Reviewer for Obligations and Contracts 1

TITLE I
OBLIGATIONS (1) it must be possible, physically and juridically;
(2) it must be determinate, or, at least, determinable
CHAPTER 1 (3) it must be capable of pecuniary estimation

GENERAL PROVISIONS III - The Vinculum Juris

I - The Obligation 2 The efficient cause, or the juridical or legal tie, is the vinculum, which may either be
a relation established by:
A. Concept of Obligation
(1) by law
1 An obligation is a juridical relation whereby a person (called the creditor) may (2) by bilateral acts (such as contracts)
demand from another (called the debtor) the observance of a determinate (3) by unilateral acts (such as crimes and quasi-delicts)
conduct, and, in case of breach, may obtain satisfaction from the assets of the
latter.
2 An obligation is a juridical necessity to give, to do, or not to do. (1156)
3 Subject to the laws, all rights acquired in virtue of an obligation are
transmissible, if there has been no stipulation to the contrary. (1178)
IV - Sources of Obligations
A. Elements of Obligation
3 Obligations arise from: (1157)
(1) an active subject, who has the power to demand the prestation, known as the
obligee or creditor; (1) Law - obligations derived from law are not presumed. Only those
(2) a passive subject, who is bound to perform the prestation, known as the obligor expressed in the Civil Code or in special laws are demandable and shall be
or debtor; regulated by the precepts of the law which establish them; and to what has
(3) an object or the prestation; and not been foreseen, the provisions of Book IV of the Civil Code. (1158)
(4) the juridical tie or vinculum juris
(2) Contracts (ex contractu) - have the force of law between the contracting
parties and should be complied with in good faith. (1159)
II - The Object or Prestation
1305. A contract is a meeting of minds between two persons whereby one binds himself,
A. Concept of Object or Prestation with respect to the other, to give something or to render some service. (1254a)

1 The object of an obligation is not a thing but a particular conduct of the debtor
which may consist in: (3) Quasi-contracts (quasi-contractu) - a juridical relation which arises from
certain lawful, voluntary, and unilateral acts, to the end that no one may be
(1) giving something unjustly enriched at the expense of another.
(2) doing something
(3) not doing something (4) Delicts (ex-maleficio) - governed primarily by the penal laws

B. Requisites (5) Quasi-Delicts (quasi-maleficio)

 Whoever by act or omission causes damage to another, there
The prestation must have the following requisites: being fault or negligence, is obliged to pay for the damage done,

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if there is no pre-existing contractual relation between the parties II - Obligations To Do

(culpa aquiliana).
6 The obligation shall be executed at his cost if:

CHAPTER 2 (1) If the person obliged to do something fails to do it; or

(2) If he does it in contravention to the tenor of the obligation.
NATURE AND EFFECTS OF OBLIGATIONS
7 Furthermore, it may be decreed that what has been poorly done be undone. (1167)
1 There are three kinds of prestations in obligations:
(1) to give 8 The law does not authorize the imposition of personal force or coercion upon the
(2) to do debtor to comply with his obligation. In such case, he can be held liable for
(3) not to do damages

I - Obligations To Give III - Obligations Not To Do

2 The obligation to give may refer either to: 9 If the obligor does what has been forbidden him:
(1) a specific or determinate thing - one that is individualized and can be (1) it shall be done at his expense (1168)
identified (2) he can be held liable for damages
or distinguished from others of its kind
(2) an indeterminate or generic thing - one that is indicated only by its kinds, IV - Remedies of the Creditor
without being designated and distinguished from others of the same
kind 10 When a debtor fails to comply with his obligation, the creditor may avail himself of
the following remedies:
A. Obligation to Give a Specific or Determinate Thing (1) an action for specific performance
(2) an action to rescind the obligation
3 Three incidental or accessory obligations: (3) an action for damages, exclusively or in addition to either of the first two
(1) The obligation to preserve the thing with the proper diligence of a good actions
father of a family, unless the law or the stipulation of the parties requires
another standard of care. (1163) V - Damages
(2) The obligation to deliver the fruits. However, the creditor shall acquire no 11 Those who in the performance of the obligations are guilty of fraud, negligence, or
real right over it until the same has been delivered to him. (1164) delay, and those who in any manner contravene the tenor thereof, are liable for
(3) The obligation to deliver the accessions and accessories, even though they damages. (1170)
may not have been mentioned. (1166)
Modes of Breach
4 The creditor may compel the debtor to make the delivery. (1165 par. 1) 1170. Those who in the performance of their obligations are guilty of fraud, negligence,
or delay, and those who in any manner contravene the tenor thereof, are liable for
A. Obligations to Give an Indeterminate or Generic Thing damages. (1101)

5 The creditor may ask that the obligation be complied with at the expense of the
debtor. (1165 par. 2)
A. Fraud (dolo incidente and dolo causante)
12 Fraud is a deliberate and intentional evasion of the normal fulfillment of obligations.
13 Responsibility arising from fraud is demandable in all obligations. Any waiver of an
action for future fraud is void. (1171)

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Woodhouse v. Halili
Plaintiff entered into an agreement with the defendant. They shall organize a
partnership for the sale of Mission Softdrinks. Plaintiff will act as the manager while the
defendant will supply the capital. The plaintiff was to secure a franchise in behalf of the
partnership. He was only able to secure a 30-day option. When defendant found out,
they both went to the US to secure a franchise. When operation started, plaintiff asked
that the partnership papers be executed but the defendant refused. He alleged that he
was led to believe that plaintiff secured an exclusive franchise.
Issue: WON there was fraud
Held: Yes
1) He is liable for dolo incidente. Plaintiff represented himself as being the
exclusive grantee of the franchise. It is improbable that he would present
himself as only having the option since he would lose his bargaining leverage.
2) Even though the 30-day option expired at the time the contract was entered
into, he is only liable for dolo incidente because he only obligated himself to
secure a franchise for the partnership, which he did.
B. Negligence (Culpa Contractual)
1 Negligence consists in the omission of that diligence which is required by the
nature of the obligation and corresponds with the circumstances of the persons,
of the time, and of the place.
2 If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be
required. (1173)
3 Responsibility arising from negligence in the performance of every kind of
obligation is also demandable, but such liability may be regulated by the courts.
(1172)
US v. Barias, 23 Phil 434 (1912)
Negligence: 'The failure to observe for the protection of the interests of another person
that degree of care, precaution, and vigilance which the circumstances justly demand,
whereby such other person suffers injury.
C. Delay (Mora) (1169)
1 Delay is incurred from the time the obligee juridically or extra-juridically demands
the fulfillment of the obligation. There can be delay only in obligations to give and
obligations to do.
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2 Kinds:
(1) Mora solvendi - default on the part of the debtor which may either be:
(a) ex re - referring to obligations to give
(b) ex persona - referring to obligations to do
(2) Mora accipiendi - default on the part of the creditor
(3) Compensatio morae - default of both parties in reciprocal obligations
o delay begins from the moment one of the parties fulfill his obligation
(Exeptio non adimpleti contractus.)
1 However, the demand by the creditor shall not necessary in order that delay may
exist:
(1) When the obligation or law expressly so declares
(2) When the period is the controlling motive or the principal inducement for
the creation of the obligation.
(3) When the demand would be useless, as when the obligor has rendered it
beyond his power to perform
VI - Force Majeure (1174)
A. Concept
2 Fortuitous events are events which could not be foreseen, or which, though
foreseen, were inevitable.
3 The doctrine of fortuitous event is applicable only to obligations to give a specific
thing and obligations to do.
4 The general effect is that the debtor cannot be held liable for damages for non-
performance.
5 To exempt the debtor from paying damages, the following instances must concur:
(1) Cause of the unforeseen occurrence or the failure of the debtor to comply
with his obligations must be independent of the human will.
(2) It must be impossible to foresee, or if it can be foreseen, it must be
impossible to avoid.
(3) The occurrence must be such as to render it impossible for the debtor to
fulfill his obligation in a normal manner.
(4) The obligor must be free from any participation in the aggravation of the
injury resulting to the creditor.
(5) Fault or negligence must not be imputed to the debtor. (Concurrent
negligence)
 Reviewer for Obligations and Contracts 4

A. Exceptions CHAPTER 3

1 The debtor will still be liable for fortuitous event: DIFFERENT KINDS OF OBLIGATIONS

(1) if it is expressly specified by law 1 The Civil Code classifies obligations primarily into:
(2) if it is declared by stipulation (1) pure
(3) when the nature of the obligation requires the assumption of risk (2) conditional
(3) with a term
(4) alternative
VII - Accion Subrogatoria and Accion Pauliana (5) joint or mancomunada
(6) solidary or several or in solidum
A. Accion Subrogatoria (7) divisible
(8) indivisible
2 In an accion subrogatoria, the creditor (C1) may collect from his debtor’s (D1) (9) with a penal clause
debtor (D2) although there is no privity of contracts between C1 and D2.

3 D1 must be: Section 1

(1) Negligent in collecting from D2, and PURE AND CONDITIONAL OBLIGATIONS
(2) in a state of insolvency -- need not be judicially declared
-- a state of insolvency exists when one’s I -- Pure Obligations
liabilities
exceed his assets 1 A pure obligation is an obligation which contains no term or condition
whatsoever upon which depends the fulfillment of the obligation contracted by
A. Accion Pauliana the debtor. (1179 par. 1)

4 An accion pauliana is an action to rescind the contracts entered into by a debtor to
defraud his creditor(s). The creditor may rescind the contract entered into by his
debtor so that the debtor’s patrimony would increase, thereby enabling the creditor
to collect from the debtor’s patrimony.
5 D1 must be:
(1) negligent
(2) insolvent
1 The difference between accion subrogatoria and accion pauliana is that in the
former, the second credit (between D1 and D2) may or may not exist ahead of the
first credit (between C1 and D1).
2 In accion pauliana, the second credit necessarily comes after the first credit;
otherwise, it is not fraudulent. The essence of the second credit must be to defraud
the creditor.
2 A pure obligation must be reasonably construed, distinguishing immediate
demandability by the creditor, from the fulfillment by the debtor, for which a
reasonable period may be granted.
II - Conditional Obligations
A. Concept
1 In conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition. (1181)
2 A condition has been defined as every future and uncertain event upon which
an obligation or provision is made to depend. (1179 par. 2)
B. Classification of Conditions

