previously.
3. Importance or dependence of one upon another:
a. Principal – can stand alone
b. Accessory – depend upon the existence of another contract
c. Preparatory – not considered the contract as an end by itself but as a mean for entering in future
transaction or contract.
4. Parties obligated
a. Unilateral – only one party has obligation
b. Bilateral – both party has obligation
5. Name or designation
a. Nominate – has a name given by law
b. Innominate – no name given by law
1. Do ut des (I give that you may give) no longer innominate. This is now called Barter
2. Do ut facias (I give that you may do)
3. Facio ut des (I do that you may give)
4. Facio ut facias (I do that you may do)
6. Risk of fulfillment
a. Commutative – real fulfillment, equivalent value are given
b. Aleatory – fulfillment depend upon chance.
7. Time of performance or fulfillment

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 a. Executed – prestation are already complied with
b. Executory – prestations are to be complied with in the future
8. According to number of person who participated in the drafting of the contract
a. Ordinary -
b. Contract of adhesion – Where the terms and condition of the contract is already drafted by one party. The
other party only signifies his consent by signing the contract.

Stages of contract
1. Preparation (Negotiation, conception or Generacion) – steps taken by the parties leading to the perfection
of the contract.
2. Perfection (or birth) – Come to a definite agreement or meeting of the mind upon the object and the
cause.
3. Consummation (death or termination) – parties have performed their respective obiigation

Characteristics of contract
1. Freedom of contract - contracting parties may establish such stipulations, clauses, terms and conditions as
they may deem convenient (1306)
Limitation:
a. Law
b. Moral
c. Good custom
d. Public order
e. Public policy
2. Mutuality of contract - contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them (1308). The principle is based on the essential equality of the parties.
 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. (1309)
 The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide
what is equitable under the circumstances (1310)
3. Relativity of contract - Contracts take effect only between the parties, their assigns and heirs (1311)
Exception:
a. Where the obligations arising from contract are not transmissible by nature (personal qualification is
involved), by stipulation or by provision of law (Agency, partnership, commodatum).
b. Stipulation in favor of third person (stipulation pour autrui) (1311 par 2)
If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment
provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or
interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred
a favor upon a third person
c. Contract creating real right (1312)
d. Contact entered into to defraud the creditors. (1313)
e. Contract which have been violated thru the inducement of 3rd person (1314)

Elements of a Contract
1. Essential elements
a. Common (Consent, Object, Cause)
b. Special
1.) Form – formalities in solemn contract, deliver in real contract, registration to bind third person (Real
estate mortgage, chattel mortgage)

Solemn contract
(Consent, Object, Cause + Execution of formalities)
a. Stipulation of interest = writing.
b. Contribution of immovable property in partnership = inventory of such property + public
instrument
c. Donation of personal property where the value exceed P5,000 = in writing
d. Donation as well as acceptance of real property = Public instrument.
e. Will = writing + formalities prescribed by law.
f. Agent authority in case of sale of immovable property in behalf of the principal = writing

Real Contract
(Consent, Object, Cause + Delivery)
a. Deposit
b. Pledge
c. Commodatum
2.) Subject matter
Real estate Real property No delivery
mortgage
Chattel mortgage Personal No delivery
property
Pledge Personal Delivery
property
Antichresis Real property Delivery
3.) Consideration or cause – Sale (price); Commodatum (liberality)
2. Natural elements – presumed to exist in certain contracts
a. Warranty against eviction
b. Warranty against hidden defect

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3. Accidental elements (by stipulation) – Exist only when they are expressly provide by the parties. (i.e.
Conditions, period, interest, penalty, place of payment)

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

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

CONSENT (1319)

Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause
which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified
acceptance constitutes a counter-offer.
Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge.
The contract, in such a case, is presumed to have been entered into in the place where the offer was made.
1. Theory of cognition – The acceptance is considered to effectively bind the offeror only from the time it came
to his knowledge. (Civil code)
2. Theory of manifestation – The contract is perfected at the moment when the acceptance is declared or
made by the offeree. (Code of commerce)

Art. 1320. An acceptance may be express or implied.

