Since 1977
BUSINESS LAW
BL.1301-Obligation and Contracts
LECTURE NOTES
OBLIGATION
OBLIGATION – originate from the latin word obligatio, means
tying or binding.
Civil obligations - is a juridical necessity to give, to do or
not to do. It give a right of action to compel their
performance
 Juridical necessity to give, to do or not to do (1156)
 Right of action to compel their performance
 Right to enforce the obligation against the obligor in a
court of law in case of breach
ELEMENTS:
1. Active subject (obligee/creditor/lender/plaintiff/he who
has the right ) – the one in whose favor the obligation is
constituted
2. Passive subject - obligor/debtor/borrower/defendant/he
who has the obligation) – the one who has the duty of
giving, doing or not doing
3. Object – prestation; the conduct which has to be
observed by the debtor/obligor
4. Vinculum Juris/ juridical tie /legal tie/ causa/ causa
debendi/ causa obligations – This arise form law,
contract, quasi contract, delict and quasi delict.
Natural obligations - not being based on positive law but
on equity and natural law, do not grant a right of action to
enforce their performance, but after voluntary fulfillment by
the obligor, they authorize the retention of what has been
delivered or rendered by reason thereof. (Art. 1423)
 Based on equity and natural law
 Duty not to recover what has voluntary been paid
although payment was no longer required.
 Basic understanding of right and wrong based on an
understanding of a right and wrong.
 Based on conscience
Illustration of Natural obligation
 When a right to sue upon a civil obligation has lapsed by
extinctive prescription, the obligor who voluntarily
performs the contract cannot recover what he has
delivered or the value of the service he has rendered.
(1424)
 When without the knowledge or against the will of the
debtor, a third person pays a debt which the obligor is
not legally bound to pay because the action thereon has
prescribed, but the debtor later voluntarily reimburses
the third person, the obligor cannot recover what he has
paid. (1425)
 When a minor between eighteen and twenty-one years
of age who has entered into a contract without the
consent of the parent or guardian, after the annulment
of the contract voluntarily returns the whole thing or
price received, notwithstanding the fact the he has not
been benefited thereby, there is no right to demand the
thing or price thus returned. (1426)
 When a minor between eighteen and twenty-one years
of age, who has entered into a contract without the
consent of the parent or guardian, voluntarily pays a
sum of money or delivers a fungible thing in fulfillment of
the obligation, there shall be no right to recover the
same from the obligee who has spent or consumed it in
good faith. (1427)
 When, after an action to enforce a civil obligation has
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failed the defendant voluntarily performs the obligation,
he cannot demand the return of what he has delivered or
the payment of the value of the service he has rendered.
(1428)
 When a testate or intestate heir voluntarily pays a debt
of the decedent exceeding the value of the property
which he received by will or by the law of intestacy from
the estate of the deceased, the payment is valid and
cannot be rescinded by the payer. (1429)
 When a will is declared void because it has not been
executed in accordance with the formalities required by
law, but one of the intestate heirs, after the settlement
of the debts of the deceased, pays a legacy in
compliance with a clause in the defective will, the
payment is effective and irrevocable. (1430)
Sources of obligation (1157)
1. Law (obligation ex lege)– Not presumed (1158)
a. Law
- Taxes, duty of husband and wife to support family,
minimum wage, workmen compensation act.
b. Quasi contract (obligation ex quasi contractu)
(Chapter 1, Title XVII) – juridical relation resulting
from lawful, voluntary and unilateral act to the
end that no one shall be unjustly enriched or
benefited at the expense of another.
Rule: No meeting of the mind hence consent of the
parties is not required. It is quasi contract not an
implied contract.
1. Nominate quasi contract
a. Solutio indebiti – Something is received
when there is no right to demand it, and it
was unduly delivered thru mistake, the
recipient has the duty to return it.
b. Negotiorum gestio – When a person
voluntary takes charge of another’s
abandoned business or property without the
owner’s authority where reimbursement
must be made for necessary and useful
expenses.
Requisites:
a.) Property or business is abandoned or
neglected
b.) The manager is unauthorized (express or
implied)
c.) The unauthorized manger voluntary take
charge the abandoned property.
2. Innominate quasi contract
Art. 2164. When, without the knowledge of the
person obliged to give support, it is given by a
stranger, the latter shall have a right to claim
the same from the former, unless it appears that
he gave it out of piety and without intention of
being repaid.
Art. 2165. When funeral expenses are borne by
a third person, without the knowledge of those
relatives who were obliged to give support to the
deceased, said relatives shall reimburse the third
person, should the latter claim reimbursement.
Art. 2166. When the person obliged to support
an orphan, or an insane or other indigent person
unjustly refuses to give support to the latter, any
third person may furnish support to the needy
individual, with right of reimbursement from the
person obliged to give support. The provisions of
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this article apply when the father or mother of a
child under eighteen years of age unjustly
refuses to support him.
Art. 2167. When through an accident or other
cause a person is injured or becomes seriously
ill, and he is treated or helped while he is not in
a condition to give consent to a contract, he shall
be liable to pay for the services of the physician
or other person aiding him, unless the service
has been rendered out of pure generosity.
Art. 2168. When during a fire, flood, storm, or
other calamity, property is saved from
destruction by another person without the
knowledge of the owner, the latter is bound to
pay the former just compensation.
Art. 2169. When the government, upon the
failure of any person to comply with health or
safety regulations concerning property,
undertakes to do the necessary work, even over
his objection, he shall be liable to pay the
expenses.
Art. 2170. When by accident or other fortuitous
event, movables separately pertaining to two or
more persons are commingled or confused, the
rules on co-ownership shall be applicable.
Art. 2171. The rights and obligations of the
finder of lost personal property shall be governed
by articles 719 and 720.
Art. 2172. The right of every possessor in good
faith to reimbursement for necessary and useful
expenses is governed by article 546.
Art. 2173. When a third person, without the
knowledge of the debtor, pays the debt, the
rights of the former are governed by articles
1236 and 1237.
Art. 2174. When in a small community a
nationality of the inhabitants of age decide upon
a measure for protection against lawlessness,
fire, flood, storm or other calamity, anyone who
objects to the plan and refuses to contribute to
the expenses but is benefited by the project as
executed shall be liable to pay his share of said
expenses.
Art. 2175. Any person who is constrained to pay
the taxes of another shall be entitled to
reimbursement from the latter.
c. Delict (obligation ex maleficio or delicto)
Governing rules:
1. Pertinent provisions of the RPC and other penal
laws subject to Art 2177 Civil Code.
 Art 100, RPC – Every person criminally liable
for a felony is also civilly liable
2. Chapter 2, Preliminary title, on Human Relations
( Civil Code )
3. Title 18 of Book IV of the Civil Code – on
damages
Civil liability arising from crime includes:
1. Restitution – The thing itself must be returned or
restored.
2. Reparation - The court shall determine the
amount of damage, taking into consideration the
price of the thing, whenever possible, and its
special sentimental value to the injured party
3. Indemnification - Indemnification for
consequential damages shall include not only
those caused the injured party, but also those
suffered by his family or by a third person by
reason of the crime.
Effect of acquittal in criminal case:
 when acquittal is due to reasonable doubt – no
civil liability
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 when acquittal is due to exempting
circumstances – there is civil liability
 when there is preponderance of evidence – there
is civil liability
d. Quasi delict (obligation ex quasi maleficio or quasi
delicto) (Chapter 2, Title XVII and special law) – Act
or omission causes damage to another, there being
fault or negligence, is obliged to pay for the damage
done there being no pre existing contractual relation
between the parties.
Elements:
a) There must be fault or negligence attributable to
the person charged
b) There must be damage or injury
c) There must be a direct relation of cause and
effect between the fault or negligence on the one
hand and the damage or injury on the other
hand ( proximate cause )
 Culpa aquiliana (not synonymous with tort)
Obligation expressly arising from Quasi delict
1. The father and, in case of his death or
incapacity, the mother, are responsible for the
damages caused by the minor children who live
in their company.
2. Guardians are liable for damages caused by the
minors or incapacitated persons who are under
their authority and live in their company.
3. The owners and managers of an establishment or
enterprise are likewise responsible for damages
caused by their employees in the service of the
branches in which the latter are employed or on
the occasion of their functions.
4. Employers shall be liable for the damages caused
by their employees and household helpers acting
within the scope of their assigned tasks, even
though the former are not engaged in any
business or industry.
5. The State is responsible when it acts through a
special agent; but not when the damage has
been caused by the official to whom the task
done properly pertains.
6. Teachers or heads of establishments of arts and
trades shall be liable for damages caused by
their pupils and students or apprentices, so long
as they remain in their custody.
 The possessor of an animal or whoever may
make use of the same is responsible for the
damage which it may cause, although it may
escape or be lost. This responsibility shall cease
only in case the damage should come from force
majeure or from the fault of the person who has
suffered damage. (2183)

