Obligations and

Contracts:
Essential Notes

1
OBLIGATIONS

2
1156
An obligation is a juridical necessity to give,
to do, or not to do.
Notes:
Definition NOT comprehensive
- does not say WHO should DO WHAT
- does not say WHO should DO the giving/
receiving
- no names/parties of obligation
- obligation above is only CIVIL OBLIGATION

3
Definition
- Juridical relation, created by virtue of
certain facts, between two or more persons,
whereby one of them, known as the creditor
or obligee, may demand of the other,
known as the debtor or obligor a definite
prestation.

4
Elements
- Active subject
- Passive subject
- Object/prestation
- Efficient cause/juridical tie

5
Requisites of Prestation
- Physically/legally possible
- Determinate/determinable
- Has a possible equivalent in money

6
1157
Sources of Obligation
- Law
- Contracts
- Quasi contracts
- Acts or omissions punishable by law, and
- Quasi delict

7
Sources are Exclusive
SC in Sagrado Orden de Predicadores
vs. Nacoco (91 Phil 503) declared—
“The occupant’s obligation to pay rentals, like
any other obligation, must arise from law,
contract, quasi-contract, crime or negligence. If
occupant took possession of the property with
the permission of the Alien Property Custodian,
without any express or implied agreement
between them that rentals would be paid for the
use and occupation of the enemy property,
NONE may be recovered by pre-war owner.”

8
1158
Obligations arising from LAW never
presumed
- Hence, in cases of doubt, presumption is
AGAINST the existence of an obligation
arising from a particular law

9
Pelayo vs. Lauren
“xxx This liability (to support) originates from
the xxx mutual obligation which the law has
expressly established between the married
couple. Within the meaning of the law, the father
and mother-in-law are strangers with respect to
the obligation that devolves upon the husband to
provide support xxx of medical assistance to his
wife xxx it does not appear that a contract existed
between the defendants and plaintiff physician
xxx.”

10
1159
Obligation’s arising from CONTRACTS
have the force of law between the
contracting parties and should be complied
with in good faith.
Except:
Those contrary to law, morals, good
customs, public order, public policy.

11
 In Cui vs. Arellano University, the Supreme
Court declared that the stipulation that a
student’s scholarship is good only if he
continues in the same school and that he
waives his right to transfer without refunding
the equivalent of his scholarship grant in cash
is contrary to public policy, xxx is NULL and
VOID.
 Scholarship are awarded in recognition of
merit and “to help students in whom society
has an established interest or first lien” and
not to keep outstanding students in school to
bolster prestige and increase its business
potential.
NOTE:
Obligations arising from CONTRACT need
NOT always be EXPRESS (like those from
LAW). They may be IMPLIED.

14
 Aldaba vs. CA, et al. (27 SCRA 263)
Issue: Was there a contract whether express
or implied?
Ruling: No express agreement to pay for the
services rendered.
No implied contract also because xxx
petitioner did not expect to be paid for the
services. xxx When a person does not
expect to be paid for his services there
cannot be a contract implied in fact to
make compensation for said services.
15
To give rise to an implied contract to pay
services, they must have been rendered by
one party in EXPECTATION that the other
party would pay for them xxx and
ACCEPTED by the other party with
KNOWLEDGE of the expectation.

16
Quasi-Contracts
Those juridical relations arising from lawful,
voluntary and unilateral acts, by virtue of
which the parties become bound to each
other, based on the principle that no one
shall be unjustly enriched or benefited at
the expense of another. (Art. 2142)

17
Kinds of Quasi-Contracts
1) Negotiorum Gestio – voluntary
management of the property or affairs of
another without the knowledge or
consent of the latter. (Art. 2144-2153)
2) Solutio Indebiti – juridical relation which
is created when something is received
when there is no right to demand it and
it was unduly delivered by mistake. (Art.
2154-2163)
3) Other cases (Art. 2164-2175)

18
NATURE AND EFFECTS OF
OBLIGATIONS

19
Classification of Obligations
Based on Prestation
I. Real Obligations – to give
(a) Real obligation to give specific object
(b) Real obligation to give generic object
II. Personal Obligations – to do, not to do,
not to give
(a) Positive personal obligation – to do or to give
(b) Negative personal obligation – not to do or not
to give

20
REAL OBLIGATIONS
Specific Generic
Determinate Indeterminate
Principal – Art. 1244 Art. 1246
‘The debtor of a thing cannot ‘xxx the creditor cannot demand a
compel the creditor to receive a thing of superior quality. Neither
different one, although the latter can the debtor deliver a thing of
may be the same value as, or inferior quality.’
more valuable than that which is
due.”

Supplemental – Art. 1163

‘xxx also obliged to take care of it Not applicable
with the proper diligence of a
good father of a family.
Except :(a) law requires another
(b) agreement states
another

21
 Specific Generic
Determinate Indeterminate
Art. 1166
‘Deliver all accessions and Ibid.
accessories of the thing although
not mentioned.’
Art. 1165, par. 2
Not applicable ‘Creditor may ask that the
obligation be complied with at the
expense of the debtor.’
Art. 1165, par. 1; Art. 1170 Art. 1170
‘Liable for damages in case of ‘Liable for damages in case of
breach by the debtor due to delay, breach due to delay, fraud,
fraud, negligence and COTOTTO.’ negligence and COTOTTO.’

22
PERSONAL OBLIGATIONS
POSITIVE NEGATIVE
Art. 1244, par. 2 Art. 1244, par. 2
The “xxx act xxx cannot be The “xxx forbearance cannot be
substituted by another act xxx substituted by another xxx
against obligee’s will.” forbearance against the obligee’s
will.”
Art. 1167 Art. 1168
- Have the obligation performed - If the obligor does what he has
or executed at the expense of been forbidden, obligee can have
obligor it undone at obligor’s expense
- Ask what has been poorly done - Recover damages
be undone Except: (1) Effects of the act
- Recover damages which is forbidden are definite
Except: when the personal in character;
qualification of the obligor is the (2) It is physically or
principal motive of the legally impossible to undo what
obligation has been done
23
Kinds of Breach of Obligations
1) Involuntary – debtor is unable to comply
with his obligation because of fortuitous
event
Note: Debtor is NOT liable for damages.
2) Voluntary – debtor, in the performance
of the obligation, is guilty of:
(a)Default (mora)
(b)Fraud (dolo)
(c)Negligence (culpa)
(d)Breach through contravention of tenor of the
obligation
Note: Debtor is liable for damages.
24
A. Default (Mora): Delay in the fulfillment of
the obligation with respect to time.
- Must be either malicious or negligent
- If due to inadvertence without any malice
of negligence, the obligor cannot be liable
under Art. 1170
(RCBC vs. CA, G.R. No. 133107, March 25, 1999)

25
Requisites in order to consider the obligor
in default
1) Obligation is demandable and already
liquidated
2) The obligor/debtor delays performance
3) The creditor requires performance
judicially or extra-judicially (demand)
(SSS vs. Moonwalk Devt. and Housing Corp.,
G.R. No. 73345, April 7, 1993)

26
Kinds of Default
1) Mora solvendi – delay of the debtor to
perform his obligation
a) Ex re – obligation is to give
b) Ex persona – obligation is to do

There is no mora solvendi in:

- Negative obligation
- Natural obligation
- Alternative obligation

27
2) Mora accipiendi – delay of the creditor in
accepting delivery of the thing which is
the object of the obligation
Requisites:
a) Offer of performance by the creditor who has
the required capacity;
b) Offer is to comply with the prestation as it
should be performed; and
c) Creditor refuses the performance without just
cause.
Remedy:
a) Consign it in court
b) Keep it to himself (not liable for damages)
28
3) Compensatio morae – delay of the
parties or obligors in reciprocal
obligation

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Rules on Default
1) Unilateral Obligation
Demand is necessary. No demand-
nodelay. Mere expiration of the period
fixed by the parties will not cause delay.
Except:
a) Express stipulation that demand is not necessary
b) The law EXPRESSLY so declares (i.e., taxes)
c) Time is of the essence of the contract
• Barzaga vs. CA
d) Demand would be useless (i.e., debtor voluntarily
destroy the thing)

30
 Pantaleon vs. American Express
(May 8, 2009)
Unreasonable delay in approving/
disapproving credit card purchase is MORA
SOLVENDI, subject to damages.

31
 Barzaga vs. CA
(Feb, 12, 1997)
Materials necessary to be delivered in a
particular date so as to complete
construction of Niche before Christmas and
to bury the dead before Dec. 25 as
requested by the deceased – FAILURE is
delay that justifies damages – no demand
necessary – time was MOTIVE

32
Lorenzo Shipping Corp. vs. BJ Mathel
International (Nov. 19, 2004)
- No delay is incurred in the delivery if NO
demand was made by creditor
- By accepting the cylinders that were
delivered after default, creditor waived
his right to sue for damages based on
Art. 1169

33
2) Reciprocal Obligation
Fulfillment by both parties should be
simultaneous; one party incurs delay
from the moment the other party fulfills
his obligation, while he himself does not
comply or is not ready to comply in a
proper manner with what is incumbent
upon him. (Art. 1169)
Except:
When different dates for the performance of
obligation is fixed by the parties. Demand is
necessary in such case.

34
In Solar Harvest vs. Davao Corrugated Carton
Corp. (July 26, 2010), SC said “in reciprocal
obligations xxx the general rule is that the
fulfillment of the parties’ respective obligation
should be simultaneous. Hence, NO DEMAND is
generally necessary because once a party fulfills
his obligation and the other party does not fulfill
his, the latter automatically incurs in delay. But
when different dates for performance xxx are fixed,
the default xxx must be determined by the rules
given by the first paragraph (Art. 1169) xxx incur
delay ONLY from the moment the other party
demands fulfillment xxx.”

35
B. Fraud (Dolo): Conscious and intentional
proposition to evade the normal fulfillment
of an obligation
- Implies some kind of malice or dishonesty
and cannot cover cases of mistake and
errors in judgment made in good faith. In
such case, obligor can be held liable for
damages.

36
Civil Frauds Distinguished
Fraud/Dolo in the Performance Causal Fraud (Dolo Causante)
of Incidental Fraud (Dolo Arts. 1338 and 1344
Incidente) Art. 1170
Present only during the Present only during the time of
performance of a pre-existing birth or perfection of the obligation
obligation
Purpose is to evade the normal Purpose is to secure the consent
fulfillment of the obligation of the other to enter into a
contract
Results in the non-fulfillment or Results in the vitiation of consent
breach of the obligation
Gives rise to a right of the obligee Gives rise to a right of an innocent
to recover damages from the party to annual the contract
debtor and not a cause of
annulment of contract
Valid obligation Voidable obligation
37
 Cathay Pacific Airways vs. Vazquez
(Mar. 14, 2003)
Upgrading of passengers from Business
Class to First Class in this case was NOT
FRAUD. The airline informed passengers
of the change. There were no insidious
words or deceitful machinations or wilful
concealment of material facts.

38
C. Negligence (Culpa): Any voluntary act or
omission, there being no malice, which
prevents the normal fulfillment of an
obligation
Kinds:
1) Civil Negligence
a) Culpa contractual
b) Culpa aquiliana/quasi-delict
2) Culpa Criminal

39
 Meralco vs. Ramoy
(March 4, 2008)
Meralco cutting the electric power of
customers on the basis solely of NPC request
to cut power of houses in NPC property
already ordered evicted by final judgment and
finding in fact that the house of Ramoy was
not in NPC property was NEGLIGENCE.

40
D. Breach through contravention of tenor
of contract
- Includes not only any illicit act which impairs
the strict and faithful fulfillment of the
obligation, but also every kind of defective
performance
The following do not excuse fulfillment:
1) Increase in cost of performance
2) Poverty
3) Wat between the subjects of a neutral
country

41
Cathay Pacific Airways vs. Vasquez
“The Vasquezes had the right to waive the
PRIORITY (FIRST CLASS) and by Cathay’s
imposing the UPGRADE, it breached its
contract of carriage with the Vasquezes.
However, since there is no bad faith or fraud
on the part of Cathay, the Sps. Vasques are
only entitled to nominal and NOT moral
damages.”

42
Areola vs. CA & Prudential Guarantee &
Insurance
Held: Prudential act of cancelling the
insurance policy entitles Areola to
damages. Even if no harm/damage was
done there was a BREACH because
there’s supposed to be continuity in
Insurance.

43
Defense
Fortuitous event (Art. 1174)
- Acts of God
- Acts of Man

44
Requisites:
1) Event must be independent of the will of
the obligor;
2) It must be either unforeseeable or
inevitable;
3) Must be of such a character as to render it
impossible for the obligor to fulfill his
obligation in a normal manner; and
4) Obligor must be free from any participation
in the aggravation of the injury resulting to
the obligee.

45
Liability in case of fortuitous event:
NO LIABILITY
Except:
1) When expressly declared by law (e.g. Arts.
552 (2), 1165 (3), 1268, 1942, 2147, 2148 and
2159 NCC)
2) When expressly declared by stipulation or
contract
3) When the NATURE of the obligation
requires the assumption of risk
4) When the object of the prestation is generic

46
 Tanguiling vs. CA (Jan. 2, 1997)
JMT contracted to build windmill.
Downpayment and partial payment made
but complete payment was denied because
the windmill collapsed due to strong wing.
Held: Not fortuitous event because
foreseeable event that strong winds are
present in windmills places.
Windmill should not have collapsed if there
was no defect.

47
 Nakpil & Sons. vs. CA (Oct. 3, 1986)
Earthquake that destroyed building IS NOT
FORTUITOUS EVENT that exempts
designers/contractors from liability if there
were alterations of the plans and
specifications that have been stipulated
with building owner.

48
All-Time Favorite Cases
Republic vs. Luzon Stevedoring
(21 SCRA 279)
Presumption of negligence; case at bar. –
Considering that the Nagtahan bridge was
an immovable and stationary object and
xxx provided with adequate openings for
the passage of water craft xxx it is
undeniable that the unusual event that the
barge xxx rammed the bridge support
raises a presumption of negligence xxx.”