Art. 1321. The person making the offer may fix the time, place, and manner of acceptance, all of which must be
complied with.
Art. 1322. An offer made through an agent is accepted from the time acceptance is communicated to him. (n)
Art. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party
before acceptance is conveyed.
Art. 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere
invitations to make an offer.
Art. 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to
accept the highest or lowest bidder, unless the contrary appears.
Art. 1327. The following cannot give consent to a contract:
(7) Unemancipated minors;
(8) Insane or demented persons, and deaf-mutes who do not know how to write. (1263a)
Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of drunkenness or
during a hypnotic spell are voidable. (n)

OPTION PERIOD (1324)

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

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Vices of Consent
1. Error or mistake
 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.(1331)
 When one of the parties is unable to read, or if the contract is in a language not understood by him, and
mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been
fully explained to the former. (1332)
 There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the
contract. (1333)
 Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may
vitiate consent. (1334)

2. Violence - when in order to wrest consent, serious or irresistible force is employed. (1335)
3. Intimidation - when one of the contracting parties is compelled by a reasonable and well-grounded fear of an
imminent and grave evil upon his person or property, or upon the person or property of his spouse,
descendants or ascendants, to give his consent. (1335)
To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind.
A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate
consent.
4. 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. (1337)
5. 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.
 Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by
confidential relations, constitutes fraud. (1339)
 The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in
themselves fraudulent. (1340)
 A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has
relied on the former's special knowledge. (1341)
 Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created
substantial mistake and the same is mutual. (1342)
 Misrepresentation made in good faith is not fraudulent but may constitute error. (1343)
 In order that fraud may make a contract voidable, it should be serious and should not have been
employed by both contracting parties. (1344)
Incidental fraud only obliges the person employing it to pay damages.

Employed by Employed by 3rd

one of the person
contracting
party
Violence Voidable Voidable
Intimidation Voidable Voidable
Fraud without Voidable Valid, unless it
connivance/ result to substantial

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 knowledge by the mistake and the
party benefited by same is mutual. It
the fraud can be annulled on
the ground of
mistake
Fraud with Voidable Voidable. As if
connivance/ exercised by the
knowledge by the party benefited by
party benefited by the fraud.
the fraud
Undue influence Voidable Valid

Absolute Relative simulated

simulated or
fictitious contract
The parties do not The parties conceal their true
intend to be bound agreement. (1345)
at all. (1345)
VOID When it does not prejudice a third
(1346) 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. (1346)

OBJECT OF CONTRACTS
 All things which are not outside the commerce of men, including future things, may be the object of a
contract. All rights which are not intransmissible may also be the object of contracts.
 No contract may be entered into upon future inheritance except in cases expressly authorized by law.
 All services which are not contrary to law, morals, good customs, public order or public policy may likewise be
the object of a contract. (1347)
 Impossible things or services cannot be the object of contracts. (1348)
 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. (1349)

CAUSE OF CONTRACTS
 To be a valid cause, it must be lawful, true and real, definite or determinate as to its kind and possible.
 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. (1350)
 The particular motives of the parties in entering into a contract are different from the cause thereof. (1351)
 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. (1352)
 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. (1353)
 Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor
proves the contrary. (1354)
 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. (1355)

FORM OF CONTRACTS
 Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential
requisites for their validity are present. However, when the law requires that a contract be in some form in
order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is
absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be
exercised. (1356)
 If the law requires a document or other special form, as in the acts and contracts enumerated in the following
article, the contracting parties may compel each other to observe that form, once the contract has been
perfected. This right may be exercised simultaneously with the action upon the contract. (1357)
 The following must appear in a public document: (1358)
(1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment
of real rights over immovable property; sales of real property or of an interest therein a governed by
articles 1403, No. 2, and 1405;
(2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of
gains;
(3) The power to administer property, or any other power which has for its object an act appearing or which
should appear in a public document, or should prejudice a third person;
(4) The cession of actions or rights proceeding from an act appearing in a public document.
All other contracts where the amount involved exceeds five hundred pesos must appear in writing,
even a private one. But sales of goods, chattels or things in action are governed by articles, 1403, No. 2 and
1405. (1280a)

