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PRESCRIPTION

Chapter 1: General Provisions

1106. By Prescription: A. One acquires ownership and other real rights through the lapse of

time in the manner and under the conditions laid down by law B. Rights and actions are lost

Sinaon vs. Sorongon: implied trust is subject to prescription; prescription is rightly regarded as a statute of repose

Morales vs. CFI of Misamis Occidental: prescription was not allowed to apply to obtain ownership over a particular property due to the fact that the statutory period was not complied with

Two kinds of Prescription: 1. Acquisitive—acquisition of a right by the lapse of time; other names

are adverse possession and usucapcion o Usucapcion—expressly vests the property and raised a new title in

the occupant 2. Extinctive—rights and actions are lost by the lapse of time; another

name is limitation of action o Bar the right of action

The concept most fundamental to a system of title by possession: the relationship between the occupant and the land in terms of possession is capable of producing legal consequences; in other words, the possessor is the actor.

Acquisitive Extinctive

The possessor is the actor One does not look at the act of the possessor but at the neglect of the owner

Important feature

Claimant in possession The owner out of possession

Concept of laches—doctrine of stale—based upon grounds of public policy which requires, for the peace of the society, and the discouragement of stale claims

o Applies independently of prescription and the prescriptive period has not yet expired

o Can also bar the filing or prosecution of a suit o Requisites:

1. Conduct on the defendant giving rise to the situation of which complaint is made and for which the complaint seeks a remedy

2. Delay in asserting the complainant’s rights, the complainant having knowledge or notice of the defendant’s conduct and having been afforded an opportunity to institute a suit

3. Lack of knowledge or notice on the part of the defendant that the complainant would assert the right on which he bases his suit

4. Injury or prejudice to the defendant in the event relief is accorded to the complainant or the suit is not held barred

Laches Statute of Limitation

Concerned with the effect of the delay

Concerned with fact of delay

A question of inequity of permitting a claim to be enforced

A matter of time

Statutory

Equity Applies at law

Based on fixed time

1107. A. Persons capable of acquiring property or rights by the other legal

modes may acquire the same by means of prescription B. Minors and other incapacitated persons, may acquire property or

rights by prescription, either personally or through their parents, guardians or legal representatives

The acquisition of a minor without the assistance of his parents or guardian is annullable or voidable

However, when such minor comes of age, he may ratify the acquisition

1108. Prescription, both acquisitive and extinctive, runs against: A. Minors and other incapacitated persons—who have parents,

guardians or other legal representatives

Art. 1108(1) of the Civil Code—illegitimate child cannot claim exemption from the effects of prescription because they fall squarely under the said article

B. Absentees—who have administrators, either appointed by them before their disappearance or appointed by the courts

If the absentee can go back to his domicile but he intentionally does not want to return, prescription will lie against him

C. Persons living abroad—who have managers or administrators


With persons living abroad without administrators, prescription will not run against them but it must be shown that they cannot return to their domicile within the period when prescription should have run

D. Juridical persons—except the State and its subdivisions

Juridical persons—endowed by law of the attributes of a natural person and hence can acquire and lose properties and rights

State and its subdivision, acting in their sovereign capacity, cannot be the subject of prescription

But if the political subdivision or instrumentality of the government is acting in its proprietary character, prescription will lie against it

Persons who are disqualified from administering their property have a right to claim damages from their legal representatives whose negligence has been the cause of prescription.

1109. Prescription does not run between:

A. Husband and Wife—even though there be a separation of property agreed upon in the marriage settlements or by judicial decree

Art. 1109 of the 1950 Civil Code—prescription by adverse possession cannot exist between husband and wife

B. Parents and Children—during the minority or insanity of the latter

Natural bond of filiation is the basis of this rule C. Guardian and Ward—during the continuance of the guardianship

Due to fiduciary relationship, prescription will not lie during the period of guardianship

1110. Prescription, acquisitive and extinctive, runs in favor of, or against a married woman 1111. Prescription, obtained by a co-proprietor or a co-owner shall benefit the others

Co-ownership—exists when the ownership of an undivided thing or right belongs to different persons

1112. Persons with capacity to alienate property may renounce prescription already obtained, but not the right to prescribe in the future.

It is deemed to have been tacitly renounced when the renunciation results from acts which imply the abandonment of the right required

When a debt is already barred by prescription, it cannot be enforced by the creditor. But a new contract recognizing and assuming the prescribed debt would be valid and enforceable

A new express promise to pay a debt barred, take the case from the operation of the statute of limitations as this proceeds upon the ground that as a statutory limitation merely bars the remedy and does not discharge the debt, there is something more than a mere moral obligation to support a promise, to wit – a pre-existing debt which is a sufficient consideration constitutes, in fact, a new cause of action

1113. All things which are within the commerce of men are susceptible of prescription, unless otherwise provided. Property of the State or any of its subdivisions not patrimonial in

character shall not be the object of prescription

Forest lands of the public domain cannot be acquired by prescription, its possession however long cannot ripen into private ownership

Judicial confirmation of imperfect title—those who, by themselves or through their predecessors-in-interest, have been in the open, continuous, exclusive, and notorious possession and occupation of agricultural lands of the public domain, under bona fide claim of ownership, for at least 30 years immediately preceding the filing of the application for confirmation of title

1114. Creditors and all other persons interested in making the prescription effective may avail themselves thereof notwithstanding the express or tacit renunciation by the debtor or proprietor 1115. The provisions of the present Title are understood to be without prejudice to what in this Code or in special laws is established with respect to specific cases of prescription

In case of conflict between the period provided in this Title and in another portion of the Civil Code: the more specific provision will prevail


If different statutes are involved providing for different prescriptive periods, as well as the types of cause of action contemplated by them are apparently conflicting, they do not exclude each other from being availed of by the aggrieved party

1116. Prescription already running before the effectivity of this Code shall be governed by laws previously in force But if since the time of this Code took effect, the entire period herein

required for prescription should elapse, the present Code shall be applicable, even though by the former laws a longer period might be required

Situations: A. Prescriptive period under the old law has lapsed before the effectivity

of the 1950 Civil Code—prescriptive period of the old law shall apply B. Prescriptive period under the old law is still running upon the

effectivity of the 1950 Civil Code i. Old law provides for a different period for the same situation—1950

Civil Code shall prevail provided that the prescriptive period of such has already lapsed even though under the old law, the period has not yet lapsed.

ii. The remaining balance of the prescription period in the old law since the effectivity of the 1950 Civil Code is shorter than that provided in the latter—old prescriptive law will apply

Chapter 2: Prescription of Ownership and Other Legal Rights 1117. Acquisitive prescription of dominion and other legal rights may be:

A. Ordinary—requires possession of things in good faith and with just title for the time fixed by law

Requires uninterrupted possession for the required statutory period of years in good faith and with a just title

B. Extraordinary

Requires uninterrupted possession for the required statutory period of years but without need of just title and good faith on the part of the possessor

1118. Possession has to be in the concept of an A. Owner

The possessor asserts dominion over the property to the exclusion of all others

It must be adverse possession

For possession to constitute a foundation of a prescriptive right, it must be en concepto de dueno (claim of title) or that possession should be adverse.

B. Public

There must be a notorious holding of the property known to the community

It must not be of a surreptitious character because it must be in the concept of an owner

C. Peaceful

There must be no valid interference from others claiming or asserting their rights to the property for acquisitive prescription to apply

D. Uninterrupted

―while tax declaration and tax receipts are not necessarily evidence of title, they are considered as a strong evidence of possession for no one in his right mind would be paying taxes year after year for a property that is not in his actual possession‖

1119. Acts of possessory character executed in virtue of license or by mere tolerance of the owner shall not be available for the purposes of possession

Possession by tolerance does not imply an assertion of ownership and thus produces no effect with respect to possession or prescription

1120. Possession is interrupted for the purposes of prescription either: A. Naturally—through any cause it should cease for more than 1 year B. Civilly—produced by judicial summons to the possessor

An uninterrupted possession strengthens the adverse right of the possessor


1121. Possession is naturally interrupted when through any cause it should cease for more than 1 year. The old possession is not revived if a new possession should be

exercised by the same adverse claimant 1122. If the natural interruption is for only one year or less, the time elapsed shall be counted in favor of the prescription

Example for 1121 and 1122: o B sold his property in a public action where A was the highest bidder.

A was already in possession of the said land for 4 years before Z claimed that he was the rightful owner. A left the said property for 2 years before A found out that Z was a fraud. A continued to be in the possession of the property for 7 years before C claimed that he had purchased the disputed property before A did. A will not own the land by ordinary acquisitive prescription even though he had possessed the property for a total of 11 years because the interruption was more than 1 year. But if the interruption was only a year or less, that said time will be computed in favor of the prescription.

1123. Civil interruption is produced by judicial summons to the possessor

It is not the filing of the complaint in court which interrupts the possession. It is interrupted upon the receipt of the possessor of the judicial summons after the filing of the complaint.

1124. Judicial summons shall be deemed not to have been issued and shall not give rise to interruption:

A. If it should be void for lack of legal solemnities

Judicial summons have been served by a person not authorized by the court

B. If the plaintiff should desist from the complaint or should allow the proceedings to lapse

Desistance—means voluntarily having the case dismissed

Allowing the proceeding to lapse—manifests the lack of interest to prosecute the case

C. If the possessor should be absolved from the complaint

Absolution—the complaint have not been fully substantiated to support any adverse claim by the complainant

The possessor is always presumed to be in good faith

In all these cases, the period of interruption shall be counted for the prescription. 1125. Ant express or tacit recognition which the possessor may make of the owner’s right also interrupts possession.

This is the recognition that one owner recognizes somebody else as having a superior right as an owner

―Where the sale is subject to the owner’s right of redemption, the purchaser’s possession has been held in subordination to the title of the owner prior to the expiration of the redemption period, although it may become hostile thereafter‖

1126. Against a title recorded in the Registry of Property, ordinary prescription of ownership or real rights shall not take place to prejudice a third person, except in virtue of another title also recorded; and the time shall begin to run from the recording of the latter. As to lands registered under the Land Registration Act, the provisions

of that special laws shall govern

Although prescription will not apply to registered property, the doctrine of laches is applicable.

Laches—the rule of ineffectivity of stale demands; inaction for an unreasonable and unexplained length of time constitutes laches

A registered landowner may lose his right to recover the possession of his registered property be reason of laches.

1127. The good faith of the possessor consists in the reasonable belief that the person from whom he received the thing was the owner thereof, and could transmit his ownership 1128. The conditions of good faith required for possession in Arts. 526, 527, 528 and 529 of this Code are likewise necessary for the determination of good faith in the prescription of ownership and other real rights.

Art. 526—not aware that there exists any flaw which invalidates his title or mode of acquisition

Art. 527—good faith is always presumed

Art. 528—possession acquired in good faith does not lose this character


Art. 529—it is presumed that possession continues to be enjoyed in the same character in which it was acquired

Good faith cannot be invoked if the claimant has actual or constructive notice of the legal and valid rights of possession of another during the prescriptive period

1129. For the purposes of prescription, there is just title when the adverse claimant came into possession of the property through one of the modes recognized by law for the acquisition of ownership or other real rights, but the grantor was not the owner or could not transmit any right. Art. 1130. The title for prescription must be true and valid “Titulo Colorado”—such title where, although there was a mode of

transferring ownership, still something is wrong because the grantor is not the owner

Art. 1131. For the purposes of prescription, just title must be proved; it is never presumed.

Art. 1132. The ownership of movables prescribes through uninterrupted possession for 4 years in good faith. The ownership of personal property also prescribes through

uninterrupted possession for 8 years, without need of any other condition

With regard to the right of the owner to recover personal property lost or of which he has been illegally deprived, as well as with respect to movables acquired in a public sale, fair, or market, or from a merchant’s store the provisions of Arts. 559 and 1505 of this Code shall be observed.

Art. 559—the possession of movable property acquired in good faith is equivalent to a title. If the possessor lost or of which the owner has been unlawfully deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid therefor

1133. Movables possessed through a crime can never be acquired through prescription by the offender

The benefits of prescription are denied to the offender

However, if the thing was in the meanwhile passed to a subsequent holder, prescription begins to run (4 or 8 years, depending on the existence of good faith)

1134. Ownership and other rights over immovable property are acquired by ordinary prescription through possession of 10 years. 1135. In case the adverse claimant possesses by mistake an area greater, or less, than that expressed in his title, prescription shall be based on the possession.

The extent of property subject to the prescription shall be the one actually possessed or held by the claimant regardless of the size indicated or described in the title.

1136. Possession in wartime, when the civil courts are not open, shall not be counted in favor of the adverse claimant.

The possession of the adverse claimant during that time shall not be counted where it must be observed that the civil courts must be closed

If it is functioning, even during wartime, the possession may be counted in his favor

1137. Ownership and real rights over immovable also prescribe through uninterrupted adverse possession thereof for 30 years, without need of title or for good faith. 1138. In the computation of time necessary for prescription, the following rules shall be observed:

A. The present possessor may complete the period necessary for prescription by tacking his possession to that of his grantor or predecessor in interest

―grantor‖ and ―predecessor in interest‖ connote a transfer in a manner provided by law of property from one person to another


Tacking possession is allowed only when there is a privity of contract or relationship between the previous and present possessors.

B. It is presumed that the present possessor who was also the possessor at a previous time, has continued to be in possession during the intervening time, unless there is proof to the contrary

The presumption proceeds from a set of facts

For the presumption to exist, there must be a prior showing of the fact that the person presently possessing the property was also the one in possession of the same before the intervening time

C. The first day shall be excluded and the last day included

Chapter 3: PRESCRIPTION OF ACTIONS 1139. Actions prescribe by the mere lapse of time fixed by law.

Prescription of actions = limitation of actions o Actions to enforce or preserve a right or claim must be brought within

a certain period of time

Actions prescribe by mere lapse of time fixed by law

When the government is the real party in interest and is proceeding mainly to assert its own rights and recover its own property, there can be no defense on the ground of laches or limitation

o Prescription of action does not run against the government

Requisites for cause or right of action exists: a. A right in favor of the plaintiff by whatever means and under

whatever law it arises or is created must be present b. An obligation on the part of the defendant to respect such right c. An act or omission on the part of such defendant violative of the right

of the plaintiff

It is the legal possibility of bringing the action that determines the starting point for the computation of the period of prescription, that is, only upon the happening of the third requisite when it can be said that a cause of action has arisen

1140. Actions to recover movables shall prescribe eight years from the time the possession thereof is lost, unless the possessor has acquired the

ownership by prescription for a less period, according to article 1132, and without prejudice to the provisions of articles 559, 1505, and 1133.

This refers to extraordinary prescription for movables period of which to bring an action to recover is fixed at 8 years

o However, action shall not prosper if it is brought after 4 years when the possessor has already acquired title by ordinary acquisitive prescription

If possessor acquired the movable in good faith at a public sale, owner cannot obtain its return without reimbursing the price paid therefore

In certain cases, owner is precluded from recovery without right to reimbursement although the action has not yet prescribed

Movables possessed through a crime cannot be acquired through prescription by offender

1141. Real actions over immovables prescribed after thirty years. This provision is without prejudice to what is established for the acquisition of ownership and other real rights by prescription.

Action for recovery of title to, or possession of, real property or an interest therein can only be brought within 10 years after cause of action accrues

This article refers to extraordinary prescription for immovables

If action is based on fraud, action prescribes in 4 years from the discovery of fraud and such discovery is deemed to have taken place upon the issuance of the certificate of title over the property

If based on implied or constructive trust, in 10 years from the alleged fraudulent registration or date of issuance of certificate of title over the property

1142. A mortgage action prescribes after ten years. 1143. The following rights, among others specified elsewhere in this Code, are not extinguished by prescription:

1. To demand a right of way, regulated in article 649 2. To bring an action to abate a public or private nuisance

Rights not extinguished by prescription: a. To demand partition of a co-ownership as long as the co-ownership is

expressly or impliedly recognized


b. To enforce an express trust c. To demand easement of light and view d. To declare the inexistence of a contract or the nullity of a void

judgment or of a void title e. To compel a trustee to reconvey property registered in his name for

the benefit of the cestui que trust f. To compel reconveyance of land registered in bad faith provided it has

not yet passed to an innocent purchaser for value g. To quiet title brought by a person in possession of the property h. To recover real property or its value where the property was taken by

the government for public use without first acquiring title thereto i. To seek issuance of a writ of possession j. To probate a will k. To recover by the State non registrable land

1144. The following actions must be brought within ten years from the time the right of action accrues:

1. Upon a written contract 2. Upon an obligation created by law 3. Upon a judgment

The computation of the period should start from the date the cause of action accrues or from the day the right of the plaintiff is violated

o The 10-year period in the case of a written contract is to be reckoned from that time which is not necessarily the date of execution of the contract

Written contracts: o Action for annulment under Art. 1391 shall be brough within 4 years o A P.N or a check or a ticket issued for transportation is a written

contract o Right to claim payment of deficiency after foreclosure of real estate

mortgage prescribes in 10 years

Obligations created by law: o Obligation of the possessor to reconvey to the true owner real

property arising from a constructive or implied trust o Obligation of the winner in a gambling game to refund the amount

won to the loser o Obligation of the lessor to indemnify the lessee in good faith for

useful improvements on the property leased o Obligation of husband and wife, parents and children, and brothers

and sisters to support each other

Judgment—judgment that is final and executory o Under Rules of Court, judgment may be executed on motion within 5

years from the date of its entry or from the date it becomes final and executory. After the lapse of such time, and before it is barred by the statute of limitations, it may be enforced by ordinary action within 10 years

1145. The following actions must be commenced within six years:

1. Upon an oral contract 2. Upon a quasi-contract

Action upon an oral contract of tenancy to compel the reinstatement of a tenant comes under the provision

Recover local license fees illegally collected upon a quasi-contract

1146. The following actions must be instituted within four years:

1. Upon an injury to the rights of the plaintiff 2. Upon a quasi-delict

Purpose of an action or suit and the law to govern it, including the period of prescription, are to be determined by the complaint itself, its allegations and prayer for relief

Examples of ―injury to the rights of the plaintiff:‖ o A suit questioning the removal as corporate secretary must be brought

within 4 years for the unjustified separation from employment or illegal dismissal is an injury to the rights of the plaintiff

o Action for recovery of damages for taking or retaining personal property, or incident to trespass upon real estate prescribes within 4 years

Examples of quasi-delicts: o Prescriptive period is counted from the day quasi-delict occurred or

was committed o Action against the Central Bank for ―tortuous inference,‖ that is, in

closing and liquidating a bank

Other actions that prescribe in 4 years: a. To revoke or reduce a donation based on the birth, appearance, or

adoption of a child b. To revoke a donation based on non-compliance with a condition c. To rescind a contract d. To annul a contract


1147. The following actions must be filed within one year: 1. For forcible entry and detainer 2. For defamation

Other actions that prescribe in 1 year: a. To recover possession de facto b. To revoke a donation on the ground of ingratitude c. To rescind or recover damages if immovable is sold with non-

apparent burden or servitude d. To enforce warranty of solvency in assignment of credits

Actions that prescribe in 6 months: a. To rescind the sale or reduce the price of real estate

1. sold at a certain price for a unit area, if the vendor is unable to deliver all that is stated in the contract

2. if made for a lump sum, of the vendor is unable to deliver all that which is included within the boundaries mentioned in the contract

b. To enforce warranty against hidden defects of, or encumbrances upon the thing sold

Action that prescribe in 40 days: o Redhibitory action, based on the faults or defects of animals sold,

must be brought within 40 days from the date of their delivery to the vendee

1148. The limitations of action mentioned in articles 1140 to 1142, and 1144 to 1147 are without prejudice to those specified on other parts of this Code, in the Code of Commerce, and in special laws.