49
The appellant strongly stresses the precautions
taken by it on the day in question: that it
assigned two of its most powerful tugboats to
tow down river its barge L-1892; that it assigned
to the task the more competent and experienced
among its patrons, had the towlines, engines
and equipment double-checked and inspected;
that it instructed its patrons to take extra
precautions; and concludes that it had done all it
was called to do, and that the accident,
therefore, should be held due to force majeure
or fortuitous event.

50
These very precautions, however, completely
destroy the appellant's defense. For caso fortuito
or force majeure (which in law are identical in so
far as they exempt an obligor from liability) by
definition, are extraordinary events not
foreseeable or avoidable, "events that could not
be foreseen, or which, though foreseen, were
inevitable" (Art. 1174, Civ. Code of the
Philippines). It is, therefore, not enough that the
event should not have been foreseen or
anticipated, as is commonly believed, but it must
be one impossible to foresee or to avoid. The
mere difficulty to foresee the happening is not
impossibility to foresee the same: xxx
51
Otherwise stated, the appellant, Luzon
Stevedoring Corporation, knowing and
appreciating the perils posed xxx voluntarily
entered into a situation involving obvious
danger; it therefore assured the risk, and can
not shed responsibility merely because the
precautions it adopted turned out to be
insufficient. xxx

52
 Far East Bank & Trust Co. vs. CA
Facts: Luis and Clarita Luna filed an action for
damages against Far East Bank and Trust
Company when it cancelled his FAREAST
CARD after Clarita Luna lost her supplemental
credit card. Luis Luna was forced to pay in
cash when he tendered a despedida lunch for a
close friend at the Bahla Rooftop Restaurant of
the Hotel Intercontinental Manila and his card
was not honored.
Issue: Whether or not Far East Bank is liable
for damages.

53
Held: Far East Bank is liable for nominal
damages.
Far East Bank’s neglect to inform Luis
Luna of the cancellation of his card
constitutes only simple negligence. If Far
East Bank’s omission was gross
negligence and is therefore, tainted with
bad faith, it would have been liable for
moral damages.

54
 Salugada vs. FEU (Apr. 30, 2008)
“We find that respondents failed to
discharge the burden of proving that they
exercised due diligence in providing a safe
learning environment for their students.
They failed to prove that they ensured that
guards met the requirements. xxx”

55
“A school should not be allowed to
completely relinquish or abdicate security
matters in its premises to security agency.
To do so would result to contracting away its
inherent obligation to ensure a safe learning
environment for students.”

56
Extinguishment of Interest and Prior
Installments (Art. 1176)
Receipt of the principal (or later installment)
without reservation as to the interest (or
prior installment) shall give rise to a
disputable presumption that the interest (or
prior installment) has been paid.

57
However, presumptions do not apply:
1) When there is a reservation made orally
or in writing
2) If the receipt does not recite that it was
issued for a particular installment due as
when the receipt is only dated
3) To payment of taxes
4) Where non-payment of the prior
obligations has been proven

58
Compare with Art. 1235
“When the obligee accepts the performance,
knowing its incompleteness or irregularity, and
without expressing any protest or objection, the
obligation is deemed fully complied with.”

(Above is CONCLUSIVE PRESUMPTION)

59
Remedies of Creditor to Protect Credit
(Art. 1177)
1) To exhaust the property in possession of the
debtor generally by attachment, subject to
exemptions provided by law
2) Accion subrogatoria – to be subrogated to all
the rights and actions of the debtor save
those which are inherent in his person
3) Accion pauliana – to impugn all the acts
which the debtor may have done to defraud
them by means of rescissory action at the
instance of the creditor who is prejudiced

60
Transmissibility of Rights Acquired by
Virtue of an Obligation (Art. 1178)
General Rule: Rights acquired by virtue of
an obligation are transmissible in character
Except:
1) When prohibited by LAW which are purely personal
in character
2) When prohibited by PERSONAL QUALIFICATION
or circumstances of the transferor which is material
ingredient attendant in the obligation
3) When prohibited by STIPULATION of the parties

61
DIFFERENT KINDS OF
OBLIGATIONS

62
PURE OBLIGATION
The effectivity or extinguishment does
not depend on the fulfillment or non-
fulfillment of a condition or on the
expiration of a term or period, and is
immediately demandable.

63
CONDITIONAL OBLIGATION
The effectivity is subordinated to the
fulfillment or non-fulfillment of a future
AND uncertain fact or event.

64
Effects of Failure to Comply with
Condition
1) PERFECTION of a contract – results in the
failure of the contract
2) PERFORMANCE of the obligation – gives
the other party an option to refuse to proceed
with the compliance of the obligation or to
waive the condition (i.e., Contract to Sell)

65
OBLIGATION WITH A PERIOD
Those whose demandability or extinguishment
is subject to the expiration of a term or period.
Term/Period
Interval of time, which, exerting an influence on an
obligation as a consequence of a juridical act, either
suspends its demandability or produces its
extinguishment
Requisites:
1) Future;
2) Certain; and
3) Possible, legally and physically

66
Note:
When obligation is demandable at once—
1) Pure obligations (Art. 1179, par. 1)
2) Obligations with a resolutory condition
(Art. 1179, par. 2)
3) Obligations with a resolutory term (Art. 1193,
par. 2)
4) Obligations with a condition not to do an
impossible thing (Art. 1183, par. 2)

67
Kinds of Condition
1) Potestative – fulfillment of the condition
depends on the will of a party to the
obligation
2) Casual – fulfillment of the condition
depends on chance and/or the will of a third
person
3) Mixed – fulfillment of the condition depends
on the will of a party to the obligation and
party on chance and/or will of a third person

68
Potestative Condition
• When it depends exclusively upon the
will of creditor – condition and obligation
is valid
• When it depends exclusively upon the
will of debtor in case of a suspensive
condition – condition and obligation are
void; to allow such condition would be to
sanction illusory obligation, in direct
contravention of the principle announced
in Art. 1308

69
• When it depends exclusively upon the
will of debtor in case of a resolutory
condition – condition and obligation is
valid; the position of the debtor is exactly
the same as the creditor in a suspensive
condition and does not render the
obligation illusory

70
Effects of Impossible Conditions (Art. 1183)
1) Conditional obligation is void – both
obligation and condition are void
2) Conditional obligation is valid – if condition is
negative, it is disregarded and obligation is
rendered pure and valid
3) Only the affected obligation is void – if the
obligation is divisible, the part not affected by
the impossible condition shall be valid
4) Only the condition is void – if obligation is
pre-existing, not depending on fulfillment of
the condition which is impossible for its
existence, only the condition is void
71
5) Condition considered not imposed – if
impossible/unlawful condition is attached for a
simple or remuneratory donation as well as to a
testamentary disposition, condition is considered
not imposed while the obligation is valid
NOTE:
The impossibility of the condition must exist at the
time of the creation of the obligation; a supervening
impossibility does not affect the existence of the
obligation.

72
Effects of Positive and Negative Condition
(Art. 1184-1185)
• In positive condition, obligation is extinguished
as soon as the time expires or if it becomes
indubitable that the event will not take place.
• In negative condition, the obligation is effective
from the moment the time indicated has lapsed,
or if it has become evidence that the event
cannot occur, although the time indicated has not
yet lapsed.
• The intention of the parties, taking into
consideration the nature of the obligation, shall
govern if no time has been fixed for the fulfilment
of the condition.
73
Positive/negative condition is different
from positive/negative obligation

74
Doctrine of Constructive Fulfillment of
Suspensive Condition (Art. 1186)
Condition is deemed fulfilled when the
obligor actually prevented the obligee from
complying with the condition; prevention
must have been voluntary or willful in
character.
Reason:
One must not profit by his own fault.

75
Requisites:
1) Condition is suspensive
2) Debtor actually prevents the fulfillment of
the condition
3) He acts voluntarily

76
Principle of Retroactivity in Suspensive
Condition (Art. 1187)
The principle of retroactivity under Art. 1187
is limited to the effects of the obligation.
The cause of action for the enforcement of
the obligation accrues and the prescription
of the action must still be computed from
the moment of the happening of the
suspensive condition. (Priority of Rights)

77
Rule on Retroactivity has no application to:
a) Real contracts; they are perfected only
by delivery of the object of the
obligation; principle only applies to
consensual contracts;
b) Contracts in which the obligation arising
therefrom can only be realized within
successive periods or intervals (e.g.
lease, hire of service, life annuity)

78
Retroactive effect as to the fruits and
interests in obligations to give
a) Reciprocal obligations – no retroactivity,
mutually compensated (fruits may be
natural, industrial or civil)
b) Unilateral obligations – no retroactivity,
debtor appropriates the fruits and
interests received because it is usually
gratuitous unless intention was
otherwise as inferred from nature and
circumstances

79
Effects of Loss, Deterioration and
Improvement in Real Obligations (Art. 1189)
1) Loss – when it perishes; or goes out of
commerce; or disappears in such a way
that its existence is unknown or it cannot
be recovered
a) Without debtor’s fault – obligation is
extinguished
b) With debtor’s fault – obligation is converted
into one of indemnity for damages

80
2) Deterioration – any reduction or
impairment in the substance or value of a
thing which does not amount to a loss
a) Without debtor’s fault – impairment to be
borne by the creditor
b) With debtor’s fault – creditor may choose
between bringing an action for rescission of
the obligation OR bringing an action for
specific performance with damages in either
case

81
3) Improvement – anything added to,
incorporated in, or attached to the thing
that is due
a) By the thing’s nature or by time – shall inure
to the benefit of the creditor
b) At the debtor’s expense – debtor shall have
no other right than that granted to a
usufructuary (Arts. 579 and 580)
Consequently, the debtor cannot ask reimbursement for
the expenses incurred for useful improvements of for
improvements for mere pleasure (Art. 579), he can only
ask reimbursement for necessary expenses. (Art. 546)

82
Above rule applies to the following:
1) Determinate things only because the
genus of a thing never perishes (genus
nun quam peruit)
2) Obligation with a period
3) Those who have a duty to return in case
of loss, deterioration or improvement of
the thing in an obligation with a
resolutory condition (Art. 1190, par. 2)

83
Rescission of Reciprocal Obligations in
General (Art. 1191)
Reciprocal Obligation – Those which are
created or established at the same time, out of
the same cause and which result in mutual
relationships of creditor and debtor between the
parties.
General Rule:
If one of the parties fails to comply with what is
incumbent upon him, there is a right on the part
of the other to rescind (or resolve) the obligation
(tacit resolutory condition)

84
• Permitted only for such breaches as are
substantial and fundamental as to defeat the
object of the parties in making the agreement
(Universal Food Corp. vs. CA, G.R. No. L-29155,
May 13, 1970)
• Can be demanded only if the plaintiff is
ready, willing, and able to comply with his
own obligation and the other is not (Seva vs.
Berwin, G.R. No. L-24321, Jan. 11, 1926) and the
party who has not performed his part of the
agreement is not entitled to sue/rescind; the
right belongs to the injured party

85
• Must be invoked judicially UNLESS contract
contains a facultative resolutory provision, in
which case, judicial permission to cancel or
rescind the contract is no longer necessary –
act of rescission must be communicated to
other party (Jison vs. CA, G.R. No. L-45349, Aug.
15, 1988)

86
Effects:
If there is a stipulation granting the right of
rescission on the part of the aggrieved party
and he validly rescinds the contract pursuant to
such express grant, any court decision
adjudging the propriety of the rescission extra-
judicially made is NOT the REVOCATORY act
of rescission but merely DECLARATORY or an
affirmation of the revocation (De Luna vs. Abrigo,
G.R. No. 57455, Jan. 18, 1990)

87
Art. 1191 does NOT apply to the following:
1) Contracts of partnership where a partner fails to
pay the whole amount which he has bound to
contribute to the common fund (Arts. 1786 and
1788)
2) Sales of real or personal property by
installments. The first being governed by Recto
Law while the latter is governed by Maceda
Law.
3) Action for rescission is not required upon
breach of compromise agreement; Art. 2041
confers upon the party concerned the authority
to regard it as rescinded and to insist upon the
original demand.
88
Prescriptive period for action of
Resolution is 10 years from the time right
of action accrues according to Art. 1144 –
NOT 4 YEARS (applicable to rescission)

89
 Vicelet & Vicelen Lalicon vs. NHA
(Jul. 13, 2011)
Violation of annotated restriction that
property sold by NHA with mortgage cannot
be sold within five years from release of
mortgage is subject to resoution in Art. 1191
– NOT Rescission in Art. 1389

90
Sps. Felipe & Leticia Conner vs. Sps.
Gil & Fernandina Galang (May 25, 2005)
Non payment of the balance of P45,000 for
a total purchase price of P120,000 after
several demands is a SUBSTANTIAL
BREACH that justify RESOLUTION of the
contract.

91
 Ayala Life Insurance vs. Ray Burton
Dev’t. (Jan. 23, 2006)
• A contract of sale, title passes to buyer
upon delivery of the thing sold.
• In contract to sell, ownership is reserved
in the seller and is NOT to pass until full
payment of price.
• In contract of sale, non-payment is
Negative Resolutory Condition

92
Effect of Fortuitous Event in Obligation with
a Period
It only relieves the contracting parties from
the fulfillment of their respective obligations
DURING the term/period. (Victoria’s Planters vs.
Victorias Milling Co., G.R. No. L-6648, July 25, 1955)

Fortuitous event does NOT interrupt the

running of the period.

93
Period for Whose Benefit (Art. 1196)
General Rule: For the benefit of both
parties.
Except: If it can be shown that the period
has been established in favor of the creditor
or debtor.

94
Judicial Term/Period
When fixed by a competent court in
accordance with the causes expressly
recognized by law.
Once fixed, the period can no longer be
judicially changed.