REFORMATION OF INSTRUMENTS
Art. 1359. When, there having been a meeting of the minds of the parties to a contract, their true

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intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake,
fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end
that such true intention may be expressed.
If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper
remedy is not reformation of the instrument but annulment of the contract.

Art. 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.

 Reformation can be avail only of the innocent party.

 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. (1368)
 When reformation proper
a. Mutual mistake of the parties causes the failure of the instrument to disclose their real agreement (1361)
b. One party was mistaken and the other acted fraudulently or inequitably in such a way that the
instrument does not show their true intention. (1362)
c. 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. (1363)
d. 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. (1364)
e. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states
that the property is sold absolutely or with a right of repurchase. (1365)
 When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for
its reformation. (1367)
 The procedure for the reformation of instrument shall be governed by rules of court. (1369)

INTERPRETATION OF CONTRACTS
 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. (1370)
If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the
former.
 In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be
principally considered. (1371)
 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. (1372)
 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. (1373)
 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. (1374)
 Words which may have different significations shall be understood in that which is most in keeping with the
nature and object of the contract. (1375)
 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. (1376)
 The interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the obscurity. (1377)
 When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the
doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and
interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity
of interests.
If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what
may have been the intention or will of the parties, the contract shall be null and void. (1378)
 The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the
construction of contracts. (1379)

DEFECTIVE CONTRACTS
1. Rescissible contract – Rescissible contract is valid until rescinded. It is allowed by reason of injury or
damage to one parties or to a third person.
The following contracts are rescissible: (1381)
a. Those which are entered into by guardians whenever the wards whom they represent suffer lesion by
more than one-fourth of the value of the things which are the object thereof;
 Not applicable when approved by court (1386)
 Prescriptive period: Four years from the termination of incapacity
b. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding
number;
 Not applicable when approved by court (1386)
 Prescriptive period: Four years from the date the domicile of the absentee is known.
c. Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due
them;
 The action to claim rescission must be commenced within four years (1389)
 Alienation which are presumed to have been entered into in fraud of creditors
a. Gratuitous title - donor did not reserve sufficient property to pay all debts contracted before the
donation.
b. Onerous title - 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

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 by the party seeking the rescission.
Note: The design to defraud creditors may be proved in any other manner recognized by the law of
evidence. (1387)
 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.
(1388)
d. Those which refer to things under litigation if they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent judicial authority;
 The action to claim rescission must be commenced within four years (1389)
e. All other contracts specially declared by law to be subject to rescission.
 The action to claim rescission must be commenced within four years (1389)

Limitation on the exercise of rescission

1. Contracts can be rescinded only in cases provided by law
2. Being a subsidiary action, it can be exercised only when there is no other legal means to obtain reparation for
the same. (1383)
3. Can be exercised only to the extent necessary to cover the damages caused. (1384)
4. 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 (mutual restitution). Hence, it can be demanded only if the one claiming
rescission can return whatever he may be obliged to restore.
5. It cannot be availed when the things which are the object of the contract are legally in the possession of third
persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person
causing the loss (1385)
6. The action for rescission has not been prescribed.

2. Voidable Contract – The consent is defective by reason of incapacity of one party or vices of consent. It is
valid until annulled.
The following contracts are voidable or annullable, even though there may have been no damage to the
contracting parties: (1390)
a. Those where one of the parties is incapable of giving consent to a contract;
b. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of
ratification.
Grounds Prescriptive period
Intimidation, violence or 4 years from the time the
undue influence defect of the consent
ceases
Mistake or fraud 4 years from the time of
the discovery* of the
same
minors or other 4 years from the time the
incapacitated persons guardianship ceases
*Note: If there is registration of the property, count from the date of registration.