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(1)
(a) Suspensive condition or condition precedent - the happening of
the condition gives rise to the obligation
(b) Resolutory or condition subsequent - the happening of the
condition extinguishes rights already existing
(2)
(a) Potestative - depends upon the will of one of the contracting
parties
(a-1) Simple potestative - presupposes not only a
manifestation of will but also the realization of an external act
(“If you sell your house”)
(a-2) Purely Potestative - depends solely and exclusively upon
the will (“If I like”)
-- a purely potestative suspensive condition is void (1182)
(b)Causal - depends exclusively upon chance or upon the will of third
persons and not upon the will of the contracting parties.
(c) Mixed- depends not only upon the will of the debtor but also upon
chance or the will of others (1183)
(3)
(a) Positive - The condition that some event happen at a determinate time
shall extinguish the obligation as soon as the time expires or if it has
become indubitable that the event will not take place. (1184)
(b) Negative - The condition that some event will not happen at a
determinate time shall render the obligation effective from the moment
the time indicated has elapsed, or if it has become evident that the
vent cannot occur. (1185)
1 In both cases, if no time has been fixed, the condition shall be deemed
fulfilled at such time as may have probably been contemplated, bearing in
mind the nature of the obligation.
(3) (a) Express
(b) Implied
(4) (a) Possible
(b) Impossible - those contrary to good customs or public policy and those
prohibited by law shall annul the obligation which depends upon them.
2 If the obligation is divisible, that part thereof which is not affected by the impossible
or unlawful condition shall be valid.
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3 The condition not to do an impossible thing shall be considered a pure obligation.
(1183)
4 The impossibility must exist at the time of the creation of the obligation; a
supervening impossibility does not affect the existence of the obligation. On the
same principle, if the condition was impossible when the obligation was constituted,
the obligation remains void even if such condition subsequently becomes possible,
unless the parties later agree again.
5 Kinds of impossibility:
1 Physical - contrary to the law of nature
2 Juridical - contrary to law, morals, good customs, and public policy.
C. Constructive Fulfillment
1 The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment. (1186)
2 Requisites:
(1) intent of the obligor to prevent the fulfillment of the condition
(2) actual prevention of compliance
1 If, however, in preventing the fulfillment of the condition the debtor acts
pursuant to a right, the condition will not be deemed s fulfilled.
2 When the condition is resolutory but not dependent on the will of the debtor,
and he unjustifiably provokes or produces the condition, which would not have
happened without his doing so, it will be considered as not having been fulfilled,
and there will be no extinguishment of rights.
III - Rights Pendente Conditione
A. Creditor
1 The creditor may, before the fulfillment of the condition, bring the appropriate
actions for the preservation of his rights. (1188 par. 1)
2 They may include for their objects:
(1) to prevent the loss or deterioration of the objects of the obligation by
enjoining or restraining acts of alienation or destruction by the debtor
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himself or by third persons
(2) to prevent concealment of the debtor’s properties which constitute the
guaranty in case of non-performance of the obligation
(3) to demand security if the debtor becomes insolvent
(4) to set aside fraudulent alienation made by the debtor
B. Debtor
1 May recover what during the same time he has paid by mistake in case of a
suspensive condition. (1188 par. 2)
2 If the payment was of a determinate thing, and it still exists in the hands of the
creditor, the accion reivindicatoria will lie; otherwise, the provisions of solutio
indebiti will apply.
3 If payment was made with knowledge of the condition, there is an implied
waiver of the condition, and whatever has been paid cannot be recovered.
IV - Improvement, Loss, Deterioration Pendente Conditione
A. Definition of Terms
(1) Loss - a thing is lost:
(a) when it perishes
(b) when it goes out of the commerce of man
(c) when it disappears in such a manner that its existence is unknown
or it cannot be recovered
(2) Deterioration - any reduction or impairment in the substance or value of a
thing which does not amount to loss
(3) Improvement - anything added to, incorporated in, or attached to a thing
that is Due
B. Effects Regarding Suspensive Conditions (1189)
In obligations to deliver specific things, obligations to do, and obligations not to
do, the following rules shall apply with regards to loss, deterioration, or improvement:
(1) If the thing is lost without the fault of the debtor, the obligation shall be
extinguished;
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(2) If the thing is lost through the fault of the debtor, he shall be obliged to
pay damages;
(3) When the thing deteriorates without the fault of the debtor, the
impairment is to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose
between:
(a) rescission + damages; or
(b) fulfillment + damages
(5) If the thing is improved by 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.
(a) If the improvement can be removed by the debtor without
damage to the thing due, then he may remove the same.
(b) But if the removal cannot be made without substantial injury to
the thing due, then the improvement must be delivered together
with the thing due to the creditor without the latter paying
indemnity to the debtor.
C. Effects Regarding Resolutory Conditions (1190)
(1) When the conditions have for their purpose the extinguishment of an
obligation to give, the parties, upon the fulfillment of said conditions, shall
return to each other what they have received.
(2) In case of loss, deterioration or improvement of the thing, the rules which,
with respect to the debtor, are laid down in the preceding article shall be
applied to the party who is bound to return.
(3) As for obligations to do and not to do, the courts shall determine the
effects of the extinguishment of the obligation.
V - Reciprocal Obligations
A. Breach by One Party (1191)
(1) The power to rescind obligations is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him. The
power to rescind is given to the injured party.
 Reviewer for Obligations and Contracts 7

(2) The injured party may choose between the fulfillment and the rescission of
the obligation, with payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible

(3) The court shall decree the rescission claimed, unless there be just cause Section 2
authorizing the fixing of a period.
OBLIGATIONS WITH A PERIOD
(4) This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with articles 1385 and 1388 I - The Term or Period
and the Mortgage Law.
A. Concept of Term
B. Breach by Both Parties (1192)
3 A period or term is a space of time which, exerting an influence on obligations
(1) The liability of the first infractor shall be equitably tempered by the courts. as a consequence of a juridical act, suspends their demandability or determines
their extinguishment.
(2) If it cannot be determined which of the parties first violated the contract, 4 The period must be:
the same shall be deemed extinguished and each shall bear his own (1) future
damages. (2) certain
(3) possible
VI - Retroactivity (1187)
B. Kinds
A. Obligations to give
(1)
1 Once the condition (suspensive) has been fulfilled, it shall retroact to the day of (a) Suspensive (ex die - from a day certain) - a period that must
the constitution of the obligation. lapse before the performance of the obligation can be demanded
(b) Resolutory (in diem - to a day certain) - the period after which the
(1) Reciprocal obligations - the fruits and interests during the pendency of the performance must terminate
condition shall be deemed to have been mutually compensated
(2) According to source:
(2) Unilateral obligations - debtor shall appropriate the fruits and interests (a) legal - period fixed by law
received, unless from the nature and circumstances of the obligation it (b) voluntary - fixed by the parties
should be inferred that the intention of the person constituting the same (c) juridical - that allowed by the courts
was different
(3) (a) express
B. Obligations To Do and Not To Do (b) implied

2 The courts shall determine, in each case, the retroactive effect of the condition (4) (a) original
that has been complied with. (b) period of grace - extension fixed by the parties themselves or by the
court

(5) (a) definite - refers to a fixed or known date or time

(b) indefinite - refers to an event which will necessarily happen but the

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date of its happening is unknown to the parties
C. Distinguished From Condition
(1) While a condition gives rise to an obligation or extinguishes one already
existing, a period has no effect upon the existence of obligations, but only
their demandability or performance. Because of this difference, a period
does not carry with it, except when there is a special agreement, any
retroactive effect.
(2) A condition which depends exclusively on the will of the debtor annuls the
obligation, but a period left to the debtor’s merely empowers the court to
fix the term.
II - Effects
A. Presumption
1 The period is presumed to have been established for the benefit of both the
creditor and the debtor, unless from the tenor of the same or other
circumstances it should appear that the period has been established in favor of
one or the other. (1196)
B. Pending the Arrival of the Period
(1) In case of loss, deterioration or improvement of the thing before the arrival
of the term the rules in article 1189 shall be observed. (1194)
(2) Anything paid or delivered before the arrival of the period, the obligor
being unaware of the period or believing that the obligation has become
due and demandable, may be recovered, with the fruits and interests.
(1195)
(a) The creditor who accepts payment in bad faith shall pay legal
interest if a sum of money is involved, or shall be liable for fruits
received.
(b) But if the creditor acted in good faith, he is liable for fruits only in
so far as they benefited him.
C. Suspensive and Resolutory Periods
(1) Suspensive - obligation shall be demandable only when the period comes
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(2) Resolutory - obligations take effect at once, but terminate upon arrival of
the
day certain
D. No Fixed Term (1197)
(1) The courts may fix the term if from its nature and circumstances it can be
inferred that a period was intended.
(2) The courts shall also fix the duration of the period when it depends upon
the will of the debtor.
 In every case, the courts shall determine such period as may under the
circumstances have been probably contemplated by the parties.
 Once fixed by the courts, the period cannot be changed by the parties.
E. Loss of Term (1198)
1 In the following cases, the obligation becomes immediately due and
demandable even if the period has not yet expired. The obligation is thus
converted to a pure obligation:
(1) When after the obligation has been contracted, the debtor becomes
insolvent, unless he gives a guaranty or security for the debt;
(2) When the debtor does not furnish to the creditor the guaranties or
securities he has promised;
(3) When by his own acts the debtor 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.
Section 3
 Reviewer for Obligations and Contracts 9

ALTERNATIVE OBLIGATIONS
I - Plurality of Objects
On the basis of plurality of objects, the obligations may be classified into:
(1) Conjunctive - one where the debtor has to perform several prestations; it is
extinguished only by the performance of all of them
(2) Alternative - several objects being due, the fulfillment of one is sufficient
(3) Facultative - only one thing is due, but the debtor has reserved the right to
substitute it with another
II - Alternative Obligations
A. Right of Choice (Debtor)
2 The right of choice belongs to the debtor, unless it has been expressly granted
to the creditor (or a third person).
3 The debtor shall have no right to choose those prestations which are
impossible, unlawful or which could not have been the object of the obligation.
(1200)
things which are alternatively the object of the obligation have been
lost, or the compliance of the obligation has become impossible.
o The indemnity shall be fixed taking as a basis of the value of the last
thing which disappeared, or that of the service which last became
impossible.
o Damages other than the value of the last thing or service may also be
rewarded. (1204)
(a) If all the prestations become impossible due to fortuitous event,
the obligation is extinguished; the debtor is not liable for
damages.
(b) If one or more of the prestations due become impossible by
fortuitous event, leaving only one prestation, and then this last
one becomes impossible by fault of the debtor, the provisions of
the present article will apply.
(c) If some of the prestations become impossible by fault of the
debtor, and the n the remaining prestation became impossible by
fortuitous event, the debtor is liable under the present article, but
the basis of damages will be the value of the last prestation which
became impossible through his fault.
D. Delay in Making Choice