95
When Court May Fix Period (Art. 1197)
General Rule: Courts are WITHOUT power
to fix period
Except:
1) If the obligation does not fix a period, but from
its nature and circumstances it can be inferred
that a period was intended;
2) If the duration of the period depends upon the
will of the debtor; and
3) If the debtor binds himself when his means
permit him to do so (Art. 1180)

96
When Debtor Loses Right to Make Use of
Period (Art. 1198)
1) He becomes insolvent, unless he gives a
guaranty or security for the debt (the
insolvency need not be judicially declared)
2) He does not furnish to the creditor the
guaranties or securities which he has
promised
3) If, after their establishment, the guaranty or
security is impaired through the fault of the
debtor, he shall lose his right to the benefit of
the period; however, if it is impaired without
his fault, he shall retain his right
97
4) If the guaranty or security disappears through
any cause, even without the fault of the
debtor
5) He violates any undertaking, in consideration
of which the creditor agreed to the period
(i.e., if an employee commits a substantial
breach of his employment contract, the
employer may terminate the employment)
6) He attempts to abscond
• It is not essential that there be actual
absconding

98
ALTERNATIVE OBLIGATION
It is one where out of two or more
prestations which may be given, only
one is due.

99
Right of Choice in Alternative Obligation
(Art. 1200)
General Rule: Right of choice belongs to the
debtor
Except:
1) Expressly granted to creditor
2) Expressly granted to third person

100
Limitations Upon the Right of Choice
The debtor cannot choose prestations/
undertakings which are:
1) Impossible
2) Unlawful
3) Could not have been the object of the obligation
• Undertakings that are not included among others from
those which the obligor may select; or
• Those which are not yet due and demandable at the
time the selection is made; or
• Those by reason of accident or some other cause,
have acquired a new character distinct or different from
that contemplated by the parties when the obligation
was constituted.
101
4) Those that are due and demandable but
whose enforcement is dependent on creditor
as when period fixed is solely for his benefit.
5) The creditor cannot be compelled to receive
part of one and part of the other undertaking.

102
Effects of Loss of Objects of Alternative
Obligation (Arts. 1204-1205)
A. When choice belongs to debtor
1) Due to fortuitous event
a) All are lost – debtor is released from the
obligation
b) Some but not all are lost – deliver that which
he shall choose from among the remainder
c) Only one remains – deliver that which
remains

103
2) Due to debtor’s fault
a) All are lost – creditor shall have a right to
indemnity for damages based on the value
of the last thing which disappeared or
service which become impossible
b) Some but not all are lost – deliver that which
he shall choose from among the remainder
without damages
c) Only one remains – deliver that which
remains

104
3) Due to creditor’s fault (Art. 1203)
- If through the creditor’s act the debtor
cannot make a choice according to the
terms of the obligation, the latter may
RESCIND with damages

105
B. When choice belongs to creditor
1) Due to fortuitous event
a) All are lost – debtor is released from the
obligation
b) Some but not all are lost – deliver that which
he shall choose from among the remainder
c) Only one remains – deliver that which
remains

106
2) Due to debtor’s fault
a) All are lost – creditor may claim the
price/value of any of them with indemnity for
damages
b) Some but not all are lost – creditor may
claim any of those subsisting without a right
to damages OR price/value of the thing lost
with right to damages

107
FACULTATIVE OBLIGATION
An obligation wherein only one object or prestation
has been agreed upon by the parties to the
obligation, but which may be complied with by the
delivery of another or the performance of another
prestation in substitution.
• Art. 1201 can be applied by analogy with respect
to the time/moment when the substitution will take
effect.
• Communication is necessary to make substitution
effective.
• Only debtor has choice.

108
JOINT OBLIGATION
(Obligacion Mancomunada)

The whole obligation is to be paid or fulfilled

proportionately by different debtors or
demanded proportionately by different
creditors.

109
SOLIDARY OBLIGATION
(Obligacion Solidaria)

Each one of the debtors is bound to render

and/or each one of the creditors has a right
to demand entire compliance with the
prestation.

110
Nature of a Collective Obligation
(Art. 1207)
General Rule: Obligation is presumed joint
if there is concurrence of several creditors
OR of several debtors OR of several
creditors and debtors in one and the same
obligation.

111
Exceptions:
1) The obligation expressly states that
there is solidarity:
• Jointly and severally
• Individually and collectively
• “I promise to pay” followed by the signatures of
two or more persons
2) The law requires solidarity
• tort, quasi-contracts, liability of principals,
accomplices and accessories of a felony,
obligations of devisees and legatees, bailees in
commodatum

112
3) Nature of the obligation requires
solidarity
4) When a charge or condition is imposed
upon heirs of legatees, and the
testament expressly makes the charge
or condition in solidum
5) When a solidary responsibility is
imputed by a final judgment upon
several defendants

113
Heirs of George Poe vs. Malayan Insurance
(April 7, 2009)
“Solidary xxx cannot lightly be inferred. It exists
only when the obligation expressly so state xxx law
provides xxx nature of obligation so requires.
Where the insurance contract provides for
indemnity against liability to third persons, the
liability of the insurer is DIRECT and such third
person can directly sue the insurer. The direct
liablity xxx does NOT mean however xxx the
insurer can be held SOLIDARILY LIABLE with the
INSURED. The liability of the insured xxx is based
on TORT xxx liability of INSURER arises from
CONTRACT xxx.”
114
Note:
Even if the parties stipulated in their
contract that the obligation of the debtor is
solidary, but such contract was superseded
by a JUDICIAL DECISION declaring the
obligation to be merely joint, the said
decision must be enforced in a joint manner
(Oriental Phils. Co. vs. Abeto, G.R. No. L-4239, Oct. 10,
1934)

115
JOINT INDIVISIBLE OBLIGATION
(Art. 1209)
Midway between joint and solidary
obligations, preserving the two
characteristics of the joint obligation, in that
no creditor can do an act prejudicial to
others, and no debtor can be made to
answer for others.

116
Breach of Joint Indivisible Obligation
(Art. 1224)
Obligations can be enforced only by
proceeding against all the creditors.
• If anyone of the debtors should fail or refuse to
comply with the obligation, it is converted into one of
indemnity for damages
• Debtors who may have been ready to comply with
what is incumbent upon them shall not contribute to
the indemnity beyond the corresponding portion of
the price of the thing or the value of the service in
which the obligation consists.
(Ex. Delivery of horse)
117
Interruption of Period of Prescription in
Joint Indivisible Obligations
1) The act of one joint creditor beneficial to others,
as for instance the interruption of period of
prescription, is sufficient since Art. 1209 merely
provides that the right of creditors may be
prejudiced only by their collective acts.
(Manresa)
2) The act of a joint creditor which would ordinarily
interrupt the period of prescription would not be
valid because the indivisible character of the
obligation requires collective action of the
creditors. (De Buen)
118
Effects of Assignment of Rights in Solidary
Obligations (Art. 1213)
General Rule: A solidary creditor CANNOT
assign his right as it is predicated upon
mutual confidence, i.e., personal
qualification of each creditor had been
taken into consideration
Except:
1) Assignment to a co-creditor
2) Assignment is with consent of c-creditor

119
To Whom Payment Made in Solidary
Obligation (Art. 1214-1216)
General Rule: Payment may be made to
any of the solidary creditors
Except:
If demand, judicial or extra-judicial, has been
made by one of them, payment should be made
to him.

120
Effect of Novation, Compensation,
Confusion and Remission in Solidary
Obligations (Art. 1215, Arts. 1219-1220)
Note:
Do only what is useful/beneficial NOT
prejudicial. (Art. 1212)

121
A. Novation
1) If prejudicial, the solidary creditor who effected
the novation shall reimburse the others for
damages incurred by them;
2) If beneficial and the creditor who effected the
novation is able to secure performance of the
obligation, such creditor shall be liable to the
others for the share which corresponds to
them, not only in the obligation, but also in the
benefits;

122
3) If effected by substituting another person in
place of the debtor, the solidary creditor who
effected the novation is liable for the acts of
the new debtor in case there is deficiency in
performance or in case damages are incurred
by the other solidary creditors as a result of
the substitution;
4) If effected by subrogating a third person in the
rights of the solidary creditor responsible for
the novation, the obligation of the debtor or
creditors is not in reality extinguished; the
relation between the other creditors not
substituted and the debtor/s is maintained;

123
5) If the novation is effected by subrogating a
third person in the rights of all the solidary
creditors, the creditor responsible for such
novation is liable to the other creditors for the
share which corresponds to them in the
obligation.

124
B. Compensation and Confusion
1) PARTIAL – rules on application of payment shall
apply, without prejudice to the right of other
creditors who have not caused the confusion or
compensation to be reimbursed to the extent
that their rights are diminished or affected;
2) TOTAL – obligation extinguished, what is left is
the ensuing liability for reimbursement within
each group – the creditor causing the confusion
or compensation is obliged to reimburse the
other creditors; the debtors benefited by the
extinguishment of the obligation are obliged to
reimburse the debtor who made the confusion
or compensation possible.
125
C. Remission
1) Entire obligation – obligation is totally
extinguished but the solidary debtor who
obtained it does not entitle him to
reimbursement from his co-debtors; said
debtor gives or loses nothing
2) For the benefit of one of the debtors covering
his entire share – he is completely released
from the creditor/s
3) For the benefit of one of the debtors and it
covers only part of his share – his character
as a solidary debtor is not affected

126
4) Total or partial remission – creditor/s
responsible for the remission are liable to
reimburse others for the share in the obligation
corresponding to them
If the creditor/s proceed against any one of the
solidary debtors for the payment of the entire
obligation, such debtor can always avail himself
of the defense of partial remission. (Art. 1222)
Note:
The above rules cannot be applied in case the debt has
been totally paid by anyone of the solidary debtors before
the remission was effected. (Art. 1219)

127
Effect of Payment by a Debtor (Art. 1217
and Art. 1218)
Payment made by one of the solidary
debtors either totally or partially
extinguishes the obligation depending upon
whether the entire amount of debt is paid or
only a part thereof.
• If two or more solidary debtors offer to pay,
the creditor may choose which offer to
accept.

128
• Solidary debtor who made the payment
merely entitles him to claim from hs co-
debtors the share which correspondents to
them with interest from the time of payment;
does not create a real case of subrogation; if
payment was made before the debt is due,
no interest for the intervening period may be
demanded.
Reason: The right of the playing co-debtor to be
reimbursed is not based on the original obligation
but upon the payment made by him.

129
• No reimbursement if payment is made after
the obligation has prescribed or has become
illegal.
• Share of the insolvent solidary debtor shall
be borne by ALL his co-debtors, in
proportion to the debt of each.

130
DIVISIBLE OBLIGATION
Those which have as their object a
prestation which is susceptible of partial
performance without the essence of
obligation changed.

131
INDIVISIBLE OBLIGATION
Those which have as their object a
prestation which is not susceptible of partial
performance, otherwise, the essence of the
obligation will be changed.

Prescription: Indivisible (Art. 1248)

132
Test of Divisibility
Whether the prestation is susceptible of
partial compliance or not. (Art. 1225, par. 1)
The susceptibility of partial compliance
should be understood in the sense of the
possibility of realizing the end or purpose
which the obligation seeks to attain.
• In obligations to give, even though the object may
be physically divisible, the obligation is still
indivisible if it is provided by law or it is so intended
by the parties (Art. 1225 par. 3)

133
General Rule: Creditor cannot be compelled
partially to receive the prestation in which the
obligation consists; neither may the debtor be
required to make partial payments.
Except:
1) When the obligation expressly stipulates the
contrary
2) When the different prestations constituting the
objects of the obligation are subject to different
terms and conditions
3) When the obligation is in part liquidated and in
part unliquidated

134
OBLIGATION WITH A PENAL CLAUSE
An obligation to which an accessory
undertaking (penal clause/penalty) is
attached for the purpose of insuring its
performance by virtue of which the obligor
is bound to pay a stipulated indemnity or
perform a stipulated prestation in case of
breach.

135
A penal clause is attached to an obligation
in order to insure performance and has a
double function:
1) to provide for liquidated damages, and
2) to strengthen the coercive force of the
obligation by the threat of greater
responsibility in the event of breach
(Filinvest Land, Inc. vs. CA, G.R. No. 138980, Sept.
20, 2005)

136
General Insurance & Surety Corp. vs.
Republic (Jan. 31, 1963)
The bond is penal in nature and substitute
indemnity for damages and payment of
interest. Even if bond is worth more than
actual damages.
• Bond is to guarantee DepEd that school
will follow rules/pay salaries. School did
not pay salary amounting to only P2,000,
bond was for P10,000.

137
Effect of Penalty (Art. 1226, par. 1)
General Rule: The penalty shall substitute
the indemnity for damages and payment of
interest in case of non-compliance.
Except:
1) When there is a stipulation to the contrary
2) When the obligor refuses to pay the penalty
3) When the obligor is guilty of fraud (Art. 1170)

138
Limitation Upon the Right of the Debtor in
Obligations with a Penal Clause (Art. 1227)
General Rule: Debtor cannot exempt
himself from the performance of the
principal obligation by paying the stipulated
penalty
Except:
Unless this right has been clearly and expressly
granted to him

139
Limitation on the Right of the Creditor in
Obligations with a Penal Clause (Art. 1227)
General Rule: Creditor cannot demand the
fulfillment of the principal obligation and
demand the satisfaction of the penalty at the
same time.
Except:
Unless this right has been clearly granted to him
• If creditor has chosen fulfillment of the principal obligation
and performance thereof became impossible without his
fault, he may still demand satisfaction of the penalty.
• If there was fault on the part of debtor, creditor may
demand not only satisfaction of penalty but also the
payment of damages.
140
 Compagnie Franco-Indochinoise vs.
Deutsched (29 Phil 474)
Property of plaintiff transported on board
steamship of defendant company, was unlawfully
detained by the captain of said steamship,
resulting in loss to its owner. Sued for damage for
an amount equal to the value of cargo, the
defendant claimed that the amount recoverable
cannot exceed the amount of freight under the
penal clause which stated – “penalty for non-
performance xxx, proved damages, not
exceeding the estimated amount of freight”. Is
contention tenable?
141
Held: NO. Assuming limitation expressed in
the penal clause is valid, xxx it was intended
to apply to cases of NON-PERFORMANCE,
that is to cases where defendant is liable for
damages for failure to perform obligations in
contract. The ACT of captain which is basis of
claim is NOT non-performance but amounts to
a conversion of the cargo, AN ACT OF
POSITIVE MISFEASANCE, and not a mere
NON-FEASANCE such as is contemplated in
the penal clause. Recoverable damages are
not limited to the amount of the freight as
stated by the Penal Clause.