2. Contract (obligation ex contractus) – Meeting of mind
between two (2) person whereby one binds himself with
respect to another to give something or render some
service. (1306) It has a force of law between the
contracting party and must be complied with n good faith
(1159)
Kinds of obligation according to subject matter
1. Real obligation
a. Specific or determinate object – particularly
designated or physically segregated from all
others of the same class.
Loss of the object without fault of debtor –
obligation extinguish
b. Generic or indeterminate – Thing refers to a
class, to a genus and cannot be pointed out with
particularity.
Loss of the object without fault of the debtor –
Obligation remain. Genus nunquam perit
(Generic never perishes)
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2. Personal obligation
a. Positive personal obligation (to do)
b. Negative personal obligation (not to do)
Duty of debtor to deliver specific thing
1. Preserve the thing (1163)
Rule: Diligence of good father of a family (ordinary
diligence)
Except:
a. Law (ex: common carrier)
b. Stipulation
2. Deliver the fruits (1164)
 Natural fruit – Spontaneous product of the soil, and
the young and other products of animals. (No human
intervention)
 Industrial fruit - Produce by lands of any kind
through cultivation or labor.
 Civil fruit – Rents of building, price of lease of lands
and other property and the amount of perpetual or
life annuities or other similar income.
Rule: The creditor has the right to the fruits of the thing
from the time the thing to deliver arises.
Exception: Obligation to deliver the fruits arises from:
a. Suspensive condition – fulfillment of the condition
b. Suspensive period – arrival of the period
c. Arise from law, quasi contract, delict, quasi delict –
provision of law
3. Deliver of accessions and accessories (1166)
 Accessions - fruits of a thing/ addition/ improvement
upon a thing. (i.e. House/trees on a land)
 Accessories – thing joined with the principal for
embellishment, better use or completion (i.e. Key of
house, bracelet of a watch)
4. Deliver the thing itself
 Actual
 Constructive
a. Traditio symbolica – delivery of key
b. Traditio brevi manu – A possessor of a thing not
as an owner, becomes the possessor as owner
(i.e. Lessor sells the thing leased to the lessee)
c. Taditio longa manu – mere consent or
agreement of the parties. (pointing out the
object)
d. Traditio constitutum possessorium – A possessor
of a thing as an owner retains possession no
longer as an owner, but in some other capacity.
This is the opposite of tradition brevi manu. (i.e.
A possessor vendor stay as tenant on the
vendee)
e. Execution of a public instrument
Rule:
a. Before delivery of the thing – Creditor has personal
right (jus in personam or jus ad rem). (1164)
b. Creditor acquires real right (jus in re) only at the
time of delivery.
5. Damages in case of breach
With the fault of the debtor (1170)
I. Fraud (dolo)
a. Dolo causante - (consent is defective –
voidable)
b. Dolo incidente (fraud in performance –
damages)
Period
a. Future fraud – Responsibility arising from
fraud is demandable in all obligation. Any
waiver of an action for future fraud is void.
(1171) same rule in case of negligence which
shows bad faith. (1173)
b. Past fraud – can be waive
II. Negligence (culpa) – Omission of diligence
required by the nature of the obligation and
corresponds with circumstances of the person,
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time and place. (1173) It is also demandable in
every kind of obligation but such liability may be
regulated by the courts according to the
circumstances. (1172)
a. Culpa contractual – performance of the
contract
b. Culpa criminal – Result from criminal act
c. Culpa aquiliana – No pre existing contract
Degree of Culpa under the Roman Law are as follows:
1.) Culpa lata – grave negligence
2.) Culpa levis – ordinary negligence
3.) Culpa levissima – slight negligence
FRAUD DISTINGUISHED FROM NEGLIGENCE
FRAUD NEGLIGENCE
There is deliberate There is no deliberate intent to
intent to cause cause damage.
damage.
Liability cannot be Liability may be mitigated.
mitigated.
Waiver for future Waiver for future negligence may
fraud is void. be allowed in certain cases:
a) gross – can never be excused
in advance; against public
policy
b) simple – may be excused in
certain cases
III. Delay (mora)
a. Ordinary delay – Failure to pay on the period
fixed by the parties without demand judicial or
extrajudicial
b. Legal delay – Failure to pay after demand by the
creditor (judicial/extrajudicial)
1. Mora solvendi - Delay of debtor
1.1 Mora solvendi ex re – Debtor delay/default
in real obligation
1.2 Mora solvendi ex persona – Debtor
delay/default in personal obligation
2. Mora accipiendi – – default on part of creditor;
Creditor is guilty of default when he
unjustifiably refuses to accept payment or
performance at the time
payment/performance can be done
3. Compensatio morae – both parties (debtor and
creditor) are in default (in reciprocal
obligations); the effect: is as if there is no
Elements of legal delay:
(1) The obligation must be due, enforceable and already
liquidated or determinate in amount
(2) There must be non-performance
(3) There must be a demand, unless demand is not
required
Effects of legal delay:
a. if determinate thing - debtor bears risk of loss (even
when there is fortuitous event)
b. debtor liable for damages/interest
c. resolution (Art 1170, in proper cases)
Rule: No demand (judicial or extrajudicial) no delay
(1169)
Exception:
1. Law
2. Stipulation
3. Time is of the essence
4. Demand would be useless
5. Performance of one party in case of reciprocal
obligation
IV. Contravention of tenor of obligation
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Without the fault of the debtor
Requisites of fortuitous event (Nakpil & Sons vs. CA):
1. The cause of the breach of the obligation must be
independent of the will of the debtor
2. The event must be either unforeseeable or
unavoidable
3. The event must be such as to render it impossible for
the debtor to fulfill his obligation in a normal manner
4. The debtor must be free from any participation in, or
aggravation of injury to the creditor
Rule: Not liable in case of Fortuitous event (1174)
Exception:
1. Law
a. Delay
b. Promised to deliver the same thing to 2 or
more person who do not have the same
interest
c. Lost of generic thing
d. Obligation arising from crime
2. Stipulation
3. Assumption of risk
Duty of debtor (Generic thing)
1. Deliver the thing based on quality intended by the
parties.
2. Damages in case of breach
Duty of debtor to do (Positive personal obligation)
 If a person obliged to do something fails to do it, the
same shall be executed at his cost.
This same rule shall be observed if he does it in
contravention of the tenor of the obligation.
Furthermore, it may be decreed that what has been
poorly done be undone. (1167)
Damages (MENTAL)
1. Moral – Include physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation and similar
injury.
2. Exemplary or corrective – imposed by way of example or
correction for the public good. It may be awarded if the
defendant acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. (bad faith).
3. Nominal – Adjudicated in order that a right of the
plaintiff, which has been violated or invaded by the
defendant, may be vindicated or recognized and not for
the purpose of indemnifying the plaintiff for any loss
suffered by him. Awarded in every case where any
property right has been invaded. (Damages awarded to
vindicate a right)
4. Temperate – More than nominal but less than actual.
Awarded when some pecuniary loss have been suffered
but its amount can not, from the nature of the case be
proved with certainty. (Exact amount of damage cannot
be ascertained)
5. Actual or compensatory – value of loss suffered but also
include profits which the creditor failed to obtain.
Pecuniary loss must be duly proved.
6. Liquidated – those agreed upon by the parties to a
contract to be paid in case of breach.(Damage
predetermined before hand)
 Usurious transaction shall be governed by special law.
(1175)
 Presumption (1176)
a. Receipt of principal without reservation as to interest
- interest is already paid
b. Receipt of a later installment of debt without
reservation as to prior installment – later installment
have been paid.

Duty of debtor not to do (Positive personal obligation) REMEDIES OF CREDITORS - generally transmissible
 When the obligation consists in not doing, and the (except: law, stipulation, personal obligation):
obligor does what has been forbidden him, it shall 1. Exact performance - specific, substitute, equivalent
also be undone at his expense. (1168) 2. Attach and execute debtor's property which is not
exempt (art 2236)
3 kinds of Performance: 3. Accion subrogatoria - Exercise all rights and actions
1. SPECIFIC PERFORMANCE - performance of the except those inherent in the person (parental
prestation itself authority, hold office, carry out agency
2. SUBSTITUTE PERFORMANCE - someone else performs Requisites:
or something else is performed at the expense of debtor a. Creditor must have right of return against debtor
3. EQUIVALENT PERFORMANCE - damages b. The debt is due and demandable
c. There is a failure of the debtor to collect his own
Real Obligations to do debt from 3rd persons either through malice or
Remedies Obligatio (Personal Obligation) negligence
n d. Debtor's assets are insufficient
Sp Gen To do Not to do e. The right of account is not purely personal
eci eric 4. Accion pauliana - (impugn or rescind acts or
fic contracts done by the debtor to defraud the
SPECIFIC undo the creditors.
PERFORMANCE Y Y NO things Requisites:
already a. There is a credit in favor of plaintiff
done b. The debtor has performed an act subsequent to
the contract, giving advantage to other persons
EQUIVALENT Can only
c. The creditor is prejudiced by the debtor's act
PERFORMANCE Y Y be Y
which are in favor of 3 rd parties and rescission
demanded
will benefit the creditor
if
d. The creditor has no other legal remedy
obligation
e. The debtor's acts are fraudulent
is not very
personal  All right by virtue of obligation are transmissible (1178)
SUBSTITUTE Undo the Exception: Law and stipulation
PERFORMANCE N Y Y things
already Primary classification of obligation under the civil
done at Code
debtor's 1. Pure –without condition and period
expense  Immediately demandable
RESCISSION/ 2. Conditional
CANCELLATION Y Y Y a.) effect
 Suspensive – give rise to obligation

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 Resolutory – extinguish the obligation  Condition for purpose of extinguishing obligation