4 The right to choose is indivisible. The debtor cannot choose part of one 2 If the debtor who has the right to choose makes no selection before the
prestation and part of another. creditor files his action, the right to choose passes automatically to the other
party.
B. Effect
E. Right of Choice (Creditor) (1205)
1 The choice shall produce no effect except from the time it has been
communicated. (1202) 3 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
C. Right to Damages communicated to the debtor.
4 Until then the responsibility of the debtor shall be governed by the following
(1) Debtor rules:
1 If through the creditor’s act the debtor cannot make a choice
according to the terms of the obligation, the latter may rescind the (1) If one of the things is lost through a fortuitous event, he shall perform the
contract with damages. (1203) obligation by delivering that which the creditor should choose from among
the remainder, or that which remains if only one subsists;
(2) Creditor (2) If the loss of one of the things occurs through the fault of the debtor, the
o has a right to damages when through the fault of the debtor all the creditor may claim any of those subsisting, or the price of that which,

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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 I - Joint Obligations
creditor shall fall upon the price of any one of them, also with indemnity for
damages. A. Concept

1 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
III - Facultative Obligations (1206)
A. Concept of Facultative Obligations
1 When only one prestation (principal prestation) has been agreed upon, but the
obligor may render another in substitution (substitute prestation), the obligation
is called facultative.
3 A joint obligation is one in which each of the debtors is liable only for a
proportionate part of the debt, and each creditor is entitled only to a
proportionate part of the credit.
4 A joint obligation has been variously termed mancomunada or mancomunada
simple or a pro rata.
5 If the law, or the nature of the wording of the obligation does not express
anything to the contrary, the joint character of the obligation is presumed.
B. Effects

B. Right of Substitution (1) The demand by one creditor upon one debtor, produces the effects of
default only with respect to the creditor who demanded and the debtor on
2 The option to perform the substitute prestation is exclusively dependent upon whom the demand was made, but not with respect to the others.
the will of the debtor. He cannot even be compelled to perform it if the
principal prestation becomes impossible. (2) The interruption of prescription by the judicial demand of one creditor upon
a debtor does not benefit the other creditors nor interrupt the prescription
3 If the impossibility of the principal prestation is due to his fault, he may be held as to the other debtors.
liable for damages, he cannot be compelled to perform the substitute
prestation. (3) The vices of each obligation arising from the personal defects of a
particular debtor or creditor does not affect the obligation or rights of the
4 Substitution becomes effective from the time the debtor communicates to the others.
creditor that he elects to perform the substitute.
(4) The insolvency of a debtor does not increase the liability of his co-debtors,
C. Loss of the Substitute nor does it authorize a creditor to demand anything from his co-creditors.

1 The loss or deterioration of the thing intended as a substitute, through the
negligence of the obligor, does not render him liable. But once the substitution
has been made, the obligor is liable for the loss of the substitute on account of
his delay, negligence, or fraud.
Section 4
(5) In the joint divisible obligation, the defense of res judicata is not extended
from one debtor to another.
(6) In joint indivisible obligations, the right of the creditors may be prejudiced
only by their collective acts, and the debt can be enforced only by
proceeding against all the debtors. If one of the debtors should be
insolvent, the others shall not be liable for his share. (1209)

JOINT AND SOLIDARY OBLIGATIONS (7) If there are several creditors and only one debtor, the obligation can be
performed only by delivering the object to all the creditors jointly. A debtor
2 According to the plurality of subjects involved, an obligation may either be: who delivers the thing to one creditor only, becomes liable for damages
(1) joint; or because of non-performance to the other creditors.
(2) solidary

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(8) If only one or some of the creditors demand the prestation, the debtor may
legally refuse to deliver to them; he can insist that all the creditors together
to receive the thing, and if any of them refuses to join the others, the
debtor may deposit the thing in court by way of consignation.
II - Solidary Obligations
A. Concept
1 A solidary obligation is one which each debtor is liable for the entire obligation,
and each creditor is entitled to demand the whole obligation.
2 Solidary obligations may also be referred to as mancomunada solidaria or joint
and several or in solidum
3 There is solidary liability when the obligation expressly so states, or when the
law or the nature requires solidarity. (1207)
4 Our law imposes solidary liability for delicts, quasi-delicts, receipt of what is
given by mistake, and those instances mentioned under Articles 19-22 of the
Civil Code. They have a common element-they are morally wrong. A moral
wrong cannot be divided into parts.
5 Solidarity may exist although the creditors and the debtors may not be bound in
the same manner and by the same periods and conditions. (1211)
6 Solidarity may either be:
(1) Active - solidarity among the creditors; or
(2) Passive - solidarity among the debtors
B. Active Solidarity
(1) A solidary creditor cannot assign his rights without the consent of the
others (1213)
(2) The debtor may pay any one of the solidary creditors; but if any demand,
judicial or extra-judicial, has been made by one of them, payment should
be made to him. (1214)
(3) Novation, compensation, confusion or remission of the debt, made by any
of the solidary creditors or with any of the solidary debtors shall extinguish
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the obligation.
1 The creditor who may have executed any of these acts, as well as he who
collects the debt, shall be liable to the others for the share in the obligation
corresponding to them. (1215)
C. Passive Solidarity
(1) The creditor may proceed against any one of the solidary debtors or some
or all of them simultaneously. The demand made against one of them shall
not be an obstacle to those which may subsequently be directed against
the others, as long as the debt has not been fully collected. (1216)
(2) The judgment adverse to a solidary creditor can be set up against the other
co-creditors in subsequent actions, unless it is founded on a cause personal
to the plaintiff in the first action. The other debtors can invoke the
favorable judgment, provided it is not based on a defense personal to the
debtor in whose favor it was rendered. Such a judgment can be based
only in:
(a) the inexistence of the obligation, or its unenforceability, or
(b) some other cause inherent in the vinculum juris,
(c) defenses personal to the debtor-defendant, and
(d) defenses personal to the other solidary debtors as regards to that
part of the debt for which the latter are responsible. (1222)
(3) Payment made by one of the solidary debtors extinguishes the obligation.
If two or more solidary debtors offer to pay, the creditor may choose which
offer to accept.
(4) He who made the payment may claim from his co-debtors only the share
which correspond to each, with the interest for the payment already made.
If the payment is made before the debt is due, no interest for the
intervening period may be demanded
(5) When one of the solidary debtors cannot, because of his insolvency,
reimburse his share to the debtor paying the obligation, such share shall be
borne by all his co-debtors, in proportion to the debt of each. (1217)
(6) If a solidary debtor pays the obligation in part, he can recover
reimbursement from the co-debtors only in so far as his payment exceeded
his share of the obligation.
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(7) After the creditor has made a remission of the share of one solidary debtor,
the credit will be limited to the balance. However, this does not affect his
obligation to contribute to the share of an insolvent co-debtor.
(8) The remission of the whole obligation, obtained by one of the solidary
debtors, does not entitle him to reimbursement from his co-debtors. (1220)
(9) If the thing has been lost or if the prestation has become impossible, and
there was fault on the part of any one of the co-debtors, or if through
fortuitous event, the thing is lost or the performance has become
impossible after one of the solidary debtors has incurred in delay, all shall
be responsible to the creditor, for the price and payment of damages and
interest, without prejudice to their action against the guilty. (1221)
D. Dual character of Obligations (1211)
2 The obligation may be join on the side of the creditors, and solidary on the side
of the debtors, or vice-versa. In such cases the rules applicable to each subject
of the obligation should be applied.
Section 5
DIVISIBLE AND INDIVISIBLE OBLIGATIONS
I - Divisible and Indivisible Obligations
A. Distinction
3 A divisible obligation is one which is susceptible of partial performance.
4 The obligation is indivisible, whatever may be the nature of the thing which is
the object thereof, when it cannot be validly performed in parts.
5 Divisibility or indivisibility of the obligation therefore, refers to the performance
of the prestation, and not to the thing which is the object thereof.
B. Things to Consider
1 The following may be considered as factors which determine whether an
obligation is divisible or indivisible:
(1) will of the contracting parties
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(2) purpose of the stipulated prestation
(3) nature of the thing
(4) provisions of the law affecting the prestation
II - Effects of Partial Performance
2 Where the contract is indivisible, in that it is not susceptible of partial
performance, even if the compensation is fixed by unit of measure, the debtor
who fails to fully perform the work agreed upon, but abandons the same after
performing a part, cannot recover on quantum meruit for the work already
finished, because in indivisible obligations partial performance is equivalent to
non-performance.
Section 6
OBLIGATIONS WITH A PENAL CLAUSE
I - The Penal Clause
A. Concept
3 In an obligation, th4e penal clause is an accessory undertaking which serves a
double purpose:
(1) to provide for liquidated damages
(2) to strengthen the coercive force of the obligation by the threat of greater
responsibility in the event of breach
4 In obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of noncompliance, if there is no
stipulation to the contrary. (1266)
5 The creditor cannot recover more than the penalty stipulated, even if he proves that
the damages suffered by him exceed the amount of such penalty.
6 The principal obligation may be joint, and yet the penalty may either be joint or
solidary, depending upon the agreement of the parties.
7 Proof of actual damages suffered by the creditor is not necessary in order that the
UP BarOps 2004
 Reviewer for Obligations and Contracts 13

penalty may be demanded. (1288) (3) Gravity of the violation of the obligation and the benefits which the debtor
may have derived from it.
(4) Sentimental value which the creditor may attach to the performance of the
B. Damages Besides Penalty obligation

(1) When there is an express provision to that effect; C. Penalty Not Enforceable
(2) When the debtor refuses to pay the penalty;
(3) When the debtor is guilty of fraud in the non-fulfillment of the obligation. (1) Principal obligation becomes impossible due to fortuitous event.
Non-performance gives rise to the presumption of fraud (2) Creditor prevents the debtor from performing the principal obligation.
(3) Nullity of the principal obligation except:
(a) When it assumes the form of a guaranty which is valid under Art.
II - Provisions Concerning the Creditor and the Debtor 2052
(b) Nullity of the principal obligation itself gives rise to liability of the
A. Creditor creditor for damages.
(4) Nullity of the penal clause, in which case damages shall be determined by
(1) The creditor cannot demand the fulfillment of the obligation and the the same rules as if no penalty had been stipulated.
satisfaction of the penalty at the same time, unless this right has been
clearly granted him.
Chapter 4
(2) However, if after the creditor has decided to require the fulfillment of the
obligation, the performance thereof should become impossible without the EXTINGUISHMENT OF OBLIGATIONS
creditor’s fault, the penalty may be imposed.
GENERAL PROVISIONS
B. Debtor
2 Obligations are extinguished: (1231)
1 The debtor cannot exempt himself from the performance of the obligation by paying
the penalty, save in the case where this right has been expressly reserved for him. (1) By payment or performance;
(1227) (2) By the loss of the thing due (specific thing);
(3) By the condonation or remission of the debt;
III - Regulation of the penal Clause (4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
A. Regulation by the Judge (6) By novation