The provisions of Title V on Prescription have suppletory application to specific cases of prescription found elsewhere in the Civil Code and in special laws

1149. All other actions whose periods are not fixed in this Code or in other laws must be brought within five years from the time the right of action accrues.

The right of action or cause of action accrues from the moment of commission or omission of an act by a party in violation of his duty to, or of the right, of another

Essential elements are: a. Right in favor of a person (obligee) b. A correlative obligation on the part of another (obligor) c. Am act or omission in violation of said right

1150. The time for prescription for all kinds of actions, when there is no special provision which ordains otherwise, shall be counted from the day they may be brought.

Prescriptive period for actions based on quasi-delict shall begin to run ―from the day the action may be brought,‖ that is, from the day the quasi-delict was committed

Unless otherwise provided, the statutory limitation for period for filing a criminal action begins to run on the commission of the offense

Where offended party expressly reserves his right to institute a separate civil action, the running of the period of prescription starts to run from the date reservation is made up to the time the civil action is actually filed in court

Statute of limitations begins to run as to each unpaid installment from the date the creditor could sue the debtor thereof

Prescriptive period to set aside or reform a simulate or fictitious written deed of pacto de retro sale where the alleged vendees make known their intention by overt acts not to abide by the true agreement, starts from the date they make known such intention

1151. The time for prescription of actions which have for their object the enforcement of obligations to pay principal with interest or annuity runs from the last payment of the annuity or of the interest.

This refers to obligations where payment of which is due at stipulated intervals

Hence, if the debt is not yet due, payment of interest or annuity will not start the running of the period

1152. The period for prescription of actions to demand the fulfillment of obligations declared by a judgment commences from the time the judgment became final. 1153. The period for prescription of actions to demand accounting runs from the day the persons who should render the same cease in their functions.

The period for the action arising from the result of the accounting runs from the date when said result was recognized by agreement of the interested parties.


There is no difference between actions for accounting and reliquidation since both involve the determination, adjustment and settlement of what is due to the parties under the law

1154. The period during which the obligee was prevented by the fortuitous event from enforcing his right is not reckoned against him.

General Rule: existence of a fortuitous event relieves the obligor from liability that might otherwise arise in the breach of an obligation or excuse an obligee from his failure to exercise a right that might otherwise constitute a waiver of said right

A court order deferring action on the execution of a judgment suspended the running of the 5-year period for execution of a judgment

Prescriptive period to institute foreclosure proceeding by a mortgagee-bank was held legally interrupted when the bank was placed under receivership by the Central Bank with express prohibition from transacting business

1155. The prescription of actions is interrupted when they are filed before the court, when there is a written extrajudicial demand by the creditors, and when there is any written acknowledgement of the debt by the debtor.

This means that the period of prescription begins to run anew, and whatever time of limitation might have already elapsed is thereby negated and rendered inefficacious

Filing of an action in court: o Civil actions are deemed commenced from the date of the filing and

docketing of the complaint with the Clerk of Court o Interruption lasts during the pendency of the action o If the plaintiff desists from prosecuting the action to its final

conclusion, the action is deemed abandoned and as if it has never been instituted

Written extrajudicial demand by the creditor when it does not interrupt prescription:

o Petition to open an administration proceeding over the estate of a deceased debtor, even if brought by the creditor

o Written extrajudicial demand addressed to a co-debtor will not interrupt the prescription as to other debtors who did not receive the demand

o In the absence of an existing obligation, the party demanding annulment cannot be considered a creditor, and Art. 1155 is not applicable

Written acknowledgement of the debt by the debtor: o Written offer of payment works as a renewal of the obligation

OBLIGATIONS AND CONTRACTS

TITLE 1: OBLIGATIONS

CHAPTER 1: GENERAL PROVISIONS 1156. An obligation is a juridical necessity to give, to do or not to do.

Obligation—―legal bond whereby constraint is laid upon a person or group of persons to act or forbear on behalf of another person or group of persons‖

Elements: 1. Vinculum juris or juridical tie which is the efficient cause established by

the various sources of obligations 2. The object which is the prestation or conduct, required to be observed 3. Subject-persons who, viewed from the demandability of the obligation

are the (a) active (oblige) and the (b) passive (obligor) subjects

―Persons‖—both natural and juridical persons

Prestations—to give, to do and not to do

1157. Obligations arise from:

1. Law 2. Contracts 3. Quasi-Contracts 4. Acts or omissions punished by law 5. Quasi-delicts

The enumeration is exclusive where there can be no other sources of obligations

Obligations are: A. Civil--gives a right of action to compel their performance B. Natural—based on equity and natural law; it does not grant a right of

action to enforce their performance, but after voluntary fulfillment by


the obligor, they authorize the retention of what has been delivered or rendered by reason thereof

1158. Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes them and as to what has not been foreseen, by the provisions of this Book.

Law is the most important source of obligation o It does not depend upon the will of the parties o Imposed by the State and is generally imbued with some public policy

considerations o The basis of the obligation must be clear o It cannot be presumed

Existing law enters into and forms part of a valid contract without need for the parties expressly making reference thereto

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

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

A contract may involve mutual and reciprocal obligations and duties between and among the parties

The willful non-fulfillment of the provisions of a contract may involve sanctions

The parties voluntarily impose upon themselves the performance of certain duties and obligations which, in the event of breach or willful non-performance, can prejudice the other party or parties

1160. Obligations derived from quasi-contracts shall be subject to the provisions of Ch. 1, Title 17, of this Book.

Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of the other

1161. Civil obligations arising from criminal offenses shall be governed by the penal laws, subject to the provisions of Art. 2177, and of the

pertinent provisions of Ch. 2, Preliminary Title, on Human Relations, and of Title 18 of this Book, regulating damages.

Civil liability attaches to any individual who is found to be criminally liable.

1162. Obligations derived from quasi-delicts shall be governed by the provisions of Ch. 2, Title 17 of this Book, and by special laws.

Quasi-delict—whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties

CHAPTER 2: NATURE AND EFFECTS OF OBLIGATIONS 1163. Every person obliged to give something is also obliged to take care of it with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care.

―something‖—connotes a determinate object

Determinate object—definite, known and has already been distinctly decided and particularly specified as the matter to be given from among the same things belonging to the same kind

In case of a contrary stipulation of the parties, such should not be one contemplating relinquishment or waiver of the most ordinary diligence

Common carriers—persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public

1164. The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him.

Acquisition of real right means that such right can be enforceable against the whole world and will prejudice anybody claiming the same object of the prestation

The real right only accrues when the thing or object of the prestation is delivered to the creditor


The personal right of the creditor can be defeated by a third person in good faith who has innocently acquired the property prior to the scheduled delivery regardless of whether or not such third person acquired the property after the right to the delivery of the thing has accrued in favor of the creditor

Personal right—the power of one person to demand of another, as a definite passive subject, the fulfillment of a prestation to give, to do, or not to do

Real right—the power belonging to a person over a specific thing, without passive subject individually determined, against whom such right may be personally exercised

1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him by Art. 1170, may compel the debtor to make the delivery.

If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor.

If the obligor delays, or has promised to deliver the same thing to 2 or more persons who do not have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery.

Generic—any object belonging to the same kind

Non-delivery of: o Generic thing—the creditor may have it accomplished or delivered in

any reasonable and legal way charging all expenses in connection with such fulfillment to the debtor

o Determinate thing—the remedy is to file an action to compel the debtor to make the delivery which is called specific performance

Fortuitous event—an event which ―could not be foreseen, or which though foreseen, were inevitable‖

A fortuitous event will not excuse the obligor from his obligation in 2 cases:

1. If the obligor delays 2. If he has promised to deliver the same thing to 2 or more persons

who do not have the same interest

1166. The obligation to give a determinate thing includes that of delivering all its accessions and accessories, even though they may not have been mentioned. 1167. If the person obliged to do something fails to do it, the same shall be executed at his cost.

This same rule shall be observed if he does it in contravention of the tenor of the obligations. Furthermore, it may be decreed that what has been poorly done be undone. 1168. When the obligation consists in not doing and the obligor does what has been forbidden, it shall also be undone at his expense.

―at his cost‖—imply both the right to have somebody else perform the obligation and the right to charge the expenses thereof to the debtor

1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extra-judicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

1. When the obligation or the law expressly so declare; or 2. When from the nature and the circumstances of the obligation it

appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or

3. When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins.

mora solvendi—delay or default committed by the debtor

mora accipiendi—delay or default committed by the creditor o the debtor can consign whatever is due to the creditor in court if the

circumstances warrant


Delay in the performance of the obligation must either be malicious or negligent

o Hence, if the delay was only due to inadvertence without any malice or negligent, the obligor will not be held liable under Art. 1170

Default generally begins from the moment the creditor demands the performance of the obligation

o Without such demand, judicial or extra-judicial, the effects of default will not arise.

o Commencement of a suit is a sufficient demand o Obligor is liable for damages for the delay from the time of extra-

judicial or judicial demand

Art. 1169 is applicable only when the obligation is to do something other than the payment of money

Art. 2209 shall apply in obligations for the payment of money where ―if the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is 6% per annum‖

If the contract stipulates from what time interest will be counted, said stipulated time controls

An action or suit can be filed at anytime after the non-compliance of the other party of his obligation because the cause of action of the aggrieved party will always start from such time

2 cases where an extra-judicial demand should first be made prior to the filing of a civil suit:

1. Ejectment cases 2. Consignment cases

In ―default‖, it is necessary that the following requisites be present for the debtor to be in default:

1. That the obligation be demandable and already liquidated 2. That the debtor delays performance 3. That the creditor requires the performance judicially and extra-

judicially

Demand is not necessary in 3 cases: 1. When the obligation or the law expressly so declares 2. When time is of the essence in a particular contract 3. When it would be useless, as when the obligor has rendered it beyond

his power to perform

Reciprocal obligations—those created and established at the same time, out of the same cause and which results in a mutual relationship of creditor and debtor between the parties

o The performance of one is conditioned upon the simultaneous fulfillment of the other

o Obligation of one is a resolutory condition of the obligation of the other, the non-fulfillment of which entitles the other party to rescind the contract

Contract of loan

Contract of lease

Contract of sale

1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages.

If any of these four bases of liability co-exist with a fortuitous event or aggravates the loss caused by a fortuitous event, the obligor cannot be excused from being liable on his obligation

1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void.

The dolo or fraud necessarily involves a valid agreement but, in the performance of the same, fraud is committed

1172. Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances.

Liability can be regulated by the courts depending on the circumstances

1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of Arts. 1171 and 2201, par. 2, shall apply.

If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required.


Negligence—―omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place‖

o In essence, it is the want of care required by circumstances o It is a relative or comparative, not an absolute term and its application

depends upon the situation of the parties and the degree of care and vigilance which the circumstances reasonably require

o It must be always proven

Bad faith—a state of mind affirmatively operating with furtive design or with some motive of ill-will.

o It imports a dishonest purpose or some moral obliquity and conscious doing of wrong

o It is synonymous with fraud and involves a design to mislead or deceive another, not prompted by an honest mistake as to one’s rights or duties, but by some interested or sinister motive

Art. 2201, 2nd par—the obligor shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation

1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable.

The general rule is that ―no one should be held to account for fortuitous cases‖

For the breach of an obligation due to an ―act of God‖, the following must concur:

1. The cause of the breach of the obligation must be independent of the will of the debtor

2. The event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner

3. The debtor must be free from any participation in, or aggravation of the injury

When the negligence of a person concurs with an act of God in producing a loss, such person is not exempt from liability

When the object of prestation is generic—the debtor cannot avail of the benefit of a fortuitous event even if the object is wiped out by it

Even if there is a fortuitous event, a person can still be held responsible for the performance of his obligation if the law, or the stipulation of the parties, or when the nature of the obligation so requires

1175. Usurious transactions shall be governed by special laws.

Art. 1175 in itself does not prohibit usurious contracts

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

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

A presumption must always arise from a fact or a set of facts o To have probative value, the creation of the presumption must be

provided by law

Presumption can be rebutted by strong evidence to the contrary

1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them.

Following successive measures which must be taken by the creditor before he can bring an action for rescission of an allegedly fraudulent sale:

1. Exhaust the properties of the debtor through levying by attachment and execution upon all the property of the debtor, except such as are exempt by law from execution

2. Exercise all the rights and actions of the debtor, save those personal to him

3. Seek rescission of the contracts executed by the debtor in fraud of their rights

1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no stipulation to the contrary.

In general, rights growing out of an obligations are transmissible


However, the person who transmits the right cannot transfer greater rights than he himself has by virtue of the obligation, and vice versa

The transmissibility of rights may be limited, or altogether prohibited by stipulation of the parties

Transmission must be subject to pertinent laws

Chapter 3: DIFFERENT KINDS OF OBLIGATIONS

Section 1: Pure and Conditional Obligations 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once. Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects of the happening of the event.

Pure obligation—an unqualified obligation which is demandable immediately

o An obligation whose performance does not depend upon a future or uncertain event, or past event unknown to the parties

Conditional obligation—reverse of a pure obligation o Condition—an act or event, other than a lapse of time, which, unless

the condition is excused, must occur before a duty to perform a promise in the agreement arises or which discharges a duty of performance that has already risen

The performance depends upon a future or uncertain event or upon a past event unknown to the parties

Its efficacy or obligatory force is subordinated to the happening of a future or uncertain event

Resolutory condition—once the condition is established and acknowledged, the right immediately exists and therefore the obligation concomitant to the right can be demanded at once

o The obligation is resolved or extinguished by operation of law but such resolution can be made effective at some later date if the parties so stipulate in their contract

o In case a contract involves a reciprocal obligation, the obligation of one is a resolutory condition of the obligation of the other, the non-fulfillment of which entitles the other party to rescind the contract

Suspensive condition—demanded only upon the happening of the future or unknown event or a past event unknown to the parties, which constitutes the condition

o It gives rise to the performance of the obligation o If the condition does not take place, the parties would stand as if the

conditional obligation had never existed o When a contract is subject to this, its birth or effectivity can take place

only if and when the event which constitutes the condition happens or is fulfilled

Contract to sell—there is only a promise to sell upon the happening of the suspensive condition

Conditional contract of sale—if the suspensive condition is not fulfilled, the perfection of the contract is abated

Contract of sale Contract to sell

Ownership thereto automatically transfers to the buyer by operation of law without any further act having to be performed by the seller

Ownership will not automatically transfer to the buyer although the property may have been previously delivered to him

The prospective seller still has to convey title to the prospective buyer by entering into a contract of sale

1180. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition.

Debtor—usually the passive subject of the prestation because he is the one who can be compelled to give or do the prestation

Creditor—the active subject because he is the one who can compel performance

1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition.

Condition precedent—known as the suspensive condition


o An act or event, other than a lapse of time, which must exist or occur before a duty to perform a promised performance arises

o If the condition does not occur and is not excused, the promised performance need not be rendered

Condition subsequent—known as the resolutory condition o An event, the existence of which, by agreement of the parties, operates

to discharge a duty of performance that has arisen

1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take effect in conformity with the provisions of this Code.

―when fulfillment of a condition‖—connotes a suspensive character of prestation

Potestative suspensive condition—if fulfillment depends upon the sole will of the debtor, then it is essentially a condition because whether the debtor will or will not fulfill the obligation is a future and uncertain event, which is void

o However, if the potestative condition is imposed not on the birth of the obligation but on its fulfillment, only the condition is avoided, leaving unaffected the obligation itself

A condition at once facultative and resolutory may be valid even though the condition is made to depend upon the will of the obligor

Mixed obligations—those which depend not only upon the will of the debtor but also upon chance and some other factors

Casual conditions—depend on chance, hazard, or the will of a third person

A resolutory condition that depends upon the will of a third person is not void

1183. Impossible conditions, those contrary to good customs or public policy and those prohibited by law shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof which is not affected by the impossible or unlawful condition shall be valid.

The condition not to do an impossible thing shall be considered as not having been agreed upon.

1184. The condition that some event happen at a determinate time shall extinguish the obligation as soon as the time expires of it if has become indubitable that the event will not take place. 1185. The condition that some event will not happen at a determinate time shall render the obligation effective form the moment the time indicated has elapsed, or if it has become evident that the event cannot occur.