b.) Form (resolutory) – return to each other what they have
 Express – clearly stated received. In case of loss, deterioration or
 Implied – merely inferred improvement – same rule above to the party bound
c.) Possibility to return (1190)
 Possible – capable of fulfillment  Power to rescind is implied in reciprocal obligation in
 Impossible (1183) case one of the obligor should not comply with what
a. Physically impossible – Nature of the thing is incumbent upon him. (1191)
b. Legally impossible – contrary to law, moral, good a. Injured party may choose fulfillment or
customs, public order or public policy Rescission + damages.
d.) Cause or origin b. Court decree the rescission unless there is just
 Potestatiive - depend upon will of one of the cause authorizing the fixing of a period.
contracting parties (debtor/creditor) (1182)  Both parties committed a breach(1192)
 Casual – depend upon chance or will of a third a. First infractor shall be equitably tempered.
person b. If cannot determined the first infractor –
 Mixed – partly upon chance and partly upon will Obligation extinguish and each shall bear own
of third person damages.
e.) Mode
 Positive – performance Art. 1189. When the conditions have been imposed
 Negative – omission with the intention of suspending the efficacy of an
f.) Numbers obligation to give, the following rules shall be
 Conjunctive – several conditions, all must be observed in case of the improvement, loss or
complied with deterioration of the thing during the pendency of the
 Disjunctive – several conditions, one or some condition:
must be complied with (1) If the thing is lost without the fault of the
g.) Divisibility debtor, the obligation shall be extinguished;
 Divisible – susceptible of partial performance (2) If the thing is lost through the fault of the
 Indivisible – not susceptible of partial debtor, he shall be obliged to pay damages; it is
performance understood that the thing is lost when it perishes, or
goes out of commerce, or disappears in such a way
Conditional obligation that its existence is unknown or it cannot be
 Future and uncertain event or past event unknown to recovered;
parties (1179) (3) When the thing deteriorates without the fault
 Resolutory condition immediately demandable of the debtor, the impairment is to be borne by the
 When the debtor binds himself to pay when his creditor;
means permit him to do so, the obligation shall be (4) If it deteriorates through the fault of the
deemed to be one with a period. (1180) debtor, the creditor may choose between the
 Acquisition or extinguishment of obligation depend rescission of the obligation and its fulfillment, with
upon the happening of the condition (1181) indemnity for damages in either case;
 Positive condition + determinate time = extinguish (5) If the thing is improved by its nature, or by
as soon as the time expire or become indubitable time, the improvement shall inure to the benefit of
that the event will not take place (1184) the creditor;
 Negative condition + determinate time = Effective (6) If it is improved at the expense of the
form the time indicated elapsed or evident that event debtor, he shall have no other right than that
cannot occur. (1185) granted to the usufructuary.
 Constructive fulfillment - The condition shall be
deemed fulfilled when the obligor voluntarily 3. With a period - Future and certain. If uncertain it is
prevents its fulfillment. (1186) conditional. (1193)
 Retroactivity of the conditional obligation. (1187) a.) Effect
a. Reciprocal – fruit and interest deemed mutually 1. Suspensive (Ex die) – arrival- give rise to
compensated obligation. Before arrival of the period no right to
b. Unilateral – Debtor appropriate the fruits an demand. (1193)
interest except Nature and circumstances of  Payment before arrival of the period
obligation the intention of the person constituting (Payment made by mistake), the debtor is
the same was different. unaware of the period – may recover with
c. Obligation to do or not to do – court shall the fruits and interests. (1195)
determine the retroactivity.  Loss, deterioration, improvement before
 Before condition is fulfilled (1188) arrival of the period. Apply Art 1189.
c. Creditor bring action for the preservation of 2. Resolutory (In diem) – arrival- extinguish the
his right obligation. The obligation is immediately
d. Debtor may recover payment by mistake demandable.
 Loss, deterioration, improvement before condition is b.) Source
fulfilled 1. Legal – provided by law
2. Conventional/voluntary – by agreement
Without fault With fault 3. Judicial – fixed by the court
(Debtor) (Debtor) c.) Definiteness
Loss Extinguish Damages 1. Definite – fixed or known when it will come
Deterioration Impairment borne Rescission or 2. Indefinite – not fixed or not known when it will
by the creditor fulfillment + come.
damages
General Rule: The court is not authorized to fix a period:
Nature or Time Expense of the (Reason: The court cannot make a contract for the
debtor parties)
Improvemen Benefit of the Right only of a Exception: Court authorizes to fix the period. (1197)
t creditor usufruct

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a.) No period fixed but period was intended (nature and
circumstances)
b.) Period depend upon the sole will of the debtor.
 Court shall determine such period as probably
contemplated by the parties. Once fixed by the
courts, the period cannot change by them. (by the
court not party)
General Rule:
Whenever period is designated, it is presumed for the
benefit of both creditor and debtor except when
expressly provided otherwise. (1196)
Hence, neither the creditor can demand performance nor
the debtor pay before arrival of the period.
Exception:
The debtor shall lose every right to make use of the
period: (1198) Hence, immediately demandable.
1. When after the obligation has been contracted, he
becomes insolvent, unless he gives a guaranty or
security for the debt;
2. When he does not furnish to the creditor the
guaranties or securities which he has promised;
3. When by his own acts he has impaired said
guaranties or securities after their establishment,
and when through a fortuitous event they disappear,
unless he immediately gives new ones equally
satisfactory;
4. When the debtor violates any undertaking, in
consideration of which the creditor agreed to the
period;
5. When the debtor attempts to abscond.
4. Alternative obligation
a. Simple – only one prestation is due
b. Compound
1. Conjunctive – Several prestation and all are due
2. Distributive – 2 or more prestation is due
a. Alternative – several prestation are due but
performance of one is sufficient.
b. Facultative – Only one is due but debtor may
substitute
Gen rule: Right of choice belong to the debtor (1200)
except when expressly grated to the creditor.
Limitation on the right of choice:
a. Impossible
b. Unlawful
c. Not the object of obligation
d. Only one is practicable (1202). In this case the
debtor loss the right of choice and the alternative
obligation is converted into a simple obligation.
 Choice produces no effect except from the time it
has been communicated. (1201)
 Communication of choice convert alternative
obligation to a simple obligation. (1205)
 Creditor fault , the debtor cannot make a choice =
rescind the contract + damages (1203)
 All object loss – Debtor is liable for damages (last
object)
Right of choice: General rule: right of choice belongs to
debtor
a. The choice is with debtor
(1) If only 1 is left either because of fortuitous
events or due to debtor's acts, perform what is
left. The effect is that the debtor loses the right
of choice
(2) if the choice is limited because of the creditor's
acts, the debtor has the right of resolution and
damages
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(3) if all are lost due to debtor, the creditor is
entitled to damages
(4) if some are lost, the debtor can choose from the
remaining
b. The choice is with creditor
(1) if one or some are lost due to fortuitous event,
the creditor chooses the remainder
(2) if one or some is lost because of the fault of
debtor, the creditor may choose either the
remainder or the value of any which
disappeared, and damages in either case
(3) if all is lost due to the debtor's fault, the creditor
may choose the value of any if some is lost due
to debtor's fault, the creditor chooses the
remainder
(4) if all is lost due to fortuitous event, obligation is
extinguished
(5) if all is lost due to creditor's fault, the obligation
is extinguished
Summary: Rule on loss
1. Debtor choice – Last item lost
2. Creditor’s choice - Any item lost through the fault of the
debtor
Art. 1205. When the choice has been expressly given to the
creditor, the obligation shall cease to be alternative from the
day when the selection has been communicated to the
debtor.
Until then the responsibility of the debtor shall be governed
by the following rules:
(1) If one of the things is lost through a fortuitous event,
he shall perform the obligation by delivering that which
the creditor should choose from among the remainder,
or that which remains if only one subsists;
(2) If the loss of one of the things occurs through the fault
of the debtor, the creditor may claim any of those
subsisting, or the price of that which, through the fault
of the former, has disappeared, with a right to
damages;
(3) If all the things are lost through the fault of the debtor,
the choice by the creditor shall fall upon the price of
any one of them, also with indemnity for damages.
The same rules shall be applied to obligations to do or not to
do in case one, some or all of the prestations should become
impossible. (1136a)
5. Facultative - When only one prestation has been agreed
upon, but the obligor may render another in substitution
(1206)
Before substitution
 Loss of the object without fault – not liable
 Loss of the object with fault of the debtor - Liable
 Loss/deterioration of the substitute with or without
fault of the debtor – Not liable
After substitution
 Loss of the object with or without fault – not liable
 Loss of the substitute with fault – liable
 Loss of the substitute without fault – not liable
Rule:
 Right of choice always to debtor
 Only one prestation is due but the debtor may
substitute
DISTINCTIONS BETWEEN ALTERNATIVE AND
FACULTATIVE OBLIGATIONS
ALTERNATIVE FACULTATIVE
a) Various things are due a) Only one thing is due but
but the giving a substitute may be given
principally of one is to render
sufficient payment/fulfillment easy
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EXCEL PROFESSIONAL SERVICES, INC.