(1) When the principal obligation has been partly or irregularly complied with 3 Other causes of extinguishment of obligations, such as annulment, rescission,
by the debtor. fulfillment of a resolutory condition, and prescription are governed elsewhere in the
Civil Code.
(2) If it is iniquitous or unconscionable

B. Considerations

(1) The penalty is strictly construed. Section 1

(2) Determined not by the injury suffered by the creditor by what has been
agreed upon by the parties. PAYMENT OR PERFORMANCE

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I - Concept of Payment: Five Questions
A. What is Payment?
4 Payment means not only the delivery of money but also the performance, in any
other manner, of the obligation (1232)
5 There are two kinds of payment:
(1) Normal - when the debtor voluntarily performs the prestation stipulated
(2) Abnormal - when he is forced by judicial proceeding, either to comply with
the prestation or to pay indemnity
1 There are two requisites for payment: (1237)
(1) Identity - the very thing or service due must be delivered or released
(2) Integrity - the prestation must be fulfilled completely.
2 When the obligation consists in the delivery of a generic thing whose quality and
circumstances have not been stated, the creditor cannot demand a thing of superior
quality. Neither can the debtor deliver a thing of inferior quality. (1246) If there is
disagreement, the court shall be the one to settle the disagreement taking into
consideration the purpose of the obligation and other circumstances.
3 Unless there is an express stipulation to that effect, the creditor cannot be
compelled partially to receive the prestation. Neither may the debtor be required to
make partial payments.
4 However, when the debt is in part liquidated and in part unliquidated, the creditor
may demand and the debtor may effect the payment of the former without waiting
for the liquidation of the latter. (1248) This article does not apply to joint
obligations or to solidary obligations where the debtor is bound under different
terms.
B. Who Can Pay?
(1) Debtor; or
(2) Third person, whether interested or not interested, as long as the creditor
accepts.
C. To Whom Should Payment Be Made?
(1) To the person in whose favor the obligation has been constituted; or
(2) His successors in interest; or
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(3) Any person authorized to receive it.
(a) Legal authority - conferred by law (guardian of an incapacitated
creditor; administrator of estate of deceased creditor)
(b) Conventional authority - given by the creditor himself (agency)
1 Payment made by the debtor to a wrong party does not extinguish the
obligation as to the creditor, if there is no fault or negligence which can be
imputed to the latter.
D. When Should Payment Be Made?
2 When the obligation becomes due and demandable.
E. Where Should Payment be Made?
(1) In the place designated in the obligation;
(2) There being no express stipulation and if the undertaking is to deliver a
determinate thing, the payment shall be made wherever the thing might be
at the moment the obligation was constituted.
(3) In any other case the place of payment shall be the domicile of the debtor.
3 Even if the thing is determinate but its existence at the place where it was
when the obligation was constituted was temporary, the performance must be
at the domicile of the debtor, unless otherwise provided.
II - Exceptions to the Five Questions
A. Identity and Integrity (What is Payment?)
(1) Substantial performance of the obligation made in good faith. (1234)
o The party who has substantially performed may enforce specific
performance of the obligation of the other party, less damages
suffered by the creditor.
(2) When the obligee accepts the performance with actual knowledge of its
incompleteness or irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied with
B. Payment by Third Persons (Who Can Pay?)
4 The creditor is not bound to accept payment from uninterested third persons,
unless there is a stipulation to the contrary.
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5 The third person who pays may demand from the debtor what he has paid,
except that if he paid without the knowledge or against the will of the debtor,
he can recover only insofar as the payment has been beneficial to the debtor.
(1236) But as between the debtor and the creditor, the obligation is
extinguished.
6 The third person who paid against the will of the debtor without the knowledge
or against the will of the latter cannot compel the creditor to subrogate him in
his rights (1237)
7 Payment by a third person who does not intend to be reimbursed is deemed to
be a donation which requires the debtor’s consent. But the payment is an any
case valid as to the creditor who has accepted it. (1238)
8 Payment made by incapacitated third persons will not be valid except in the
case of natural obligations (1427). (1239)
C. Payment to Incapacitated Persons and Third Persons
(To Whom Should Payment Be Made?)
(1) Incapacitated Persons -- By virtue of consignation, payment is valid as long
as he has kept the thing delivered, or insofar as the payment has been
beneficial to him.
(2) Third Persons - Valid as long as it has redounded to the benefit of the
creditor
1 Such benefit to the creditor need not be proved in the following cases:
(a) If after payment, the third person acquires the creditor’s rights;
(b) If the creditor ratifies the payment to the third person
(c) If by the creditor’s conduct, the debtor has been led to believe that the
third person had authority to receive the payment (1241)
(d) When in good faith he pays to one in possession of the credit (1242)
III - Dacion en Pago (1245)
2 Dation in payment is the delivery and transmission of ownership of a thing by
the debtor to the creditor as an accepted equivalent of the performance of the
obligation. The property given may consist not only of a thing, but also of a
real right (such as an usufruct) or of a credit against a third person.
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3 The modern concept of dation in payment considers it as a novation by the
change of the object. It extinguishes the obligation to the extent of the value
of the thing delivered, either as agreed upon by the parties or as may be
proved.
4 If the obligation is payment of a sum of money, dation in payment shall be
governed by the law on sales.
IV - Payment of Debt in Money
A. Rule
(1) Should be in the currency which is legal tender in the Philippines
(2) Promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when:
(a) they have been cashed
(b) when through the fault of the creditor they have been impaired
B. Extra-Ordinary Circumstances
1 In case of extra-ordinary inflation or deflation (unusual fluctuations in the value
of the currency which the parties could not have reasonably foreseen), 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.
V. Invalid Payment
2 Payment made to the creditor by the debtor after the latter has been judicially
ordered to retain the debt shall not be valid. (1243)
VII - Additional Expenses to Debtor
(1) Extra-judicial expenses required by the payment; with regards to judicial
cost, the Rules Of Court shall govern (1247)
(2) If the debtor changes his domicile in bad faith or after he has incurred in
delay (1251)
Subsection 1
APPLICATION OF PAYMENTS
A. Requisites:
 Reviewer for Obligations and Contracts 16

property, and to pay themselves in the amount which the proceeds of the sale
The debtor must have: permit and in the manner agreed upon.

(1) various debts ; and B. Requisites

(2) of the same kind
(3) due and demandable (1) debtor is on the verge of insolvency; and
(4) in favor of one and the same creditor (2) he has two or more creditors

B. Rules of Application
C. Distinguished from Dacion en Pago
(1) Declaration of the debtor to which of them payment must be applied.
If the debtor makes a proper application of the payment, but the (1) Dacion en Pago transfers ownership while in Payment by cession, only
creditor refuses to accept it because he wants to apply it to another debt, such possession and administration is transferred.
creditor will incur in delay.
(2) Dacion en Pago may totally extinguish the obligation while Payment by
(2) Creditor can also make an application of payment by issuing a receipt that Cession extinguishes the creditors to the extent of the amount realized
is accepted by the debtor. (1252) from the properties assigned.

(3) When the payment cannot be applied in accordance with the preceding (3) Dacion en Pago involves cession of only some specific thing while in
rules, or if application cannot be inferred from other circumstances, the Payment by Cession, assignment involves all the property of the debtor.
debt which is most onerous to the debtor shall be deemed to have been
satisfied. (4) In Dacion en Pago, there is only one creditor while in Payment by Cession,
there are various creditors.
(4) If the debts due are of the same nature and burden, the payment shall be
applied to all of them proportionately. Subsection 3

(5) If the debt produces interest, payment of the principal shall not be deemed TENDER OF PAYMENT AND CONSIGNATION
to have been made until the interest has been covered.
I - Concepts
Subsection 2
A. Tender of Payment
PAYMENT BY CESSION
1 Tender of payment is the manifestation made by the debtor to the creditor or his
A. Concept desire to comply with his obligation, with the offer of immediate performance

3 If the debtor is on the verge of insolvency, and he has two or more creditors,
he may cede or assign his property to his creditors in payment of his debts.
Such assignment does not have the effect of making the creditors the owners of
the property of the debtor, unless there is an agreement to the effect. The
assignment cannot include property exempt from execution unless the debtor
waives the exemption.
4 The assignment gives to the creditors the right to proceed to the sale of the
B. Consignation
1 Consignation is the deposit of the object of the obligation in a competent court in
accordance with rules prescribed by law, after the tender of payment has been
unjustly refused by the creditor. It is the consignation which constitutes a form of
payment, and must follow, supplement, or complete the tender of payment in order
to discharge the obligation. Consignation is not necessary when there is no debt
due.

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II - Requisites of A Valid Consignation
(1) Tender of payment must be made to the creditor and the creditor refuses
to accept it due to unjustifiable reasons.
(2) Consignation must first be announced to the persons interested in the
fulfillment of the obligation (co-debtors, guarantors, or sureties, solidary
co-creditors, or possible litigants, such as those who claim to be entitled to
the payment. (1257) Lack of notice does not invalidate the consignation,
but simply makes the debtor liable for the expenses
(3) Consignation shall be made by depositing the thing due at the disposal of
judicial authority. The court would likewise have authority in such case to
make an order for the sale of property and the payment of the proceeds
into the court if the goods should be of a perishable nature.
(4) The consignation having been made, the interested parties shall also be
notified thereof. (1258 par. 2)
(5) Consignation is properly made
(a) when the creditor accepts the consignation
(b) when the creditor objects to the consignation but the court, after
proper hearing, declares that the consignation has been validly
made.
(6) Consignation has a retroactive effect and payment is deemed to have been
made at the time of the deposit of the thing in court.
(7) The expenses of consignation, when properly made, shall be charged
against the creditor.
(8) If, the consignation having been made, the creditor should authorize the
debtor to withdraw the same, there is a revival of the obligation and the
relationship of the debtor and creditor is restored to the condition in which
it was before the consignation. But third persons who were benefited by
the consignation are not prejudiced by the revival of the obligation
between the debtor and the creditor.
III - Pending Completion
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2 Before the consignation is completed, the debtor may withdraw the thing or the sum
deposited allowing the obligation to remain in force. (1260 par. 2) Creditor may
prevent the withdrawal by accepting the consignation, even with reservations.
IV - Tender of Payment Not Necessary (1256)
(1) When the creditor is absent or unknown, or does not appear at the place of
the payment. He must furthermore, have no legal representative, or if he
has one, the debtor, without his fault, does not know it. Absence or
incapacity need not be legally declared.
(2) When the creditor is incapacitated to receive the payment at the time it is
due
(3) When, without just cause, the creditor refuses to give a receipt.
(4) When two or more persons claim the right to collect. They must have the
appearance of a right to collect such that the debtor would have a
reasonable doubt, not based on negligence, as to who is entitled to the
payment.
(5) When the title of the obligation has been lost.
V -- Effect on Interest
(1) Accrual of interest is suspended when a tender of payment is made in such
a form that the creditor could have realized payment, followed by a prompt
attempt to deposit the means of payment in court by way of consignation.
(2) Interest is not suspended when the tender of payment is not accompanied
by means of payment and the debtor did not take any immediate step to
make a consignation.
Section 2
LOSS OF THE THING DUE
I - General Principles
A. Concept of Loss
3 A thing is lost when:
(1) it perishes
 Reviewer for Obligations and Contracts 18