If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been contemplated, bearing in mind the nature of the obligation. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.

The good faith-obligation of the parties includes an implied term on the part of the said parties not to impede, hinder, obstruct or prevent the fulfillment of the obligation

Constructive fulfillment—the obligor voluntarily prevents the fulfillment of the condition in an obligation where the law states that the obligation shall be deemed fulfilled

In reciprocal obligation, both parties are mutually obligors and also obligees, and any of the contracting parties may, upon non-fulfillment by the other party of his part of the prestation, rescind the contract or seek fulfillment.

1187. The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation. Nevertheless, when the obligation imposes reciprocal prestations upon the parties, the fruits and the interests during the pendency of the condition shall be deemed to have been mutually compensated. If the obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and circumstances of the obligation it should be inferred that the intention of the person constituting the same was different.


In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been complied with.

In resolutory condition, the fulfillment of the event extinguishes the obligation; hence retroactivity is not relevant

o When the obligation imposes reciprocal prestations upon the parties, the fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated

In suspensive conditions, the efficacy of the obligation is merely suspended or held in abeyance until the condition is fulfilled

o Art. 1187 applies to this where the suspensive condition occurs, the effect of a conditional obligation ―to give‖ retroacts to the day of the constitution of the obligation

If the obligation is unilateral, the debtor or obligor shall appropriate the fruits and interests received, unless from the nature and circumstances of the obligation it should be inferred that the intention of the person constituting the same is different

1188. The creditor may, before the fulfillment of the condition, bring the appropriate actions for the preservation of his right.

The debtor may recover what during the same time he has paid by mistake in case of a suspensive condition.

A creditor can file an injunction suit to stop the debtor from alienating his property which is supposed to be given to the creditor once a particular condition is fulfilled.

If prior to the happening of the event constituting the suspensive condition, the debtor, by mistake, pays the creditor, the debtor can recover because the obligation is not yet due and demandable

1189. When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the pendency of the condition:

1. If the thing is lost without the fault of the debtor, the obligation shall be extinguished

2. If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered

3. When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor

4. If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case

5. If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor

6. If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary

The choice of the remedies to be pursued, whether rescission plus damages or fulfillment plus damages, belongs to the creditor regardless of the degree of deterioration caused by the debtor

If the deterioration caused by the debtor is so grave that the object goes out of commerce, it can be considered lost and the creditor can seek damages from the debtor

Usufruct—it gives a right to enjoy the property of another with the obligation of preserving its form and substance unless the title constituting it or the law otherwise provides

1190. When the conditions to have for their purpose the extinguishment of an obligation to give, the parties, upon the fulfillment of said conditions, shall return to each other what they have received.

In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor, are laid down in the preceding article shall be applied to the party who is bound to return

As for obligations to do and not to do, the provisions of the 2nd par. of Art. 1187 shall be observed as regards the effect of the extinguishment of the obligation.

Once a resolutory condition is fulfilled, the obligation is extinguished and there must be restitution of what has been obtained.

1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may


also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Arts. 1385 and 1388 and the Mortgage Law.

―to rescind‖—―is to declare the contract void at its inception and to put an end to it as though it never was‖

Rescission or resolution under Art. 1191 is predicated on the breach of faith by any of the parties to a contract that violates the reciprocity between them

The power to rescind is not absolute and must be based on a serious or substantial breach of an obligation as to defeat the object of the parties in making the agreement

o A mere casual breach does not justify rescission of the contract o The question of whether a breach of a contract is substantial depends

upon the attendant circumstances

The implied power to rescind can only be enforced through court action, in the absence of stipulation to the contrary.

o The decision of the court is the revocatory act of rescission

The power to rescind need not be implied in all cases. o The law does not prohibit parties from entering into an agreement

providing that the violation of the terms of contract shall cause the cancellation, termination or rescission thereof even without court intervention

o But it is always provisional, being ever subject to scrutiny and review by the proper court

Notice must always be given to the defaulter before rescission can take effect

If the contract involved is a contract to sell, the termination is not a rescission under Art. 1191 but an enforcement of the contract

1192. In case both parties have committed a breach of the obligation, the liability of the first shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract,

the same shall be deemed extinguished, and each shall bear his own damages.

Section 2: Obligations with a Period 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day comes.

Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain.

A day certain is understood to be that which must necessarily come, although it may not be known when.

If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it shall be regulated by the rules of the preceding Section.

Period—designates a particular time which is certain to happen as the moment when the obligation will either be effective or be extinguished

Suspensive period—gives rise to the effectivity of the obligation

Resolutory period—gives rise to the extinguishment of the obligation

Obligation with a suspensive period: o An obligation constitute at a much earlier date but its effectivity only

commences on a certain future period of time

1194. In case of loss, deterioration, or improvement of the thing before the arrival of the day certain, the rules in Art. 1189 shall be observed. 1195. Anything paid or delivered before the arrival of the period, the obligor being unaware of the period or believing that the obligation has become due and demandable, may be recovered with the fruits and interests.

If the obligor delivered the object before the arrival of the period, and upon arrival of the period, the obligee is in the possession of the object, the obligor can only recover the fruits and interest accruing from the time of the delivery up to the arrival of the period.


1196. Whenever in an obligation a period is designated, it is presumed to have been established for the benefit of both of the creditor and the debtor, unless from the tenor of the same or other circumstances it should appear that the period has been established in favor of one or of the other.

The benefit of the period may be waived by the person in whose favor it was constituted

1197. If the obligation does not fix a period but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof.

The courts shall also fix the duration of the period when it depends upon the will of the debtor.

In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them.

Two-step process: 1. The court must first determine that ―the obligation does not fix a

period‖ or that a period is made to depend upon the will of the debtor, but from the nature and circumstances it can be inferred that a period was intended

2. The court must decide what period was ―probably contemplated by the parties‖

1198. The debtor shall lose every right to make use of the period:

1. When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the debt

Insolvency need not be judicially declared

2. When he does not furnish to the creditor the guaranties or securities which he has promised

Securities can take the form of real-estate mortgages or pledges

3. When by his own acts he has impaired said guaranties or securities after their establishment, and when through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory

4. When the debtor violates any undertaking, in consideration of which the creditor agreed to the period

5. When the debtor attempts to abscond

If the debtor attempts to flee from his obligations, or to move away to evade payment of his indebtedness, the debt can be demanded from him immediately

Sec. 3 – Alternative Obligations

1199. A person alternatively bound by different prestations shall completely perform one of them.

The creditor cannot be compelled to receive part of one and part of the other undertaking.

―Different prestations‖—refers to both the strict sense and the loose sense of the word ―prestation‖

Partial performance of the different prestations cannot be considered fulfillment of the obligation and therefore cannot be done unless the creditor accepts such partial performance as complete performance

If all but one of the alternatives become legally impossible to fulfill, the obligation will cease to be alternative

1200. The right of choice belongs to the debtor; unless it has been expressly granted to the creditor.

The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not have been the object of the obligation.

Any doubt as to whom the choice is given must always be interpreted in favor of the debtor

Only by an express grant of choice can a creditor have the right to choose which prestation is to be performed

1201. The choice shall produce no effect except from the time it has been communicated.

The creditor is always entitled to be notified of the choice.

Communication to the creditor gives effect to the choice


1202. The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only one is practicable.

Majority of the choices must be practicable

If only one is practicable, the creditor has no right to complain about such situation because such affects only the debtor who will lose his right of choice

The creditor has no choice but to accept this single practicable choice provided that it is not unlawful or inconsistent with the object of the obligation

―practicable‖—capable of being done, or simply feasible

1203. If through the creditor’s acts the debtor cannot make a choice according to the terms of the obligation, the latter may rescind the contract with damages.

If the debtor has been prevented from making a choice due to the fault of the creditor, the debtor can ask for the rescission of the contract with damages

1204. The creditor shall have a right to indemnity for damages when, through the fault of the debtor, all the things which are alternatively the object of the obligation have been lost, or the compliance of the obligation has become impossible.

The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, or that of the service which last became impossible.

Damages other than the value of the last thing or service may also be rewarded. 1205. When the choice has been expressly given to the creditor, the obligation shall cease to be alternative from the day when the selection has been communicated to the debtor.

Until then, the responsibility of the debtor shall be governed by the following rules: (1) If one of the things is lost through a fortuitous event, he shall

perform the obligation by delivering that which the creditor should choose from among the remainder, or that which remains if only one subsists;

If only the car were lost, the creditor has a choice between the truck and the boat

But if all the things are lost through a fortuitous event, the obligation is extinguished

(2) If the loss of one of the things occurs through the fault of the debtor, the creditor may claim any of those subsisting, or the price of that which, through the fault of the former, has disappeared, with a right to damages;

If the debtor destroys the car, the creditor has a choice among the truck, the boat or the price of the car plus damages

(3) If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the price of any one of them, also with indemnity for damages.

If all the things are lost, the creditor has a choice among the price of the car, the price of the truck or the price of the boat plus damages

The same rules shall be applies to obligations to do or not to do in case one, some or all of the prestations should become impossible. 1206. When only one prestation has been agreed upon, but the obligor may render another in substitution, the obligation is called facultative.

The loss or deterioration of the thing intended as a substitute, through the negligence of the obligor, does not render him liable. But once the substitution has been made, the obligor is liable for the loss of the substitute on account of his delay, negligence or fraud.

If the substitute prestation was one of the main reasons which induced the creditor to enter into the contract with the debtor, but the latter did not really intend to constitute it as a substitute, this could be an act of fraud which would make the whole contract voidable.

o If the creditor does not make any move to annul the contract and accepts the substitute, his acceptance cannot cure the defect of the said voidable contract


Sec. 4: JOINT AND SOLIDARY OBLIGATIONS 1207. The concurrence of 2 or more creditors or of 2 or more debtors in one and the same obligations does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with prestation. There is solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidary liability.

Solidary obligation—implies a situation where there are debts or obligations incurred by 2 or more debtors in favor of 2 or more creditors, and giving anyone, some or all of the creditors the right to demand from anyone, some or all of the debtors the satisfaction of the total obligation and not merely the share of each debtor in the debts or obligations.

1. It exists only when the obligation expressly so states, or when the law or nature of the obligation requires solidarity

Surety—a person who binds himself to pay the obligation of the debtor when it becomes due

1. A surety who is solidarily is therefore an insurer of the debt

Guarantor—a person who can be required to pay the indebtedness of the principal debtor only after the creditor has unsuccessfully exhausted all means to collect from the debtor.

1. A guarantor is subsidiarily liable for the debt of the debtor; he is not jointly liable

An agreement to be ―individually‖ and ―jointly‖ liable indicates solidary liability

1. ―individually‖—has the same meaning as ―collectively‖, ―separately‖ or ―severally‖

2. Several obligation—one by which one individual binds himself to perform the whole obligation

In case of concurrence of 2 or more creditors or 2 or more debtors in one obligation, the presumption is that the obligation is joint, and not solidary

o Solidarity must be expressed o When the obligation is ambiguous, it must be considered as joint

obligation

Obligations: 1. Individual obligation—one debtor and one creditor 2. Collective obligation—2 or more debtors and 2 or more creditors

a. Joint—entire obligation is to be paid or performed proportionately by the debtors

b. Solidary—each one of the debtors are obliged to pay the entire obligation, each one of the creditors has the right to demand from any of the debtors the fulfillment of the entire obligation

i. Passive solidarity—solidarity on the part of the Debtors Full payment made by one of the solidary debtors

extinguishes the obligation. The one who paid can claim reimbursement from his co-debtors as regards their corresponding shares in the obligation

ii. Active solidarity—solidarity on the part of the Creditors Full payment to any of the creditors extinguishes the

obligation. The creditor who received the entire amount will be liable to pay the corresponding shares of his co-creditors in accordance with their internal agreement.

1208. If from the law, or the nature or the wording of the obligations to which the preceding article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits.

The presumption of law is that the obligation is always joint.

The joint debtors are obliged to pay only their share in the indebtedness while the creditors can only claim their share in the credit

When there is a concurrence of several creditors or of several debtors in one and in the same obligation, there is a presumption that the obligation is joint.

This provision speaks of joint divisible obligation. o Each of the creditors shall be entitled to demand only the payment

of his proportionate share of the credit. o Each of the debtors may be compelled to pay only his

proportionate share of the debt. o The credits or debts shall be considered distinct from one another.

Consequences of joint obligation: 1. Each debtor – liable for a proportionate part of the entire debt; 2. Each creditor – entitled to a proportionate part of the credit;


3. Demand made by one creditor upon one debtor produces the effects of default only as between them, but not with respect to the others;

4. The interruption of prescription caused by the demand made by one creditor upon one debtor will not benefit the cocreditors;

5. The insolvency of one debtor will not increase the liability of his co-debtors, nor will it allow a creditor to demand anything from the co-creditors.

1209. If the division is impossible, the right of the creditors may be prejudiced only by their collective acts, and the debt can be enforced only by proceeding against all the debtors. If one of the latter should be insolvent, the others shall not be liable for his share.

A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does not comply with the undertaking

The debtors who may have been ready to fulfill their promises 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

Batman and Robin jointly obliged themselves to deliver a brand new Toyota Fortuner worth P1,500,000.00 to Superman. The object, a vehicle, is indivisible. They must deliver the thing jointly. In case of breach, the obligation is converted into monetary obligation for indemnity for damages. Batman and Robin will be liable only for P 750,000.00 each.

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

Solidary obligation—refers to the nature of the obligation attaching to the obligor and oblige

Indivisible Obligation—the obligation where the prestation or object to be delivered cannot be performed by parts without altering its essence or substance

Basis Indivisibility Solidarity Nature Refers to the prestation of the

contract Refers to tie existing between parties

Number of subjects / parties

Does not require plurality of parties

Requires plurality of parties

Effect of breach of obligation

Obligation is converted into monetary obligation for indemnity for damages—where each debtor is liable only for his own part

The liability, even if converted into indemnity for damages, remain solidary

1211. Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions.

Enforcement of the terms and conditions may be made at different times. The obligations which have matured can be enforced while those still undue will have to be awaited. Enforcement can be made against any one of the solidar debtors although it can happen that a particular obligation chargeable to a particular debtor is not yet due. He will be answerable for all the prestations which fall due although chargeable to the other co-debtors.

1212. Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudiced to the latter.

Satisfaction of a judgment against one of the debtors by one of the creditors will discharge their obligation to the other solidary creditors

If one of the solidary creditors make an extra-judicial demand for the debtor to pay, this will benefit also the other creditors as the demand will effectively make the prescriptive period for the fulfillment of the obligation run anew

The fact that these other solidary creditors were prejudiced will not invalidate the extinguishment of the obligation

o Their remedy is to collect their share of the indebtedness from the solidary creditor who made the remission

o They can likewise ask for damages for whatever they may have lost as a result of the remission, such as interest

1213. A solidary creditor cannot assign his rights without the consent of the others.

Ideally, the relationship between and among solidary creditors is one of mutual trust

o Hence, to preserve as much as possible this confidence, a solidary creditor cannot assign his rights without the consent of the others


The assignee does not become a solidary creditor, and any payment made upon him by the debtor does not extinguish the obligation. He is considered a stranger, and his acts are not binding to the solidarity.

Doctrine of mutual agency - in solidary obligations, the act of one is act of the others.

Exceptions to the doctrine: 1. Art. 1212 – a creditor may not perform an act prejudicial to other

creditors 2. Art. 1213 – a creditor cannot transfer his right without consent

1214. The debtors may pay any of the solidary creditors; but if any demand, judicial or extra-judicial, has been made by one of them, payment should be made to him.

This article does not by itself expressly make invalid or void payment to the other non-demanding creditors.

o It is only giving preference to the demanding-creditor without necessarily curtailing the rights of the other creditors to be paid or the right of the debtor to pay the other creditors their rightful due

If the demand is extra-judicial, it will facilitate the fulfillment of the obligation and ultimately the satisfaction of his share

1215. Novation, compensation, confusion or remission of the debt, made by one of the solidary creditors or with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of Art. 1219.

The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the others for the share in the obligation corresponding to them.

Modes of extinguishing an obligation: 1. Novation—the change of creditors, debtors or the principal condition

of the contract o It must however be clear to release the solidary obligation of the

debtors 2. Compensation—takes place when 2 persons, in their own right, are

creditors and debtors of each other o Erap borrowed P100 from Fernando. Fernando borrowed P75

from Erap. Erap‘s obligation to Fernando is now P25 only,

because the original obligation was offset by Fernando‘s supposed-to-be obligation to Erap.

3. Confusion—merger of the characters of creditor and debtor in the same person

o Tito pays his debt to Vic with a check payable to ―cash‖. Vic paid his debt to Joey with the same check. Joey paid his debt to Tito, with the same check Tito issued to Vic. Tito becomes paid by his own check. He becomes the debtor and the creditor of himself at the same time.

4. Remission—the condonation of an obligation 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.

The solidary creditor has a right not to accept partial payment from the solidary debtors.

o However, if he does not accept partial payment from some of them, this will not prevent him from demanding or claiming from the others who have not actually paid

1217. Payment made by one of the solidary debtors extinguishes the obligation. If 2 or more solidary debtors offer to pay, the creditor may choose which offer to accept.

He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded.

When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each.

Payment – consists in the delivery of the thing or the rendition (rendering) of the service which is the object of the obligation.

Interest – compensation for the use of borrowed money


Partial payment – the solidary debtor who made the partial payment is entitles to be reimbursed only for such amount of money which he had paid and which exceeds his own share in the obligation.

1218. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the obligation has prescribed or become illegal.

If A pays the creditor despite the prescription of the claim, B can refuse to pay A his share in the indebtedness because technically the debt has prescribed

1219. The remission made by the creditor of the share which affects one of the solidary debtors does not release the latter from his responsibility towards the co-debtors, in case the debt had been totally paid by anyone of them before the remission was affected.

Applicable only when there is one creditor

1220. The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to reimbursement from his co-debtors.

There is nothing to be reimbursed because he did not spend any money, the remission being a gratuitous act.