b) If one of prestations is b) If principal obligations is use of the due diligence, prevented the misfortune. (Art.
illegal, others may be void and there is no 2184)
valid but obligation necessity of giving the 11. The responsibility of two or more persons who are liable
remains substitute; nullity of P for quasi-delict. (Art. 2194)
carries with it nullity of S
c) If it is impossible to give c) If it is impossible to Solidarity under special Law (related law only)
all except one, the last one give the principal, the 1. Liability of directors for watered stocks. (Sec. 65, BP
must still be given substitute does not 68)
have to be given; if it is 2. When the director or trustee who willfully and knowingly
impossible to give the vote for or assent to patently unlawful acts of the
substitute, the principal corporation or who are guilty of gross negligence or bad
must still be given faith in directing the affairs of the corporation or acquire
d) Right to choose may be d) The right of choice is any personal or pecuniary interest in conflict with their
given either to debtor or given only to the debtor duty (Sec 31 BP 68)
creditor 3. Workmen compensation act
4. Where an instrument containing the word "I promise to
pay" is signed by two or more persons, they are deemed
6. Joint /Solidary
to be jointly and severally liable thereon. (Sec 17, g, Act
a.) Individual – one debtor and one creditor
2031)
b.) Collective – Two or more debtor and two or more
5. Joint payees or joint indorsees who indorse are deemed
creditor
to indorse jointly and severally. (Sec 68, Act 2031)
1. Joint – 2or more debt/credit as there are
debtor/creditor (mancomunada,
Kinds of solidarity
mancomunadamente, pro rata, proportionately,
1. Parties bound
We promise to pay signed by 2 or more person)
a. Passive solidarity – Debtor
2. Solidary - Each debtor/creditor is bound to
b. Active solidarity – Creditor
pay/right to demand payment the entire
c. Mixed solidarity – both creditor and debtor
compliance of the obligation ( Joint and/or
2. Source
severally, solidaria, in solidum, juntos o
a. Conventional – by agreement
separademente, Individually and/or collectively,
b. Legal solidarity – imposed by law
I promise to pay signed by 2 or more persons,
c. Real solidarity – nature of the obligation
each will pay the whole value)
3. Legal tie
a. Uniform – bound by the same stipulation
Gen Rule: Joint obligation
b. Non-uniform or varied – not subject to the same
Exception:
stipulation
a. Law
b. Stipulation
Invisibility vs solidarity
c. Nature of obligation requires solidarity (real
1. Prestation vs. juridical tie or legal tie
solidarity)
2. Debtor guilty of breach is only liable vs. all debtor
are liable
Solidarity imposed by law (under the New Civil Code)
3. Exist even only 1 debtor and 1 creditor vs. at least 2
1. 2 or more heirs take possession of the estate - loss or
debtor/creditor
destruction of a thing devised or bequeathed, even
4. Other debtor not liable in case of insolvency of one
though only one of them should have been negligent.
debtor vs. other debtor are proportionately liable
(Art. 927)
2. Death or injury is due to the negligence of a fellow
Solidarity creditor
worker, the latter and the employer shall be solidarily
 Can do useful to but not prejudicial to other solidary
liable for compensation. (Art. 1712)
creditor
3. The collapse of building or structure within fifteen years
 Cannot assign without the consent of the other
(15) from completion of the structure, the engineer or
solidary creditor
architect who supervises the construction shall be
 Novation, compensation, confusion or remission by
solidarily liable with the contractor. (Art 1723)
solidary creditor extinguish the obligation but liable
4. Any wrongful act or omission of any partner acting in the
to the other solidary creditor
ordinary course of the business of the partnership or
 Debtor may pay any one of the solidary creditor.
with the authority of co-partners, loss or injury is caused
Except when one of the solidary creditor demand
to any person. (Art. 1822 and 1824
judicial or extrajudicial payment must be made to
5. Partner received money or property from 3 rd person and
him.
misapplies it or Partnership receives money or property
of a 3rd person and such property was misapplied by any
Solidary debtor
partner while in partnership custody. (Art 1823 and
 Creditor can proceed to any solidary debtor as long
1824)
as the debt has not been fully collected
6. Even when the agent has exceeded his authority, the
 Payment by one of solidary debtor extinguishes the
principal is solidarily liable with the agent if the former
obligation. If 2 or more debtor offers, the creditor
allowed the latter to act as though he had full powers.
may choose which offer to accept.
(Art. 1911)
 Solidary debtor who pay, may claim from his co-
7. Two or more persons have appointed an agent for a
debtor + interest from the date of payment (except
common transaction or undertaking, - Liable to the
when not yet due, no interest for intervening
agent for all the consequences of the agency. (Art. 1915)
period)
8. Two or more bailees (Commodatum) to whom a thing is
 Insolvency of one of solidary debtor – to be borne by
loaned in the same contract (1945)
all his co-debtor in proportion to the debt of each.
9. The responsibility of two or more officious managers
Payment by solidary debtor after the obligation has
(negotiorum gestio) shall be solidary, unless the
prescribed or become illegal – Not entitled to
management was assumed to save the thing or business
reimbursement.
from imminent danger. (Art. 2146)
 Remission made by the creditor of the share of one
10. The owner and his driver in a motor vehicle mishaps, if
of the solidary debtor – Does not release such
the former, who was in the vehicle, could have, by the

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EXCEL PROFESSIONAL SERVICES, INC.
solidary debtor toward other co-debtor when the
debt was totally paid before remission.
 Remission of whole obligation obtained by one of the
solidary debtors – not entitled for reimbursement
 Loss without fault of any debtor– obligation
extinguished
 Loss with fault of any debtor – All debtor are liable
without prejudice to the action against guilty or
negligent debtor.
 Loss due to fortuitous event after delay by any of
the solidary debtor – same all debtor are liable.
 Claim for Compensation under Workmen’s
compensation law. (Sec 2, workmen compensation
law)
 Article 19, 20, 21, 22 of the Civil code (Human
relations)
Defense of solidary debtor
a. Nature of the obligation – payment , fraud,
prescription, remission, illegality, absence of
consideration, res judicata, non performance of
suspensive condition
b. Those personal to him - incapacity, mistake,
violence, minority. (personal or complete defense)
c. Those personal to the other.
7. Divisible – Capable of partial fulfillment
8. Indivisible – Not capable of partial fulfillment
Kinds of division
a. Qualitative division – based on quality
b. Quantitative division – based on quantity
c. Ideal or intellectual division – exist only in mind of
the parties
Kinds of indivisibility
a. Legal indivisibility – by law
b. Conventional indivisibility - by agreement
c. Absolute or natural indivisibility – nature of the
object/prestation
 Divisibility or indivisibility is determined by the
purpose or intention of the parties not the possibility
or impossibility of partial performance. (except of
nature indivisibility)
 Divisible or indivisible refer to the object of he
obligation not on the cause or legal tie.
 Joint indivisible obligation give rise to indemnity for
damages – one debtor does not comply with his
undertaking.
a. Effect – Obligation is converted into one for
damages. Specific performance or rescission is
not a remedy because the other debtors are
willing to fulfill.
 Obligation to give definite thing and not susceptible
of partial performance – Indivisible
 Object the execution of a certain number of days of
work – Divisible
 Accomplishment of work by metrical units or
analogous things
 Nature are susceptible of partial performance –
Divisible
 Obligation not to do – Determined by the character
of the prestation in each particular case.
9. Obligation with a penal clause – Penalty shall substitute
the indemnity for damages and the payment of interests
in case of non-compliance (absence of agreement).
a. Principal
b. Accessory
Kinds of penal clause
a. Origin
1.) Legal penal clause - by law
2.) Conventional penal clause – by agreement
b. Purpose
Page 8 of 19 www.prtc.com.ph
1.) Compensatory penal clause – take the place of
damages (1226)
2.) Punitive penal clause – imposed as punishment for
breach
c. Demandability or effect
1.) Subsidiary or alternative penal clause - only penal
clause can be enforce.
2.) Joint or cumulative – both principal and penal clause
can be enforce
1. The penal clause shall substitute the indemnity for
damages and the payment of interest in case of non
compliance. (1226) However, Penalty may be
enforced only when it is demandable.
2. Proof of actual damages suffered by the creditor not
necessary to enforce the penalty. (1228)
However damages shall be paid
a. There is stipulation
b. Obligor refuses to pay the penalty
c. Guilty of fraud in the fulfillment of the obligation.
3. Debtor cannot exempt himself from performance and
to pay only the penalty (except when expressly
granted to him). Neither can the creditor demand the
fulfillment of the obligation and the satisfaction of
the penalty at the same time, unless this right has
been clearly granted him. (1227) However, if
creditor choose performance but become impossible
without his fault, the penalty may be imposed.
Causes for reduction of penalty:
a. Principal obligation has been partly or irregularly
complied with;
b. Penalty is iniquitous or unconscionable
 Nullity of the penal clause does not carry of the
principal obligation but the nullity of the principal
carries with that of the penal clause. (Rule:
Accessory follows the principal)
Extinguishment of Obligation
Art. 1231. Obligations are extinguished:
(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and
debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishing an obligation
a. Annulment
b. Rescission
c. Fulfillment of a resolutory condition
d. Prescription
e. Arrival of resolutory period
f. Death of the party
g. Mutual desistance/withdrawal
h. Compromise
i. Impossibility of performance
j. Happening of a fortuitous event
1. Payment or performance – not only delivery of money
but also the performance in any other manner of an
obligation. (1232)
Gen rule: There must be total performance. Partial or
irregular performance does not extinguish obligation.
(1233)
Exception:
a. Substantial performance in good faith. (1234)
Requisites of Substantial Performance
1. Attempt in Good Faith to perform without willful
or intentional departure
2. Deviation is slight
3. Omission/Defect is technical or unimportant
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EXCEL PROFESSIONAL SERVICES, INC.

4. Must not be so material that intention of parties

is not attained 3rd person
Effect of Substantial performance in good faith
1. Obligor may recover as though there has been Valid if
strict and complete fulfillment, less damages
redounded
suffered by the obligee
2. Right to rescind cannot be used for slight breach to the
b. Creditor accepts performance knowing its
incompleteness or irregularity without expression of
benefit of Guarantor
the creditor
protest. (principle of estoppels)(1235)
except
 Creditor may refuse to accept payment payment in
1. Payment by 3rd person
2. Partial performance
good faith in
3. When the debtor has no capacity to alienate or possession of Payment
free disposal of the thing theCreditor
credit Debtor
 General rule: Creditor not bound to accept
Presumed
Acceptance of creditor is always required
performance by 3rd person. (1236) The creditor is benefit
Capacitatto Free disposal of the thing
bound to accept payment only by: the
1. Debtor ed -creditor
Valid Capacity to alienate
2. Has interest in the performance of obligation
Subrogation
Incapacita
(guarantor, surety) Ratification
ted –
3. 3rd person if there is stipulation. Estoppel
But the payment in any case valid if the creditor accepts. valid if
The option to accept is granted to the creditor. the
creditor
 Payment by 3rd person to creditor may recover to
the debtor kept the
a.) With knowledge of the debtor – right of thing
reimbursement (amount paid, not amount of delivered
debt) + subrogation (acquire all the right of the Without
creditor) (1236 par 2) or it
knowledge
b.) Without knowledge/against the will of the debtor redounde
– only benefit to the debtor. 3rd person cannot or against 3rd person
d to his
compel the creditor to subrogate in his rights the will of
such as those arising from mortgage, guaranty benefit
the debtorIntend to be reimbursed
or penalty. (1237) Not intended to be reimbursed - d
c.) No recovery - Payment by 3 rd person who does (Only
not intend to be reimburse is deemed donation beneficial
which requires debtor’s consent. to creditor)
 Payment by one who does not have free disposal of With
the thing due and capacity to alienate – Not valid knowledge
without prejudice to natural obligation. (1239) or not
 Payment must be to the person in whose favor the
obligation has been constituted. (creditor , creditor against the
successor in interest, any person authorized to will of the
receive payment) (1240) debtor
a. Payment to a person who is incapacitated to
administer his property shall be valid if he has (Reimburse
kept the thing delivered or insofar as the ment +
payment has been beneficial to him.
subrogatio
b. Payment to 3rd person shall also be valid insofar
as it has redounded to the benefit of the n)
creditor. (1241)
 Payment made in good faith to any person in
Payment to 3rd person : Presumed that it redounded to possession of the credit shall release the debtor.
the benefit of the creditor: (1242)
a. 3rd person acquires the creditor’s right (subrogation) Requisites:
b. Creditor ratifies the payment to the 3rd person 1. Payment by debtor must be made in good faith
(ratification) 2. Creditor must be in possession of the credit &
c. Creditors' led to believe that the 3 rd person had not merely the evidence of indebtedness
authority to receive the payment (Estoppels)  Payment made to the creditor by the debtor after the
latter has been judicially ordered to retain the debt
shall not be valid. (1243)
 Debtor cannot compel the creditor to receive a
different one although of the same value or more
valuable than that which is due. (1244)
 Obligation to do or not to do, an act or forbearance
cannot be substituted by another act or forbearance
against the obligee’s will. (1242 par 2)
 Obligation to deliver an indeterminate or generic
thing whose quality and circumstances have not
been stated. (1246)