(2) it goes out of commerce (1) earthquake

(3) it disappears in such a way that its existence is unknown or it cannot be (2) flood
recovered. (3) storm
(4) other natural calamity.
1 The courts shall determine whether, under the circumstances, the partial loss of
the object of the obligation is so important as to extinguish the obligation. F. Effect of Extinguishment of Obligation
(1264)
6 The obligation having been extinguished by the loss of the thing, the creditor shall
B. Requisites have all the rights of action which the debtor may have against third persons by
(1) Loss must be subsequent to the execution of the contract. reason of the loss (1269)
(2) Loss must be without the fault of the debtor.
(3) Loss must be before the debtor has incurred in delay.
II - Exceptions to the Rule
C. Scope
7 The following cases constitute exceptions to the rule that loss of the determinate
2 Loss of the thing due extinguishes the obligation only in the following cases: object by fortuitous event extinguishes the obligation:

(1) Obligations to deliver a specific thing; subjective impossibility will make the
debtor liable for damages. (1262 par. 1).
(2) In obligations to do when the prestation becomes physically or legally
impossible. (1266)
3 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)
D. Temporary Impossibility
(1) When the law provides it (1174). (Ex: Arts. 1492; 1979; 2147; 2159)
(2) When it is stipulated
(3) When the nature of the obligation requires the assumption of risk (1174)
(4) When the debtor is at fault or is negligent
(5) When the loss occurs after the debtor has incurred in delay (1165)
(6) When the debtor has promised to deliver the same thing to two or more
different parties (1165)
(7) When the obligation to deliver a determinate thing arises from a criminal
act (1268)

(1) Does not extinguish the obligation if temporary obstacles to the

performance of the prestation may be expected to disappear in the near Section 3
future.
CONDONATION OR REMISSION OF THE DEBT
(2) Extinguishes the obligation if the obstacle is of an unknown or unforeseen
duration. The obligation is extinguished and is not revived by the fact that I - Condonation
it becomes possible later when circumstances change.
A. Concept of Condonation (1270)
E. Presumption
By remission, the creditor renounces the enforcement of the obligation, which is
4 When the thing is lost in the possession of the debtor, it shall be presumed that the extinguished in its entirety or in that part or aspect of the same to which the remission
loss was due to his fault. refers.

5 This presumption does not apply in cases of: B. Kinds

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(1) As to form
(a) express - made formally and should be in accordance with the
form of ordinary donations
(b) implied
(2) As to extent
(a) total
(b) partial - may refer to the amount of the indebtedness, or to an
accessory obligation only (such as pledge or interest), or to some
other aspect of the obligation (such as solidarity)
(3) As to manner
(a) inter vivos - effective during the lifetime of the creditor
(b) mortis causa - effective upon the death of the creditor
-- must be contained in a will or a testament
II - Applicable Rules
A. Express Remission
8 Express remission should be in accordance with the form of ordinary donation
(1) On the manner of acceptance, Arts. 745 and 746 apply
(2) With respect to the amount, Arts. 750 and 752 govern
(3) As to revocation, Arts. 760; 761; 764; and 765 apply
B. Implied Remission
(1) The delivery of a private document evidencing a credit, made voluntarily by
a creditor to the debtor, implies remission. (1271 par. 1)
9 There may also be tacit remission when the creditor voluntarily destroys or cancels
the evidence of the credit, with the intent to renounce his right. This is not true in
the case of public documents, because there is always a copy in the archives which
can be used to prove credit.
(2) Whenever the private document evidencing credit is in the possession of
the debtor, it shall be presumed that the creditor delivered it voluntarily.
(1272)
(3) The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force.
(1273)
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o 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
debtor, or a third person who owns the thing. (1274) The remission of the
pledge extinguishes only the security, not the principal obligation.
o In remission, whether express or implied, one and the other kind shall be
subject to the rules which govern inofficious donations.
Section 4
CONFUSION OR MERGER OF RIGHTS
A. Requisites
10 In confusion or merger of rights, the characters of creditor and debtor are merged in
the same person. (1275)
(1) It must take place between the creditor and the principal debtor. (1276)
(2) The very same obligation must be involved.
(3) The confusion must be total or as regards the entire obligation.
B. Causes of Merger
(1) An act which brings about a succession to the credit, whether it is universal
or particular, inter vivos or mortis causa.
(2) Most frequent way is by way of testate or intestate successions.
11 But where the creditor inherits from the debtor, there can be no confusion if the
debt is for a sum of money, because the debt is not transmitted to the heir under
our present law.
C. Revocation of Merger
12 When the act which occasions the merger is susceptible of termination or
revocation, the merger that has taken place is also terminated or revoked, and the
obligation is recreated in the same condition that it had when the merger took place.
D. Benefits
(1) Merger which takes place in the person of the principal debtor or creditor
benefits the guarantors.

(2) When the merger takes place in the person of the guarantor, his obligation
as guarantor is extinguished, but the principal obligation subsists and can
be enforced by him against the debtor and the other co-guarantors.
(3) Confusion does not extinguish a joint obligation except as regards the
share corresponding to the creditor or debtor in whom the two characters
concur.
E. Real Rights
13 Real rights, which do not involve the relation of debtor and creditor, may be
extinguished by the “merger” of the real right with the right of ownership. But in
reality, this is a consolidation of ownership.
Section 5
COMPENSATION
I - Compensation
A. Concept of Compensation
14 It is a mode of extinguishing to the concurrent amount, the obligations of those
persons who in their own right are reciprocally debtors and creditors of each other
(the obligation, however, should not be reciprocal).
15 It is the offsetting of two obligations which are reciprocally extinguished if they are
of equal value (total compensation), or extinguished to the concurrent amount if of
different values (partial compensation)
B. Rescissible or Voidable Contracts
1 When one or both debts are rescissible or voidable, they may be compensated
against each other before they are judicially rescinded or avoided.
2 The moment it is rescinded or annulled, the decree of rescission or annulment is
retroactive, and the compensation must be considered as cancelled. Rescission
or annulment require mutual restitution.
C. Several Debts
1 If a person should have against him several debts which are susceptible of
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compensation, the rules on the application of payments shall apply. (1289)
II - Kinds of Compensation
A. Legal
2 When compensation takes place by operation of law because all the requisites
are present:
(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 consists in a sum of money, or if the things due are
fungible, 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 9enforceable in court);
(4) That they be liquidated (debt’s existence and amount is determined) 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.
(1279)
B. Facultative Compensation
3 This compensation which can be set up only at the option of the creditor, when
legal compensation cannot take place because of the want or some legal
requisites for the benefit of the creditor. Facultative compensation takes place
when the creditor declares his option to set it up.
C. Conventional Compensation
4 When the parties agree to compensate their mutual obligations even if some
requisite is lacking, such as when the debts are not yet due. (1282)
5 However, voluntary compensation is not limited to this. The parties may
compensate by agreement any obligations with the minimum requirement that
each one of the obligors be bound principally, and that he be at the same time
a principal creditor of the other.
6 Voluntary/Conventional compensation takes effect upon the agreement of the
parties.

D. Judicial Compensation
1 This is compensation which takes place when the defendant, who is creditor of
the plaintiff for an unliquidated amount, sets up his credit as counterclaim
against the plaintiff, and his credit is liquidated by the judgment, thereby
compensating it with the credit of the plaintiff.
2 Judicial compensation takes place upon final judgment.
III - Effects of Compensation
(1) Both debts are extinguished to the concurrent amount.
(2) Interests stop accruing on the extinguished obligations or the part
extinguished.
(3) Period of prescription stops with respect to the obligation or part
extinguished.
(4) All accessory obligations of the principal obligation which has been
extinguished are also extinguished.
IV - Assignment and Compensation (1285)
A. Assignment After Compensation
1 A subsequent assignment of an extinguished obligation cannot produce any
effect against the debtor. The assignee is left only with an action for damages
for fraud against the assignor.
2 The only exception to this rule is when the debtor consents to the assignment
of the credit; his consent constitutes a waiver of the compensation, unless at
the time he gives his consent, he informs the assignor that he reserved his right
to the compensation.
B. Assignment Before Compensation
1 As far as the debtor is concerned, the assignment does not take effect except
from the time he is notified thereof.
(1) Debtor can set up compensation of debts due prior of the assignment. If
he consents to the assignment, he waives compensation even of debts
already due, unless he makes a reservation.
(2) If the debtor does not consent, and the credit assigned to a third person
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matures after that which pertains to the debtor, the debtor may set up
compensation provided that the credit of the debtor became due before the
assignment.
(3) If the debtor did not have knowledge of the assignment, he may set up
compensation all credits maturing before he is notified thereof.
V - Prohibition of Compensation
Compensation shall not be proper when:
(1) One of the debts arise from a depositum or from the obligations of a
depositary or of a bailee in commodatum
(2) Neither can compensation be set up against a creditor who has a claim for
support due by gratuitous title. Support in arrears however can be
compensated.
(3) If one of the debts consists in civil liability arising from a penal offense.
But the offended party entitled to the indemnity can set up his claim in
compensation of his debt. This is another case of facultative
compensation.
Section 6
NOVATION
I - General Principles
A. Concept of Novation
2 Novation is the extinguishment of an obligation by the substitution or change of
the obligation by a subsequent one which extinguishes or modifies the first,
either by:
(1) Changing the object or principal conditions (objective or real);
(2) Substituting the person of the debtor (passive subjective);
(3) Subrogating a third person in the rights of the creditor (active subjective)
(1291)
3 Novation is a juridical act of dual function in that at the time it extinguishes an
obligation it creates a new one in lieu of the old.
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B. Requisites
(1) Previous valid obligation
(2) The agreement of all the parties to the new contract
(3) The extinguishment of the old contract.
(4) The extinguishment of the old contract
(5) The validity of the new one
4 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.
5 Accessory obligations may subsist only insofar as they may benefit third persons
who did not give their consent. This rule is especially applicable to novation by
substitution of debtors.
6 If the new obligation is void, the original one shall subsist. If the new
obligation is only voidable, the novation becomes effective. But if the obligation
is annulled, it will be deemed as if there had been no novation and the original
obligation subsists, unless the parties intended to definitely extinguish it at all
events. (1297)
C. Classification of Novation
(1) As to Form
(a) Express - the extinguishment of the old obligation by the new one
must be declared in unequivocal terms
(b) Implied - novation is never presumed
1 The old and the new obligation must be on every point
incompatible with each other, otherwise the old contract
remains in force and the new contract is added to it
2 In order that there may be an implied novation, the change
must refer to the object, the cause, or the principal conditions
of the obligation. There must be an essential change.
(2) As to effect
(a) partial - when there is only a modification in some principal
conditions of the obligation
(b) total - old obligation is completely extinguished
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II - Substitution of the Person of the Debtor
A. Expromision
1 The initiative for the change does not emanate from the debtor and may even
be made without his knowledge, since it consists in a third person assuming the
obligation. It logically requires the consent of the third person and the creditor.
2 In expromision, the new debtor’s insolvency or non-fulfillment of the obligation
shall not give rise to any liability on the part of the original debtor. (1294)
3 The new debtor can recover only insofar as the payment has been beneficial to
the old debtor. In this case, there is no subrogation.
B. Delegacion
1 The debtor (delegante) offers and the creditor (delegatario) accepts a third
person (delegado) who consents to the substitution, so that the consent of
these three is necessary.
2 It is not enough to extend the juridical relation to a third person; it is necessary
that the old debtor be released from the obligation, and the new debtor takes
his place in the relation. Without such release, there is no novation.
3 The new debtor could demand from the old debtor what he has paid.
Subrogation takes place.
4 In delegacion, the insolvency of the new debtor shall not revive the action of
the creditor against the original creditor except:
(1) the insolvency was already existing and of public knowledge
(2) the insolvency was known to the debtor when he delegated his debt.
III - Subrogating a Third Person in the Rights of the Creditor
1 Subrogation transfers to the person subrogated the credit with all the rights
thereto appertaining, either against the debtor or against third persons.
A. Legal Subrogation
2 Takes place by operation of law because of certain acts. It is not presumed
except in the following instances:
 Reviewer for Obligations and Contracts 23