142
Modes of Extinguishing Obligations
1) Payment/performance
2) Loss of the thing due
3) Condonation or remission of debt
4) Confusion or merger
5) Compensation
6) Novation
7) Annulment
8) Rescission
9) Fulfillment of a resolutory condition
10) Prescription

143
Payment or Performance (Art. 1232)
• Means delivery of money and the
performance, in any other manner, of an
obligation.
• Also means non-performance
Characteristics of payment:
1) Identity – only the prestation agreed upon and no
other must be complied with
2) Completeness – the thing or service must be
completely delivered or rendered
3) Indivisibility – payment or performance must be
inidivisible

144
Manila International Airport Authority vs.
Ding Velayo Sports Center (May 30, 2011)
Article 1235 of the Civil Code states that “[w]hen the
obligee accepts the performance, knowing its
incompleteness or irregularity, and without
expressing any protest or objection, the obligation is
deemed fully complied with.” The Contract of Lease
was executed on May 14, 1976, and the one-year
period expired on May 14, 1977. Yet, petitioner did
not register any protest or objection to the alleged
incompleteness of or irregularity in the performance
by respondent of its obligation to build and develop
improvements on the subject property.

145
Persons From Whom the Creditor Must
Accept Payment (Art. 1236)
1) Debtor himself or his legal representative
2) Any person who has an interest in the
obligation (like a guarantor)
(Ex. Monte de Piedad vs. Rodrigo)
3) A 3rd person who has no interest in the
obligation when there is stipulation that he
can make payment
• Person who pays the obligation should have the
necessary legal capacity to effect such payment
(Art. 1239)

146
Cecilleville Realty & Services Corp. vs.
Sps. Acuna (July 13, 2009)
Cecilleville paid the debt of the Acuna spouses
to Prudential as an interested third party.
Even if the Acuna spouses insist that
Cecilleville’s payment to Prudential was without
their knowledge or against their will, Art. 1302
(3) of the Civil Code states that Cecilleville still
has a right to reimbursement.

147
Cecilleville clearly has an interest in the fulfillment of
the obligation because it owns the properties
mortgaged to secure the Acuna spouses’ loan.
When an interested party pays the obligation, he is
subrogated in the rights of the creditor. Because of
its payment of the Acuna spouses’ loan, Cecilleville
actually steps into the shoes of Prudential and
becomes entitled, not only to recover what it has
paid, but also to exercise all the rights which
Prudential could have exercised. There is, in such
cases, not a real extinguishment of the obligation,
but a change in the active subject.

148
Effect of Payment by 3rd Person
• Without knowledge or against the will –
recovery is only up to the amount
beneficial to the debtor; no subrogation
• With knowledge – rights of
reimbursement and subrogation

149
To Whom Payment Must Be Made (Art. 1240)
1) The person in whose favor the obligation
has been constituted
2) His successor in interest
3) Any person authorized to receive it – by
law or by the creditor at the time when
payment is due and not when the
obligation was constituted

150
Effect of Payment to Unauthorized Persons
in Obligation to Give
General Rule: It shall NOT be valid, even
though made in good faith.
Except:
1) Provided that it has redounded to the benefit of
the creditor.
2) Payment to the possessor of the credit, made
in good faith (Art. 1242)
• Refers to the possession of credit not the
document evidencing it.

151
Benefit to the creditor is presumed in the
following cases: (Art. 1241)
1) If after the payment, the third person
acquires the creditor’s rights (subrogation);
2) If the creditor ratifies the payment to the
third person (ratification)
3) If by the creditor’s conduct, the debtor has
been led to believe that the third person
had authority to receive the payment
(estoppel)

152
Republic, PNP vs. Thi Thu Thuy De Guzman
(June 15, 2011)
Facts: The PNP replied that payment was made
to "Montaguz Builders”, via Land Bank of the
Philippines (LBP) Check , received by one
Edgardo Cruz (Cruz) who signed for the check
due to MGM. Respondent claimed that payment
was made to Montaguz Builders, her other
company, which was also doing business with
the PNP, and not to MGM, with which the
contract was made

153
Held: No, petitioner's obligation consists of payment
of a sum of money. In order for petitioner's payment
to be effective in extinguishing its obligation, it must
be made to the proper person. Art. 1240 of the Civil
Code states:
Art. 1240.Payment shall be made to the person in whose favor
the obligation has been constituted, or his successor in interest,
or any person authorized to receive it.
In Cembrano v. City of Butuan, SC said:
Payment made by the debtor to the person of the creditor or to
one authorized by him or by the law to receive it extinguishes the
obligation. When payment is made to the wrong party, however,
the obligation is not extinguished as to the creditor who is without
fault or negligence even if the debtor acted in utmost good faith
and by mistake as to the person of the creditor or through error
induced by fraud of a third person.

154
 In general, a payment in order to be effective to discharge an
obligation, must be made to the proper person. xxx. Payment
made to one having apparent authority to receive the money will,
as a rule, be treated as though actual authority had been given
for its receipt. Likewise, if payment is made to one who by law is
authorized to act for the creditor, it will work a discharge. xxx
The respondent was able to establish that the LBP check
was not received by her or by her authorized personnel.
The PNP's own records show that it was claimed and
signed for by Cruz, who is openly known as being
connected to Highland Enterprises, another contractor.
Hence, absent any showing that the respondent agreed
to the payment of the contract price to another person, or
that she authorized Cruz to claim the check on her
behalf, the payment, to be effective must be made to her.

155
Note:
In obligations to give, payment to
incapacitated person is valid when:
1) The incapacitated has kept the amount or
thing paid or delivered
2) Payment has been beneficial to the
incapacitated person (Art. 1241)

156
Rule in Monetary Obligation (Art. 1249)
Must be made in the currency stipulated; if it
is not possible to deliver such currency, then
in the currency which is legal tender in the
Philippines.

157
Legal Tender
Such currency which may be used for the payment
of all debts, whether private or public. Its
significance is manifested by the fact that it is such
which the debtor may compel a creditor to accept in
payment of the debt.
Legal tender in the Philippines would be all NOTES
AND COINS issued by the Bangko Sentral (Circular
No. 537)
1) 1-Peso, 5-Pesos and 10-Peso coins: in amounts
not exceeding P1,000.00
2) 25 centavo coin or less: in amounts not exceeding
P100.00

158
Take note that bills, regardless of denomination,
are legal tender up to whatever amount.
RA 8163 provides that all monetary obligations
shall be settled in the Philippine currency which
is legal tender in the Philippines. The parties
may agree that the obligation or transaction be
settled in other currency at the time of payment.

159
Place of Payment (Art. 1251)
1) Place stipulated by the parties
2) If there is no stipulation and the obligation is
to deliver a determinate thing, payment shall
be made at the place where the thing might
be at the time the obligation was constituted.
3) In any other case, the payment shall be
made at the domicile of the debtor.

160
Go Sinco vs. CA, et al. (Oct. 9, 2009)
Issue: If there is unjustified refusal to accept
payment, does such act constitute
extinguishment of the obligation”
Rule: NO. The law requires the twin acts of
tender of payment and consignation. If there is
tender of payment but no consignation, it does
not have the effect of payment. The effect of the
tender is xxx debtor is freed from the obligation
to pay interest on the outstanding amount from
the time of the unjust refusal took place.”

161
Special Forms of Payment
A. Application of Payment
Designation of the debt to which the
payment must be applied when the debtor
has several obligations of the same kind in
favor of the same creditor.

162
Requisites:
1) There must be only one debtor and only one
creditor;
2) There must be two or more debts of the same
kind;
3) All the debts must be due except if there is
stipulation to the contrary OR application of
payment is made by the party for whose
benefit the term has been constituted (Art.
1196); and
4) Amount paid by the debtor is insufficient to
cover the total amount of all the debts.

163
Rules on Application of Payment
• The right to designate the debt to which the
payment shall be applied belongs primarily to
the debtor.
• If the debtor does not apply, the creditor may
designate which debt is paid by specifying in
the receipt
• If the creditor did not apply or if application is
void, debt which is the most onerous, is the
one satisfied. It is evident in the
circumstances laid by Art. 1254, that it is the
law which makes the application

164
Limitation:
• Interest first
• Cannot disregard indivisibility
• Those that may be due already, anytime for
debtor but not creditor cause latter has
exclusive benefit of period

165
No hard and fast rule, however, can be put up.
As last resort when it cannot definitely be
determined whether one debt is more
burdensome than the other.
• Debts due of the same nature, payment shall
be applied proportionately

166
B. Dation in Payment (Dacion en pago)
Delivery and transmission of ownership of
a thing by the debtor to the creditor as an
accepted equivalent of the performance of
the obligation.

167
C. Payment by Cession (Art. 1255)
Special form of payment whereby the
debtor assigns/abandons ALL of his
property for the benefit of his creditors in
order that from the proceeds thereof, the
latter may obtain payment of their credits.
Requisites:
1) Plurality of debts;
2) Partial or relative insolvency of the debtor;
and
3) Acceptance of the cession by the creditors

168
D. Tender of Payment and Consignation (Art.
1256)
Tender of Payment – Manifestation of the
debtor to the creditor of his decision to comply
immediately with his obligation; preparatory
act and extrajudicial in character
Consignation – Deposit of the object of the
obligation in a competent court in accordance
with the rules prescribed by law, after refusal
or inability of the creditor to accept the tender
of payment; principal act and judicial in
character

169
Special Requisites of Consignation
1) Existence of a valid debt which is due;
2) Tender of payment by the debtor;
creditor’s refusal without just cause to
accept it or any of the cases provided in
Art. 1256, par. 2 exists
a) Tender must be precede consignation;
b) It must have been unconditional;
c) Refusal must be without just cause

170
3) Previous notice of consignation to person
interested in the fulfillment of the obligation, in
order to give the creditor the opportunity to
reconsider his unjustified refusal and to accept
payment to avoid consignation and the
subsequent litigation
• Lack of previous notice does not invalidate the
consignation, but simply makes the debtor liable for
the expenses occasioned thereby
• With respect to the creditor, this notice can be made
simultaneously with the tender of payment (i.e., by
way of warning that should the payment be not
accepted the thing will be deposited in court).
Separate notices must be given to other interested
parties such as guarantors.
171
4) Consignation – amount or thing due placed at
the disposal of the court
5) Subsequent notice of consignation to enable
the creditor to withdraw the goods or money
deposited
• It would be unjust to make the creditor
suffer the risk of deterioration, depreciation
or loss of such goods or money by reason
of lack of knowledge of the consignation

172
Instances Where Consignation Shall
Produce the Effects of Payment Without
Prior Tender of Payment (Art. 1259, par. 2)
1) Creditor is absent or unknown, or does
not appear at the place of payment
• Absence need not be judicially declared.
He must, however, have no legal
representative to accept the payment
2) Creditor is incapacitated to receive the
payment at the time it is due

173
3) When without just cause, the creditor refuses
to give a receipt
• Refusal to issue a receipt preceded the tender of
payment
4) When two or more persons claim the right to
collect (as in the case of interpleader)
5) When the title of the obligation has been lost
6) Creditor declares he will not accept
Note:
The list is not exclusive. The rule also applies if the
creditor, prior to the tender of payment, intimated that
he will not accept the debtor’s payment.

174
E. Loss of the Thing Due
Effects of Loss in Determinate Obligation
to Give (Art. 1262) – Obligation is
extinguished if the thing is lost or destroyed
without the fault of the debtor and before
he has incurred in delay.

175
General Rule: Loss of a determinate thing due to
a fortuitous event shall extinguish the obligation.
Except:
1) When the law so provides;
2) When the stipulation so provides;
3) When the nature of the obligation requires
an assumption of risk;
4) Loss of the thing is partly due to the fault of
the debtor;
5) Loss of the thing occurs after the debtor
incurred in delay;

176
6) When the debtor promised to deliver the
same thing to two persons who do not have
the same interest;
7) When the obligation to deliver arises from a
criminal offense; and
8) When the obligation is generic

177
Effect of Partial Loss (Art. 1264)
General Rule: Partial loss does not
extinguish the obligation.
Except:
When the partial loss or destruction of the
thing is of such importance that would be
tantamount to a complete loss or destruction.

178
Effect of Impossibility of Performance in
Obligation to Do (Art. 1266)
When the obligation becomes legally or
physically impossible without the fault of the
debtor, obligor is released from the obligation.
The legal and physical impossibility must have
occurred after the constitution of the obligation.

179
Release in obligation to do when
prestation becomes legally or
physically impossible.

180
 PNCC vs. CA (May 5, 1997)
PNCC leased land for rock crushing plant. Term
for 5 years, beginning on date of issuance of an
industrial clearance by Ministry of Human
Settlement. PNCC given Temporary Permit for 2
years in Jan. 7, 1986, hence Lessor demand
payment for for rent 1 year.
PNCC declined because it decided to cancel the
contract as it decided to cancel rock crushing
plant due to financial and technical difficulties.
PNCC cites Art. 1266.

181
Held: NO. Contract of lease was perfected.
PNCC cannot use Art. 1266 because it is
applicable to obligation to ‘DO’. The contract
created obligation to ‘GIVE’. Lease property
delivered and to pay rent are TO GIVE.

182
Temporary Impossibility
Merely delays performance of the obligation
NOT extinguishes the same.
Except:
1) In case of agreement
2) Must be performed within a definite time
BUT if the obstacle is unforeseen or unknown
as to DURATION, obligation may be
considered juridically impossible to perform,
hence, extinguished. Subsequent REMOVAL
of the obstacle does NOT revive the obligation.