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EXCEL PROFESSIONAL SERVICES, INC.
a. Creditor cannot demand a thing of superior
quality.
b. Debtor cannot deliver a thing of inferior quality.
 Extrajudicial expense – account of the debtor
 Judicial expense – The Rules of court apply. Judicial
expense is shouldered by the losing party.
Place of payment (1251)
1. Place designated in the obligation
2. No express stipulation
a. Determinate thing – Place where the thing was,
at the perfection of the contract
b. Generic thing – domicile of the debtor.
Gen Rule: The creditor cannot be compelled to receive
partial performance. Neither may the debtor be required
to make partial payment.(1248)
Exception:
1. Express stipulation
2. Debt is part liquidated and in part unliquidated.
3. Different prestation are subject to different terms or
conditions which affect some of them.
 The payment of debts in money shall be made in the
currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal
tender in the Philippines. (1249)
 The delivery of promissory notes payable to order, or
bills of exchange or other mercantile documents shall
produce the effect of payment only when they have
been cashed, or when through the fault of the
creditor they have been impaired.
In the meantime, the action derived from the original
obligation shall be held in the abeyance.
 In case an extraordinary inflation or deflation of
the currency stipulated should supervene, the value
of the currency at the time of the establishment
of the obligation shall be the basis of payment,
unless there is an agreement to the contrary(1250)
Nota Bene:
Section 52. Legal Tender Power. - All notes and coins
issued by the Bangko Sentral shall be fully guaranteed by
the Government of the Republic of the Philippines and shall
be legal tender in the Philippines for all debts, both public
and private: Provided, however, That, unless otherwise
fixed by the Monetary Board, coins shall be legal tender
in amounts not exceeding Fifty pesos (P50.00) for
denominations of Twenty-five centavos and above, and in
amounts not exceeding Twenty pesos (P20.00) for
denominations of Ten centavos or less. (R.A. 7653)
Hence, Philippine currency notes have no limit to their legal
tender power. However, pursuant to BSP Circular No. 537,
Series 2006 (Dated: July 18, 2006), coins in denomination of
1-,5- and 10-piso shall be legal tender in amounts not
exceeding P1,000.00 while coins in denomination of 1-,5-
and 10- and 25 sentimo shall be legal tender in amounts
not exceeding P100.00.
Special forms of payment
a. Dation in payment / Adjudication or dacion en pago
– governed by law on sales
 Property is alienated to the creditor in
satisfaction of debt in money
b. Application of payment
1. One debtor and one creditor
2. Two or more debts
3. Debt must be of the same kind
4. The payment for the debt applied must be due
5. Payment must not sufficient to cover all the 2.
debts
Note: Not really a special form of payment
 Debtor has the 1st choice – must indicate at the
time of payment
Page 10 of 19 www.prtc.com.ph
 If the debtor does not apply, the creditor may
make the designation. Specify in the receipt
which debt is being paid
 In the absence of above, debt which is most
onerous to the debtor
 If the same nature and burden – applied to all of
them proportionately.
 Payment applies to interest, then to principal.
c. Payment by cession
1. Two or more creditors
2. Debtor must be partially insolvent
3. Assignment/cession must be accepted by the
creditors.
d. Tender of payment (extrajudicial) and consignation
(judicial) – Creditor refuse to accept payment
without just cause
 Must comply with the rules on payment (must be
total)
 Unconditional and total
 Actual. Manifestation of a desire or intention to
pay is enough.
 The debtor must show possession of the thing at
the time of the offer (tender).
 Before creditor accepts the consignation or
before judicial declaration, the debtor may
withdraw the thing deposited.
 Should the creditor authorize to withdraw the
thing consigned – He lose every preference over
the thing (co-debtor, guarantors and sureties are
released)
Tender of payment alone cannot extinguish valid
debt. However, consignation alone when allowed
extinguished obligation.
Requisites:
1. Existence of valid debt which is due and
demandable
2. Tender of payment by the debtor
3. Refusal without justifiable reason by the creditor
to accept it.
4. Previous notice of consignation to persons
interested in the fulfillment of the obligation.
(guarantor, mortgagee, solidary debtors, solidary
creditors).
5. Consignation of the thing
6. Subsequent notice of consignation to in
interested parties.
When tender of payment not required
1. Creditor is absent or unknown or does not
appear in the place of payment
2. Creditor is incapacitated at the time of payment
3. Creditor refuse to give receipt without just cause
4. Two or more person claim the same right to
collect
5. Title of the obligation has been lost
Dation in payment vs. Payment by cession
1. One creditor vs. several creditor
2. Debtor not insolvent vs. debtor insolvent
3. Not all property of the debtor vs. all property of
the debtor
4. Creditor become the owner vs. creditor acquire
only the right to dispose the thing and apply the
proceeds to their credit proportionately.
5. Act of novation vs. not act of novation
Loss of determinate thing
Kinds of loss
a. Physical loss – perishes
b. Legal loss – goes out of commerce
c. Civil loss – thing disappears in a such way that its
existence is unknown.
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EXCEL PROFESSIONAL SERVICES, INC.
Loss of a thing due
1. Obligation to give specific thing
a. Total loss
1. Loss with the fault of the debtor – (Liable)
2. Loss without the fault of the debtor -
Fortuitous event (not liable)
Exception:
1. Law
a. Delay
b. Promised to deliver the same thing to
2 or more person who do not have
the same interest
c. Lost of generic thing
d. Obligation to deliver a specific thing
arises from crime. (1268)
2. Stipulation
3. Assumption of risk
b. Partial loss – Court shall determine under the
circumstances (importance of the partial loss of
the object) whether partial loss is as to be
equivalent to a complete or total loss. (i.e.
Broken leg - horse for race or horse to be
slaughtered)
2. Obligation to do
 The debtor in obligations to do shall also be
released when the prestation becomes legally or
physically impossible without the fault of the
obligor. (1266)
a. Impossibility at the beginning - void
b. Impossibility after the constitution of the
obligation
 When the service has become so difficult as to be
manifestly beyond the contemplation of the
parties, the obligor may also be released
therefrom, in whole or in part. (1267)
Kinds of impossibility
 Physical impossibility – (Accident/death)
 Legal impossibility – Ordinance declaring an area
residential zone (i.e. obligation to construct
commercial building; Lawyer appointed as judge)
General rule: When a thing is loss in possession of the
debtor it is presumed that it was loss due to his fault. (1265)
Exception:
1. Earthquake
2. Flood
3. Storm
4. Other natural calamity
 The obligation having been extinguished by the
loss of the thing, the creditor shall have all the
rights of action which the debtor may have against
third persons by reason of the loss. (1269)
3. Condonation/remission of debt - Condonation or
remission is essentially gratuitous, and requires the
acceptance by the obligor. It may be made expressly
or impliedly. One and the other kind shall be subject to
the rules which govern inofficious donations. Express
condonation shall, furthermore, comply with the forms of
donation (1270)
Kinds of remission
a. Extent
1. Complete – cover the entire obligation
2. Partial – Not cover the entire obligation
b. Form
1. Express – verbal or in writing
2. Implied – Inferred from conduct
Voluntary delivery of private document
evidencing the credit by the creditor to the
debtor (Art 1271)
c. Date of effectivity
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1. Intervivos – take effect during lifetime of the
donor
2. Mortis cause – effective upon death of the donor
 The delivery of a private document evidencing a
credit, made voluntarily by the creditor to the
debtor, implies the renunciation of the action which
the former had against the latter.
If in order to nullify this waiver it should be claimed
to be inofficious, the debtor and his heirs may uphold
it by proving that the delivery of the document was
made in virtue of payment of the debt. (1271)
 Whenever the private document in which the debt
appears is found in the possession of the debtor, it
shall be presumed that the creditor delivered it
voluntarily, unless the contrary is proved. (1272)
 The renunciation of the principal debt shall
extinguish the accessory obligations; but the waiver
of the latter shall leave the former in force. (1273)
(accessory follows the principal)
 It is presumed that the accessory obligation of
pledge has been remitted when the thing pledged,
after its delivery to the creditor, is found in the
possession of the debtor, or of a third person who
owns the thing. (1274)
4. Merger/confusion – The character of creditor and debtor
are merged in the same person. (1275)
 Merger which takes place in the person of the
principal debtor or creditor benefits the guarantors.
(principal obligation is extinguish as well as
accessory obligation) Confusion which takes place in
the person of any of the latter does not extinguish
the obligation. (Only accessory obligation is
extinguished) (1276)
 Confusion does not extinguish a joint obligation
except as regards the share corresponding to the
creditor or debtor in whom the two characters
concur. (1277)
5. Compensation - When two person, in their own right,
are creditors and debtors of each other, (1278)
Confusion vs. Compensation
1. Only one person who is a debtor and creditor of
himself vs. two person involved, each of whom is a
debtor and a creditor of the other
2. Only one obligation vs. 2 obligation
3. Impossiblity of payment vs. indirect payment
Kinds of compensation
1. Effect or extent
a. Total – Both obligation are of the same amount
b. Partial – Two obligation are of different amount
2. Cause or origin
a. Legal – Takes place by operation of law
b. Voluntary – by agreement
c. Judicial – takes place by order from a court in a
litigation.
d. Facultative – can be set up only by one of the
parties.
Art. 1279. In order that compensation may be proper, it is
necessary: (Legal compensation)
1.) That each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the
other;
2.) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind,
and also of the same quality if the latter has been
stated;
3.) That the two debts be due;
4.) That they be liquidated and demandable;
5.) That over neither of them there be any retention or
controversy, commenced by third persons and
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communicated in due time to the debtor. (1196)
 The parties may agree upon the compensation of debts
which are not yet due.(1282)
 If one of the parties to a suit over an obligation has a
claim for damages against the other, the former may set
it off by proving his right to said damages and the
amount thereof. (1283)
 When one or both debts are rescissible or voidable, they
may be compensated against each other before they are
judicially rescinded or avoided. (1284)
 The debtor who has consented to the assignment of
rights made by a creditor in favor of a third person,
cannot set up against the assignee the compensation
which would pertain to him against the assignor, unless
the assignor was notified by the debtor at the time he
gave his consent, that he reserved his right to the
compensation. (1285)
 If the creditor communicated the cession to him but the
debtor did not consent thereto, the latter may set up the
compensation of debts previous to the cession, but not
of subsequent ones.
 If the assignment is made without the knowledge of the
debtor, he may set up the compensation of all credits
prior to the same and also later ones until he had
knowledge of the assignment. (1198a)
 Compensation takes place by operation of law, even
though the debts may be payable at different places, but
there shall be an indemnity for expenses of exchange or
transportation to the place of payment. (1286)
 If a person should have against him several debts which
are susceptible of compensation, the rules on the
application of payments shall apply to the order of the
compensation. (1289)
Art. 1287. Compensation shall not be proper when one of
the debts arises from a depositum or from the obligations of
a depositary or of a bailee in commodatum.
Neither can compensation be set up against a creditor who
has a claim for support due by gratuitous title, without
prejudice to the provisions of paragraph 2 of article 301.
(1200a)
Art. 1288. Neither shall there be compensation if one of the
debts consists in civil liability arising from a penal offense.
(n)
6. Novation – Obligations may be modified by: (1)
Changing their object or principal conditions; (2)
Substituting the person of the debtor; (3) Subrogating a
third person in the rights of the creditor. (1291)
Kinds of novation
1. Origin
a. Legal – operation of law
b. Conventional – agreement of the parties
2. How it s constituted
a. Express – Declared in unequivocal term
b. Implied – Old and new obligation are essentially
incompatible with each other
3. Extent or effect
a. Total or extinctive – Old obligation is completely
extinguished
b. Partial or modificatory – Old obligation is merely
modified
4. Subject
a. Real or objective – Object or principal condition
are changed
b. Personal or subjective – person of the debtor is
substituted/ or when a third person is
subrogated in the right of the creditor.
1. Substitution – Person of the debtor is
substituted
1.1. Expromision – 3rd person on his own
initiative and without the knowledge or
against the will of the original debtor
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assumes the latter’s obligation with the
consent of the creditor. (Only the
consent of the creditor and 3 rd person is
made)
1.2. Delegacion – Creditor accepts a third
person to take the place of the debtor at
the instance of the latter. It requires that
the old debtor be release from the old
obligation. (all parties, old debtor, new
debtor and the creditor must agree)
2. Subrogation – Third person is subrogated in
the rights of the creditor.
c. Mixed – Combination of real and personal
novation.
 Novation is never presumed.
 Test: Is the old and new obligation having an
independent existence. Positive - compatible (No
novation); Negative – incompatible - Novation.
 Conventional subrogation be clearly establish (1300)
and it requires the consent of the original parties and
of the third person. (1301)
 Legal subrogation is not presumed except in cases
provided for by law. (1300)
 When the principal obligation is extinguished in
consequence of a novation, accessory obligations
may subsist only insofar as they may benefit third
persons who did not give their consent. (1296)
 If the new obligation is void, the original one shall
subsist, unless the parties intended that the former
relation should be extinguished in any event. (1297)
 The novation is void if the original obligation was
void, except when annulment may be claimed only
by the debtor or when ratification validates acts
which are voidable. (1298)
 If the original obligation was subject to a suspensive
or resolutory condition, the new obligation shall be
under the same condition, unless it is otherwise
stipulated. (1299)
 Subrogation transfers to the persons subrogated the
credit with all the rights thereto appertaining, either
against the debtor or against third person, be they
guarantors or possessors of mortgages, subject to
stipulation in a conventional subrogation. (1303)
 A creditor, to whom partial payment has been made,
may exercise his right for the remainder, and he
shall be preferred to the person who has been
subrogated in his place in virtue of the partial
payment of the same credit. (1304)
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EXCEL PROFESSIONAL SERVICES, INC.