(1) When a creditor pays another creditor who is preferred, even without the compliance cannot be left to the will of one of them. (1308)
debtor’s knowledge; (3) Relativity - contract is binding only upon the parties and their successors
(2) When a third person, not interested in the obligation, pays with the
express or tacit approval of the debtor; C. Limitations
(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 6 The contracting parties may establish such stipulations, clauses, terms and
confusion as to the latter’s share. conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy. (1306)
B. Conventional Subrogation
D. Stages of A Contract
3 Requires the consent of:
(1) Preparation, Conception, or Generation - period of negotiation and
(1) the original creditor bargaining, ending at the agreement of the parties.
(2) the new creditor (2) Perfection or birth of the contract
(3) the debtor (a) Consensual contracts - perfected by mere consent (express or
implied)
C. Partial Payment (b) Real contracts - perfected by the delivery of the object of the
obligation
4 A creditor, to whom partial payment has been made, may exercise his right for (3) Consummation or death - fulfillment or performance of the terms agreed
the remainder, and he shall be preferred to the person who has been upon in the contract.
subrogated in his place in virtue of the partial payment of the same credit.
(1304)

TITLE II II - Third Persons

CONTRACTS
A. Determination of performance
CHAPTER 1
7 The determination of the performance may be left of third persons, whose
GENERAL PROVISIONS decision shall not be binding until it has been made known to both parties.

I - General Principles 8 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)
A. Concept of Contract
B. Effects
5 A contract is a juridical convention manifested in legal form, by virtue of which
one or more persons bind themselves in favor of another or others, or (1) A contract cannot be binding upon and cannot be enforced against one
reciprocally, to the fulfillment of a prestation to give, to do, or not to do. who is not a party to it.

B. Characteristics of Contracts (2) However, if a contract should contain some stipulation in favor of a third
person, he may demand its fulfillment provided he communicated his
(1) Obligatory force - constitutes the law as between the parties acceptance to the obligor before its revocation. A mere incidental benefit
(2) Mutuality - the contract must bind both contracting parties; its validity or or interest of a person is not sufficient. The contracting parties must have

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clearly and deliberately conferred a favor upon a third person ( pour (1) plurality of subjects
autrui). (1311 par. 2) (2) capacity
(3) intelligence
(3) Juridical situations affecting them: (4) express or tacit manifestation of the will
(a) In contracts creating real rights, third persons who come into (5) conformity of the internal will and its manifestation
possession of the object of the contract are bound thereby,
subject to the provisions of the Mortgage Law and the Land II - Offer
registration laws.
(b) Creditors are protected in case of contracts intended to defraud A. Requisites
them. (1313)
(c) Any third person who induces another to violate his contract shall 1 An offer is a unilateral proposition which one party makes to the other for the
be liable for damages to the other contracting party. (1314) celebration of a contract. It must therefore be:

C. Contracting in the Name of Another (1) Definite

(2) Complete
9 No one may contract in the name of another without being authorized by the (3) Intentional
latter, or unless he has by law a right to represent him.
B Ineffectivity

2 An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency
CHAPTER 2 of either party before acceptance is conveyed. (1323)

ESSENTIAL REQUISITES OF CONTRACTS

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
Section 1
CONSENT
I - Concept of Consent
10 The essence of consent is the conformity of the parties on the terms of the
contract, the acceptance of one by the offer made by the other; it is the
concurrence of the minds of the parties of the object and the cause which shall
constitute the contract.
11 Consent presupposes the following requisites:
C Withdrawal of Offer (1324)
3 The law permits the offeror to withdraw the offer at any time before acceptance
(1) If there is a fixed period, the offeree may accept at anytime until such
period expires. However, the offer can be withdrawn even before the
period for acceptance has expired.
(2) When the offeror has not fixed a period,
(a) If it is made to a person present, acceptance must be made
immediately
(b) If it is made to a person absent, the acceptance may be made
within such time that, under normal circumstances, an answer can
be received from him.
D. Crossing of Revocation and Acceptance
(1) If the intention of the parties is not to demand an express acceptance, the
tacit acceptance perfects the contract, the subsequent receipt of a letter of
revocation is ineffective

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V - Vitiated Consent
(2) If the parties intended that there should be an express acceptance, and if
the revocation and the acceptance cross, that which arrives first at its 3 A contract where consent is given through mistake, violence, intimidation, undue
destination is effective. It is not the moment of sending but the time of influence, or fraud is voidable.
receipt which is controlling.
4 Defect or lack of valid consent must be established by full, clear, and convincing
E. Mere Invitations To Make Offers evidence.

(1) Business advertisements, unless it appears otherwise VI - Mistake

(2) Advertisements for bidders
A. Scope
III - Acceptance
1 The error which is referred to is to both mistake of fact and mistake of law based on
A. Concept good faith.

4 It is necessary that the acceptance be unequivocal and unconditional, and the
acceptance and the proposition shall be without any variation whatsoever.
Acceptance may either be express or implied.
5 A qualified acceptance constitutes a counter-offer.
6 The person making the offer may fix the time, place, and manner of acceptance all
of which must be complied with.
2 In order that mistake may invalidate consent, it should refer to:
(1) The object of the contract.
(2) The principal conditions which have moved one or both parties to enter
into the contract.
(3) 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.
An error as to the solvency of the other party is not a cause of nullity.

B. Knowledge of the Offeror 1 A simple mistake of account shall give rise to its correction

1 No contract will arise unless acceptance is made known to the offeror. B. Burden of Proof

(1) By correspondence - the contract is presumed to have been entered into in
the place where the offer was made.
(2) By agent - an offer made through an agent is accepted from the time
acceptance is communicated to him.
1 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.
C. Error of Law

IV - Incapacity to Give Consent 2 Error of law may vitiate consent provided:

(1) the error must be as to the legal effect of the agreement
2 The following cannot give consent to a contract: (2) it must be mutual
(3) the real purpose of the parties is frustrated
(1) Unemancipated minors
(2) Insane or demented persons - previous judicial declaration of mental VII - Violence and Intimidation
incapacity not necessary
(3) Deaf-mutes who do not know how to write A. Violence

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(1) physical force employed must be irresistible

(2) such force is the determining cause in giving the consent to the contract D. Not Cases of Fraud

B. Intimidation (1) Usual exaggeration in trade, when the other party had an opportunity to
know the facts
(1) the intimidation must have caused the consent to be given (2) A mere expression of an opinion unless made by an expert and the other
(2) the threatened act be unjust or unlawful party has relied on the former’s special knowledge
(3) the threat be real and serious (3) Misrepresentation made in good faith is not fraudulent but may constitute
(4) produces a reasonable and well-grounded fear that the threat can and will error.
be carried out

VIII - Fraud VIII - Simulation of a Contract

A. Concept A. Concept of Simulation

3 Fraud is every kind of deception, whether in the form of insidious words or
machinations, manipulations, concealments or misrepresentations of one of the
contracting parties to the other without necessarily constituting estafa or some
offense under the penal laws and the other is induced to enter into a contract
which, without them, he would not have agreed to.
B.
4 Fraud must be established by full, clear, and convincing evidence, and not merely a
preponderance thereof.
B. Kinds
(1) Dolo causante - fraud prior or simultaneous to the consent of the creation
of the obligation and is the essential cause of the consent .
1 Dolo causante is a ground for annulment of contract
C.
(2) Dolo incidente - fraud which occurs with the fulfillment of the obligation.
2 Dolo incidente only gives rise to an action for damages.
C. Requisites
(1) Employed by one contracting party upon the other. (1344).
3 Misrepresentation by a third person does not vitiate consent, unless
such misrepresentation has created substantial mistake and the same
is mutual. (1342)
(2) It must have induced the other party to enter into the contract.
(3) It must have been serious
(4) It must have resulted in injury to the party seeking annulment.
4 It is the declaration of a fictitious will, deliberately made by agreement of the
parties, in order to produce, for the purpose of deception, the appearance of a
juridical act which does not exist or is different from that which was really
executed.
Kinds
(1) Absolute Simulation - There is color of contract, without any substance
thereof, the parties, not having any intention to be bound. An absolutely
simulated contract is known as simulado.
(2) Relative Simulation - The parties have an agreement which they conceal
under the guise of another contract. Relatively simulated contracts are
called disimulados.
Effects
(1) Absolutely simulated - void
(2) Relatively simulated - valid provided that:
(a) it does not prejudice third persons
(b) not intended for any purpose contrary to law, morals, good
customs, public order, or public policy
(c) concealed contract must have all the essential requisites such as
consent, object, and cause.
5 When the purpose of the simulation is illicit, or to prejudice a third
person, it would be void and inexistent (1409) and neither can have an
action against the other.