1221. If the thing has been lost or if the prestation has become impossible without the fault of the solidary debtors, the obligation shall be extinguished.

If there was fault on the part of any one of them, all shall be responsible to the creditor, for the price and the payment of damages and interest, without prejudice to their action against the guilty or negligent debtor.

It through a fortuitous event, the thing is lost or the performance has become impossible after one of the solidary debtors has incurred in delay through the judicial or extra-judicial demand upon him by the creditor, the provisions of the preceding paragraph shall apply.

Loss of the thing or impossibility of prestation – 1. NO FAULT – solidary debtors – obligation is extinguished 2. FAULT of any one of them – all are liable because of their mutual

agency

3. FORTUITOUS EVENT – delay on the part of the debtors – all will be liable

If the thing due was not lost, but there is merely a delay, fraud or negligence on the part of one of the solidary debtors, all (including the innocent) debtors will share in the payment of the principal prestation. The damages and interest imposed will be borne by the guilty debtor.

Obligation to deliver is converted into an obligation to pay indemnity when there us loss or impossibility of performance.

1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debts for which the latter are responsible.

While the whole debt may be collected from one of the solidary debtors, he can nevertheless pay less than the whole amount of indebtedness to the creditor in the event that there are defenses he can set up

Defenses of a solidary debtor: 1. Defense arising from the nature of the obligation – such as

payment, prescription, remission, statute of frauds, presence of vices of consent, etc.

2. Defenses which are personal to him or which pertains to his own share alone – such as minority, insanity and others personal to him.

3. Defenses personal to the other solidary creditors but only as regards that part of the debt for which the other creditors are liable.

Sec. 5: DIVISIBLE AND INDIVISIBLE OBLIGATIONS 1223. The divisibility or indivisibility of the things that are the object of obligations in which there is only one debtor and only one creditor does not alter or modify the provisions of Chapter 2 of this Title.


1224. A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does not comply with his undertaking. The debtors who may have been ready to fulfill their promises shall not contribute to the indemnity beyond the corresponding portion of the price of the thing or of the value of the service in which the obligation consists.

Joint debtors—only bound to perform their respective portion in a particular indebtedness

o If the obligation is indivisible, each debtor must coordinate with the rest of the debtors for the fulfillment of the obligation

1225. For the purposes of the preceding articles, obligations to give definite things and those which are not susceptible of partial performance shall be deemed to be indivisible.

When the obligation has for its object the execution of a certain number of days of work, the accomplishment of work by metrical units, or analogous things which by their nature are susceptible of partial performance, it shall be divisible.

However, even though the object or service may be physically divisible, an obligation is indivisible if so provided by law or intended by the parties.

In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each particular case.

Indivisible obligation—an obligation which is not susceptible of partial performance

In obligations not to do, divisibility of indivisibility shall be determined by the character of the prestation in each particular case

The following are considered INDIVISIBLE obligations: 1. Obligation to give definite things 2. Obligations which are not susceptible of partial performance 3. Even though the object or service may be physically divisible, it is

indivisible if: a. the law so provides b. when the parties intended it to be indivisible

The following obligations are deemed DIVISIBLE: 1. When the object of the obligation is the execution of a certain

number of days of work

2. When the object of the obligation is the accomplishment of work measured in units

3. When the object of the obligation is susceptible of partial compliance

4. When the object of the obligation is such that the debtor is required to pay in installments

If the contract is divisible, and a part of it is illegal, the illegal part is void, and the rest shall be valid and enforceable.

If the contract is indivisible, and a part of it is illegal, the entire contract is void.

Partial performance of an indivisible obligation is tantamount to non-performance.

Sec. 6: OBLIGATIONS WITH A PENAL CLAUSE

1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

If the principal obligation has been complied with, the penal clause has lost its efficacy or applicability

Penal clause—an accessory obligation which the parties attach to a principal obligation for purpose of insuring the performance thereof by imposing on the debtor a special prestation in case the obligation is not fulfilled or is irregularly or inadequately fulfilled

Penalty—there is need of proof of loss

Liquidated damages—payment may be made without proof of loss

There is no difference between a penalty and liquidated damages, so far as legal results are concerned

If the parties stipulate that the award of penalty pursuant to the penalty clause shall not constitute a bar to the recovery of other damages, and in the payment of interest, then it shall be so


Penalty may be claimed only when there is demand, judicial or extra-judicial, unless the law, the stipulation of the parties or the nature of the contract otherwise demands

Purposes: 1. Funcion coercitiva o de garantia – to insure the performance of the

obligation 2. Funcion liquidatoria – to liquidate the amount of damages to be

awarded to the injured party in case of breach of the principal obligation; and

3. Funcion estrictamente penal – in certain exceptional cases, to punish the obligor in case of breach of the principal obligation.

The penalty imposable is a substitute for the indemnity for: 1. damages 2. payment of interest in case of breach of obligation

-unless the contrary is stipulated!

EXCEPTIONS – additional damages may be recovered from the following acts:

1. If the debtor refuses to pay the penalty 2. If the debtor is guilty of fraud in the fulfillment of the obligation 3. If there is express stipulation that the other damages or interests

are demandable to the penalty in the penal clause

1227. The debtor cannot exempt himself from the performance of the obligation by paying the penalty, save in the case where this right has been expressly reserved for him. Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless this right has been clearly granted to him. However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become impossible without his fault, the penalty may be enforced.

The debtor cannot substitute performance of the principal obligation by mere payment of penalty because penalty is only an accessory obligation, but the parties can stipulate otherwise

In the event that the creditor demands fulfillment of the obligation and the same has become impossible without the fault of the debtor, the penalty may be enforced

The creditor cannot demand the stipulated fulfillment of the principal obligation and the penalty at the same time, except

1. when the creditor was clearly given the right to enforce both the principal obligation and penalty;

2. when the creditor has demanded fulfillment of the obligation but cannot be fulfilled due to the

a. debtor‘s fault – creditor may demand for penalty b. creditor‘s fault – he cannot claim the penalty c. fortuitous event – principal obligation and penalty are

extinguished

1228. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded.

This is because the particular penalty in the penalty clause is already specified and hence liquidated, there is no need to prove actual damages

1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.

If the penalty clause, which is construed against the one enforcing it, is so unconscionable that its enforcement, in effect, constitutes an undue deprivation or confiscation of the property of the obligor, the courts can strike it down as an invalid

Judicial Reduction Of Penalty 1. Principal obligation – partly complied with by the debtor (but not

in indivisible obligation, because it is tantamount to non-compliance)

2. Principal obligation – complied not in accordance with the tenor of the agreement (refers to irregular performance)

3. Penalty – iniquitous or unconscionable

Judge‘s power to reduce penalties are limited to private contracts.

Iniquitous or Unconscionable – when it is revolting to the conscience or common sense; grossly disproportionate to the damages suffered.

Penalty not enforceable: 1. Impossible performance of principal obligation due to fortuitous

events 2. Creditor prevented the debtor from fulfilling the obligation 3. Penalty is contrary to good morals or good customs 4. Both parties are guilty of breach of contract


5. Breach of contract by the creditor 6. None of the parties committed any willful or culpable violation of

the agreement

1230. The nullity of the penal clause does not carry with it that of the principal obligation.

The nullity of the principal obligation carries with it that of the penal clause.

The penal clause, being merely an accessory obligation, does not invalidate the principal obligation in the event that such penal clause is void or without effect.

Chapter 4: EXTINGUISHMENT OF OBLIGATIONS

GENERAL PROVISIONS

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

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code.

Death of a party, however, does not extinguish an obligation unless the obligation is personal in nature or intransmissible

If the civil liability neither solely nor originally springs from the crime, the civil liability shall persist despite the extinction of the criminal liability

Section 1: PAYMENT OF PERFORMANCE

1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation.

Payment is not exclusively limited to the giving of money; it includes any manner of performing the obligation with the end in view of extinguishing it

The burden of proving that the obligation has been extinguished by payment devolves upon the debtor

Promissory notes in the hands of the creditor are proofs of indebtedness rather than proofs of payment

1233. A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be.

Payment contemplates full satisfaction of the debt or obligation

Complete delivery or service must comprise everything that is necessary to satisfy the obligation consistent with the object of the same

1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee.

Substantial performance is not complete performance where it constitutes a breach of obligation

o However, the breach in this case is not a material one enough to compel the obligor to rescind the whole obligation

The pertinent inquiry is not simply whether the breach was willful but whether the behavior of the party in default comports with the standards of good faith and fair dealing

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.

The substantial compliance contemplated here connotes the waiver of the obligee of damages arising from the breach of contract which resulted in the incompleteness or irregularity of the obligation

The law does not require the protest or objection of the creditor to be made in a particular manner or at a particular time.

o If the party fails to interpose any objection to the entries or conditions in an invoice furnished to him by the other party, such failure can be considered as implied acceptance and therefore he will be liable to pay the amount stated therein


1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.

Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor.

Reason for this article: whenever a third person pays there is a modification of the prestation that is due.

If the debt has been remitted, paid compensated or prescribed, a payment by a third person would constitute a payment of what is not due; his remedy would be against the person who received the payment under such conditions and not against the debtor who did not benefit from the payment

payment against debtor‘s will – even if payment of the third party is against the will of the debtor, upon payment by the third party, the obligation between the debtor and creditor is already extinguished

1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty or penalty.

This article gives to the third person who paid only a simple personal action for reimbursement, without the securities, guaranties and other rights recognized in the creditor, which are extinguished by the payment

1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which requires the debtor’s consent. But the payment is in any case valid as to the creditor who has accepted it.

Legal subrogation—transfers to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or against third persons, be they guarantors, or possessors of mortgages

If the third person pays the creditor: a. Without the knowledge or against the will of the debtor—can only

recover from the debtor to the extent that the debtor has been benefited

o As to what is beneficial to the debtor can be invoked only by such debtor but is determined by law and not the will of the debtor

o The beneficial effects must be determined at the time the payment was made

b. With the knowledge of the debtor but over his objection—same as (a)

c. With the knowledge and consent of the debtor—can recover the amount he paid and can compel the creditor to transfer to him any mortgage, guaranty or penalty

d. If the creditor accepts payment from a third person because this has been allowed in the contract—same as (c)

e. Without intending to be reimbursed—obligation is extinguished whether or not the consent of the debtor is obtained. The payment is treated as donation which requires the debtor‘s consent

1239. In obligation to give, payment made by one who does not have the free disposal of the thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of Art. 1427 under the Title on “Natural Obligations.”

Free disposal—the owner of the thing or a person given authority by the owner to use the property as payment

Art. 1427: ―when a minor between 18 and 21 years of age, who has entered into a contract without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith‖

o General Rule: any contract entered into by a minor with respect to alienation of something which he owns is annullable

o Art. 1427 is already repealed by Arts. 234 and 236 of the Family Code which lowered the age of majority and emancipation to 18 years of age

o If ever the effects of Art. 1427 is still to apply, it shall apply only to those 17 years of age and below

1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successors-in-interest, or any person authorized to receive it.

―any person authorized to receive it‖—not only a person authorized by the same creditor, but also a person authorized by law to do so whose


right or authority to receive payment is indisputable: guardian, executor or administrator of estate of a deceased, and assignee or liquidator of a partnership or corporation

Payment made to a third person, even through error and in good faith, shall not release the debtor of the obligation to pay and will not deprive the creditor of his right to demand payment.

o If it becomes impossible to recover what was unduly paid, any loss resulting therefrom shall be borne by the deceived debtor, who is the only one responsible for his own acts unless there is a stipulation for a wrongful payment.

1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the thing delivered, or insofar as the payment has been beneficial to him.

Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved in the following cases:

1) If after the payment, the third person acquires the creditor’s rights 2) If the creditor ratifies the payment to the third person 3) If by creditor’s conduct, the debtor has been led to believe that the

third person had authority to receive payment

For an incapacitated person, such as minor or an insane, to be able to administer his property and to be able to transact business, there must be a guardian appointed by the courts to hand his affairs.

Direct payment to an incapacitated person shall be voidable unless if one of the following conditions is present:

a. He has kept the thing delivered b. He uses the payment for activities beneficial to him

in addition to those mentioned above, payment to a third person releases the debtor:

a. when, without notice of the assignment of credit, he pays to the original creditor

b. when in good faith he pays to one in possession of the credit

even when the creditor receives no benefit from the payment to a third person, he cannot demand payment anew, if the mistake of the debtor was due to the fault of the creditor

1242. Payment made in good faith to any person in possession of the credit shall release the debtor.

A person in possession of a credit is presumed to own the credit and hence, a debtor who pays such person in good faith shall be released from the debt

1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid.

There is a situation where the debtor is prohibited from paying a particular creditor during the effectivity of a court order prohibiting him to make such payment

1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value as, or more valuable than that which is due.

In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee’s will

Unless the prestation is subject to an alternative or facultative condition, a debtor has no choice in the payment of his obligation except by giving what has been agreed upon by the parties

Upon agreement of consent of the creditor, the debtor may deliver a different thing or perform a different prestation in lieu of that stipulated. In this case there may be dation in payment or novation

The defects of the thing delivered may be waived by the creditor, if he expressly so declares or if, with knowledge thereof, he accepts the thing without protest or disposes of it or consumes it

1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law on sales.

Dation in payment (Dacion en Pago)—is the delivery and transmission of ownership of a thing by the debtor to creditor as an accepted equivalent of the performance of an obligation

o Before the creditor becomes the owner of the property collateralizes to secure the debt, an intervening agreement subsequent and independent from the original contract is entered into by the creditor and the debtor to have the property collateralized in the original agreement as payment of the debt, thereby extinguishing the obligation


Requisites for a valid dation in payment: a. There must be the performance of the prestation in lieu of payment

which may consist in the delivery of a corporeal thing or a real right or a credit against the third person

b. There must be some difference between the prestation due and that which is given in substitution

c. There must be an agreement between the creditor and debtor that the obligation is immediately extinguished by reason of the performance of a prestation different from that due

Any property made as a security for a loan must always be foreclosed or subjected to a sale by public bidding in case it shall be used to satisfy the debt wholly or partially of the debtor

Obligation is totally extinguished only when the parties, by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation

Pactum commissorium—the parties agree, generally in one single contract, that, in the event that the debtor fails to pay the debt, the mortgaged or pledged property of the debtor shall automatically be appropriated or owned by the creditor

o This is void in accordance with Art. 2088 where ―the creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void‖

Elements of pactum commissorium: a. There must be a creditor-debtor relationship between the parties b. The property of the debtor was used as a security for the loan, either

as a mortgage or a pledge c. There was automatic appropriation of the property upon failure of the

debtor to pay the obligation as provided in their agreement

1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken in consideration.

If there is disagreement between the debtor and the creditor as to the quality of the thing delivered, the court should decide whether it complies with the obligation, taking into consideration the purpose and other circumstances of the obligation

Both the creditor and the debtor may waive the benefit of this article

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

The creditor usually benefits from the obligation and as such, the creditor must fully take the benefit of not spending in the extra-judicial expenses for the payment or performance of the obligation

1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestation in which the obligation consists. Neither may the debtor be required to make partial payments.

However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter.

Partial payment can be made if there is an a. Express stipulation by the parties allowing the same b. If the debt is partially liquidated and partially unliquidated c. If the creditor accepts such partial payment and benefits from it

The creditor who refuses to accept partial prestations does not incur delay except when there is abuse of right or if good faith requires acceptance

This article does not apply to obligations where there are several subjects or where the various parties are bound under different terms and conditionss

1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance.

Promissory note—a document where a promise to pay is made by the debtor to the creditor


o An unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time, a sum certain in money to order or to bearer.

Bill of exchange—an unconditional order in writing addressed by one person to another signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or bearer

Check—a bill of exchange drawn on a bank payable on demand

―when through the fault of the creditor they have been impaired‖—applicable only to instruments executed by third person and delivered by the debtor to the creditor

A check becomes stale if it has not been presented to the bank for a period of 6 months from the date of the said check

Legal Tender - means such currency which in a given jurisdiction can be used for the payment of debts, public and private, and which cannot be refused by the creditor

o That which a debtor may compel a creditor to accept in payment of debt.

So long as the notes were legal tender at the time they were paid or delivered, the person accepting them must suffer the loss if thereafter they became valueless

The provisions of the present article have been modified by RA No. 529 which states that payments of all monetary obligations should now be made in currency which is legal tender in the Phils.

o A stipulation providing payment in a foreign currency is null and void but it does not invalidate the entire contract, and R.A. 4100.

1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.

Extraordinary inflation—exists when ―there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the value of said currency, and such decrease or increase could not have been reasonable foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation‖

The effects of extraordinary inflation or deflation cannot be applied without an official declaration thereof by competent authorites: Bangko Sentral and the Department of Finance

Art. 1250 applies only to cases where a contract or agreement is involved and not where the obligation to pay arises from law, independent of contract

―value of the currency‖—refers to the purchasing power of the currency; often referred as

a. ―par value‖—the amount it takes one currency to buy a unit in another country that is, how pieces of one unit are necessary to equal the gold content of the other unit

b. ―legal exchange rate‖ c. ―par of exchange‖—applies only between countries having a fixed

metallic content for their currency unit

1251. Payment shall be made in the place designated in the obligation.

There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted.

In any other case, the place of payment shall be the domicile of the debtor.

If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him.

These provisions are without prejudice to venue under the Rules of Court.

Since the law fixes the place of payment at the domicile of the debtor, it is the duty of the creditor to go there and receive payment; he should bear the expenses in this case because the debtor cannot be made to shoulder the expenses which the creditor incurs in performing a duty imposed by law and which is for his benefit.

But if the debtor changes his domicile in bad faith or after he has incurred in delay, then the additional expenses shall be borne by him

When the debtor has been required to remit money to the creditor, the latter bears the risks and the expenses of the transmission. In cases however where the debtor chooses this means of payment, he bears the risk of loss.