183
Effect of Relative Impossibility
(Difficulty of Performance)
Doctrine of Unforeseen Events (Art. 1267) – When
the service has become so difficult as to be
manifestly beyond the contemplation of the parties,
the court should be authorized to release the
obligor in whole or in part. (This is also referred to
as the Doctrine of Frustration of Enterprise)
Also known as—
• Theory of IMPREVISIBILITY
• Theory of Lack of Basis
• Rebus Sic Stantibus

184
• The intention of the parties should govern
and if it appears that the service turns out
to be so difficult as to have been beyond
their contemplation, it would be doing
violence to the intention to hold the obligor
still responsible.
• The impossibility is RELATIVE because
the difficulty of performance triggers a
manifest disequilibrium in the prestations,
such that one party would be placed at a
disadvantage by the unforeseen event.

185
Requisites:
1) The event or change of circumstances
could not have been foreseen at the time of
the execution of contract
2) Makes performance extremely difficult NOT
impossible
3) The event must NOT be due to the act of
any of the parties
4) Contract is for a long period of time or for
successive performances.

186
Effect of Loss on Reciprocal Obligations
• First View: If an obligation is extinguished
by the loss of the thing or impossibility of
performance through fortuitous events, the
counter-prestation is also extinguished. The
debtor is released from liability but he
cannot demand the prestation which has
been stipulated for his benefit. He who
gives nothing has no reason to demand.
(Tolentino, Commentaries and Jurisprudence on the Civil
Code of the Phils., Vol. 4, p. 337-338 [1991])
(Res Perit Domino)

187
• Second View: The loss or impossibility of
performance must be due to the fault of the
debtor. In this case, the injured party may
ask for rescission under Art. 1191 plus
damages. If the loss or impossibility was
due to a fortuitous event, the other party is
still obliged to give the prestation due to the
other. (J.B.L. Reyes)
(Res Perit Creditori)

188
Better View:
Res Perit Creditori general rule
Except:
1) Law requires Res Perit Domino
• Art. 1504 – Sale of Personal Property
• Art. 1655 – In Lease Contracts
• Art. 1717 – Contract for a Piece of Work

189
Rule If Obligation Arises From Criminal
Offense (Art. 1268)
General Rule: Debtor shall not be
exempted from the payment of the price
whatever may be the cause for the loss.
Except:
When the thing having been offered by the
debtor to the person who should receive it, the
latter refused without justification.
Also, SC in Reyes vs. Caltex and Villaruel vs.
Manila Motors favored view that RISK of LOSS
is for the account of creditor.

190
F. Condonation or Remission of the Debt
• An act of liberality by virtue of which the
obligee without receiving any price or
equivalent, renounces the enforcement
of the obligation, as a result of which it
is extinguished in its entirety or in that
part or aspect of the same to which the
remission refers.
• It is the gratuitous abandonment by the
creditor of his right; a form of donation.

191
Requisites of remission:
1) It must be gratuitous;
2) It must be accepted by the obligor;
3) The obligation must be demandable;
4) Parties must have the capacity;
5) Not inofficious; and
6) Must comply with the forms of donation
SHOULD IT BE EXPRESS (Arts. 748
and 749)

192
Court may NOT condone interest due the
creditor for to condone is an act of
liberality. It is to forgive, or revert a debt.
(Baez vs. Young, Oct. 27, 1952)

193
Implied Remission (Art. 1271)
- Delivery of private document
evidencing a credit made voluntarily
by creditor to debtor

194
To refute implication – it should be
claimed to be inefficious

195
 Lopez Lizo vs. Tambunting
Creditor proved that he sent his receipt to
debtor for purposes of collecting without
intending the document to remain in
possession of debtor – is sufficient proof
to rebut the presumption that creditor
voluntarily delivered document.

196
G. Confusion
It is the merger of the characters of the
creditor and the debtor in one and the
same person by virtue of which the
obligation is extinguished.

197
Requisites of merger:
1) Merger of the characters of the creditor
and debtor must be in the same person;
2) Must take place in the person of either the
principal creditor or the principal debtor;
and
3) Whether the merger refers to the entire
obligation or only part thereof, there must
be complete and definite meeting of all
qualities of creditor and debtor in the
obligation or in the part thereof affected by
the merger.

198
Effects of Confusion/Merger (Art. 1276-1277)
If confusion takes place:
1) In the person of either the principal creditor
or principal debtor – extinguishment of
entire obligation
2) In the person of a subsidiary creditor or
subsidiary debtor (e.g. guarantor) – no
extinguishment of principal obligation; only
substitution of creditor or debtor

199
3) In one of the joint debtor – principal
obligation is extinguished up to the share
which corresponds to him;
4) In one of the solidary debtors – entire
obligation is extinguished. However, the
debtor in whom confusion took place may
claim reimbursement from co-debtors for
the shares which corresponds to them.

200
H. Compensation
Mode of extinguishing in the concurrent
amount of the obligation of those persons
who are reciprocally debtors and creditors
of each other.
• Most fundamental effect: It extinguishes
both debts to the extent that the amount
covered by the amount of the other.

201
Requisites of compensation (Art. 1279):
1) There must be two parties, who, in their
own right, are principal creditors and
principal debtors of each other except in
case of a guarantor (Art. 1280);
2) Both debts must consist in sum of money,
or if the things due are fungibles
(consumables), they must be of the same
kind and quality.
General Rule: Compensation is not possible
in obligations to do because of the difference
in the respective capacities of the obligors.

202
3) Both debts must be due;
Except: Voluntary compensation (Art. 1282)
4) Both debts must be liquidated and
demandable;
5) There must be no retention or controversy
commenced by third persons over either
of the debts and communicated in due
time to the debtor;
6) The compensation must not be prohibited
by law.

203
Right of guarantor to set up
compensation (Art. 1280)

204
Rule in case of rescissible or
voidable debts (Art. 1284)

205
Effects of assignment of rights.
(Art. 1285)

206
Debts which cannot be compensated:
- Depositum
- Commodatum
- Support
- Criminal offense
- In favor of government

207
 Lao vs. Special Plans (June 29, 2010)
Issue: When are claims LIQUIDATED for proper
COMPENSATION?
Rule: Claim is liquidated when the amount and time
of payment is FIXED. If acknowledged by debtor,
although NOT in writing, the claim must be treated
as liquidated. When the defendant, who has an
unliquidated claim, sets up by way of counterclaim,
and judgment is rendered liquidating such claim, it
can be compensated against the plaintiff’s claim
from the moment it is liquidated by judgment. (Here
contract of lease where Lessee to undertake
necessary repairs, Lessor STRUCTURAL repairs.)

208
Problem:
Is it proper to compensate defendant-
appellant’s indebtedness of P9k claimed in
the complaint, with the sum of P10k
representing the value of his shares of stock
with the plaintiff entity?

209
Answer:
Considering that a share of stock is not an
indebtedness to the owner nor evidence of
indebtedness, it is, therefore, not a credit.
Stockholders as such are not creditors of the
corporation. The capital stock of a corporation is a
trust fund to be used more particularly for the
security of creditors of the corporation who
presumably deal with it on the credit of its capital
stock. Therefore, since the defendant-appellant
stockholder is not a creditor of the corporation
although the corporation is a creditor of the
former, there can be no compensation. (Garcia
vs. Lim Chua Sing, 59 Phil 562)
210
Problem:
Has a bank the right to apply a
deposit to the debt of a depositor to
the bank?

211
Answer:
YES, because an ordinary bank deposit
creates the relationship of creditor and
debtor. (Gullas vs. Philippine National
Bank, 62 Phil 519)

212
Problem:
X sued Y to collect P20k plus interest and
attorney’s fees. Y, in his answer, included
a counterclaim for P150 allegedly loaned
by him to X and which was already
overdue. X moved to dismiss the
counterclaim which motion was granted by
the lower court. Was the motion correctly
resolved?

213
Answer:
NO. Pursuant to Arts. 1278, 1279, 1286
and 1290 of the Civil Code, the defendant
would have been entitled to deduct from
plaintiff’s claim of P20k if the latter were
established—the sum of P150 involved in
the counterclaim if the allegations thereof
were true, even if no such counterclaim is
filed. (Icasiano vs. Icasiano, L-16592, Oct.
27, 1961)

214
I. Novation
It is the substitution or change of:
1. an obligation by another, resulting in its
extinguishment or modification, either
by:
a. changing its object;
b. principal conditions; or
2. by substituting another in place of the
debtor; or
3. by subrogating a third person in the
rights of the creditor.

215
Requisites of novation:
1) Previous valid and existing obligation;
• A new contract, recognizing and assuming a
prescribed debt, would be valid and
enforceable. The prescription, being available
to the debtor, can be waived by him. The
novation of a prescribed debt is thus valid.
2) Capacity of the contracting parties (to the
new contract)
3) Animus novandi or intent to novate
(especially for implied novation and
substitution of debtors);

216
4) Substantial difference between the old
obligation and the new obligation
(especially for implied novation),
consequently, extinguishment of the
obligation; and
5) Validity of the new obligation

217
Note:
A change in the rate of interest is merely
collateral agreement between the creditor and
principal debtor that did not affect the surety.
The agreement to pay the additional interest
was an additional burden upon the debtor
only. It did not in any way affect the original
contract. Thus, despite the compounding of
the interest, the liability of the surety remains
only up to the original uncompounded
interest. (Garcia, Jr. vs. CA, G.R. No. L-
80201, Nov. 20, 1990)

218
 National Exchange Co. vs. Ramos,
(51 Phil 310)
A corporation with ACS of P250k increased
the CS to P500k. There was novation by
changing the principal condition of the
obligation and a subscriber to shares of the
original CS, without knowledge of such
novation is relieved of the obligation to pay
which became extinguished as a
consequence of said novation.

219
Problem:
B secured a money judgment against P.
Subsequently B and P entered into a contract
whereby said judgment was to be
extinguished by monthly payment and that in
case of failure to pay the monthly payment B
shall be at liberty to enter suit against P. Was
there a novation of the judgment?

220
Answer:
NO. Because the contract did not expressly
extinguish the obligation existing in said
judgment. On the contrary, it expressly
recognized and modified the obligations existing
in said judgment and expressly provided a
method giving P more time to extinguish the
same, that is by monthly payment.
The contract was not a new and individual
obligation expressly extinguishing the judgment;
neither were its terms incompatible with the
obligations of the judgment. (Zupanta vs. De
Rotaeche, 21 Phil 154)

221
Problem:
In the course of construction of a building
according to plans and specifications, the
defendant requested a number of changes
and alterations which the contractor made on
the understanding that he would be paid
therefor. Was there a novation of a contract?

222
Answer:
Although numerous changes were made and
there was a minor increase in the cost of the
building there was no material change in its size
or dimensions. The original contract was used as
a basis for the construction of the building and
any changes or alterations which were made
were founded upon the original contract with the
understanding that the contractor would be paid
the reasonable value of such changes and
alterations. Hence, there was no novation. (Tiu
Suico vs. Habana, 45 Phil 707)

223
Problem:
The contract of lease contained a stipulation
that the lease shall be obligatory upon and
redound to the benefit not only of the persons
who are the lessees but also their assigns.
The lessee firm having assigned the lease to
a third person, was there a novation by
substitution of the debtor?

224
Answer:
NO. Because the contract does not stipulate that the
original lessees shall be discharged by such
assignment and an agreement to this effect cannot be
implied from the mere acquiescence of the lessor in
the transfer of the lease. The new obligation assumed
by the assignee in taking over the lease was not at all
incompatible with the continued liability of the original
lessee. It is a very common thing in business affairs
for a stranger to a contract to assure its obligation,
and while this may have the effect of adding to the
number of persons liable, it by no means implies the
extinguishment of the liability of the first debtor. (Rios
and Reyes vs. Jacinto Palma, 49 Phil 7)

225
Problem:
The first contract provided for an
easement of right of way for a period of 20
years while the second contract reduced
the period to 7 years. Was there a
novation?

226
Answer:
YES. Because insofar as the duration of the right
of way is concerned, the two contracts are
incompatible with each other. The duration of the
right of way is one of the principal conditions of
the first as well as of the second contract and, as
said principal condition has been modified, the
contract was novated. (Kabankalan Sugar Co. vs.
Josefa Pacheco, 55 Phil 555)

227
Sps. Reyes vs. BPI Family Bank (Mar. 31, 2006)
Issue: Is there NOVATION if there is a 45-day credit
extension in the payment of an obligation?
Rule: NO. Extinctive novation is never presumed.
There must be an express intention to novate; in
cases where it is implied, the act of the parties must
clearly demonstrate their intent to dissolve the old
obligation as the moving consideration for the
emergence of the new one.
No incompatibility between the old obligation and
the extension of the credit.

228
Kinds of Novation
As to its essence:
1) Objective/Real
2) Subjective/Personal – substitution of
debtor or by subrogation
3) Mixed – change in the object or principal
obligation and change in the persons of
either creditor and debtor of an existing
obligation

229
Kinds of Novation by Substitution of Debtors
1) Expromision – effected with the consent of
the creditor at the instance of the new
debtor even without the consent or even
against the will of the old debtor (beneficial
reimbursement)
Requisites:
a) Initiative for substitution must emanate from
the new debtor;
b) Consent of the creditor to the substitution; and
c) Old debtor must be released from obligation.

230
Kinds of Substitution by Expromision
a) Substitution with the knowledge and
consent of the old debtor; and
b) Substitution without the knowledge or
against the will of the old debtor.

231
2) Delegacion – effected with the consent of
the creditor at the instance of the old debtor
(delegante), with the concurrence of the
new debtor (delegado) (reimbursement and
and subrogation)
Requisites:
a) Initiative for substitution must emanate from
the old debtor;
b) Consent of the new debtor;
c) Acceptance by the creditor; and
d) Old debtor must be released from obligation.