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D. Effects As To Third Persons (Of A. Concept

Relatively Simulated Contracts)
8 Impossible things or services cannot be the object of contracts (1348). The
(1) If the third person acted in good faith, he may avail himself of the conduct impossibility must be actual and contemporaneous with the making of the
of the parties to the simulated contract which is most favorable to himself contract, and not subsequent thereto

(2) If he is prejudiced, he may invoke the nullity of the simulated contract. 9 The impossibility may be:

(1) Absolute or objective - when nobody can perform it

Section 2 (2) Relative or subjective- when due to the special conditions or qualifications
of the debtor cannot be performed.
OBJECTS OF CONTRACTS
1 The absolute impossibility nullifies the contract and must be determined
I -- The Object objectively, and not in relation to the debtor personally.

A. Concept of Object B. Liability for Damages

6 The object of a contract is its subject matter. The object of the 2 If the creditor, relying on the contract, has incurred expenses, rejected other
contract and the object of the obligation created thereby are identical. offers, and suffered damages, is he not entitled to recover these?

B. Requisites of Object (1) If the debtor knew or could have known of the impossibility, his bad faith
or negligence makes him liable for damages. The damages will be limited
(1) within the commerce of man to the losses the creditor may have suffered; he cannot recover all the
(2) licit, or not contrary to law, morals, good customs, public policy, or public damages arising from non -performance of the contract.
order at the time the contract entered into
(3) it must be possible (2) If the debtor is also ignorant of the impossibility, and his ignorance is
(4) it must be determinate or determinable as to its kind; the quantity may be unjustifiable, or unavoidable, he cannot be held liable for damages.
indeterminate, so long as the right of the creditor is not rendered.
(3) There is no liability for damages if both parties know of the impossibility.
C. Future Inheritance (1347 par 2)
C. Partial Impossibility
7 No contract may be entered its upon future inheritance except in cases
expressly authorized by law generally does not allow contracts on future 3 If the object is indivisible there is no contract but if the thing is divisible, then
inheritance. In order that a contract may fall with in the prohibition, the ff. the contract is valid to the extent that it is possible.
Requisites are necessary.

1. that the succession has not yet been opened Section 3

2. that the object of the contract form part of the inheritance
3. the promissor has, with respect to the object, an expectancy of a right CAUSE OF CONTRACTS
which is purely hereditary in nature. (see p. 522)
I - The Cause
II - Impossible Things

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A. Concept
4 The cause of a contract is the “why of the contract”, the immediate and most
proximate purpose of the contract, the essential reason which impels the
contracting parties to enter into it and which explains and justifies the creation
of the obligation through such contract.
B. Requisites
(1) It must exist - contracts without cause produce no effect whatsoever
(2) It must be true
(3) It must be licit - contracts whose cause is contrary to law, morals, good
customs, public order, or public policy produce no effect whatsoever
5 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)
6 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)
II - Onerous, Remuneratory, and Gratuitous Contracts (1350)
A. Onerous Contracts
7 The cause is understood to be, for each contracting party, the prestation o
promise of a thing or service by the other.
B. Remuneratory Contracts
8 A remuneratory contract is one where a party gives something to another
because of some service or benefit given or rendered by the latter to the
former, where such service or benefit was not due as a legal obligation
9 The cause is the service or benefit which is remunerated.
C. Gratuitous Contracts
10 Gratuitous contracts are essentially agreements to give donations. The
generosity or liberality of benefactor is the cause of such contracts.
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III - Statement of False Cause
11 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)
12 Where the true consideration is partly legal and partly illegal, a party cannot
recover upon the contract if he fails to prove what part of the contract is
supported by the legal cause.
CHAPTER 3
FORM OF CONTRACTS
I - General Principles
A. General Rule
1 Contracts shall be obligatory, in whatever form they may have been entered into,
provided all the essential requisites for their validity are present. However, there
are two cases when form is absolute and indispensable:
(1) when the form is essential to its validity (ad essentia, ad solemniatatem)
(2) when the contract is unenforceable unless it is in a certain form, such as
those under the Statute of Frauds (ad probationem)
B. Compliance With Formality (1357)
1 If the law requires a document or other special form, the contracting parties
compel each to observe that form, once the contract has been perfected. This
right may be exercised simultaneously with the action upon the contract.
2 When a party to a contract dies and is survived by his heirs, the latter may be
compelled to execute the proper documents.
II - Public Documents
The following must appear in a public document:
(1) Acts and contracts which have for their object the creation, transmission,
 Reviewer for Obligations and Contracts 29

modification or extinguishment of real rights over immovable property; II - Instances for Reformation

(2) The cession, repudiation or renunciation of hereditary rights or of those (1) Mutual mistake by the parties
of the conjugal partnership of gains; (2) One party was mistaken and the other acted fraudulently or inequitably.
The fraud or inequitable conduct must be clearly shown, and must be at
(3) The power to administer property, or any other power which has for its the time of the execution of the instrument. The mistake must refer to the
object an act appearing or which should appear in a public document, or contents of the instrument, and not the subject matter or principal
should prejudice a third person; conditions of the agreement. (1362)
(3) When one party was mistaken and the other knew or believed that the
(4) The cession of actions or rights proceeding from an act appearing in a instrument did not state their real agreement, but concealed that fact from
public document. the former
(4) Mistake of the draftsman
1 All other contracts where the amount involved exceeds five hundred pesos must (5) If two parties agree upon the mortgage or pledge of real or personal
appear in writing, even a private one. property, but the instrument state that the property is sold absolutely or
with a right of repurchase.
2This provision does not require such form in order to validate the act or contract
but to insure its inefficacy. III - No Reformation
CHAPTER 4
(1) Simple donations inter vivos wherein no condition is involved
REFORMATION OF INSTRUMENTS (2) Wills (subject to the exception in Art 789)
(3) When the real agreement is void
I - General Principles
IV - Procedure
A. Requisites
(1) Governed by the rules promulgated by the Supreme Court
(1) there must have been a meeting of the minds upon the contract
(2) When one of the parties has brought an action to enforce the instrument,
(2) the instrument or document evidencing the contract does not express the he cannot subsequently ask for its reformation.
true agreement between the parties
(3) If mistake was mutual, reformation may be ordered at the instance of
(3) the failure of the instrument to express the agreement must be due to either party or his successors in interest.
mistake, fraud, inequitable conduct, or accident
(4) In other cases, upon petition of the injured party, or his heirs and assigns.
1 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. CHAPTER 5

B. Operation and Effect INTERPRETATION OF CONTRACTS

2 Upon the reformation of an instrument, the general rule is that it relates back (1) Meaning and intention must be sought first of all from the language of the contract
to, and takes effect from the time of its original execution, especially as itself.
between the parties. (2) The spirit of the contract prevails over its letter
(3) In order to judge the intention of the contracting parties, their contemporaneous

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and subsequent acts shall be principally considered
(4) General terms do not comprehend things that are different from those upon which
the parties intended.
(5) A particular intent will control a general one that is inconsistent with it.
(6) Interpret stipulations in favor of validity C.
(7) Interpret the contract as a whole
(8) Words which may have different significations shall be understood in that which is
most in keeping with the nature of the object of the contract.
(9) The usage or custom of the place shall be borne in mind.
(10) Obscure terms shall be interpreted strictly against the one who caused the
obscurity. D. How Attacked
(11) The least transmission of rights and interests shall prevail.
(12) If the contract is onerous, the doubt shall be settled in favor of the greatest
reciprocity of interests.
E.
(13) The written portion prevails over the printed portions of a policy.
(14) Where the intention of the parties relative to the objects of the contract cannot be
known, the contract shall be null and void.
CHAPTER 6
RESCISSIBLE CONTRACRTS F.
I - General Principles
A. Concept of Rescission
3 Rescission is a remedy granted by law to the contracting parties and even to
third persons, to secure the reparation of damages caused to them by a II - The Rescissible Contracts
contract, even if this should be valid, by means of the restoration of things to
their condition at the moment prior to the celebration of said contract.
B. Requisites
(1) The contract must be a rescissible contract.
(2) The party asking for rescission must have no other legal means to obtain
reparation for the damages suffered by him. (The action for rescission is
subsidiary.)
(3) The person demanding rescission must be able to return whatever he may
be obliged to re if rescission is granted.
(4) The things which are the object of the contract must not have passed
legally to the possession of a third person acting in good faith.
(5) The action for rescission must be brought within the prescriptive period of
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Reviewer for Obligations and Contracts 30
four years.
(6) Rescissible contracts must be attacked directly, not collaterally
(7) A valid contract can be rescinded only for cases established by law.
Who May Bring Rescission
(1) person injured
(2) heirs of these persons
(3) their creditors
4 Must be attacked directly
Prescriptive Period
5 Within four years.
6 For persons under guardianship and for absentees, the period of four years
shall not begin until the termination of the former’s incapacity or until the
domicile of the latter is known.
Effects of Rescission
(1) obligation to return the things which were the object of the contracts
(2) right to damages if the thing cannot be returned
(3) rescission shall be only to the extent necessary to cover the damages
caused
(1) Those which are entered into by guardians whenever the wards whom they
represent suffer lesion by more than one fourth of the value of the things
which are the object thereof, unless it is judicially approved;
(2) Those agreed upon in representation of absentees, if the latter suffer the
lesion stated in the preceding number, unless it is judicially approved;
(3) Those undertaken in fraud of creditors when the latter cannot in any other
manner collect the claims due him;
(4) Those which refer to things under litigation if they have been entered into
by the defendant without the knowledge and approval of the litigants or of
competent judicial authority;
 Reviewer for Obligations and Contracts 31

(5) All other contracts specially declared by law to be subject to rescission.
(1381)
(6) Payments made in a state of insolvency for obligations to whose fulfillment
the debtor could not be compelled at the time they were effected.
The person must both be:
(1) The plaintiff must either be oblighed principally or subsidiarily; and
(2) The victim and not the party responsible for the defect is the person who
must assert the same. (1327)

III - Subsequent Transfer C. How Should it be Attacked?