Subsection 1: APPLICATION OF PAYMENTS 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts which are not yet due.

If the debtor accepts from the creditor a receipt in which an application of payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract.

The choice as to which debt the payment is to be applied is given to the debtor

The debtor must make a declaration as to which debt should the payment be applied

Application of payment cannot be made on debts which are not yet due, unless the parties agree

Requisites: a. 1 debtor and 1 creditor only b. 2 or more debts of the same kind c. all debts must be due d. amount paid by the debtor must not be sufficient to cover the total

amount of all the debts

It is necessary that the obligations must all be due. Exceptions: a. when there is a stipulation to the contrary; and b. the application of payment is made by the party for whose benefit

the term or period has been constituted (relate to Art. 1196)

It is also necessary that all the debts be for the same kind, generally of a monetary character. This includes obligations which were not originally of a monetary character, but at the time of application of payment, had been converted into an obligation to pay damages by reason of breach or nonperformance

1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered.

This is merely directory and not mandatory

The receipt of the principal by the creditor without reservation with respect to the interest, shall give rise to the presumption that the interest has been paid

1254. When the payment cannot be applied in accordance with the preceding rules, or if application cannot be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied.

If the debts due are of the same nature and burden, the payment shall be applied to the proportionately.

―most onerous debt‖—the indebtedness which exacts the heavier burden from among the many. Thus, a debt with interest or an acceleration clause is more onerous

Debts are not of the same burden (1st par.)– Rules: 1. Oldest are more onerous than new ones 2. One bearing interest more onerous than one that does not 3. secured debt more onerous than unsecured one 4. principal debt more onerous than guaranty 5. solidary debtor more onerous than sole debtor 6. share in a solidary obligation more onerous to a solidary debtor 7. liquidated debt more onerous than unliquidated

Debts are of the same burden (2nd par.)– the payment shall be applied to all of them pro rata or proportionately.

Example: debtor owes his creditor several debts, all of them due, to wit: (1) unsecured debt, (2) a debt secured with mortgage of the debtor's property, (3) a debt with interest, (4) a debt in which the debtor is solidarily liable with another. Partial payment was made by the debtor, without specification as to which the payment should be applied. The most onerous is (4), followed by (2), then (3), then (1). Consequently, payment shall be made in that order.

Subsection 2: PAYMENT BY CESSION

1255. The debtor may cede or assign his property to his creditors in payment of his debts. This cession, unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned. The agreements which, on the effect of


cession, are made between the debtor and his creditors shall be governed by special laws.

Cession—is both a mode of extinguishing debt and a form of payment o It presupposes financial difficulties on the part of the debtor and

refers to a situation where the debtor owes 2 or more creditors

The creditors must agree to the cession and as to which debt will be paid first or as to the proportioning of the payment of money obtained through cession for the payment of debt

o If there is no agreement, the applicable law on preference of credit will apply

Once cession is made, the obligation of the debtor shall only be extinguished up to the extent that the proceeds are able to satisfy the claims of the creditors

Requisites: a. plurality of debts b. partial or relative insolvency of the debtor c. acceptance of cession by the creditors

Kinds of Cession: a. Contractual (Art. 1255) b. Judicial (Insolvency Law)

Must be initiated by debtors

Requires two or more creditors, debtors insolvent, cession accepted by creditors

Such assignment does not have the effect of making the creditors the owners of the property of the debtor unless there is an agreement to that effect

Dation Cession May be 1 creditor Many creditors Does not require insolvency Requires partial or relative insolvency Delivery of a thing Delivery of all the property Transfer of ownership of property

No transfer of ownership (only of possession and administration)

A novation Payment extinguishes obligation (to the extent of the value of the thing delivered)

The effect is merely to release the debtor from the net proceeds of the property; hence, partial extinguishment of obligation

Subsection 3: TENDER OF PAYMENT AND CONSIGNATION 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due.

Consignation alone shall produce the same effect in the following cases: 1) When the creditor is absent or unknown, or does not appear at the

place of payment 2) When he is incapacitated to receive the payment at the time it is

due 3) When, without just cause, he refuses to give a receipt 4) When 2 or more persons claim the same right to collect 5) When the title of the obligation has been lost

Tender of payment and consignation apply in any contract where there is an obligation to pay

For a valid tender of payment, it is necessary that there be a fusion of intent, ability and capability to make good such offer, which must be absolute and must cover the amount due

Consignation—the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment and it generally requires a prior tender of payment

o Must be judicially made

Tender—the antecedent of consignation o In order to be valid, the tender of payment must be made in lawful

currency o Tender of a check to pay for an obligation is not a valid tender of

payment o Can be made extra-judicially

1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation.

The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment.

Requirement of a valid consignation: 1. There was a debt due


2. The consignation of the obligation had been made because the creditor to whom tender of payment was made refused to accept it, or because he was absent or incapacitated, or because several persons claimed to be entitled to receive the amount due

3. The previous notice of the consignation had been given to the person interested in the performance of the obligation

4. The amount due was placed at the disposal of the court

5. After the consignation had been made, the person interested was notified

The lack of notice does not invalidate the consignation but simply makes the debtor liable for the expenses

The tender of payment and the notice of consignation sent to the creditor may be made in the same act. In case of absent or unknown creditors, the notice may be made by publication

Special Requisites of consignation: [DLN-DN] 1. [D] There was a debt due 2. [L] The consignation of the obligation was made because of some

legal cause provided in the present article 3. [N] That previous notice of the consignation has been given to

persons interested in the performance of the obligation 4. [D] The amount or thing due was placed at the disposal of the

court 5. [N] After the consignation had been made the persons interested

had been notified thereof

1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases.

The consignation having been made, the interested parties shall also be notified thereof.

1st paragraph hereof - 4th Special Requisite of Consignation ([D] Disposal of the Court)

o this is complied with if the debtor deposts the thing or amount with the Clerk of Court

2nd paragraph hereof - 5th Special Requisite of Consignation ([N] Subsequent Notice)

o this is to enable the creditor to withdraw the goods or money deposited.

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

This is because it is the creditor’s failure to accept payment that led to the consignation

The consignation is properly made when: a. after the thing has been deposited in court, the creditor accepts the

consignation without objection and without any reservation of his right to contest it because of failure to comply with any of the requisites for consignation; and

b. when the creditor objects to the consignation but the court, after proper hearing, declares that the consignation has been validly made

in these cases, the creditor bears the expenses of the consignation

1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation.

Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force.

Payment is deemed to have been made at the time of the deposit of the money in court or when it was placed at the disposal of the judicial authority

Consignation has a retroactive effect and the payment is deemed to have been made at the time of the deposit of the thing in court or when it was placed at the disposal of the judicial authority

The effects of consignation are: a. the debtor is released in the same manner as if he had performed

the obligation at the time of the consignation because this produces the same effect as a valid payment

b. the accrual of interest on the obligation is suspended from the moment of consignation

c. the deteriorations or loss of the thing or amount consigned occurring without fault of the debtor must be borne by the creditor, because the risks of the thing are transferred to the creditor from the moment of deposit

d. any increment or increase in value of the thing after the consignation inures to the benefit of the creditor.


When the amount consigned does not cover the entire obligation, the creditor may accept it, reserving his right to the balance. If no reservations are made, the acceptance by the creditor of the amount consigned may be regarded as a waiver of further claims under the contract

1261. If, the consignation having been made, the creditor should authorize the debtor to withdraw the same, he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be released.

When the consignation has already been made and the creditor has accepted it or it has been judicially declared as proper, the debtor cannot withdraw the thing or amount deposited unless the creditor consents thereto. If the creditor authorizes the debtor to withdraw the same, there is a revival of the obligation, which has already been extinguished by the consignation, and the relationship of debtor and creditor is restored to the condition in which it was before the consignation. But third persons, solidary co-debtors, guarantors and sureties who are benefited by the consignation are not prejudiced by the revival of the obligation between the debtor and the creditor

Sec. 2: LOSS OF THE THING DUE

1262. An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor; and before he has incurred in delay.

When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not extinguish the obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk.

If it is the debtor’s fault or if it has been lost after the debtor has incurred in delay, he shall answer for the resulting damages

1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation.

A generic thing cannot really be lost or destroyed unless the whole class of said thing is destroyed, hence the obligation subsists despite the loss or destruction of one thing in the said class

1264. The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation.

A loss may be: 1. Complete—arts. 1262 and 1263 will apply 2. Partial—if the loss is partial and the circumstances so warrant, the

court may consider it as a complete loss which extinguishes the obligation.

o This can only happen if the partial loss is so important so as to totally affect the whole object of the obligation.

1265. Whenever the thing is lost in the possession of the debtor; it shall be presumed that the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of Art. 1165. This presumption does not apply in case of earthquake, flood, storm, or other natural calamity.

General Rule: the loss of thing is presumed to be due to the fault of the debtor which arises from the fact that it was lost while it is in the possession of the debtor

If the presumption applies, it is incumbent upon the debtor to prove that the loss is not through his fault or it has been caused by a fortuitous event.

The presumption does not apply even if the loss happens at the time the thing is in the possession of the debtor if, at the time of the loss, an earthquake, storm, or other natural calamity exists.

3rd paragraph of Art. 1165: when the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same interest, he shall be liable for any fortuitous event until he has effected the delivery

o Hence, in cases where Art. 1165, par. 3 is applicable, even if the debtor can prove that the loss of the thing in his possession was not through his fault or that it was through a fortuitous event, he shall still be liable to the creditor for damages.

1266. The debtor in obligation to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor.

Obligation ―to do‖—includes all kinds of work or service


Obligation ―to give‖—a prestation which consists in the delivery of a movable or an immovable thing in order to create real right of for the use of the recipient, or for its simple possession, or in order to return to its owner

When the prestation becomes legally or physically impossible without the fault of the obligor, it shall be considered a loss which extinguishes the obligation

Legal Impossibility : may either be - 1. direct (when the law prohibits the performance or execution of the

work agreed upon, i.e. when it is immoral or dangerous) 2. indirect (the law imposes duties of a superior character upon the

obligor which are incompatible with the work agreed upon, although the latter may be perfectly licit, as where the obligor is drafted for military service or for a civil function)

Physical Impossibilty : examples – death of the debtor; when there is an accident...

1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part.

Subjective impossibility—a promissor’s duty is never discharged by the mere fact that the supervening events deprive him of the ability to perform, if they are not such as to deprive other persons, likewise, of ability to render such performance

Requisites for this article to apply: 1. The prestation has become so difficult to render; and 2. The service has become manifestly beyond the contemplation of the

parties

Principle of rebus sic stantibus—the parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist, the contract also ceases to exist

―service‖—refers to the ―performance‖ of the obligation

Doctrine Of Unforeseen Event / Doctrine Of Relative Impossibility (rebus sic stantibus)

o It refers to obligation "to do" (personal obligation) o Parties are presumed to have the risk o It does not apply to aleatory contracts (insurance contract) o Excludes highly speculative business (stock exchange) o Monatory obligations are also excluded (governed by 1357)

Requisites: 1. event or change in the circumstances could have been foreseen of

the time of the execution contract 2. it makes the performance of the contract extremely difficult but

not impossible 3. the event must not be due to the act of any of the parties 4. the contract is for a future prestation. If the contract is of

immediate fulfillment, the gross inequality of the reciprocal prestations may be involve desion or want of cause.

1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it.

If A stole a watch from B and was criminally charged for such an offense, and the watch was lost through a fortuitous event, the debtor-accused must still pay the price of the watch

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

If A buys a house from G, and the house, which is insured, is accidentally burned by a fortuitous event prior to the demand for its delivery, the obligation of G to deliver the house is extinguished

o However, in the event that A has already paid the price of the house, he can seek reimbursement of the insurance proceeds due from the insurance company.

Sec. 3: CONDONATION OR REMISSION OF DEBT

1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly.

One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation.

Condonation—an act of liberality


o Connotes that there is a previous demandable obligation but the obligee or the creditor decides not to enforce the debtor’s prestation anymore which requires the obligor’s implied or express consent

Condonation or Remission of a debt—a donation of the obligee’s credit in favor of the debtor

Inofficious donation—if it turns out that the thing or amount donated (remitted or condoned) encroaches or infringes on the legitime or successional rights of the heirs of the condoning creditor

o In this case, the debtor must pay the child/children the amount which will complete his/their legitime

Art. 772: Only those who at the time of the donor’s death have a right to the legitime and their heirs and successors in interest may ask for the reduction of inofficious donations

Art. 760: Every donation inter vivos, made by a person having no children or descendants, legitimate or legitimated by subsequent marriage, or illegitimate, may be revoked or reduced as provided in the next article, by the happening of these events:

1. If the donor, after the donation, should have legitimate or legitimated or illegitimate children, even though they be posthumous

2. If the child of the donor, whom the latter believed to be dead when he made the donation, should turn out to be living

3. If the donor should subsequently adopt a minor child 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor; implies the renunciation of the action which the former had against the latter.

If in order to nullify this waiver, it should be claimed to be inofficious, the debtor and his heirs may uphold it by proving that the delivery of the document was made in virtue of payment of the dent.

Promissory note—most common private document evidencing a credit o If a creditor delivers a promissory note to the debtor, the former, in

effect, furnishes the debtor the evidence which could prove the indebtedness of such debtor in his favor. It therefore implies that he is no longer interested in the debt

1272. Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved.

The fact that the document evidencing the debt is in the possession of the debtor gives rise to the refutable presumption that such document has been delivered by the creditor voluntarily

1273. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force.

The existence of the accessory obligation depends on the existence of the principal obligation

If the principal obligation is extinguished, it carries with it the extinguishment of the accessory obligation but not vice-versa

1274. It is presumed that the necessary obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing.

Pledge—an accessory contract o it involves a movable property constituted by the owner of such

property who has free disposal of it, to secure the fulfillment of a principal obligation and such contract is perfected only upon the delivery of the thing pledged to the creditor

In a contract of pledge, the creditor or the obligee must be in possession of the thing pledged

o If it is in the possession of the debtor or of the third person who owns it, there is a presumption that the accessory obligation has been condoned or remitted

Sec. 4: CONFUSION OR MERGER OF RIGHTS

1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person.

Requisites of merger or confusion are: 1. It must take place between the creditor and the principal debtor, 2. The very same obligation must be involved, for if the debtor

acquires rights from the creditor, but not the particular obligation in question in question there will be no merger,

3. The confusion must be total or as regards the entire obligation.


1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which takes place in the person of any of the latter does not extinguish the obligation.

The indebtedness by a debtor and guaranteed by a third person is extinguished if there is a merger of the characters of the debtor and creditor

o In this case, the guarantor is benefited because the extinguishment of the principal obligation extinguishes the accessory obligation of the guarantee

However, the merger of the persons of the guarantor and the creditor does not extinguish the obligation

o It merely extinguishes the accessory obligation

1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur.

Joint debtors owe the creditor only their share in the whole indebtedness and the creditor can only collect from a joint debtor his share in the total indebtedness

However, if the obligation of the debtors is solidary and there is merger of characters, the obligation is extinguished

Sec. 5: COMPENSATION

1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.

If the parties are mutually debtors and creditors of each other such that they owe each other the same amount and the requisites under Art. 1279 are present, they do not have to make actual payment, as payment is made by operation of law

Compensation is a mode of extinguishing to the concurrent amount, the obligations of those persons who in their own right are reciprocally debtors and creditors of each other. It is the offsetting of two obligations which are reciprocally extinguished if they are of equal value. Or extinguished to the concurrent amount if of different values.

Kinds of Compensation: a. As to their effects

i. compensation may be total (when the two obligations are of the same amount); or

ii. partial (when the amounts are not equal). b. As to origin (it may be)

i. Legal—when it takes place by operation of law because all requisites are present

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

iii. Conventional—when the parties agree to compensate their mutual obligations even if some requisite is lacking

iv. Judicial—when decreed by the court in a case where there is a counterclaim

Compensation vs. Payment: In compensation, there can be partial extinguishment of the obligation; in payment, the performance must be complete, unless waived by the creditor. Payment involves delivery of action, while compensation (legal compensation) takes place by operation of law without simultaneous delivery.

Compensation vs. Merger: In compensation, there are at least two persons who stand as principal creditors and debtor of each other, in merger, there is only one person involved in whom the characters of creditor and debtor are merged. In merger, there is only one obligation, while in compensation, there are two obligations involved.

1279. In order that compensation may be proper, it is necessary:

1. That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other

2. That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated

3. That the two debts be due 4. That they be liquidated and demandable 5. That over neither of them, there be any retention or controversy,

commence by third persons and communicated in due time to the debtor


Demandable means that the debts are enforceable in court, there being no apparent defenses inherent in them. The obligations must be civil obligations, including those that are purely natural.

An obligation is not demandable, therefore, and not subject to compensation, in the following cases:

a. when there is a period which has not yet arrived, including the cases when one party is in a state of suspension of payments;

b. when there is a suspensive condition that has not yet happened; c. when the obligation cannot be sued upon, as in natural obligation.

Explanation of the requisites: 1. The parties must be mutual creditor and debtor of each other and

their relationship is a principal one, that is, they are principal debtor and creditor of each other.

2. When the debts consist of money, there is not much of a problem when it comes to compensation to the concurrent amount. It is a matter of mathematical computation.

o When the debt consist of things, it is necessary that the things are consumable which must be understood as ‗fungible‘ and therefore susceptible of substitution. More than that they must be of the same kind. If the quality has been states, the things must be of the same quality.

o ―consumable‖—must be interpreted as ―fungible‖ which is susceptible of substitution

3. A debt is ‗due‘ when its period of performance has arrived. If it is a subject to a condition, the condition must have already been fulfilled.

o However, in voluntary compensation, the parties may agree upon the compensation of debts which are not yet due.

4. A debt is considered ‗liquidated‘ when its amount is clearly fixed. Of if it is not yet specially fixed, a simple mathematical computation will determine its amount or value.

o It is ‗unliquidated‘ when the amount is not fixed because it is still subject to a dispute or to certain condition.

o It is not enough that the debts be liquidated. It is also essential that the same be demandable. A debt is demandable if it is not yet barred by prescription and it is not illegal or invalid.