232
Note:
The mere fact that the creditor receives a guaranty
or accepts payment from a third person who agrees
to assume the obligation, when there is no
agreement that the first debtor shall be released
from responsibility, does not constitute novation,
and the creditor can still enforce the obligation
against the original debtor. If the older debtor is not
released, there is no novation; the third person
becomes merely a co-debtor; surety or co-surety
(Mercantile Insurance Co. vs CA, G.R. No. 85647,
April 22, 1991)

233
Problem:
In novation by substitution of the debtor,
must the creditor’s consent be express?

234
Answer:
YES, for the reason that since novation extinguishes
the personality of the first debtor who is to be
substituted by a new one, it implies on the part of the
creditor a waiver of the right that he had before the
novation, which waiver must be express under the
principle that renuntiatio non praesumitur, recognized
by the law in declaring that a waiver of right may not
be performed, unless the will to waive is indisputably
shown by him who holds the right. As the second
contract was executed without the consent of the
creditor, evidence tending to prove consent of the
creditor is not in law sufficient. There was no novation.
(Testate Estate of Mota, et al. vs. Serra, 47 Phil 464)

235
However, in Asia Banking Corp. vs. Elser, 34 Phil 994,
the court held that Art. 1205, now Art. 1293 does not
say that the creditor’s consent to the substitution of
the new debtor for the old, must be express or given
at the time of the substitution. According to Spanish
jurisprudence it is sufficient that the creditor’s consent
be given at any time and in any form whatever, while
the agreement of the debtor subsists. The existence of
the consent may be inferred from the acts of the
creditor since volition may as well be expressed by
deeds as by words. The holding in Testate Estate of
Mota vs. Serra is not meant to convey the impression
that the word “express” was to be given an unqualified
meaning contrary to the Spanish and American cases
cited in said decision.

236
Problem:
X sue Y for estafa. While the case was
pending, Y entered into a contract with X
where Y promised to pay X in installment
the amount misappropriated by Y. Despite
this stipulation, the court convicted Y for
estafa. Y questioned the legality of the
conviction on the ground of novation.

237
Answer:
The conviction must be upheld. Y’s novation theory
may perhaps apply prior to the filing of the criminal
action in court by the state prosecutors because up to
that time, the original trust relation may be converted
by the parties into an ordinary creditor-debtor
relationship, thereby placing the complaint in estoppel
to insist on the original trust. But after the justice
authorities have taken cognizance of the crime and
instituted action in court, the offended party may no
loner divest the prosecution of its power to exact the
criminal liability as distinguished from the civil. (People
vs. Nery, L-19567, Feb. 5, 1964; People vs. Benitez,
L-15923, June 30, 1960)

238
Effects of Insolvency or Non-Fulfillment by
New Debtor (Arts. 1294-1295)
1) Expromision
• Tolentino: it shall not revive the original
debtor’s liability to the creditor whether the
substitution is effected with or without the
knowledge or against the will of the original
debtor.
• Jurado: If the substitution was effected with
the knowledge and consent of the original
debtor, it shall revive the original debtor’s
liability to the credtiro.

239
2) Delegacion
The right of the creditor can no longer be
revived EXCEPT in the following cases.
a) Insolvency already existing and of public
knowledge at the time when the original
debtor delegated his debt
b) Insolvency was already existing and known
to the original debtor when he delegated his
debt
It is submitted that ACTUAL knowledge of the
creditor that new debtor was insolvent at the time of
delegation, will bar him from recovering from the old
debtor. He must bear the consequences of his acts
knowingly done.
240
Effects of Novation Upon Accessory
Obligations (Art. 1296)
When the principal obligation is
extinguished in consequence of a novation,
accessory obligation may subsist only
insofar as they may benefit third persons
who did not give consent.

241
Effects of Condition in Novation
1) If the original obligation was subject to
suspensive/resolutory condition, the new
obligation shall be under the same condition,
unless otherwise stipulated. (Art. 1299)
2) If the new obligation and the old obligation are
subject to different conditions:
a) If the conditions can stand together—
• If both are fulfilled – the new obligation becomes
demandable
• If only the condition affecting the old obligation is fulfilled
– old obligation is revived while the new obligation loses
its force
• If only the condition affecting the new obligation is
fulfilled – there is no novation since the requisite of a
previous valid and effective obligation would be lacking.
242
Novation by Subrogation (Art. 1300)
A personal novation effected by subrogating
a third person in the rights of the creditor.

243
Legal Subrogation (Art. 1302)
General Rule: Legal subrogation is not
presumed.
Except:
1) When a creditor pays another creditor who is
preferred, without debtor’s knowledge;
2) When a third person, not interested in the
obligation, pays with the express or tacit approval
of the debtor; or
3) When, even without knowledge of the debtor, a
person interested in the fulfillment of the obligation
pays, without prejudice to the effects of confusion
as to the latter’s share.

244
Effects of Subrogation (Arts. 1303-1304)
1) Total subrogation – Transfers to the
person subrogated the credit will all the
rights the original creditor had against
the debtor or third persons.
2) Partial subrogation – 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.

245
CONTRACTS

246
CONTRACTS
A Contract is a meeting of minds between
two persons whereby one binds himself,
with respect to the other, to give something
or to render some service.
Stages in life of contract:
1) Preparation (conception)
2) Perfection/Execuory
3) Consummation/Executed

247
Estate of Orlando Llenado, et al. vs. Llenado
(March 4, 2009)
Lease with option to Lessee to renew must be
exercised.
SC – “While the option to renew is an enforceable right, it
must be first exercised to be given effect. xxx the option of the
lessee gives the latter an enforceable right to renew xxx such
time as provided for. xxx In the absence of a stipulation in the
lease requiring notice of the exercise of an option xxx to be
given within a certain time before the expiration of the lease,
xxx general rule is that the lessee must exercise an option xxx
to renew xxx and NOTIFY the lessor thereof BEFORE or at
least at the time of the expiration of the original term xxx
(Executory). The silence of lessee after termination of original
period CANNOT mean to be that they opted to renew xxx
(Executed).

248
Effects of Contracts
1) Essential – those without which there can be
no contract (Art. 1318)
a) Common elements – present in all contracts
- Consent
- Object or subject matter
- Cause or consideration
b) Special elements – only in certain contracts
c) Extraordinary elements – peculiar to specific
contract

249
2) Natural – those which are derived from the
nature of the contract and ordinarily
accompany the same; they are presumed by
law
3) Accidental – those which exist only when
the parties expressly provide for them for the
purpose of limiting or modifying the normal
effects of the contract

250
Characteristics of Contracts
1) Obligatory force of contracts
2) Mutuality
3) Autonomy
4) Relativity
5) Consensuality

251
Obligatory Force of Contracts
• This principle is explicitly recognized in
Arts. 1159, 1308, 1315 and 1356.
• It is a rule that once the contract is
perfected, it shall be of obligatory force
upon both of the contracting parties.

252
Mutuality (Art. 1308)
The contract must bind both parties.
Note:
The validity or fulfilment of a contract cannot
be left to the will of one of the contracting
parties.
Validity or fulfilment may be left to (1) the will
of a third person, whose decision shall not be
binding until made known to both the
contracting parties (Art. 1309) or (2) chance.

253
Philippine Savings Bank vs. Sps. Castillo, et al.
(May 30, 2011)
Held: The unilateral determination and imposition of the
increased rates (of interest in loan) is violative of the
principle of mutuality of contracts under Art. 1308 xxx. A
perusal of the Promissory Note will readily show that the
increase or decrease of interest rates hinges solely on
the discretion of petitioner. It does not require the
conformity of the maker xxx. Any contract which
appears to be heavily weighed in favor of one of the
parties so as to lead to an unconscionable result, thus
partaking of the nature of a contract of adhesion, is void.
Any stipulation regarding the validity or compliance of
the contract left solely to the will of one of the parties is
likewise invalid.
BUT…
254
MIAA vs. Ding Velayo Sports Center (May 30, 2011)
An express agreement which gives the lessee
the sole option to renew the lease is frequent
and subject to statutory restrictions, valid and
binding on the parties. This option, which is
provided in the same lease agreement, is
fundamentally part of the consideration in the
contract xxx. It is a purely executory contract and at
most confers a right to obtain a renewal if there is
compliance with the conditions on which the right is
made to depend. The right of renewal constitutes a
part of the lessee's interest in the land and forms a
substantial and integral part of the agreement.

255
The fact that such option is binding only on the
lessor and can be exercised only by the lessee
does not render it void for lack of mutuality.
After all, the lessor is free to give or not to give
the option to the lessee. xxx Mutuality obtains in
such a contract and equality exists between the
lessor and the lessee since they remain with the
same faculties in respect to fulfillment.

256
Autonomy (Art. 1306)
The contracting parties may establish such
stipulations, clauses, terms and conditions
as they deem convenient.
Limitation to the principle of autonomy:
• Stipulations should not be contrary to law,
morals, good customs, public order, or public
policy.
• Exercise of Parens Patriae – weakening the
consensual nature of contracts giving undue
advantage to one of the contracting parties

257
Relativity (Art. 1311)
General Rule: Contracts take effect only
between parties, their assigns and heirs.
Limitations: HOWEVER with respect to
assignees or heirs, the general rule under Art.
1311 is not applicable if the rights and
obligations arising from the contract are not
transmissible or purely personal.

258
Exceptions:
1) Beneficial stipulation/stipulation pour autrui – A
stipulation in favour of a third person.
2) When the third person comes into possession of
the object of a contract creating real rights; (Art.
1312)
3) Where the contract is entered into in order to
defraud a creditor; (Art. 1313)
• Here, the creditor may ask for its rescission.
1) Where the third person induces a contracting
party to violate his contract (Art. 1314). Such third
person can be held liable for damages.

259
5) Contracts creating “status” (marriage contract)
6) In suspension of payments and compositions
under the Insolvency Law
7) CBA
8) Negotiorum gestio (Art. 2150-2151)
9) Violence & intimidation employed by 3P
(Art. 1336)

260
Essential Requisites of Contracts
CONSENT: conformity of the parties to the
terms of the contract; the acceptance by the
offeree of the offer made by the other
Requisites:
1) Must be manifested by the concurrence of the
other and acceptance; (Arts. 1319-1326)
2) Parties must possess the necessary legal
capacity; (Arts. 1327-1329) and
3) Must be intelligent, free, spontaneous, and
real. (Arts. 1330-1346)

261
• The fact that the signatures of the witnesses
and the notary public were forged does not
negate the existence of the contract for as
long as the parties consented to it. The
signatures of the witnesses and the notary
public are necessary simply to make the
contract binding on the third person (Soriano
v. Soriano, G.R. No. 130348, Sept. 3, 2007)

262
OFFER: Unilateral proposition which one
party makes to the other for the celebration
of a contract
Requisites:
1) It must be defined.
2) It must be intentional.
3) It must be complete.
4) It must be directed to person or persons with
whom the other offeror intends to enter into a
contract except definite offers which are not
directed to a particular person but to the public
in general (i.e. public auction)

263
Withdrawal of Offer
Offer/proposal may be withdrawn so long as
the offeror has no knowledge of acceptance
by offeree
Except: Option Contract (Art. 1324)
Counter-offer
Qualified acceptance; involves a new
proposal; a rejection of the original offer

264
Complex Offers
When a single offer involves two or more
contracts, the perfection, where there is only
partial acceptance, will depend upon the
relation of the contracts between
themselves, whether due to their nature or
due to the intent of the offeror.

265
Rule on Complex Offers
1) Offers are interrelated – contract is
perfected if all the offers are accepted
2) Offers are not interrelated – single
acceptance of each offer results in a
perfected contract unless the offeror has
made it clear that one is dependent upon
the other and acceptance of both is
necessary

266
ACCEPTANCE: Must be certain or definite
and absolute in character. A qualified
acceptance constitutes a counter-offer. (Art.
1319)
It may be express or implied (e.g. failure on
the part of the heir to reject the inheritance
within 30 days from notice of the order of
the court distributing the estate). (Art. 1320)

267
Requisites of acceptance:
1) Absolute (no vitiation)
2) Directed to the offeror
3) Made with the intention to be bound
4) Made within the prior time
5) Communicated to the offeror and learned
by him unless the offeror knows of the
acceptance.

268
Amplified Acceptance
Under certain circumstances, a mere
amplification on the offer must be
understood as an acceptance of the
original offer, plus a new offer which is
contained in the amplification.

269
Withdrawal Acceptance
• First View (Manresa) – Although the offeror
is not bound until he learns of the
acceptance, the same thing cannot be said
of the offeree who from the moment he
accepts, loses the power to retract such
acceptance xxx
• Second View (Tolentino) – Acceptance
may be revoked before it comes to the
knowledge of the offeror because in such
case there is still no meeting of minds

270
Theories that determine the exact moment of
perfection when acceptance is made by letter or
telegram:
1) Manifestation Theory – perfected from the
moment the acceptance is declared or
made.
• Adhered to by the Code of Commerce
1) Expedition Theory – perfected from the
moment the offeree transmits the notification
of acceptance to the offeror.

271
3) Reception Theory – perfected from the
moment that the notification is in the hands
of the offeror in such a manner that he can,
under ordinary conditions, procure the
knowledge of its contents, even if he is not
able to actually acquire such knowledge.
4) Cognition Theory – perfected from the
moment the acceptance comes to the
knowledge of the offerror.
Note:
The stipulation of the parties governs the manner
and moment of acceptance as when they stipulate
that it be expressly accepted.

272
Note:
Silence can be construed as consent.
Requisites:
1) There is a duty or possibility to express
oneself;
2) The manifestation of the will cannot be
interpreted in any other way;
3) There is a clear identity in the effect of the
silence and the undisclosed will (Arts. 1670,
1870-1873)

273
OPTION CONTRACT
A preparatory contract in which one party
grants to the other for a fixed period under
specified conditions, to decide whether or not to
enter into a principal contract.
Requisites:
1) It is supported by an independent
consideration; and
2) It is exclusive.
If the option is not supported by a consideration which is
distinct from the purchase price, the offer may still be
withdrawn even if the offeree has already accepted it
(Jurado, Desiderio, Comments and Jurisprudence on
Obligations and Contracts, p. 413 [2010])
274
Persons Incapacitated to Give Consent
(Art. 1327)
A. Minors
Exceptions:
a) When minor misrepresents his age (It must be
an active not merely constructive
representation); physical attributes;
b) Contracts involving the sale and delivery of
necessaries to minors (Art. 1489)
c) Contracts by guardians or legal
representatives.

275
B. Insane or Demented Persons - Unless
the contract was entered into during a
lucid interval (Art. 1328).
C. Deaf-mutes who do not know how to
read and write
N.B. Rule 93, Sec. 2—
Incompetents
1) Persons under civil interdiction
2) Hospitalized lepers, prodigals, deaf & dumb
3) Unsound mind
4) Person who cannot take care of themselves
because of age, disease or weak mind.