Donation of immovable property must be in a public

instrument, Sale of land or interest therein, the
Real novation authority of the agent must be in writing)
Old Creditor Old Debtor 2. Cause or equivalence of value of prestation
a. Onerous – equivalent value of prestation
Object Expromision b. Gratuitous or lucrative – no equivalent prestation
1. Without the c. Remunerative - the prestation is the benefit or
S knowledge service that had been rendered previously.
u 3. Importance or dependence of one upon another:
2. Against the will a. Principal – can stand alone
b of the debtor b. Accessory – depend upon the existence of another
s Note: Insolvency contract
t c. Preparatory – not considered the contract as an end
of the new by itself but as a mean for entering in future
i debtor – transaction or contract.
t 4.
Obligation of the Parties obligated
u a. Unilateral – only one party has obligation
old debtor is not b. Bilateral – both party has obligation
t revived (1294) 5. Name or designation
i a. Nominate – has a name given by law
o b. Innominate – no name given by law
1. Do ut des (I give that you may give) no longer
nDelegacion innominate. This is now called Barter
All parties agree 2. Do ut facias (I give that you may do)
3. Facio ut des (I do that you may give)
Note: Insolvency 4. Facio ut facias (I do that you may do)
New Debtor of the new 6. Risk of fulfillment
debtor – a. Commutative – real fulfillment, equivalent value are
Subrogation given
Obligation of b. Aleatory – fulfillment depend upon chance.
Conventional - Express the old 7. Time of performance or fulfillment
agreement (debtor, debtor is not a. Executed – prestation are already complied with
original creditor and 3rd b. Executory – prestations are to be complied with in
revived the future
person (new creditor) Exception: 8. According to number of person who participated in the
Legal – by operation of Insolvency was drafting of the contract
law a. Ordinary -
already existing b. Contract of adhesion – Where the terms and
and of public condition of the contract is already drafted by one
knowledge party. The other party only signifies his consent by
signing the contract.
Insolency is
known to the Stages of contract
debtor, when he 1. Preparation (Negotiation, conception or Generacion)
– steps taken by the parties leading to the perfection
delegated his of the contract.
debt. (1295) 2. Perfection (or birth) – Come to a definite agreement
or meeting of the mind upon the object and the
cause.
Art. 1302. It is presumed that there is legal 3. Consummation (death or termination) – parties have
subrogation: performed their respective obiigation
(1) When a creditor pays another creditor who is
preferred, even without the debtor's knowledge; Characteristics of contract
(2) When a third person, not interested in the obligation, 1. Freedom of contract - contracting parties may establish
pays with the express or tacit approval of the debtor; such stipulations, clauses, terms and conditions as they
(3) When, even without the knowledge of the debtor, a may deem convenient (1306)
person interested in the fulfillment of the obligation Limitation:
pays, without prejudice to the effects of confusion as to a. Law
the latter's share. (1210a) b. Moral
c. Good custom
CONTRACTS d. Public order
e. Public policy
Contract - meeting of minds between two persons whereby 2. Mutuality of contract - contract must bind both
one binds himself, with respect to the other, to give contracting parties; its validity or compliance cannot be
something or to render some service. left to the will of one of them (1308). The principle is
based on the essential equality of the parties.
Kinds of contract  The determination of the performance may be left to
1. Formation or perfection a third person, whose decision shall not be binding
a. Consensual – perfected by mere consent (1315) until it has been made known to both contracting
b. Real – perfected by delivery (i.e. depositum, pledge, parties. (1309)
commodatum) (1316)  The determination shall not be obligatory if it is
c. Formal or solemn (i.e. Interest must be in writing evidently inequitable. In such case, the courts shall
(1956); Contribution of immovable property must be decide what is equitable under the circumstances
in a public instrument, donation of personal property (1310)
where the value exceed P5,000 must be in writing;

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3. Relativity of contract - Contracts take effect only CONSENT (1319)

between the parties, their assigns and heirs (1311)
Exception:
a. Where the obligations arising from contract are not
transmissible by nature (personal qualification is
involved), by stipulation or by provision of law
(Agency, partnership, commodatum).
b. Stipulation in favor of third person (stipulation pour
autrui) (1311 par 2)
If a contract should contain some stipulation in favor
of a third person, he may demand its fulfillment
provided he communicated his acceptance to the
obligor before its revocation. A mere incidental
benefit or interest of a person is not sufficient. The
contracting parties must have clearly and
deliberately conferred a favor upon a third person
c. Contract creating real right (1312)
d. Contact entered into to defraud the creditors. (1313)
e. Contract which have been violated thru the
inducement of 3rd person (1314)
Elements of a Contract
1. Essential elements
a. Common (Consent, Object, Cause)
b. Special
1.) Form – formalities in solemn contract, deliver in
real contract, registration to bind third person
(Real estate mortgage, chattel mortgage)
Solemn contract
(Consent, Object, Cause + Execution of
formalities)
a. Stipulation of interest = writing.
b. Contribution of immovable property in
partnership = inventory of such property +
public instrument
c. Donation of personal property where the
value exceed P5,000 = in writing
d. Donation as well as acceptance of real
property = Public instrument.
e. Will = writing + formalities prescribed by
law.
f. Agent authority in case of sale of immovable
property in behalf of the principal = writing
Art. 1319. Consent is manifested by the meeting of the offer
and the acceptance upon the thing and the cause which are
to constitute the contract. The offer must be certain and the
acceptance absolute. A qualified acceptance constitutes a
counter-offer.
Acceptance made by letter or telegram does not bind the
offerer except from the time it came to his knowledge. The
contract, in such a case, is presumed to have been entered
into in the place where the offer was made.
1. Theory of cognition – The acceptance is considered to
effectively bind the offeror only from the time it came to
his knowledge. (Civil code)
2. Theory of manifestation – The contract is perfected at
the moment when the acceptance is declared or made by
the offeree. (Code of commerce)
Art. 1320. An acceptance may be express or implied.
Art. 1321. The person making the offer may fix the time,
place, and manner of acceptance, all of which must be
complied with.
Art. 1322. An offer made through an agent is accepted from
the time acceptance is communicated to him. (n)
Art. 1323. An offer becomes ineffective upon the death, civil
interdiction, insanity, or insolvency of either party before
acceptance is conveyed.
Art. 1325. Unless it appears otherwise, business
advertisements of things for sale are not definite offers, but
mere invitations to make an offer.
Art. 1326. Advertisements for bidders are simply invitations
to make proposals, and the advertiser is not bound to accept
the highest or lowest bidder, unless the contrary appears.
Art. 1327. The following cannot give consent to a contract:
(7) Unemancipated minors;
(8) Insane or demented persons, and deaf-mutes who do
not know how to write. (1263a)
Art. 1328. Contracts entered into during a lucid interval are
valid. Contracts agreed to in a state of drunkenness or
during a hypnotic spell are voidable. (n)