5. A debt of a thing cannot be a subject of compensation if the same had been subject of a garnishment of which the debtor was timely notified. When a credit or property had been properly garnished of

attached, it cannot be disposed of without the approval of the court.

o ―due time‖—the period before legal compensation was supposed to take place, considering that legal compensation operates so long as the requisites concur, even without any conscious intent on the part of the parties

A controversy communicated to the parties after that time may no longer undo the compensation that had taken place by force of law

1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor.

Guarantor—a person who promises to pay the creditor in the event that the principal debtor fails to pay the indebtedness

o But before the creditor can go against the guarantor, the creditor must first exhaust all possible ways to collect the debt from the principal debtor unless the guarantor binds himself solidarily with the principal debtor

o If the debtor goes against the guarantor, the latter can resist payment by invoking compensation between the creditor and the principal debtor

―notwithstanding the provisions of the preceding article‖—refers to the fact that, even if the guarantor and the principal creditor are not mutual debtors and creditors of each other, the obligation of the guarantor can be extinguished by invoking compensation insofar as the principal debtor is concerned

Exception to the Rule On Compensation: Right of Guarantor to Invoke Compensation Against Creditor. The general rule is that for compensation to operate, the parties must be related reciprocally as principal creditors and debtors of each other. Under the present Article, the guarantor is allowed to set up compensation against the creditor.

1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total compensation.

Total compensation—arises when the mutual debts of the parties to each other are equal


Partial compensation—when the debts are not equal, in which case, the debts are extinguished to the concurrent amount

1282. The parties may agree upon the compensation of debts which are not yet due.

General Rule: compensation can only occur when the debts are due and demandable

Contractual compensation—the parties agreeing upon the compensation of debts which are not yet due

1283. If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof.

This is judicial set-off and if the court agrees, there can be compensation

For judicial set-off to apply, the amount of damages or the claim sought to be compensated must be duly proven

1284. When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided.

A rescissible or voidable debt is valid up to the time it is rescinded or annulled.

o Hence, if all the requisites for a valid compensation are present before the contract is rescinded or annulled, the compensation can occur by operation of law.

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

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

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

Assignment after Compensation: o General Rules: when compensation has already taken place before

the assignment, inasmuch as it takes place ipso jure, there has already been an extinguishment of one of the other of the obligations. A subsequent assignment of an extinguished obligation cannot produce any effect against the debtor.

o Exception to the rule: when the debtor consents to the assignment of the credit; his consent constitutes a waiver of the compensation, unless at the time he gives consent, he informs the assignor that he reserved his right to the compensation.

Assignment before compensation. o The assignment may be made before compensation has taken place,

either because at the time of assignment one of the debts is not yet due or liquidated, or because of some other cause which impedes the compensation. As far as the debtor is concerned, the assignment does not take effect except from the time he is notified thereof. If the notice of assignment is simultaneous to the transfer, he can set up compensation of debts prior to the assignment. If notice was given to him before the assignment, this takes effect at the time of the assignment; therefore the same rule applies. If he consents to the assignment, he waives compensation even of debts already due, unless he makes a reservation.

o But if the debtor was notified of the assignment, but he did not consent, and the credit assigned to a third person matures after that which pertains to the debtor, the latter may set up compensation when the assignee attempts to enforce the assigned credit, provided that the credit of the debtor became due before the assignment. But if the assigned credit matures earlier than that of the debtor, the assignee may immediately enforce it, and the debtor cannot set up compensation, because the credit is not yet due.

o If the debtor did not have knowledge of the assignment, he may set up by way of compensation all credits maturing before he is notified thereof. Hence, if the assignment is concealed, and the assignor still contracts new obligation in favor of the debtor, such obligation maturing before the latter learns of the assignment will still be allowable by way of compensation. The assignee in such case would have a personal action against the assignor.


1286. Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment.

―indemnity for expenses of exchange or transportation to the place of payment‖—arises only when there is partial payment

Under Art. 1247, the extra-judicial expenses required for payment shall be for the account of the debtor, unless it is otherwise stipulated

This article applies to legal compensation and not to voluntary compensation.

1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depository or a bailee in commodatum.

Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to the provisions of par. 2 of Art. 301.

Compensation will not occur in the following situations 1. Debts arising from a depositum or from the obligations of a depository o Deposit—constituted from the moment a person receives a thing

belonging to another, with the obligation of safely keeping it and returning the same

2. Debts arising from the obligations of a bailee in commodatum o Bailee in commodatum—acquires the use of the thing loaned but not

its fruits o The bailee is obliged to pay the ordinary expenses for the use and

preservation of the thing loaned o The bailee cannot retain the thing loaned on the ground that the

bailor owes him something even though it may be by reason of expenses

3. Debts arising from duty to support o Par. 2 of Art. 301: support in arrears can be compensated or

renounced

The application of this is doubtful in view of the fact that the said Art. 301 has already been deleted by the New Family Code

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

4. Debts consisting of a civil liability arising from a penal offense

o The person who has the civil liability arising from crime is the only party who cannot set up the compensation; but the offended party entitled to the indemnity can set up his claim in compensation of his debt.

o A criminal violation of the Trust Receipt Law which makes the obligor financially and civilly liable to the contracting bank to the extend indicated cannot be extinguished by a claim of compensation of the amount of deposit which the obligor has with the bank even if, under the law, a person who opens a deposit account in a bank is technically a creditor of that bank

1289. If a person should have against him several debts which are susceptible of compensation, the rules on the application of payments shall apply to the order of the compensation. 1290. When all the requisites mentioned in Art. 1270 are present, compensation takes effect by operation of law, and extinguishes both to the concurrent amount, even though the creditors and debtors are not aware of the compensation.

Legal compensation takes place from the moment that the requisites of the articles 1278 and 1270 co-exist; its effects arise on the very day which all its requisites concur.

Voluntary of conventional compensation takes effect upon the agreement of the parties.

Facultative compensation takes place when the creditor declares his option to set it up.

Judicial compensation takes place upon final judgment.

Effects of Compensation: 1. Both debts are extinguished to the concurrent amount; 2. interests stop accruing on the extinguished obligation of the part

extinguished; 3. the period of prescription stops with respect to the obligation or

part extinguished; 4. all accessory obligations of the principal obligation which has been

extinguished are also extinguished.

Renunciation of Compensation. o Compensation can be renounced, either at the time an obligation is

contracted or afterwards. Compensation rests upon a potestative right, and a unilateral decision of the debtor would be sufficient


renunciation. Compensation can be renounced expressly of impliedly.

No Compensation. o Even when all the requisites for compensation occur, the

compensation may not take place in the following cases: a. When there is renunciation of the effects of compensation by a

party; and b. When the law prohibits compensation.

Sec. 6: NOVATION

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

Under the provisions of the Civil Code, novation refers to extinctive novation and not modifactory novation

Novation—a juridical act with a dual function, namely, it extinguishes an obligation and creates a new one in lieu of the old

Types of Novation: 1. Objective Novation—occurs when there is a change of the object or

principal conditions of an existing obligation o To effect, it is imperative that the new obligation expressly declare

that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the new one

2. Subjective Novation—occurs when there is a change of either the person of the debtor, or of the creditor in an existing obligation

o To effect, it is necessary that the old debtor be released expressly from the obligation and the third or new debtor assumes his place in the relation

3. Mixed Novation—occurs when the change of the object or principal conditions of an obligation happens at the same time with the change of either the person of the debtor or creditor

Novation arising from a purported change in the person of the debtor must be clear and express because, to repeat, it is never presumed

General Rule: there is no form of words or writing necessary to give effect to a novation

1292. In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other.

There can be no novation unless 2 distinct and successive binding contracts take place, with the later one designed to replace the preceding convention

If a subsequent contract is designed to novate a previous contract and not all parties to the original contract consented to or are made parties in the subsequent contract—no novation

Modifications introduced before a bargain becomes obligatory can in no sense constitute novation in law

The extinguishment of the old obligation by the new one is a necessary element of novation which may be effected either expressly or impliedly

o ―expressly‖—contracting parties incontrovertibly disclose that their object in executing the new contract is to extinguish the old one

o ―implied‖—all that is prescribed by law would be an incompatibility between the two contracts

Test of incompatibility—whether or not the 2 obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first.

The incompatibility must take place in any of the essential elements of the obligation; otherwise, the change would be merely modifactory in nature and insufficient to extinguish the original obligation

―to cancel‖—means to strike out, revoke, rescind, abandon, or terminate

An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by changing only the terms of payment and adding other obligations not incompatible with the old one, or wherein the old contract is merely supplemented by the new one

Four essential requisites of Novation: 1. A previous valid obligation 2. The agreement of all the parties to the new contract 3. The extinguishment of the old contract 4. Validity of the new one


1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Arts. 1236 and 1237.

Delegacion—if the old debtor, to extinguish his obligation, suggests to the creditor that he be substituted by a new debtor of his choice and the creditor agrees

1294. If the substitution is without the knowledge or against the will of the debtor, the new debtor’s insolvency or non-fulfillment of the obligation shall not give rise to any liability on the part of the original debtor.

Expromission—if the old debtor is substituted without the knowledge or consent of the old debtor and the obligation is extinguished

In both delegacion and expromission, the consent of the creditor is indispensable

1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor; except when said insolvency was already existing and of public knowledge, or known to the debtor, when he delegated his debt.

2 cases where the creditor can go against the old debtor in case of insolvency of the new debtor:

1. When the insolvency of the new debtor has already been existing and of public knowledge when the old debtor delegated the debt

2. When the insolvency is known to the old debtor when he delegated his debt

In both cases, the creditor must not have knowledge of the insolvency of the new debtor

In both cases, the insolvency must have existed at the time the old debtor delegated his debt

1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist insofar as they may benefit third person who did not give their consent.

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

A subsequent void obligation intended to novate an old one has no legal effect and will be considered as not having been agreed upon in the first place; hence, the old obligation subsists

o However, if the parties agree that it shall in any event extinguish the old obligation, then such obligation will not be revived

1298. The novation is void if the original obligation was void, except when annulment may be claimed only by the debtor; or when ratification validates acts which are voidable.

If the previously existing obligation is void, a subsequent obligation intending to novate it shall likewise be voids unless it is clear that such subsequent one can stand on itself and without any reference to the old one.

If the original obligation is merely annullable or voidable, it means that it is valid up to the time it is annulled

o Hence, it can be novated before it is annulled

1299. If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated.

In order not to subject the obligation to the previous suspensive condition, there must be an express statement to that effect in the new obligation as novated

1300. Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect.

Legal subrogation—takes effect by mandate of law and does not proceed from an agreement of the parties

o The law which forms the basis of the subrogation must be clearly identified and invoked to enforce the rights pertinent thereto

Conventional subrogation—must be clearly established by the unequivocal terms of the substituting obligation or by the evident incompatibility of the new and old obligations on every point


Both kinds of subrogation principally involve the change in the person of the creditor

1301. Conventional subrogation of a third person requires the consent of the original parties and of the third person. 1302. It is presumed that there is legal subrogation:

1. When a creditor pays another creditor who is preferred, even without the debtor’s knowledge

2. When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor

3. When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter’s share

Preferred credit—the claims for the unpaid price of movables sold, on said movables, so long as they are in the possession of the debtor, up to the value of the same

o Hence, any creditor who owns such credit is a preferred creditor

―a person interested in the fulfillment of the obligation‖—one who will be affected by payment of the debtor such as the guarantor, surety or a solidary debtor

1303. Subrogation transfers to the person subrogated the credit with all the rights thereto appertaining either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation.

In conventional subrogation, the parties may stipulate the nature, limits, extent and scope of the subrogation provided these are not contrary to the law, morals, good customs, public order, or public policy.

1304. 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 subrogated in his place in virtue of the partial payment of the same credit.

This contemplates a situation where a debt has been partially paid by a third person without the consent of the debtor

In the event that the creditor and the third party demands from the debtor at the same time, the creditor will be preferred

Title 2: CONTRACTS

Chapter : General Provisions

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

This states the statutory definition of contracts

Contract—a source of obligation and it can be defined also as a legally enforceable agreement

o A juridical convention manifested in legal form, by virtue of which one or more persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to do or not to do.

o An agreement whereby at least one of the parties acquires a right, either in rem or in personam, in relation to some person, thing, act or forbearance

Agreements falling under the Statute of Frauds are useless contracts for they cannot be implemented which, in effect, negates the existence of a contract

Negotiation—covers the period from the time the prospective contracting parties indicate interest in the contract to the time the contract is concluded (perfected)

Perfection—takes place upon the concurrence of the essential elements of the contract

A contract which is consensual as to perfection is so established upon a mere meeting of the minds i.e. the concurrence of offer and acceptance, on the object and on the cause thereof

Real contract—a contract which requires, in addition to the above, the delivery of the object of the agreement, as in a pledge or commodatum

Solemn contract—compliance with certain formalities prescribed by law is essential in order to make the act valid, the prescribed form being thereby an essential element thereof

Stage of consummation—begins when the parties perform their respective undertakings under the contract culminating in the extinguishment thereof

Other Terms (Contract): a. Perfect promise – distinguished from a contract, in that the latter

establishes and determines the obligations arising therefrom; while


the former tends only to assure and pave the way for the celebration of a contract in the future.

b. Imperfect Promise – mere unaccepted offer c. Pact – a special part of the contract, sometimes incidental and

separable for the principal agreement d. Stipulation – similar to a pact; when the contract is an instrument,

it refers to the essential and dispositive part, as distinguished from the exposition of the facts and antecedents upon which it is based.

Number of Parties:

The Code states ―two persons‖; what is meant actually is ―two parties‖. For a contract to exist, there must be two parties. A party can be one or more persons.

o Husband & Wife: Husbands and wives cannot sell to each other as a protection of the conjugal partnership. They can however enter into a contract of agency.

Auto-contracts—It means one person contracts himself. As a general rule, it is accepted in our law. The existence of a contract does not depend on the number of persons but on the number of parties. There is no general prohibition against auto-contracts; hence, it should be held valid.

Contracts of Adhesion—Contracts prepared by another, containing provisions that he desires, and asks the other party to agree to them if he wants to enter into a contract.

o Example: transportation tickets. It is valid contract according to Tolentino because the other party can reject it entirely.

Characteristics of Contracts: (3 elements) 1. Essential elements – without which there is no contract; they are:

a. consent b. subject matter; and c. cause

2. Natural elements – exist as part of the contract even if the parties do not provide for them, because the law, as suppletory to the contract, creates them

3. Accidental elements – those which are agreed by the parties and which cannot exist without stipulated

Stages of a Contract: (3 stages) 1. Preparation, Generation or Policitacion – period of negotiation and

bargaining, ending at the moment of agreement of the parties 2. Perfection or Birth of the contract – the moment when the parties

come to agree on the terms of the contract

3. Consummation or Death – the fulfillment or performance of the terms agreed upon in any contract

1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

This states the autonomous nature of contracts

Freedom to stipulate terms and conditions—essence of the contractual system provided such stipulations are not contrary to law, morals, good customs, public order, or public policy

o This also prohibits a party from coercing or intimidating or unduly influencing another to enter into a contract

Contractual stipulations contravening provisions of law designed to protect laborers and employees were not valid

In the absence of express legislation or constitutional prohibition, a court, in order to declare void as against public policy, must find that the contract, as to the consideration or thing to be done, has a tendency to injure the public, is against the public good, or contravene some established interest of society, or is inconsistent with sound policy and good morals which tends to undermine the security of individual rights, whether of personal liability or of private property

It is a rule that only laws existing at the time of the execution of a contract are applicable thereto and that later statutes do not govern said contract unless the latter is specifically intended to have a retroactive effect

Non-impairment of contracts or vested rights clauses will have to yield to the superior and legitimate exercise by the State of police power to promote the health, morals, peace, education, good order, safety and general welfare of the people

Statutes promulgated in exercise of a valid police power must be read into every contract

This article embodies the Principle of Autonomy of Contracts

Freedom to contract: o Any person has the liberty to enter into a contract so long as they

are not contrary to law, morals, good customs, public order or public policy. The legislature, under the constitution, is prohibited from enacting laws to prescribe the terms of a legal contract.

Validity of Stipulations:


o Any and all stipulations not contrary to law, morals, good customs, public order or public policy is valid

Contrary to law: o Freedom of contract is restricted by law for the good of the public.

It is fundamental postulate that however broad the freedom of the contracting parties may be, it does not go so far as to countenance disrespect for or failure to observe a legal prescription. The Statute takes precedence.

o Examples: a. A promissory note which represents a gambling debt is

unenforceable in the hands of the assignee. b. Stipulations to pay usurious interests are void. c. A contract between to public service companies to divide the

territory is void because it impairs the control of the Public d. Service Commission. e. Agreement to declare valid a law or ordinance is void.

Contrary to Morals: o Morals mean those generally accepted principles of morality which

have received some kind of social and practical confirmation. o Examples:

a. a promise to marry or nor to marry, to secure legal separation, or to adopt a child

b. a promise to change citizenship, profession, religion or domicile c. a promise not to hold public office or which limits the

performance of official duties d. a promise to enter a particular political party or separate from it e. contracts which limit in an excessive manner the personal or

economic freedom of a person to make an act dependent on money or some pecuniary value, when it is of such a nature that it should not depend thereon; payment to kill another.

Contrary to Public Order: o Public order means the public weal or public policy. It represents

the public, social, and legal interest in private law that which is permanent and essential in institutions, which, even if favoring some individual to whom the right pertains, cannot be left to his own will. A contract is said to be against public order if the court finds that the contract as to the consideration or the thing to be done, contravenes some established interest of society, or is inconsistent with sound policy and good morals, or tends clearly to undermine the security of individual rights.

o Examples: a. Common carrier cannot stipulate for exemption for liability

unless such exemption is justifiable and reasonable and the contract is freely and fairly made.

b. Payment to intermediaries in securing import licenses or quota allocations.

c. Contract of scholarship stipulating that the student must remain in the same school and that he waives his right to transfer to another school without refunding the school

1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provision of Titles I and II of this Book, by the rules governing the most analogous nominate contracts, and by the customs of the place.