276
Are they Incapacitated?
Answer: Incompetents also incapacitated
OBVIOUSLY cannot give consent
BUT
incompetents NOT incapacitated – can give
consent
BUT
if guardian already appointed, then cannot
give consent anymore.

277
Incapacity to give consent (Art. 1327) vs.
Disqualification to contract (Art. 1329)
Article 1327 Article 1329
Restrains the existence Restrains the very right
of the right to contract itself
Based upon subjective Based upon public
circumstances of policy and morality
certain persons
Voidable Void

278
Vices of Consent (Art. 1330)
1) Vices of the will (vicios de la formacion de la
voluntad)
2) Violence
3) Intimidation
4) Mistake
5) Fraud
6) Undue Influence

Vices of Declaration (vicios de la declaracion)

- Simulation of contracts

279
A. Mistake
It must refer to the substance of the thing
which is the object of the contract, or to
those conditions which have principally
moved one or both parties to enter into the
contract. (Art. 1331)
Not only wrong conception of the thing but
also the lack of knowledge with respect to it.

280
 Two (2) General Kinds of Mistake

Mistake of Fact Mistake of Law

One or both contracting One or both parties arrive at
parties believe that a fact an erroneous conclusion
exists when in reality it does regarding the interpretation
not or vice versa. of a question of law or legal
effects of a certain act or
transaction.
Vitiates consent Does not vitiate consent
except when it involves
mutual error as to the effect
of an agreement when the
real purpose is frustrated.

281
Requisites of Art. 1334 which will vitiate
consent:
1) It must be of a past or present fact;
2) It must not be imputable to the party mistaken,
i.e. mistake is not inadvertent and excusable;
3) Mistake must be with respect to the legal effect
of an agreement;
4) It must be mutual; and
5) Parties’ real purpose must have been frustrated.
• There is NO MISTAKE in the party alleging it
knew the doubt, contingency or RISK affecting
the object of the contract (Art. 1333)

282
B. Violence
When in order to wrest consent serious or
irresistible force is employed (Art. 1335)
Requisites:
1) Must be serious or irresistible
2) Must be the determining cause for the party
upon whom it is employed in entering in the
contract
3) It is not justified
4) It is sufficient

283
C. Intimidation (Art. 1335)
Requisites:
1) One party is compelled to give his consent by
a reasonable and well-grounded fear of an
evil;
2) The evil must be imminent and grave;
3) The evil must be upon his person or property,
spouse, descendants or ascendants; and
4) It is the reason why he enters the contract.
5) The evil must be unjust.

284
 Violence vs. Intimidation

Violence Intimidation
Refers to physical Refers to moral compulsion
compulsion
External or prevents the will Internal or induces the
to manifest itself performance of an act

285
D. Undue Influence (Art. 1337)
When a person takes improper advantage
of his power over the will of another,
depriving the latter of a reasonable freedom
of choice.
Test of undue influence:
Whether or not the influence exerted has so
overpowered or subjugated mind of a contracting
party as to destroy his free agency, making him
express the will of another rather than his own.
(Coso v. Fernandez Deza, G.R. No. 16763, December 22,
1921)

286
Circumstances considered to determine
whether the influence exerted is unreasonable:
1) Confidential relations
2) Family relations
3) Spiritual relations
4) Other relations between the parties

• By analogy, undue influence employed by

a third person may annul the contract.

287
N.B.
Reverential fear is fear of displeasing a
person to whom respect and obedience is
due. Here, there is NO unreasonable
restraint in the choice of the party and
HENCE NOT VITIATE CONSENT.

288
E. Fraud (Art. 1338)
When, through insidious words or
machinations of one party, the other is
induced to enter into a contract which
without them, he would not have agreed to.
Kinds of fraud:
1) Fraud in the PERFECTION of the contracts
a) Causal Fraud (Dolo Causante)
b) Incidental Fraud (Dolo Incidente)
2) Fraud in the PERFORMANCE of an obligation
(Art. 1170)

289
Requisites of Fraud under Art. 1338:
1) One party must have employed fraud or
insidious words or machinations
2) It must have been serious;
3) It induced the other party to enter into a
contract;
4) It must have been employed by one contracting
party upon the other and not employed by both
contracting parties or by third persons;
5) Damage or injury resulted to the other party;
6) It must be made in bad faith, i.e. with knowledge
of its falsify

290
 Dolo Causante vs. Dolo Incidente
Dolo Causante (Art. 1338) Dolo Incidente (Art. 1344)
Refers to those deceptions or Refers to those deceptions or
misrepresentations of a serious misrepresentations which are not
character employed by one party serious in character and without
and without which the other party which the other party would have
would not have entered into the still entered the contract.
contract

Fraud which is serious in character Not serious in character

It is the cause which induces the Not the cause

party to enter into a contract

Renders the contract voidable Liability for damages

291
Bad faith and fraud are allegations of fact that
demand clear and convincing proof. They are
serious accusations that can be so convenient
and casually invoked, and that is why they are
never presumed. (Cathay Pacific Airways, Ltd vs.
Sps. Vazquez, G.R. No. 150843, March 14, 2003)

292
Note:
Failure to disclose facts, when there is a
duty to reveal them, constitutes fraud.
(Art. 1339)

293
• The usual exaggerations in trade, when
the other party had an opportunity to
know the facts, are not in themselves
fraudulent (Art. 1340)
• A mere expression of an opinion does
not signify fraud unless made by an
expert and the other party relied on the
former’s special knowledge (Art. 1341).

294
Fraud by third person does not vitiate consent
UNLESS:
a) It has created a substantial mistake and
the same is mutual.
b) Third person makes the
misrepresentation with the complicity, or
at least with the knowledge but without
the objection, of the favoured contracting
party.

295
• Misrepresentation made in good faith is
not fraudulent but may constitute error
(Art. 1343)
• When two persons constitute one party
of the contract with respect to another,
the deceit exercised by one of them upon
his co-party is not a cause for annulment
of the contract.

296
Simulation of Contracts
(Arts. 1345-1346)
A deliberate declaration contrary to the will of
the parties.
1) Agreement of the parties to the apparently
valid act.
2) The purpose is to deceive or to hide from
third persons although it is not necessary
that the purpose be illicit or for purposes of
fraud.

297
Kinds of simulation of contract:
1) Absolute (simulados) – parties do not intend to
be bound by the contract at all.
• Status: VOID
2) Relative (disimulados) – parties conceal their
true agreement. It binds the parties to their real
agreement, when it does not prejudice a third
person and is not intended for any pupose
contrary to law, morals, good customs, public
order or public policy. (i.e. a deed of sale of a
piece of land is executed by the parties to
conceal their two agreement which is a
donation)

298
Two juridical acts in relatively simulated
contracts:
1) Ostensible Act (apparent or fictitious) –
pretended contract
2) Hidden Act (real) – true agreement

299
Should the hidden act or the concealed
contract be lawful and does not prejudice a
third person, it is absolutely enforceable. Its
validity and effects will be governed by the
rules applicable to it, and not by those
applicable to the apparent contract.

300
With respect to a third person acting in good
faith, the apparent contract must be considered
as the true contract. The declaration that the
contract is simulated does not prejudice him.

• Relative simulation is presumed by law in

case of Art. 1602

301
OBJECT: The thing, right or service which is
the subject matter of the obligation arising
from the contract.
Requisites:
1) Must be within the commerce of man;
2) Should be real or possible;
3) Should be licit; and
4) Should be determine, or at least possible of
determination as to its kind.

302
Things Which Cannot Be the Object of
Contracts (Art. 1347-1349)
General Rule: All things or services may be the
object of contracts.
Exceptions:
1) Things outside the commerce of men;
2) Intransmissible rights;
3) Future inheritance except in cases expressly
authorized by law:
a) The object of the contract forms part of the
inheritance; and
b) The promissor has an expectancy of a right which is
purely hereditary in nature.
303
4) Services contrary to law, morals, good
customs, public order or public policy;
5) Impossible things or services;
6) Objects not possible of determination as to
their kind.

304
Note:
In order that a thing, right or service may be the
object of a contract, it should be in existence at the
moment of the celebration of the contract, or at
least, it can exist subsequently or in the future:
• Future thing may be the object of a contract. Such
contract may be interpreted in two possible ways:
1) Conditional contract – if its efficacy should depend
upon the future existence of the thing
2) Aleatory contract – if one of the contracting parties
should bear the risk that the thing will never come
into existence

305
CAUSE: It is the immediate, direct or most
proximate reason which explains and justifies
the creation of an obligation through the will of
the contracting parties.
Essential requisites of cause:
1) Existing at the time of the celebration of the
contract;
2) Licit or lawful; and
3) True

306
 Cause and Object Distinguished
Cause Object
The service or benefit which The thing which is given in
is remunerated remuneration
The liberality of the donor or The thing which is given or
benefactor donated
Prestation or promise of a The thing or service itself
thing or service by the other
Different with respect of May be the same for both
each party parties

307
 Cause and Motive Distinguished
Cause Motive
Direct and most proximate Indirect or remote reason
reason of a contract
Objective or juridical reason Psychological or purely
of a contract personal reason
Always the same for each Differs for each contracting
contracting party party
Its legality affects the Its legality does not affect
existence or validity of the the existence or validity of
contract contract.

308
Effect of Lack of Cause, Unlawful Cause,
False Cause and Lesion (Arts. 1352-1355)
Cause Effect
Lack of Cause There is a total lack The contract
or absence of cause confers no right and
produces no legal
effect
Illegality of cause The cause is stated The contract is void
but is not true if it should not be
proved that they
were founded upon
another cause
which is true and
lawful

309
 Cause Effect
Lesion or Shall not invalidate
inadequacy of the contract,
price UNLESS:
1) There is fraud,
mistake or
undue influence;
or
2) When the
parties intended
a donation or
some other
contract.

310
FORMS OF CONTRACTS
General Rule: Contracts shall be obligatory, in
whatever form they may have been entered into,
provided all the essential requisites for their validity
are present (Art. 1356).
Exceptions:
1. When the law requires that the contract be in a
certain form to be valid (Art. 1356)
2. When law requires that the contract be in a
certain form to be enforceable (Statute of
Frauds)
3. When required to make the contract effective as
against third parties (Art. 1357-1358)
311
Where the validity of a contract is made to
depend upon a particular formality, an
action under Art. 1357 cannot be brought to
compel the other party to execute such
formality.
Article 1357 presupposes the existence of a
valid contract and cannot possibly refer to
the form to make it valid.

312
Contracts which must appear in writing:
1. Donation of personal property whose value
exceeds five hundred pesos (Art. 748)
2. Sale of a piece of land or any interest therein
through an agent (Art. 1874)
3. Agreements regarding payment of interest in
contracts of loan (Art. 1956);
4. Antichresis (Art. 2134); and
5. Stipulation limiting common carrier’s duty of
extraordinary diligence to ordinary diligence
(Art. 1744)

313
Contracts which must appear in public instrument:
1. Donation of immovable properties (Art. 749);
2. Partnership where immovable property or real rights
are contributed (Arts. 1171 and 1773);
3. Acts/contracts which have for their object the
creation, transmission, modification or
extinguishment of real rights over immovable
property (Arts. 1358 (1), 1403 (2), 1405);
4. The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal
partnership of gains (Art. 1358 (2);
5. The power to administer property or those which
should prejudice a third person (Art. 1358 (3);
6. The cession of actions or rights proceeding from an
act appearing in a public document (Art. 1358 (4)

314
Note:
With respect to those enumerated under Art.
1358 (items 3 to 6 in the preceding list), they
are valid as between the contracting parties.
The requirement that they be executed in a
particular form is for the purpose of making
them effective against third persons. However,
with respect to items 1 and 2, formalities are
required for the validity of the contract.

315
Contracts which must be registered:
1. Chattel mortgages (Art. 2140)
2. Sale/transfer of large cattle
(Cattle Registration Act)

316
Note:
Arts. 1357-1358 do not require the execution of
the contract either in a public/private document
in order to validate/enforce it but only to insure
efficacy, so that after its existence has been
admitted, the party bound may be compelled to
execute the necessary document.

317
• When one of the contracting parties invokes Art. 1357
and 1358 by means of proper action, the effect is to
place the existence of the contract in issue, which must
be resolved by the ordinary rules of evidence.
• Actions to compel the execution of the necessary
document and action upon the contract may be
exercised simultaneously, unless it appears that the
former action must precede the latter.
• Although Art. 1357, in connection with Art. 1358, do not
operate against the validity of the contract nor the
validity of the acts voluntarily performed by the parties
for the fulfilment thereof, it is evident that under them
execution of the required document must precede the
determination of the obligations derived from the
contract.

318
R.A. 8792 (E-Commerce Act)
It provides that the formal requirements to
make contracts effective as against third
persons and to establish the existence of a
contract are deemed complied with provided
that the electronic document is unaltered and
can be authenticated as to be usable for future
reference.

319
Reformation of Instruments
Remedy by means of which a written
instrument is made or construed so as to
express or conform to the real intention of the
parties when some error or mistake has been
committed.

320
Requisites:
1) Meeting of the minds of the parties;
2) Their true intention is not expressed in the
instrument;
3) Failure to express true intention is due to
mistake, fraud, inequitable conduct or
accident; and
4) Clear and convincing proof of mistake,
accident, relative simulation, fraud, or
inequitable conduct.