Real Contract
(Consent, Object, Cause + Delivery)
a. Deposit
b. Pledge
c. Commodatum
2.) Subject matter
Real estate Real property No delivery
mortgage
Chattel mortgage Personal No delivery
property
Pledge Personal Delivery
property
Antichresis Real property Delivery
3.) Consideration or cause – Sale (price);
Commodatum (liberality)
2. Natural elements – presumed to exist in certain
contracts
a. Warranty against eviction
b. Warranty against hidden defect
3. Accidental elements (by stipulation) – Exist only when
they are expressly provide by the parties. (i.e.
Conditions, period, interest, penalty, place of payment)

Art. 1318. There is no contract unless the following

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

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should refer to the substance of the thing which is

Offer becomes ineffective upon
Business the object of the contract, or to those conditions
Death
advertisemen which have principally moved one or both parties to
Civil interdiction enter into the contract.
t of thig for Mistake as to the identity or qualifications of one of
Insanity
sale in not the parties will vitiate consent only when such
Insolvency
definite offer, identity or qualifications have been the principal
Of either party before acceptance is conveyed cause of the contract.
unless appear A simple mistake of account shall give rise to its
otherwise. (! correction.(1331)
325) Offer certain or definite (1)  When one of the parties is unable to read, or if the
Offere may fix the contract is in a language not understood by him, and
Advertsemen mistake or fraud is alleged, the person enforcing the
time, place and he
t for bidders contract must show that the terms thereof have
By telegram
mannner of been fully explained to the former. (1332)
are simply
Offerer (Seller) acceptance
invitation to (offererallOfferee (Buyer)  There is no mistake if the party alleging it knew the
doubt, contingency or risk affecting the object of the
must be complied
knowledge)
make Agent with (1321)
contract. (1333)
proposals. Qualified  Mutual error as to the legal effect of an agreement
when the real purpose of the parties is frustrated,
Advertiser is acceptance
may vitiate consent. (1334)
not bound to Acceptance (express/implied)
Constitute
counter 2. Violence - when in order to wrest consent, serious or
accept. Absolute(2) irresistible force is employed. (1335)
(1326) offer
3. Intimidation - when one of the contracting parties is
compelled by a reasonable and well-grounded fear of an
Incapacity Vices of imminent and grave evil upon his person or property, or
(1327) consent upon the person or property of his spouse, descendants
Unemancipated Error or or ascendants, to give his consent. (1335)
To determine the degree of intimidation, the age, sex
minor mistake and condition of the person shall be borne in mind.
Insane or (1331) A threat to enforce one's claim through competent
demented Violence or authority, if the claim is just or legal, does not vitiate
consent.
persons, and force (1335) 4. Undue influence - when a person takes improper
Deaf-mutes Intimidation advantage of his power over the will of another,
who do not or threat or depriving the latter of a reasonable freedom of choice.
The following circumstances shall be considered: the
know how to duress (1335) confidential, family, spiritual and other relations between
write . Undue the parties, or the fact that the person alleged to have
Note: influence been unduly influenced was suffering from mental
weakness, or was ignorant or in financial distress.
1. ) Conract (1337) (1337)
entered Fraud or 5. Fraud - when, through insidious words or machinations
during deceit (1338) of one of the contracting parties, the other is induced to
enter into a contract which, without them, he would not
lucid have agreed to.
interval  Failure to disclose facts, when there is a duty to
are valid. reveal them, as when the parties are bound by
confidential relations, constitutes fraud. (1339)
2.) State of  The usual exaggerations in trade, when the other
drunkenes party had an opportunity to know the facts, are not
s or during in themselves fraudulent. (1340)
 A mere expression of an opinion does not signify
hypnotic fraud, unless made by an expert and the other party
spell has relied on the former's special knowledge. (1341)
Voidable  Misrepresentation by a third person does not vitiate
consent, unless such misrepresentation has created
OPTION PERIOD (1324) substantial mistake and the same is mutual. (1342)
Art. 1324. When the offerer has allowed the offeree a certain  Misrepresentation made in good faith is not
period to accept, the offer may be withdrawn at any time fraudulent but may constitute error. (1343)
before acceptance by communicating such withdrawal,  In order that fraud may make a contract voidable, it
except when the option is founded upon a consideration, as should be serious and should not have been
something paid or promised. (n) employed by both contracting parties. (1344)
Incidental fraud only obliges the person employing it to
Option money – Consideration for the period (option pay damages.
contract is created) Employed by Employed by 3rd
Downpayment (Earnest money) one of the person
Contract is perfected contracting
party
Violence Voidable Voidable
Vices of Consent Intimidation Voidable Voidable
1. Error or mistake
Fraud without Voidable Valid, unless it
 In order that mistake may invalidate consent, it
connivance/ result to substantial

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knowledge by the mistake and the the law requires that a contract be in some form in order
party benefited by same is mutual. It that it may be valid or enforceable, or that a contract be
the fraud can be annulled on proved in a certain way, that requirement is absolute
the ground of and indispensable. In such cases, the right of the parties
mistake stated in the following article cannot be exercised.
Fraud with Voidable Voidable. As if (1356)
connivance/ exercised by the  If the law requires a document or other special form, as
knowledge by the party benefited by in the acts and contracts enumerated in the following
party benefited by the fraud. article, the contracting parties may compel each other to
the fraud observe that form, once the contract has been perfected.
Undue influence Voidable Valid This right may be exercised simultaneously with the
action upon the contract. (1357)
Absolute Relative simulated  The following must appear in a public document: (1358)
simulated or (1) Acts and contracts which have for their object the
fictitious contract creation, transmission, modification or
The parties do not The parties conceal their true extinguishment of real rights over immovable
intend to be bound agreement. (1345) property; sales of real property or of an interest
at all. (1345) therein a governed by articles 1403, No. 2, and
VOID When it does not prejudice a third 1405;
(1346) person and is not intended for any (2) The cession, repudiation or renunciation of
purpose contrary to law, morals, hereditary rights or of those of the conjugal
good customs, public order or partnership of gains;
public policy binds the parties to (3) The power to administer property, or any other
their real agreement. (1346) power which has for its object an act appearing or
which should appear in a public document, or should
prejudice a third person;
OBJECT OF CONTRACTS (4) The cession of actions or rights proceeding from an
 All things which are not outside the commerce of men, act appearing in a public document.
including future things, may be the object of a contract. All other contracts where the amount involved
All rights which are not intransmissible may also be the exceeds five hundred pesos must appear in
object of contracts. writing, even a private one. But sales of goods, chattels
 No contract may be entered into upon future or things in action are governed by articles, 1403, No. 2
inheritance except in cases expressly authorized by and 1405. (1280a)
law.
 All services which are not contrary to law, morals, good REFORMATION OF INSTRUMENTS
customs, public order or public policy may likewise be Art. 1359. When, there having been a meeting of the
the object of a contract. (1347) minds of the parties to a contract, their true intention
 Impossible things or services cannot be the object of is not expressed in the instrument purporting to embody
contracts. (1348) the agreement, by reason of mistake, fraud, inequitable
 The object of every contract must be determinate as to conduct or accident, one of the parties may ask for the
its kind. The fact that the quantity is not determinate reformation of the instrument to the end that such true
shall not be an obstacle to the existence of the contract, intention may be expressed.
provided it is possible to determine the same, without If mistake, fraud, inequitable conduct, or accident has
the need of a new contract between the parties. (1349) prevented a meeting of the minds of the parties, the proper
remedy is not reformation of the instrument but annulment
CAUSE OF CONTRACTS of the contract.
 To be a valid cause, it must be lawful, true and real,
definite or determinate as to its kind and possible. Art. 1366. There shall be no reformation in the following
 In onerous contracts the cause is understood to be, for cases:
each contracting party, the prestation or promise of a (1) Simple donations inter vivos wherein no condition is
thing or service by the other; in remuneratory ones, the imposed;
service or benefit which is remunerated; and in contracts (2) Wills;
of pure beneficence, the mere liberality of the (3) When the real agreement is void.
benefactor. (1350)
 The particular motives of the parties in entering into a  Reformation can be avail only of the innocent party.
contract are different from the cause thereof. (1351)  Reformation may be ordered at the instance of either
 Contracts without cause, or with unlawful cause, produce party or his successors in interest, if the mistake was
no effect whatever. The cause is unlawful if it is contrary mutual; otherwise, upon petition of the injured party, or
to law, morals, good customs, public order or public his heirs and assigns. (1368)
policy. (1352)  When reformation proper
 The statement of a false cause in contracts shall render a. Mutual mistake of the parties causes the failure of
them void, if it should not be proved that they were the instrument to disclose their real agreement
founded upon another cause which is true and lawful. (1361)
(1353) b. One party was mistaken and the other acted
 Although the cause is not stated in the contract, it is fraudulently or inequitably in such a way that the
presumed that it exists and is lawful, unless the debtor instrument does not show their true intention.
proves the contrary. (1354) (1362)
 Except in cases specified by law, lesion or inadequacy of c. When one party was mistaken and the other
cause shall not invalidate a contract, unless there has knew or believed that the instrument did not state
been fraud, mistake or undue influence. (1355) their real agreement, but concealed that fact from
the former. (1363)
FORM OF CONTRACTS d. When through the ignorance, lack of skill,
 Contracts shall be obligatory, in whatever form they may negligence or bad faith on the part of the
have been entered into, provided all the essential person drafting the instrument or of the clerk
requisites for their validity are present. However, when or typist, the instrument does not express the true