Innominate contracts—those which are not specifically governed by any provision in the Civil Code or special law but which likewise involve the fulfillment or accomplishment of some prestations

o They are governed by the following: a. Stipulation of the parties b. Provisions in the law of obligations and contracts under Title I and

II of the Civil Code c. Rules governing the most analogous nominate contracts

Types of nominate contracts:

Sale, barter or exchange, lease, partnership, agency, loan, deposit, aleatory, contracts, compromises, guaranty, pledge, mortgage, and antichresis

Governed by special laws: insurance, real estate mortgage, and charter party

d. Customs of the place

Custom—a rule of conduct formed by repetition of acts uniformly observed as a social rule, legally binding and obligatory and it must be proved as a fact according to the rules of evidence

Innominate Contracts: 1. do ut des (I give that you may give) – An agreement in which A

will give one thing to B, so that B will give another thing to A. 2. do ut facias (I give that you may do) – An agreement under which

A will give something to B, so that B may do something for A. 3. facio ut facias (I do that you may do) – An agreement under which

A does something for B, so that B may render some other service for A.


4. facio ut des (I do that you may give) – An agreement under which A does something for B, so that B may give something to A.

Analogous contracts: o Innominate contracts, in the absence of stipulations and specific

provisions of law on the matter, are to be governed by rules applicable to the most analogous contracts.

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

This expresses the concept of mutuality of contracts o Its purpose is to render void a contract containing a condition which

makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties

A contract expressly giving to one party the right to cancel the same if a resolutory condition therefor agreed upon is not fulfilled, is valid, the reason being that when the contract is thus cancelled the, the agreement of the parties is in reality being fulfilled

In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality

Contract of adhesion—one wherein a party, usually a corporation, prepares the stipulations in the contract, while the other party merely affixes his signature or his ―adhesion‖ thereto.

o These types of contracts are as binding as ordinary contracts. Because in reality, the party who adheres to the contract is free to reject it entirely

Principle of Mutuality of Contract: o The binding effect of contract on both parties is based on the

principles:

that obligations arising from contracts have the force of law between the contracting parties

that there must be mutuality between the parties based on their essential equality, to which is repugnant to have one party bound by the contract leaving the other free therefrom.

o A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties is void.

Unilateral Cancellation:

o Just as nobody can be forced to enter into a contract, in the same manner once a contract is entered into, no party can renounce it unilaterally or without the consent of the other.

o Nobody is allowed to enter into a contract, and while the contract is in effect, leaves, denounces or disavows the contract to the prejudice of the other.

When Stipulated: o However, when the contract so stipulates that one may terminate

the contract upon a reasonable period is valid. o Judicial action for the rescission of the contract is no longer

necessary when the contract so stipulates that it may be revoked and cancelled for the violation of any of its terms and conditions. This right of rescission may be waived.

1309. The determination of the performance may be left to a third person, whose decision shall not be binding until it has been made known to both contracting parties.

Exception to Art. 1308 (Mutuality of Contract) o A third person may be called upon to decide whether or not

performance has been done for the fulfillment of the contract. Such decision becomes binding when the contracting parties have been informed of it.

1310. The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is equitable under the circumstances.

Exception to Art. 1308 (Mutuality of Contract) o However, when the decision cannot be arrived due to inequity, the

courts shall decide what is equitable for the parties involved.

1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation, or by provision of law. The heir is not liable beyond the value of the property he received from the decedent.

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental


benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.

This expresses the nature of relativity of contracts

General Rule: a stranger cannot invoke the contract of another for his own interest or for a source of an alleged prejudice.

The law operates to effect the transfer of a chosen of action from one person to another without any concurring act on the part of the parties or indeed without their assent

o The usual ways by which such transfers are brought to pass are by the transfer of an interest in land, by marriage, and by death

Real property is peculiar in that, upon its transfer, covenants may be annexed to the contract which run with the land and one who subsequently acquires an interest therein takes it subject to the benefits and obligations of such covenants

Transmission of rights and obligations in a contract may likewise be agreed upon by the parties.

3 cases where contracts cannot take effect with respect to the heirs or assigns:

a. When the nature of the contract does not allow transmission o Where acts stipulated in a contract require the exercise of special

knowledge, genius, skill, taste, ability, experience, judgment, discretion, integrity, or other personal qualification of one or both parties, the agreement is of a personal nature, and terminates on the death of the party who is required to render such service

b. When the parties stipulate that no transmission of rights shall be allowed

c. When the law provides non-transmission

Contracts pour autrui—enforcement of which may be demanded by a third party for whose benefit it has been made, although not a party to the contract, before the stipulation in his favor has been revoked by the contracting parties. There must be a clear intent to benefit the third party. It is insufficient that the third party be merely incidentally benefited.

Stipulation pour autrui—a stipulation in favor of a third person conferring a clear and deliberate favor upon him, which stipulation is found in a contract entered into by parties neither of whom acted as agent of the beneficiary; it is not necessary that such third person be always named in the contract

o Requisites:

1. There must be a stipulation in favor of a third person 2. The stipulation must be a part, not the whole of the contract 3. The contracting parties must have clearly and deliberately conferred

a favor upon a third person, not a mere incidental benefit or interest 4. Neither of the contracting parties bears the legal representation or

authorization of the third party 5. The favored party must have communicated his acceptance of the

stipulation to the obligor before its revocation

1st paragraph of this article embodies the Principle of Relativity of Contract

Four exceptional instances where a contract may produce effect on third persons (stipulation pour autrui): Art. 1311, par.2 – 1314

a. Parties bound by contract: o Generally, only the parties that agreed on the contracts are

bound by the contract. Transmission is possible to the heirs or assignees if so stipulated and in certain contracts.

b. Third persons not bound: o It is a general rule that third parties are not bound by the acts of

another. o A contract cannot be binding upon and cannot be enforced

against one who is not a party to it, even if he has knowledge of such contract and has acted with knowledge thereof.

c. Enforcement of contract: o Only a party to the contract can maintain an action to enforce

the obligations arising under said contract. d. Contracts bind heirs: o Rights and obligations under a contract are transmissible to

heirs. Heirs are not third persons because there is privity of interest between them and their predecessor.

1312. In contracts creating real rights, third persons who come into possession of the object of the contract are bound thereby, subject to the provisions of the Mortgage Law and the Land Registration Law.

This provides another example when a third person not a party to a contract is affected or may be subject to its provisions

Example: if the lessor terminates the lease contract for a valid cause, the sublessee can be ejected from the leased premises even if he is not a party to the lease contract

Real Rights in Property


o A real right directly affects property subject to it; hence, whoever is in possession of such property must respect that real right.

1313. Creditors are protected in cases of contracts intended to defraud them.

Art. 1381(3)—provides that a contract shall be rescissible if it is undertaken in fraud of creditors when the latter cannot in any other manner collect the claim due them

Even if the creditor is not a party to the contract intended to defraud him, he is given legal personality by law to terminate the contract

1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party.

A stranger owes to the parties to the agreement a duty not to interfere with its performance

This doctrine is not confined to contract of services

It covers every case where one person maliciously persuades another to break any contract with a third person

Malicious act—if the persuasion be used for the indirect purpose of injuring the plaintiff, or benefiting the defendant, at the expense of the plaintiff

Lack of malice precludes damages. But it does not relieve petitioner of the legal liability for entering into contracts and causing breach of existing ones

The party guilty of such breach may, nevertheless, recover against the one who induces him to violate his contract when the latter, by such acts and persuasion, intended to injure the other contracting party or to coerce him into adopting a line of business against his will and judgment

Damage—the loss, hurt, or harm which results from injury and damages are the recompense or compensation awarded for the damage suffered

One becomes liable in an action for damages for a non-trespassory invasion of another’s interest in the private use and enjoyment of asset if:

1. The other has property rights and privileges with respect to the use or enjoyment interfered with

2. The invasion is substantial 3. The defendant’s conduct is a legal cause of the invasion 4. The invasion is either intentional and unreasonable or unintentional

and actionable under general negligence rules

Elements of tort interference are: 1. Existence of a valid contract 2. Knowledge on the part of the third person of the existence of contract 3. Interference of the third person is without legal justification or excuse

1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law.

General Rule: Contracts are perfected by mere consent of the parties i.e. contract of sale however, ownership over the object is transferred only upon actual or constructive delivery

1316. Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation.

Exception to the Principle of Consensuality

Real Contracts—perfected not only be mere consent but by delivery of the object of the contract

1. Bailee in commodatum—acquires the use of the thing loaned but not its fruits

2. Pledge—constituted by the owner of the object to be pledged to secure a loan

o It is indispensable that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement

3. Deposit—constituted from the moment a person receives a thing belonging to another, with the obligation and principal purpose of safely keeping it and of returning the same

1317. No one may contract in the name of another without being authorized by the latter; or unless he has by a law a right to represent him.

A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party.


Contract of agency—a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter

The principal of the agent must comply with all the obligations which the agent may have contracted with the scope of his authority

Wherein the agent has exceeded his power, the principal is not bound except when he ratifies it expressly or tacitly

When the agent exceeded his authority, the principal is solidarily liable with the agent if the former allowed the latter to act as though he had full powers

When a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing; otherwise, the sale shall be void

―if a private corporation intentionally or negligently clothes its officers or agents with apparent power to perform acts for it, the corporation will be stopped to deny that such apparent authority is real, as to innocent third persons dealing in good faith with such officers or agents‖

This apparent authority may result from: 1. General manner by which the corporation holds out an officer or

agent as having power to act 2. The acquiescence in his acts of a particular nature, with actual or

constructive knowledge thereof, whether within or without the scope of his ordinary powers

Art. 1393: Ratification may be effected expressly or tacitly. It is understood that there is tacit ratification, if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right

Compromise—an agreement between two or more persons who, for preventing or putting an end to a lawsuit, adjust their respective positions by mutual consent in the way they feel they can live with

Reciprocal concessions—the very heart and life of every compromise agreement, where each party approximates and concedes in the hope of gaining balanced by the danger of losing

3 minimum elements for any valid contract: 1. Consent 2. Object certain which is the subject matter of the contract 3. Cause of the obligation which is established

Consent—manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the agreement

Offer—must be certain and the acceptance seasonable and absolute; if qualified, the acceptance would merely constitute a counter-offer

Chapter 2: Essential Requisites of Contracts

1318. There is no contract unless the following requisites concur: 1. Consent of the contracting parties 2. Object certain which is the subject matter of the contract 3. Cause of the obligation which is established

―cause‖—all the 3 requisites must be present o Absence of one negates the existence of a contract

The rule on pari delicto as between the parties does not apply in cases of inexistent contracts

Section 1: Consent

1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made.

Consent—the concurrence of the wills of the offerer and the acceptor as to the thing and the cause which constitute a contract

Offer—a manifestation of a willingness to enter into a bargain so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it

o Making an offer means inviting an acceptance which, if given, will finally create a contract

It must be so complete that its acceptance will form an agreement containing all the terms necessary and intended by the parties, for it is obvious that there can be no agreement until its terms are settled, and that an offer which is not complete is merely a step in the negotiations


The following relations, until a contract is perfected, are not considered binding commitments, and if withdrawn, such withdrawal is effective immediately after its manifestation such as by its mailing and not necessarily when the offeree learns of the withdrawal

o Negotiation—is formally initiated by an offer o Imperfect promise (policitacion)—is merely an offer o Public advertisements or solicitations and the like—are ordinarily

construed as mere invitations to make offers or only as proposals.

Essence of Consent: the conformity of the parties on the terms of the contract, the acceptance by one, of the offers made by the other

Acceptance must be unconditional and unequivocal o It must be identical to the terms of the offer o It must not vary from the proposal either by way of omission, addition

or alteration

Condition imposed on the perfection of a contract o Failure to comply results in the failure of a contract

Condition imposed merely on the performance of an obligation o Failure to comply gives the other party options and/or remedies to

protect interests

Requisites of Consent: a. consent must be manifested by the concurrence of the offer and the

acceptance (Arts. 1319-1326); b. contracting parties must possess the necessary legal capacity (Arts.

1327-1329); and c. consent must be intelligent, free, spontaneous and real (Arts. 1330-

1346)

Manifestation: Consent is manifested by the concurrence of offer and acceptance with respect to the object and the cause of the contract. Once there is such a manifestation, the period or stage of negotiation is terminated. If consensual, the contract is perfected.

A unilateral proposition (offer), to form a valid contract, must be: a. Definite—distinguished from mere communications b. Complete—stating the essential and nonessential conditions

desired by the offeror c. Intentional—when accepted by another party

Mental reservation—when a party makes a declaration but secretly does not desire the effects of such declaration. The mental reservation of the offeror, unknown to the other, cannot affect the validity of the offer.

1320. An acceptance may be express or implied.

Acceptance may be shown by the acts, conduct or words of a party recognizing the existence of the contract

Implied acceptance may arise from acts or facts which reveal the intent to accept, such as the consumption of the things sent to the offeree, or the fact of immediately carrying out of the contract offered.

1321. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with.

The offerer will not be bound by an acceptance made by the acceptor in any other manner than that specified by the offerer unless the latter acquiesces in the change

In a contract of sale—the manner of payment of the purchase price is essential element before a valid and binding contract of sale can exist

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

Contract of Agency: a person binds himself to render some service or to do something in representation or on behalf of another with the consent or authority of the latter

When a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing, otherwise the sale is void

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

―before acceptance is conveyed‖—before acceptance has come to the actual knowledge of the offeror

When an offer becomes ineffective, nothing can be accepted

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

Option—a contract granting a privilege to buy or sell at a determined price within an agreed time


Option period—the offerer has allowed the offeree a certain period to accept the offer

a. If the period is not itself founded upon or supported by a consideration

o The offerer is still free and has the right to withdraw the offer before its acceptance or if an acceptance was made, before the offeror’s coming to know of such fact, by communicating that withdrawal to the offeree

o The right to withdraw must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim under Art. 19 of the Civil Code

―every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith‖

b. If the period has a separate consideration o A contract of ―option‖ is deemed perfected and it would be a

breach of that contract to withdraw the offer during the agreed period

o If the optioner-offeror withdraws the offer before its acceptance by the optionee-offeree, the latter may not sue for specific performance on the proposed contract since it has failed to reach its own stage of perfection

o However, the optioner-offeror renders himself liable for damages for breach of the option

An optional contract is a privilege existing only in one party—the buyer o He is given the right to decide to purchase or not, a certain

merchandise or property, at any time within the agreed period, at a fixed price

Consideration—in an option contract, may be anything of value, unlike in sale where it must be the price certain in money or its equivalent

Earnest money—considered part of the price in a contract of sale and can be a proof of the perfection of the contract of sale

o However, it is not the giving of the earnest money per se, but the proof of the concurrence of all the essential elements of the contract of sale which establishes the existence of a perfected sale

It is not the moment of sending but the time of receipt of the revocation or acceptance which is controlling.

The delay in transmission is at the risk of the sender, because he is the one who selects the time and the manner of making the transmission.

Contract of Option: This is a preparatory contract in which one party grants to the other, for a fixed period and under specified conditions, the power to decide whether or not to enter into a principal contract. It must be supported by an independent consideration, and the grant must be exclusive.

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

General Rule: advertisement of things for sale are mere invitations to make an offer

Exception: ―unless it appears otherwise‖—connotes that the advertisement may constitute an offer which is certain

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

Davies, Inc. v. CA: o When a company starts the process of a bidding and disseminates the

document denominated the ―Terms Conditions of the Bidding‖ to the bidders, the dissemination of the said documents constitutes an ―advertisement‖ to bid in the project

o The bid proposals or quotations submitted by the prospective suppliers are the offers

o The favorable reply of the company to one of the prospective suppliers is the acceptance

1327. The following cannot give consent to a contract:

1. Unemancipated minors 2. Insane or demented persons, and deaf-mutes who do not know

how to write

Emancipation takes place by the attainment of majority age which commences at the age of 18 years

o Any contract entered into by an unemancipated person is annullable or voidable

o Only the minor can invoke the ground that a contract is annullable because, at the time it was entered into, he was still a minor

Hence, if a person of age bought property from a minor and the latter received the purchase price, the person of age cannot file a


case to annul the contract on the ground that the other party is a minor

o Braganza v. De Villa Abrille: 2 minors signed a promissory note, without telling the creditor their ages, and where the creditor sought to enforce the promissory note against them, the SC ruled that the minors can set up the defense of minority to resist claim

o Minors have no juridical duty to disclose their inability or age o Even if the written contract is unenforceable because of non-age, they

shall make restitution to the extent that they may have profited by the money they received

Contracts entered into by insane or demented persons are likewise annullable

o Valid up to the time they are rendered ineffective by the courts o To annul a contract, it is always important to prove the insanity of the

other party at the time of the perfection of the contract

Classes of persons suffering from mental incapacity: 1. Idiot—one who has been insane from birth 2. Lunatic—one who was at one time sane, but who from some cause or

other has lost use of his reason 3. Persons who are not legally totally incapacitated but are mentally weak

The contract of one who is insane as to be unable to understand its nature and effect is voidable at his option, except for necessaries

o But, when the insane is not under a guardian and the other contracting party has no reasonable cause to believe him otherwise insane, the agreement is valid if equitable and beneficial to such insane person

This provision is designed to prevent fraud for the protection of handicapped people

Unemancipated minors cannot enter into valid contracts, and contracts entered into by them are not binding upon them, unless upon reaching majority they ratify the same.

Insane persons: It is not necessary that there be a previous of declaration of mental incapacity in order that a contract entered into by a mentally defective person may be annulled; it is enough that the insanity existed at the time the contract was made.

Being deaf-mute is not by itself alone a disqualification for giving consent. The law refers to the deaf-mute who does not know how to write.