321
 Reformation Annulment
Presupposes that there is a The contract was not validly
valid contract but the entered into as when their
document/instrument minds did not meet or if the
executed does not express consent was vitiated
their true intention

Gives life to the contract by Involves a complete

making the instrument nullification of the contract
conform to the true intention
of the parties

322
When can one party ask for the reformation of the
contract (Arts. 1361-1365)
1) In case of mutual mistake of the parties (Art. 1361)
2) When one party was mistaken and the other party
acted fraudulently (Art. 1362);
3) When one party was mistaken, the other knew or
believed that the instrument does not show their
real intent but concealed that fact to the former (Art.
1363);
4) In case of ignorance, lack of skill, negligence or bad
faith on the part of the person drafting the
instrument (Art. 1364);
5) When parties agree upon the mortgage or pledge of
a real or personal property, but the instrument
states that the property is sold absolutely or with a
right of repurchase (Art. 1365).
323
Instances when there can be no reformation:
(Art. 1366)
1) Simple donations inter vivos wherein no
condition is imposed;
2) Wills;
3) When the real agreement is void (Art. 1366)
Note:
• If mistake, fraud, inequitable conduct or accident
has prevented a meeting of the minds of the
parties, the proper remedy is not reformation of
the instrument but annulment of the contract (Art.
1359)
• Expediency and convenience are not grounds for
the reformation of an instrument (Multi-Ventures
Capital vs. Stalwart, G.R. No. 157439, July 4, 2007)
324
4) When one of the parties brought an action to
enforce the instrument (Art. 1367)
Note:
• When one of the parties has brought an action
to enforce the instrument, no subsequent
reformation can be asked (principle of
estoppel)
• In case of mutual mistakes, reformation may
be ordered at the instance of either parties or
his successors in interest, otherwise it may
only be brought by the petition of the injured
party or his heirs and assigns (Art. 1365).

325
RESCISSIBLE Contracts
Contracts which are valid but are defective
because of injury or damage to either of the
contracting parties or to third persons, as a
consequence of which it may be rescinded
by means of a proper action for rescission.

• Distinguish from ‘RESOLUTION’ in

Article 1191

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Requisites of rescission:
1) Contract must be rescissible under Arts. 1381 and
1382.
2) Party asking for rescission must have no other legal
means to obtain reparation for the damages suffered
by him (Art. 1383)
3) Person demanding rescission must be able to return
whatever he may be obliged to restore if rescission
is granted (Art. 1385)
4) Things which are the object of the contract must not
have passed legally to the possession of a third
person acting in good faith (Art. 1385); and
5) Action must be brought within four years (Art. 1389)

327
Contracts that are rescissible
(Arts. 1381-1382)
A. Lesion
1) Those entered into by guardians where the
ward suffers lesion of more than ¼ of the value
of the things which are objects thereof.
2) Those agreed upon in representation of
absentees, if the latter suffer lesion by more
than ¼ of the value of the things which are
subject thereof.

328
B. Fraud
1) Those undertaken in fraud of creditors when the
latter cannot in any manner claim what are due
them. (accion pauliana)
2) Those which refer to things under litigation if
they have been entered into by the defendant
without the knowledge and approval of the
litigants and the court.
3) Payments made in a state of insolvency for
obligations whose fulfilment the debtor could not
be compelled at the time they were effected.

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C. Other Causes Stated By Law
1) Art. 1098 – partition of inheritance where an heir
suffers LESION of at least ¼ of the share to which
he is entitled
2) Art. 1189 (4) – deterioration of the thing through
the fault of the debtor
3) Art. 1526 (4) – right of unpaid seller to rescind
4) Art. 1538 – deterioration of the object of the sale
5) Art. 1539 – sale of real estate with a statement of
its area at the rate of a certain price for a unit of
measure or number and the vendor failed to
deliver the area stated, which should be not less
than 1/10th of that stated

330
6) Art. 1542 – the vendee does not accede to the
failure to deliver what has been stipulated
7) Art. 1556 – when through eviction, the vendee loses
a part of the thing sold of such importance, in
relation to the whole, that he would not have bought
it without the said part
8) Art. 1560 – if immovable sold is encumbered with
any non-apparent burden or servitude of such nature
that it cannot be presumed that the vendee could not
have acquired it had he been aware thereof
9) Art. 1567 – election of the vendee to withdraw from
the contract in the cases under Arts. 1561-1566
10) Art. 1659 – rescission by the aggrieved party in a
contract of lease when the other party does not
comply with Arts. 1654 and 1657
331
Requisites before a contract entered into in behalf
of wards of absentees may be rescinded on the
ground of LESION:
Lesion is the injury which one of the parties
suffers by virtue of a contract which is
disadvantageous for him. TO give rise to
rescission, the lesion must be known or could
have been known at the time of making of the
contract.

332
1) Contract was entered into by a guardian in behalf
of his ward or by a legal representative in behalf of
an absentee;
2) It was entered into without judicial approval;
3) Ward or absentee suffered lesion of more than ¼
of the value of the property which is the object
contract.
4) There is no other legal means of obtaining
reparation for the lesion;
5) Person bringing the action must be able to return
whatever he may obliged to restore; and
6) Object of the contract must not be legally in the
possession of a third person who did not act in
bad faith.

333
Note:
A guardian is authorized only to MANAGE the
estate of the ward; should he DISPOSE a
portion thereof without authority from the court
by way of a contract, the same is
unenforceable under Art. 1403 (1), irrespective
of whether there is lesion or not.

334
Requisites before a contract entered into in
FRAUD OF CREDITORS may be rescinded:
1) There is a credit existing prior to the celebration
contract;
2) There is fraud, or at least, the intent to commit fraud
to the prejudice of the creditor seeking rescission;
3) Creditor cannot in any legal manner collect his
credit; and
4) Object of the contract must not be legally in the
possession of a third person who did not act in bad
faith.
The action to rescind contracts in fraud of
creditors is known as accion pauliana.

335
Requisites:
1) The plaintiff asking for rescission has a credit
prior to the alienation;
2) The debtor has made a subsequent contract
conveying a patrimonial benefit to a third
person;
3) The creditor has no other legal remedy to satisfy
his claim;
4) The act being impugned is fraudulent; and
5) The third person who received the property
conveyed, if it is by onerous title, has been an
accomplice in the fraud.

336
• Accion pauliana resupposes a judgment
and unsatisfied execution which cannot
exist when the debt is not yet demandable
at the time the rescissory action is brought.
• Even secured creditors are entitled to
accion pauliana.

337
When alienation of property presumed in Fraud
of Creditors:
1) Alienation by gratuitous title if the debtor has
not reserved sufficient property to pay all of
his debts contracted before alienation;
2) Alienation by onerous title if made by a
debtor against whom some judgment has
been rendered in any instance or some writ
of attachment has been issued.

338
Requisites before payment made by
insolvent can be rescinded:
1) It was made in a state of insolvency; and
2) Obligation must have been one which
the debtor could not be compelled to pay
at the time such payment was effected.

339
Asia Banking vs. Noble Jose and Lichauco
& Co., (51 Phil 703)
Where a debtor transfers property to a
creditor supposedly in payment of a debt
which has NOT YET matured at the time
when debtor is INSOLVENT and for a
CONSIDERATION which is grossly
inadequate as compared to the actual
value, SC considered the same as
FRAUDULENT and may be set aside.

340
But... it is NOT fraudulent if the
consideration of the sale was a pre-existing
debt and the debt was due and owing and
enforceable at the time of sale.

341
Parties who may institute action:
1) The creditor who is defrauded in rescissory
actions on ground of fraud, and other person
authorized to exercise the same in other
rescissory actions.
2) Their representatives
3) Their heirs
4) Their creditors by virtue of the subrogatory
action define in Art. 1177 of the NCC

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Effect of Rescission (Art. 1385)
1) As to the parties – mutual restitution
together with the fruits and interest.
Note: This is applicable only to rescissory actions on
the ground of lesion and not to rescissory actions on
the ground of fraud.
2) As to third person
• Bad faith or not legally in possession –
obliged to return
• Legally in possession and not in bad faith –
no rescission; however, indemnity for
damages may be demanded from the
person causing the loss.

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Prescriptive Period: Action for Rescission
(Art. 1389)
1) Under Art. 1381 (1)– within 4 years from the time
of the termination of the incapacity of the ward
2) Under Art. 1381 (2)– within 4 years from the time
the domicile of the absentee is known
3) Under Art. 1381 (3) and (4) as well as Art. 1382 –
within 4 years from the time of the discovery of
fraud
4) In certain contracts of sale especially declared by
law to be rescissible – 6 months or even 40 days
counted from the day of delivery (Arts. 1547,
1571, 1577)

344
VOIDABLE Contracts
Those which possess all the essential
elements fr validity but the consent is
vitiated either by lack of legal capacity of
one of the contracting parties or by mistake
violence, intimidation, undue influence or
fraud even though there may have been no
damage to the contracting parties.

345
CAUSE
The following contracts are voidable or
annullable:
1) Those where ONE of the parties is
incapable of giving consent to a contract;
2) Those where the consent is vitiated by
mistake, violence, intimidation, undue
influence of fraud (Art. 1390)

346
Prescriptive Period: Action for Annulment
(Art. 1391):
1) Contracts entered into by incapacitated
person – within 4 years from the time
guardianship ceases;
2) Where consent is vitiated by violence,
intimidation or undue influence – within 4
years from the time such violence,
intimidation or undue influence ceases;
3) Where consent is vitiated by mistake or
fraud – within 4 years from the time of the
discovery of such mistake or fraud.

347
• Discovery of fraud must be reckoned
from the time the document was
registered in the Office of the Registry of
Deeds. Registration constitutes
constructive notice to the whole world.
(Carantes vs. CA, 1977)

348
Who May Institute Action for Annulment
(Art. 1397)
General Rule: Action for annulment may be
instituted by all who are thereby obliged
principally or subsidiarily. A stranger to the
contract cannot institute an action for
annulment.
Requisites:
1) Plaintiff must have interest in the contract;
2) The victim and not the party responsible for the
vice or defect must assert the same.

349
Exception:
If a third person is prejudiced in his rights
with respect to one of the contracting
parties, and can show detriment which
would positively result to him from the
contract in which he has no intervention
(Teves v. People’s Homesite & Housing Corp., GR No.
21498, June 27, 1968)

350
Effects of Annulment
1) In contract has not yet been
consummated parties shall be released
from the obligations arising therefrom;
2) If contract has already been
consummated rules provided in Arts.
1398-1402 shall govern.
• Arts. 1398-1399 – Obligation of mutual
restitution
• Arts. 1400-1402 – Effect of failure to make
restitution

351
UNEFORCEABLE Contracts
Those which cannot be enforced by proper
action unless they are ratified, because,
either:
1) They are entered into without or in
excess of authority (Art 1403 (1); Art.
1317);
2) They do not comply with the statute or
frauds (Art. 1403 (2);
3) Both contracting parties do not possess
the required legal capacity.

352
Note:
The statute of frauds applies only to
EXECUTORY CONTRACTS, not to those that
are partially or completely fulfilled. Further, the
statute does not apply to actions which are
neither for specific performance of the contract
nor for the violation thereof. Take note that the
provision mentions “unenforceable by action.”
The prohibition, thus, applies on actions which
spring from the enforcement of the contract.

353
Mactan-Cebu Int’l. Airport Authority vs.
Lozado, Sr. (Feb. 25, 2010)
Held: The Statute of Frauds operates
only with respect to executory contracts,
and does not apply to contracts which
have been completely or partially
performed,

354
Ratification of Contracts Infringing the
Statute of Frauds (Art 1405)
Such contracts may be ratified by:
1) Failure to object to the presentation of oral
evidence to prove such contracts; or
2) Acceptance of benefits under these
contracts
Note:
The unenforceability of a contract can only be
assailed by parties thereto (Art. 1408). This defense
is personal to the party to the agreement.

355
VOID OR INEXISTENT Contracts
In general, they are those which lack
absolutely either in fact or in law one or some
of the elements essential for its validity.
Note:
The defense of illegality of contract is not
available to third persons whose interests are not
directly affected (Art. 1421)
• A contract which is the direct result of a previous
illegal contract, is also void and inexistent (Art.
1422)

356
Void and Inexistent Contracts Distinguished
Void Inexistent
Those where all of the Those where one or some or
requisites of a contract are all of the requisites essential
present but the cause, object or for the validity of a contract are
purpose is contrary to law, absolutely lacking
morals, good customs, public
order, or public policy or
contract itself is prohibited or
declared void by law.
Principle of pari delicto is Principle of pari delicto is not
applicable applicable
May produce legal effects Cannot produce legal effect
Covers Art. 1409 nos. 1, 3, 4, Covers Art. 1409 nos. 2 and 3
5, 6 and 7
357
Contracts which are INEXISTENT and VOID AB
INITIO (Art. 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;
and
7) Those expressly prohibited or declared void by law.

358
Principle of In Pari Delicto (Arts. 1411-
1417)
General Rule: When the defect of a void
contract consists in the illegality of the
cause or object of the contract and both of
the parties are at fault or in pari delicto, the
law refuses them any remedy and leaves
them where they are.

359
Exceptions:
1) Payment of usurious interest (Art. 1413);
2) Payment of money or delivery of property for an
illegal purpose, where the party who paid or
delivered repudiates the contract before the
purpose has been accomplished, or before any
damage has been caused to a third person (Art.
1414);
3) Payment of money or delivery of property made
by an incapacitated person (Art. 1415);
4) Agreement or contract not illegal per se but
merely prohibited by law, and the prohibition is
designed for the plaintiff’s protection (Art. 1416);

360
5) Payment of any amount in excess of the
maximum price of any article or commodity fixed
by law (Art. 1417);
6) Contract whereby a labourer undertakes to work
longer than the maximum number of hours fixed
by law (Art. 1418);
7) Contract whereby a labourer accepts a wage
lower than the minimum wage fixed by law (Art.
1419);
8) In case of divisible contracts, the legal terms
may be enforced separately from the illegal
terms (Art. 1420); and

361
9) One who lost in gambling because of fraudulent
schemes practiced on him. He is allowed to
recover his losses. [Art. 315, 3(b), RPC] even if
gambling is prohibited.

Note:
The principle of in pari delicto is applicable
ONLY TO VOID CONTRACTS and not to
inexistent contracts.

362
Rules when only one of the parties is at
fault:
1) Executed Contracts – guilty party is barred
from recovering what he has given to the
other party by reason of the contract.
Innocent party may demand for the return of
what he has given.
2) Executory Contracts – Neither of the
contracting parties can demand for the
fulfilment of any obligation from the contract
nor may be compelled to comply with such
obligation.

363
-END-

364