1 Whoever acquires in bad faith the things alienated in fraud of creditors, shall 3 Either:
return the thing or if return be impossible, he shall indemnify the creditor for
damages. (1) Directly -- by an action for that purpose; or
(2) Indirectly - by way of defense to an action to enforce the same
2 If there are two or more alienations, the first acquirer shall be liable first, and
so on successively. (1388) D. Prescriptive Period

4 Within four years.

CHAPTER 7 5 The period shall begin:
(1) In cases of intimidation, violence or undue influence, from the time the
VOIDABLE CONTRACTS defect of the consent ceases.
(2) In case of mistake or fraud, from the time of the discovery of the same. In
I - General Principles legal contemplation, discovery of fraud must be reckoned to have taken
place from the time the document was registered in the office of the
A. Concept register of deeds, for registration is a notice to the whole world.
(3) When the action refers to contracts entered into by minors or other
1 A voidable contract is valid until it is set aside. They can be confirmed or incapacitated persons, from the time the guardianship ceases.
ratified.
E. Effects of Annulment

(1) Nullity arising from Incapacity

B. Voidable Contracts
(a) The incapacitated person is not obliged to make any restitution
2 The following contracts are voidable or annulable, even though there may have except insofar as he has been benefited by the thing or price
been no damage to the contracting parties: received by him.
(b) Capacitated party is obliged to make complete restitution subject
(1) Those where one of the parties is incapable of giving consent to the to the exception provided in Natural Obligations (Art. 1497).
contract
(2) Those where the consent is vitiated by mistake, violence, intimidation, (2) Nullity arising From Vitiated Consent
undue influence, or fraud.
1 The primary effect is mutual restitution of the subject matter of the
contract taking into account the principle of unjust enrichment. Mutual
restitution under this provision does not apply to strangers to the
B. Who May Attack? actual contractual relation.

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2 As regards to the fruits and interests, the following rules apply: 5 In obligations to render service, the value thereof shall be the basis for damages.

(a) Restitution as long as the cause of nullity does not involve an illicit IV - Loss of the Thing
act such as error and incapacity unknown to the other party.
(b) But when the cause of nullity is illicit (violence, fraud), the party A. By Plaintiff
who employed those means must be obliged to restore; on the
other hand, the innocent party should not be required to return (1) If lost through fraud or fault, action for annulment is extinguished.
fruits or pay interest. (2) If lost through fortuitous event, the defendant cannot be compelled to
make restitution.

II - Ratification B. By Defendant

A. Requisites (1) If 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.
1 Ratification extinguishes the action to annul a voidable contract. It may either be (2) If lost through fortuitous event, he shall pay the value of the thing at the
express or implied. time of its loss but without interest.

2 Ratification, to be effective, must comply with the following requisites:

(1) That the contract is a voidable contract
(2) That ratification is made with knowledge of the cause for nullity
(3) That at the time the ratification is made, the cause of nullity has already
ceased to exist CHAPTER 8

B. Who May Ratify? UNENFORCEABLE CONTRACTS

(1) injured party A. Concept

(2) guardian of the incapacitated person
(3) heirs of the party entitled to such right
C. Effects
(1) Extinguishes the action to annul a voidable contract
(2) Cleanses the contract from all its defects
(3) Retroacts to the moment the contract was constituted
1 An unenforceable contract is one which cannot be enforced unless it is first
ratified in the manner provided by law. It is distinguished from the rescissible
and the annullable contracts in that the latter two contracts produce legal
effects unless they are set aside by a competent court, while the unenforceable
contract does not produce any effect unless it is ratified.
B. The Unenforceable Contracts

III - Damages
3 As a rule, the annulment of the contract, and the resulting mutual restitution
eliminates the possibility of damage suffered by the injured party.
4 However, damages can be awarded in cases of additional expenses or loss or
deterioration of the object of the obligation.
(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.
(a) An agreement that by its terms is not to be performed within a

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year from the making thereof; VOID OR INEXISTENT CONTRACTS

(b) A special promise to answer for the debt, default, or miscarriage
of another; I - Concept
(c) An agreement made in consideration of marriage, other than a
mutual promise to marry; 2 A void or inexistent contract is one which has no force and effect from the very
(d) An agreement for the sale of goods, chattels or things in action, at beginning, as if it had never been entered into. They produce no legal effects
a price not less than five hundred pesos, unless the buyer accept and confer no rights or obligations.
and receive part of such goods and chattels, or the evidences, or 3 They cannot be ratified.
some of them, of such things in action, or pay at the time some 4 In case of divisible contracts, if the illegal terms can be separated from the legal
part of the purchase money; but when a sale is made by auction ones, the latter may be enforced.
and entry is made by the auctioneer in his sales book, at the time 5 A contract which is the direct result of a previous illegal contract is also
of the sale, of the amount and kind of property sold, terms of inexistent.
sale, price, names of the purchasers and person on whose
account the sale is made, it is a sufficient memorandum; II - Void and Inexistent Contracts
(e) An agreement for the leasing for a longer period than one year, or
for the sale of real property or of an interest therein; A. Void Contracts
(f) A representation to the credit of a third person. 1 The void contracts are those in pars. 1 and 7 of Art 1409:

(3) Those where both parties are incapable of giving consent.
Express or implied ratification by the parent, or guardian of one of the
contracting parties will turn the contract into a voidable contract.
If ratification is made by the parents or guardians of both contracting
parties, the contract shall be validated from the inception.
C. Enforceability
For contracts entered into within the Statute of Frauds to be enforceable, a note
or memorandum , in writing, and subscribed by the party charged, or by his agent,
evidence thereof, of the agreement is needed.
(1) Those whose cause, object or purpose is contrary to law, morals, good
customs, public order, or public policy;
(2) Those expressly prohibited or declared void by law.
B. Inexistent Contracts
2 The inexistent contracts are those enumerated in pars. 2-6 of Art 1409:
(2) Those which are absolutely simulated or fictitious
(3) Those whose cause or object never came into existence
(4) Those whose object is outside the commerce of man
(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.

D. Ratification C. Who May Assail?

Contracts infringing the Statute of Frauds are ratified by: (1) parties
(2) third persons directly affected
(1) failure to object to the presentation of oral evidence to prove the same; or
(2) by acceptance of benefits under them D. Prescriptive Period

E. Who May Assail? 1 The action or defense for the declaration of the inexistence of a contract does not
prescribe.
They cannot be assailed by third persons
CHAPTER 9

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TITLE III
NATURAL OBLIGATIONS 5 However, if the act, conduct or representation of the party sought to be estopped is
due to ignorance founded on innocent mistake, estoppel will not lie.
I - Types of Obligations
6 Estoppel is effective only as between the parties thereto or their successors in
1 In juridical science, four types of obligations can be known: interest.

(1) Moral - duties of conscience completely outside the field of law B. Requisites
(2) Natural - not sanctioned by any action but have a relative juridical effect
(3) Civil - juridical obligations which are in conformity with positive law but are (1) Reliance
contrary to juridical principles and susceptible of being annulled. (2) Prejudice
(4) Mixed - have full juridical effect
C Kinds
2 Jurisprudence has reduced this classification into only two: natural and civil.
(1) Estoppel by Record
(2) Estoppel by Deed
II - Natural Obligations (3) Estoppel In Pais (Equitable Estoppel
(4) Estoppel by Silence
A. Concept (5) Estoppel by Acquiescence
(6) Laches
3 Natural obligations are midway between the civil obligations and the purely moral (7) Estoppel From Benefits
obligations. Civil obligations are enforceable by action, while moral obligations rest
entirely upon conscience. It is distinguished from the moral in that it produces
some juridical effect; such as the right to retain what has been voluntarily paid by
the debtor; and from the civil in that it does not give rise to an action to compel
performance.

B. Necessary Conditions

(1) That there be a juridical tie between the two persons

(2) That this tie is not given effect by law
(3) Voluntary Fulfillment
TITLE V
TRUST
TITLE IV
ESTOPPEL GENERAL PROVISIONS

A. Concept A. Concept of Trust

4 Estoppel is a bar which precludes a person from denying or asserting anything to 1 Trust is the legal relationship between one person having an equitable ownership in
the contrary of that which has, in contemplation of law, been established as the property and another person owning the legal title to such property, the equitable
truth, either by the acts of judicial or legislative offices or by his own deed or ownership of the former entitling him to the performance of certain duties and the
representation, either express or implied. exercise of certain powers by the latter.

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 Reviewer for Obligations and Contracts 35

(3) ascertainable trust

2 With regard to trust, it is not always necessary that the certui que trust should be (4) sufficiently certain beneficiaries
named, or even be in existence at the time the trust is created in his favor.
B. How Created
B. Characteristics
3 No particular words are required for the creation of an express trust, it being
(1) It is a relationship sufficient that a trust is clearly intended.
(2) It is a relationship of fiduciary character
(3) It is a relationship with respect to property, not one involving merely C. How Proven
personal duties
(4) It involves the existence of equitable duties imposed upon the holder of the 4 When the express trust concerns an immovable or an interest therein a writing is
title to the property to deal with it for the benefit of another. necessary to prove it.
(5) It arises result of a manifestation of intention to create the relationship.
(6) It is distinguished from other relationships of a fiduciary character (deposit, D. Acceptance By the Beneficiary
guardianship, agency) in that the fiduciary in trust has legal title to the
property.
CHAPTER 3
C. Terms
IMPLIED TRUST
(1) Trustor - person who establishes a trust
(2) Trustee - one in whom confidence is reposed as regards property for the A. Concept
benefit of another person
(3) Beneficiary - person whose benefit the trust has been created 5 An implied trust comes into existence by operation of law. It can be proved by oral
(4) Trust property - property so held evidence.
(5) Trust estate - trust property taken as a whole
(6) Res - subject matter of the trust B. Kinds

D. Kinds (1) Resulting Trust

1 arises where a person makes or causes to be made a disposition of
(1) Express property under circumstances which raise an inference that he does
(2) Implied not intend that the person taking or holding the property should have
the beneficial interest in the property. The doctrine of resulting trust is
founded on the presumed intention of the parties.

CHAPTER 2 (2) Constructive Trust

2 imposed where a person holding title to property is subject to an
EXPRESS TRUST equitable duty to convey it to another on the ground that he would be
unjustly enriched if he were permitted to retain it. The duty to convey
A. Requisites the property arises because it was acquired through fraud, duress,
undue influence, or mistake, or through breach of a fiduciary duty, or
(1) trustor through the wrongful disposition of another’s property.
(2) trustee

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 Reviewer for Obligations and Contracts 36

“Excellence. UP BarOps 2004

Not just a tradition. It’s a commitment.”