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intention of the parties. (1364)
e. If two parties agree upon the mortgage or pledge of
real or personal property, but the instrument states
that the property is sold absolutely or with a right of
repurchase. (1365)
 When one of the parties has brought an action to
enforce the instrument, he cannot subsequently ask
for its reformation. (1367)
 The procedure for the reformation of instrument shall
be governed by rules of court. (1369)
INTERPRETATION OF CONTRACTS
 If the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the literal
meaning of its stipulations shall control. (1370)
If the words appear to be contrary to the evident
intention of the parties, the latter shall prevail over the
former.
 In order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be
principally considered. (1371)
 However general the terms of a contract may be, they
shall not be understood to comprehend things that are
distinct and cases that are different from those upon
which the parties intended to agree. (1372)
 If some stipulation of any contract should admit of
several meanings, it shall be understood as bearing that
import which is most adequate to render it effectual.
(1373)
 The various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense
which may result from all of them taken jointly. (1374)
 Words which may have different significations shall be
understood in that which is most in keeping with the
nature and object of the contract. (1375)
 The usage or custom of the place shall be borne in mind
in the interpretation of the ambiguities of a contract, and
shall fill the omission of stipulations which are ordinarily
established. (1376)
 The interpretation of obscure words or stipulations
in a contract shall not favor the party who caused
the obscurity. (1377)
 When it is absolutely impossible to settle doubts by the
rules established in the preceding articles, and the
doubts refer to incidental circumstances of a gratuitous
contract, the least transmission of rights and interests
shall prevail. If the contract is onerous, the doubt shall
be settled in favor of the greatest reciprocity of interests.
If the doubts are cast upon the principal object of
the contract in such a way that it cannot be known
what may have been the intention or will of the
parties, the contract shall be null and void. (1378)
 The principles of interpretation stated in Rule 123 of
the Rules of Court shall likewise be observed in the
construction of contracts. (1379)
DEFECTIVE CONTRACTS
1. Rescissible contract – Rescissible contract is valid until
rescinded. It is allowed by reason of injury or damage
to one parties or to a third person.
The following contracts are rescissible: (1381)
a. Those which are entered into by guardians whenever
the wards whom they represent suffer lesion by
more than one-fourth of the value of the things
which are the object thereof;
 Not applicable when approved by court (1386)
 Prescriptive period: Four years from the
termination of incapacity
b. Those agreed upon in representation of absentees, if
the latter suffer the lesion stated in the preceding
number;
 Not applicable when approved by court (1386)
 Prescriptive period: Four years from the date the
domicile of the absentee is known.
c. Those undertaken in fraud of creditors when the
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latter cannot in any other manner collect the claims
due them;
 The action to claim rescission must be
commenced within four years (1389)
 Alienation which are presumed to have been
entered into in fraud of creditors
a. Gratuitous title - donor did not reserve
sufficient property to pay all debts contracted
before the donation.
b. Onerous title - when made by persons
against whom some judgment has been
issued. The decision or attachment need not
refer to the property alienated, and need not
have been obtained by the party seeking the
rescission.
Note: The design to defraud creditors may be
proved in any other manner recognized by the
law of evidence. (1387)
 Whoever acquires in bad faith the things
alienated in fraud of creditors, shall indemnify
the latter for damages suffered by them on
account of the alienation, whenever, due to any
cause, it should be impossible for him to return
them.
If there are two or more alienations, the first
acquirer shall be liable first, and so on
successively. (1388)
d. Those which refer to things under litigation if they
have been entered into by the defendant without the
knowledge and approval of the litigants or of
competent judicial authority;
 The action to claim rescission must be
commenced within four years (1389)
e. All other contracts specially declared by law to be
subject to rescission.
 The action to claim rescission must be commenced
within four years (1389)
Limitation on the exercise of rescission
1. Contracts can be rescinded only in cases provided by law
2. Being a subsidiary action, it can be exercised only when
there is no other legal means to obtain reparation for the
same. (1383)
3. Can be exercised only to the extent necessary to cover
the damages caused. (1384)
4. Rescission creates the obligation to return the things
which were the object of the contract, together with their
fruits, and the price with its interest (mutual restitution).
Hence, it can be demanded only if the one claiming
rescission can return whatever he may be obliged to
restore.
5. It cannot be availed when the things which are the
object of the contract are legally in the possession of
third persons who did not act in bad faith. In this case,
indemnity for damages may be demanded from the
person causing the loss (1385)
6. The action for rescission has not been prescribed.
2. Voidable Contract – The consent is defective by reason
of incapacity of one party or vices of consent. It is valid
until annulled.
The following contracts are voidable or annullable, even
though there may have been no damage to the
contracting parties: (1390)
a. Those where one of the parties is incapable of
giving consent to a contract;
b. Those where the consent is vitiated by mistake,
violence, intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled by
a proper action in court. They are susceptible of
ratification.
Grounds Prescriptive period
Intimidation, violence or 4 years from the time the
undue influence defect of the consent
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ceases
Mistake or fraud 4 years from the time of
the discovery* of the
same
minors or other 4 years from the time the
incapacitated persons guardianship ceases
*Note: If there is registration of the property, count from the
date of registration.
 Ratification extinguishes the action to annul avoidable
contract. (1392)
 Express ratification – Done in writing or orally
 Tacit ratification - with knowledge of the reason which
renders the contract voidable and such reason having
ceased, the person who has a right to invoke it should
execute an act which necessarily implies an intention to
waive his right. (1393)
 Ratification may be effected by the guardian of the
incapacitated person. (1394)
 Ratification does not require the conformity of the
contracting party who has no right to bring the action for
annulment. (1395)
 Ratification cleanses the contract from all its defects
from the moment it was constituted. (1396).
 The action for the annulment of contracts may be
instituted by all who are thereby obliged principally or
subsidiarily. However, persons who are capable cannot
allege the incapacity of those with whom they
contracted; nor can those who exerted intimidation,
violence, or undue influence, or employed fraud, or
caused mistake base their action upon these flaws of the
contract. (1397)
 An obligation having been annulled, the contracting
parties shall restore to each other the things which have
been the subject matter of the contract, with their fruits,
and the price with its interest, except in cases provided
by law. In obligations to render service, the value
thereof shall be the basis for damages. (1398)
 When the defect of the contract consists in the incapacity
of one of the parties, the incapacitated person is not
obliged to make any restitution except insofar as he has
been benefited by the thing or price received by him.
(1399)
 Whenever the person obliged by the decree of 4.
annulment to return the thing can not do so because it
has been lost through his fault, he shall return the fruits
received and the value of the thing at the time of the
loss, with interest from the same date. (1400)
 The action for annulment of contracts shall be
extinguished when the thing which is the object thereof
is lost through the fraud or fault of the person who has a
right to institute the proceedings.
If the right of action is based upon the incapacity of any
one of the contracting parties, the loss of the thing shall
not be an obstacle to the success of the action, unless
said loss took place through the fraud or fault of the
plaintiff (1401)
 As long as one of the contracting parties does not
restore what in virtue of the decree of annulment he is
bound to return, the other cannot be compelled to
comply with what is incumbent upon him.(1402)
3. Unenforceable contract – Contract that cannot be
enforce unless ratified.
The following contracts are unenforceable, unless they
are ratified: (1403)
(1) Those entered into in the name of another person by
one who has been given no authority or legal
representation, or who has acted beyond his
powers;
(2) Those that do not comply with the Statute of
Frauds as set forth in this number. In the following
cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some
note or memorandum, thereof, be in writing, and
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subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be
received without the writing, or a secondary
evidence of its contents:
(a) An agreement that by its terms is not to be
performed within a year from the making
thereof;
(b) A special promise to answer for the debt,
default, or miscarriage of another;
(c) An agreement made in consideration of
marriage, other than a mutual promise to
marry;
(d) An agreement for the sale of goods, chattels
or things in action (personal property), at
a price not less than five hundred pesos,
unless the buyer accept and receive part of
such goods and chattels, or the evidences, or
some of them, of such things in action or pay at
the time some part of the purchase money; but
when a sale is made by auction and entry is
made by the auctioneer in his sales book, at the
time of the sale, of the amount and kind of
property sold, terms of sale, price, names of the
purchasers and person on whose account the
sale is made, it is a sufficient memorandum;
(e) An agreement of the leasing for a longer
period than one year, or for the sale of (real
property) or of an interest therein;
(f) A representation as to the credit of a third
person.
(3) Those where both parties are incapable of giving
consent to a contract.
 Statutes of fraud is no longer applicable when:
a. There is total or partial performance (Partially or
totally executed)
b. Failure to object to the presentation of oral
evidence to prove the contract.
 Cannot be assailed by third person (1408)
 Effect of ratification by parents or guardian (1407)
a. Only one party – Voidable contract
b. Both parties- valid
Void contract – contract that never exist in the eyes of
law. It has no effect at all and cannot be ratified.
The following contracts are inexistent and void from the
beginning: (1409)
(1) Those whose cause, object or purpose is contrary to
law, morals, good customs, public order or public
policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the
time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to
the principal object of the contract cannot be
ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the
right to set up the defense of illegality be waived.
Rules in determining contracts void
1. Absence of any of essential requites of contract
(Consent, Object or Cause)
2. Contract that are prohibited by law. (i.e Sale
between husband and wife, donation between
husband and wife)
 The action or defense for the declaration of the
inexistence of a contract does not prescribe. (1410)
 Interest paid in excess of the interest allowed by the
usury laws may be recovered by the debtor, with
interest thereon from the date of the payment.
(1413)
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 Where one of the parties to an illegal contract is

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

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