 Ratification extinguishes the action to annul avoidable contract. (1392)

 Express ratification – Done in writing or orally
 Tacit ratification - with knowledge of the reason which renders the contract voidable and such reason having
ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to
waive his right. (1393)
 Ratification may be effected by the guardian of the incapacitated person. (1394)
 Ratification does not require the conformity of the contracting party who has no right to bring the action for
annulment. (1395)
 Ratification cleanses the contract from all its defects from the moment it was constituted. (1396).
 The action for the annulment of contracts may be instituted by all who are thereby obliged principally or
subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they
contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or
caused mistake base their action upon these flaws of the contract. (1397)
 An obligation having been annulled, the contracting parties shall restore to each other the things which have
been the subject matter of the contract, with their fruits, and the price with its interest, except in cases
provided by law. In obligations to render service, the value thereof shall be the basis for damages. (1398)
 When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not
obliged to make any restitution except insofar as he has been benefited by the thing or price received by him.
(1399)
 Whenever the person obliged by the decree of annulment to return the thing can not do so because it has
been lost through his fault, he shall return the fruits received and the value of the thing at the time of the
loss, with interest from the same date. (1400)
 The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost
through the fraud or fault of the person who has a right to institute the proceedings.
If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing
shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of
the plaintiff (1401)
 As long as one of the contracting parties does not restore what in virtue of the decree of annulment he is
bound to return, the other cannot be compelled to comply with what is incumbent upon him.(1402)

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3. Unenforceable contract – Contract that cannot be enforce unless ratified.
The following contracts are unenforceable, unless they are ratified: (1403)
(1) Those entered into in the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers;
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following
cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or
memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without the writing, or a secondary evidence of its
contents:
(a) An agreement that by its terms is not to be performed within a year from the making thereof;
(b) A special promise to answer for the debt, default, or miscarriage of another;
(c) An agreement made in consideration of marriage, other than a mutual promise to marry;
(d) An agreement for the sale of goods, chattels or things in action (personal property), at a
price not less than five hundred pesos, unless the buyer accept and receive part of such goods
and chattels, or the evidences, or some of them, of such things in action or pay at the time some
part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer
in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale,
price, names of the purchasers and person on whose account the sale is made, it is a sufficient
memorandum;
(e) An agreement of the leasing for a longer period than one year, or for the sale of (real
property) or of an interest therein;
(f) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a contract.

 Statutes of fraud is no longer applicable when:

a. There is total or partial performance (Partially or totally executed)
b. Failure to object to the presentation of oral evidence to prove the contract.
 Cannot be assailed by third person (1408)
 Effect of ratification by parents or guardian (1407)
a. Only one party – Voidable contract
b. Both parties- valid

4. Void contract – contract that never exist in the eyes of law. It has no effect at all and cannot be ratified.

The following contracts are inexistent and void from the beginning: (1409)
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public
policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of the contract cannot be
ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.

Rules in determining contracts void

1. Absence of any of essential requites of contract (Consent, Object or Cause)
2. Contract that are prohibited by law. (i.e Sale between husband and wife, donation between husband and
wife)
 The action or defense for the declaration of the inexistence of a contract does not prescribe. (1410)
 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. (1413)
 Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the
interest of justice so demands allows recovery of money or property delivered by the incapacitated
person. (1415)
 When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is
designated for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he
has paid or delivered. (1416)
 When the price of any article or commodity is determined by statute, or by authority of law, any person
paying any amount in excess of the maximum price allowed may recover such excess. (1417)
 When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a contract is
entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand
additional compensation for service rendered beyond the time limit. (1418)
 When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is agreed
upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency. (1419)
 In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be
enforced. (1420)
 The defense of illegality of contract is not available to third persons whose interests are not directly
affected. (1421)
 A contract which is the direct result of a previous illegal contract is also void and inexistent. (1422)

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