1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable.

Lucid interval—that period of time when an insane person acts with reasonable understanding, comprehension and discernment with respect to what he is doing

o Lunacy may be intermittent in character o However, when one is shown to have been mentally deranged at a

recent period anterior to the execution of the contract, that condition is presumed to continue and the burden is on the other party to show that the agreement was entered into during a lucid interval

The intoxication must be such a character as to perpetuate an undue advantage over the drunken person

o Other than necessities, an agreement made by a person when so drunk as to be incapable of understanding its nature and effect, is voidable at the intoxicated person’ option

The contracts of an intoxicated person may be voidable under any of the following:

1. When it appears that the drunkenness was brought about by the opposite party

2. That a fraudulent advantage was taken of it 3. That the drunkenness was so complete as to deprive the party of his

reason of an agreeing mind

The effect of the drunkenness or intoxication must render the person incapable of intelligent assent and deprived of the power to know what he is doing

o Any short of this will not invalidate the contract

Hypnosis—an artificially induced state, resembling sleep, but characterized by exaggerated suggestibility and continued responsiveness to the voice of the hypnotist

The use of intoxicants does not necessarily mean a complete loss of understanding. The same may be said of drugs. But a person, under the influence of superabundance of alcoholic drinks or excessive use of drugs, may have no capacity to contract.

In hypnotism and somnambulism, the utter want of understanding is a common element.


1329. The incapacity declared in Art. 1327 is subject to the modification determined by law, and is understood to be without prejudice to special disqualification established in the laws.

The Rules of Court provide a list of incompetents who need guardianship: persons suffering from the penalty of civil interdiction, hospitalized lepers, prodigals, deaf and dumb who are unable to write and read, those of unsound mind (even though they have lucid intervals), and persons not being of unsound mind but by reason of age, disease, weak mind, and other similar causes cannot, without outside aid, take care of themselves and manage their property—becoming an easy prey for deceit and exploitation.

The incapacity to give consent (Arts. 1327 & 1328) to contracts renders the contract merely voidable, while special disqualification (Art. 1329) makes it void.

1330. A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable.

Intimidation, violence and undue influence—can be classified as acts of duress where, as a result, the coerced party is compelled to execute the contract against his will

A contract obtained through duress or mistake is voidable or annullable under Art. 1390.

1331. In order that mistake may invalidate consent, it should refer to the substance of the thing which is the object of the contract, or to those conditions which have principally moved one or both parties to enter into the contract.

Mistakes as to the identity or qualifications of one of the parties will vitiate consent only when such identity or qualifications have been the principal cause of the contract.

A simple mistake of account shall give rise to its correction.

For mistake to make a contract voidable or annullable, the law states that the consent must either refer to the

1. Substance of the thing which is the object of the contract 2. Conditions which principally induced the parties to enter into a

contract

A unilateral mistake in the making of an agreement, of which the other party is entirely ignorant and to which he in no way contributes, will not affect the agreement or afford ground for its avoidance or rescission, unless it is such a mistake as goes to the substance of the agreement itself

Mistake involved either a. Ignorance—absence of knowledge which respect to a thing b. Mistake properly speaking—a wrong conception about said thing or a

belief in the existence of some circumstance, fact or event which in reality does not exist

A simple mistake of account shall give rise to its correction o A simple accounting error does not go into the essentials of a contract

Ignorance and error are 2 different states of mind. Ignorance means the complete absence of any notion about a particular matter, while error or mistake means a wrong or false notion about such matter.

Annulment of contract on the ground of error is limited to cases in which it may reasonably be said that without such error the consent would not have been given.

An error as to the person will invalidate consent when the consideration of the person has been the principal cause of the same.

Mistake as to qualifications, even when there is no error as to person, is a cause vitiating consent, if such qualifications have been the principal cause of the contract.

A mistake as to the motive of a party does not affect the contract; to give it such effect would destroy the stability of contractual relations. When the motive has, however, been expressed and was a condition of the consent given, annulment is proper—because an accidental element is, by the will of the parties, converted into a substantial element.

1332. When one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former.

Presumption: when entering into a contract, the parties are presumed to have understood the terms of the contract they voluntarily signed especially when there is proof that they are educated


Before the benefits of this article can be availed of, the person invoking the same must prove that he has the conditions described in the same article

o Only after sufficiently adducing evidence proving the fact that he cannot read or that he does not understand the language of the contract will the burden of proof shift to the one enforcing the contract to show that the terms thereof have been explained to the person who is unable to read or who does not understand the language of the contract

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

If the parties are conscious of their ignorance as to the existence of some facts, the non-existence of such facts is of no consequence

To invalidate consent, the error must be excusable. It must be a real error and not one that could have been avoided by the party alleging it. The error must arise from facts unknown to him. A mistake that is caused by manifest negligence cannot invalidate a juridical act.

1334. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent.

A unilateral mistake of law as to the legal effect of an agreement is generally not a ground to annul a contract

A mistake of law may vitiate consent if the following requisites are present:

1. The mistake as to the legal effect of the agreement must be mutual

2. Such mutual mistake frustrates the real purpose of the parties

Three requisites under this article: 1. the error must be as to the legal effect of an agreement 2. it must be mutual; and 3. the real purpose of the parties is frustrated

The legal effects include the rights and obligations of the parties, not as stipulated in the contract, but as provided by the law.

The mistake as to these effects, therefore, means an error as to what the law provides should spring as consequences from the contract in question.

An error as to the nature or character is always essential, and makes the act juridically inexistent.

1335. There is violence when in order to wrest consent, serious or irresistible force is employed.

There is intimidation when one of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants or ascendants, to give his consent.

To determine the degree of the intimidation, the age, sex and condition of the person shall be borne in mind.

A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate consent.

There is total absence of free will in case a person is compelled to enter into a contract through violence

It is necessary that the threats and circumstances be of a character as to excite the reasonable apprehensions of a person of ordinary courage, and that the agreement be made under the influence of such threats or menace

o Threat must be tangible and direct

The duress or intimidation must be more than the ―general feeling of fear‖

o There must be specific acts or instances of such nature and magnitude as to have, of themselves, inflicted fear or terror upon the subject thereof that his execution of the questioned deed or act cannot be considered voluntary

Mere threat to bring a good faith action, maintainable at law, does not amount to duress

Legal actions which amount to duress: 1. A threatened civil action where the parties are not on an equal footing 2. Threats made against a person of inferior intellect, or an aged

weakened in body and mind to the effect that certain civil proceedings will be instituted

3. Threatening litigation while the defendant is ill, or to continue litigation when the circumstances are oppressive

Duress is that degree of constraint or danger either actually inflicted (violent) or threatened and impending (intimidation), sufficient to overcome the mind and will of a person of ordinary firmness.

Violence refers to physical force or compulsion, while intimidation refers to moral force or compulsion.


Requisites of violence: 1. That the physical force employed must be irresistible or of such

degree that the victim has no other course, under the circumstances, but to submit; and

2. that such force is the determining cause in giving the consent to the contract

Requisites of intimidation: 1. that the intimidation must be the determining cause of the

contract, or must have caused the consent to be given; 2. that the threatened act be unjust or unlawful; 3. that the threat be real and serious, there being an evident

disproportion between the evil and the resistance which all men can offer; and

4. that it produces a reasonable and well-grounded fear from the fact that the person from whom it comes has the necessary means or ability to inflict the threatened injury

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

If A is coerced to enter into a contract with X because G threatens to kill all the children of A if he does not do so, such contract may be annulled whether or not X knew of the intimidation

1337. There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the confidential, family, spiritual and other relations between the parties, or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress.

Annulling a contract based on undue influence ―is based upon principles of highest morality, it reaches every case and grants relief where influence is acquired and abused, or where confidence is reposed and betrayed‖

―undue‖—unrighteous, illegal and designed to perpetrate a wrong o It must amount to fraud or coercion

―due influence‖—solicitation, importunity, argument and persuasion used by one party as means to the consent of the other

o Influence obtained by persuasion or argument or by appeals to the affections is not prohibited either in law or morals and is not obnoxious even in courts of equity

In intimidation, there must be an unlawful or unjust act which is threatened and which causes consent to be given, while in undue influence there need not be an unjust or unlawful act. In both cases, there is moral coercion.

Moral coercion may be effected through threats, expressed or implied, or through harassing tactics.

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

1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to.

Fraud—a false representation of a material fact made by word or conduct with knowledge of its falsehood or in reckless disregard of its truth, in order to induce and actually inducing another to act thereon to his injury

There must be always be damage or injury in case of fraud

Fraud is every kind of deception, whether in the form of insidious machinations, manipulations, concealments, or misrepresentations, for the purpose of leading another party into error and thus executing a particular act.

Fraud produces qualified error; it induces in the other party an inexact notion of facts. The will of another is maliciously misled by means of false appearance of reality.

―Insidious words or machinations‖ include false promises; exaggeration of hopes or benefits; abuse of confidence; and fictitious names, qualifications, or authority.

Kinds of fraud: 1. dolo causante (Art. 1338) — which determines or is the essential

cause of the consent; fraud in the perfection of contract 2. dolo incidente— (Arts. 1344 & 1170) which does not have such a

decisive influence and by itself cannot cause the giving of consent, but refers only to some particular or accident of the obligation.


Dolo causante can be a ground for annulment; dolo incident cannot be a ground for annulment.

The result of fraud is error on the part of the victim.

Requisites of fraud: 1. it must have been employed by one contracting party upon the

other; 2. it must have induced the other party to enter into the contract; 3. it must have been serious; 4. and it must have resulted in damage or injury to the party seeking

annulment

1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud.

The mere fact that one of the parties has superior knowledge of the value of the property subject of the transaction does not per se constitute fraud

There is only fraud when, under the special and peculiar circumstances of each case, a legal or equitable duty is imposed upon the dominant party to reveal certain facts material to the transaction or when there is a confidential relationship between the parties

Silence or concealment, by itself, does not constitute fraud, unless there is a special duty to disclose certain facts, or unless according to good faith and the usages of commerce, the communication should be made

Thus, the innocent non-disclosure of a fact does not affect the formation of the contract or operate to discharge the parties from their agreement.

1340. The usual exaggeration in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent.

If a party is induced by such exaggerations, there may be fraud amounting to active misrepresentation

If it is within the means of the other party to investigate and he does not do so, there will be no fraud despite the exaggerations

Tolerated fraud includes minimizing the defects of the thing, exaggeration of its good qualities, and giving it qualities that it does not have. This is lawful misrepresentation known as dolus bonus. This is also called lawful astuteness.

These misrepresentations are usually encountered in fairs, markets, and almost all commercial transactions. They do not give rise to an action for damages, either because of their insignificance or because the stupidity of the victim is the real cause of his loss.

The thinking is that where the means of knowledge are at hand and equally available to both parties, one will not be heard to say that he has been deceived.

1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former’s special knowledge.

General Rule: Opinions are not regarded as representation of facts o Hence, if it turns out to be wrong, it is not considered legally deceitful

insidiously inducing a party to enter into a contract

This provision is the exception

An opinion of an expert is like a statement of fact, and if false, may be considered a fraud giving rise to annulment.

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

A contract may be annulled on the ground of vitiated consent if deceit by a third person, even without connivance or complicity with one of the contracting parties, resulted in mutual error on the part of the parties to the contract

The general rule is that the fraud employed by a third person upon one of the parties does not vitiate consent and cause the nullity of a contract.

Exception: If one of the parties is in collusion with the third person, or knows of the fraud by the third person, and he is benefited thereby, he may be considered as an accomplice to the fraud, and the contract becomes voidable.

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

Misrepresentation is inclusive of the term fraud

Practically, every fraud is a misrepresentation but not every misrepresentation is fraudulent


Misrepresentations may be made without the knowledge of its falsity and therefore completely done in good faith

o In this case, it may constitute merely an error

1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties.

Incidental fraud only obliges the person employing it to pay damages.

The fraudulent act must be serious o There must be an intention to injure and that damage or injury in fact

resulted o It must not be dolo incidente—accidental and collateral fraud—which

does not necessarily bear on the decision of the party defrauded to enter into the contract

o It must be dolo causante—which refers to the very cause why the other party entered into the contract

Fraud is serious when it is sufficient to impress, or to lead an ordinarily prudent person into error; that which cannot deceive a prudent person cannot be a ground for nullity.

Besides being serious, the fraud must be the determining cause of the contract. It must be dolo causante.

When both parties use fraud reciprocally, neither one has an action against the other; the fraud of one compensates that of the other. Neither party can ask for the annulment of the contract.

1345. Simulations of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement.

Absolute simulation—renders the contract null and void—when the parties do not intend to be bound at all by the same

The basic characteristic of this type of simulation of contract is the fact that the apparent contract is not really desired or intended to either produce legal effects or in any way alter the juridical situation of the parties

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

1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement.

Pua v. CA: where it was proven that the person who allegedly entered into the contract was not even conceived at the time the contract was executed, the SC said that the contract was definitely absolutely simulated

In absolute simulation, there is color of a contract, without any substance thereof, the parties not having any intention to be bound.

In relative simulation, the parties have an agreement which they conceal under the guise of another contract. Example: a deed of sale executed to conceal donation.

Section 2: Object of Contracts

The object of a contract is its subject matter. It is the thing, right, or service which is the subject-matter of the obligation arising from the contract.

Requisites: [CILID] 1. [C] within the commerce of man; 2. [I] not intransmissible 3. [L] must be licit, or not contrary to law, morals, good customs,

public policy, or public order; 4. [I]not an impossible thing or service; and 5. [D] it must be determinate as to its kind.

1347. All things which are not outside the commerce of men, including future things, may be the object of a contract. All rights which are not intransmissible may also be the object of contracts.

No contract may be entered into upon future inheritance except in cases expressly authorized by law.

All services which are not contrary to law, morals, good customs, public order or public policy may likewise be the object of a contract.

Any property or service can be the object of a contract provided that it is within the commerce of man

Creek—a recess or arm extending from a river and participating in the ebb and flow of the sea and is a property belonging to the public


domain which is not susceptible to private appropriation and acquisitive prescription

Future things that can be reasonably ascertained can be the object of a contract

Rights may likewise be the object of contracts provided they are transmissible

Future inheritance—any property or right not in existence or capable of determination at the time of the contract, that a person may in the future acquire by possession

Blas v. Santos: where the wife agreed to give whatever her share in the conjugal partnership property to her heirs once the husband dies, the SC said that such agreement does not involve future inheritance

o The document refers to existing properties which she will receive by operation of law on the death of her husband, because it is her share in the conjugal assets

Things which are outside the commerce of man: 1. Services which imply an absolute submission by those who render

them, sacrificing their liberty, their independence or beliefs, or disregarding in any manner the equality and dignity of persons, such as perpetual servitude or slavery;

2. Personal rights, such as marital authority, the status and capacity of a person, and honorary titles and distinctions;

3. Public offices, inherent attributes of the public authority, and political rights of individuals, such as the right of suffrage;

4. Property, while they pertain to the public dominion, such as the roads, plazas, squares, and rivers;

5. Sacred things, common things, like the air and the sea, and res nullius, as long as they have not been appropriated.

6. Even future things can be the object of contracts, as long as they have the possibility or potentiality of coming into existence.

7. The law, however, generally does not allow contracts on future inheritance. A contract entered into by a fideicommissary heir with respect to his eventual rights would be valid provided that the testator has already died. The right of a fideicommissary heir comes from the testator and not from the fiduciary.

1348. Impossible things or services cannot be the object of contracts.

One cannot be bound to do the impossible

Things are impossible when they are not susceptible of existing, or they are outside the commerce of man. Personal acts or services

impossible when they beyond the ordinary strength or power of man.

The impossibility must be actual and contemporaneous with the making of the contract, and not subsequent thereto.

The impossibility is absolute or objective when nobody can perform it; it is relative or subjective when due to the special conditions or qualifications of the debtor it cannot be performed.

The absolute or objective impossibility nullifies the contract; the relative or subjective does not.

1349. The object of every contract must be determinate as to its kind. The fact that the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new contract between the parties.

The object must be one that can be ascertained with reasonable certainty as to its kind

o Hence, a contract engaging a certain person to perform a deed, without specifying what deed it is, does not make the service determinable and is therefore void

Section 3: Cause of Contracts

The cause of the contract is the ―why of the contract,‖ the immediate and most proximate purpose of the contract, the essential reason which impels the contracting parties to enter into it and which explains and justifies the creation of the obligation through such contract.

The cause as to each party is the undertaking or prestation to be performed by the other. The object of the contract is the subject matter thereof (e.g., the land which is sold in a sales contract).

Consideration, meanwhile, is the reason, motive, or inducement by which a man is moved to bind himself by an agreement.

Requisites: 1. it must exist; 2. it must be true; and 3. it must be licit.


1350. In onerous contracts, the cause is understood to be, for each contracting party, the prestation of promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor.

Cause of the contract—the essential or more proximate purpose which the contracting parties have in view at the time of entering into the contract

o It may or may not be tangible o It can take different forms:

a. Prestation or promise of a thing or service by another b. Giving of a sum of money, an object c. Expectation of profits from a subdivision project

The contact is the law between the parties o When the words of a contract are plain and readily understandable,

there is no room for construction

Cause of contracts: 1. Onerous contract—for each contracting party, the prestation or

promise of a thing or service by the other 2. Reciprocal contracts—the obligation or promise of each party 3. Remuneratory contracts—the service or benefit which is remunerated 4. Contracts of pure beneficence—mere liberality of the benefactor o It does not involve any material thing but rather it involves only the

generosity of the benefactor

In onerous contracts, the cause need not be adequate or an exact equivalent in point of actual value, especially in dealing with objects which have a rapidly fluctuating price. There are equal considerations.

A remuneratory contract is one where a party gives something to another because of some service or benefit given or rendered by the latter to the former, where such service or benefit was not due as a legal obligation. The consideration of one is greater than the other‘s.

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

―cause‖—essential reason for the contract

―motive‖—particular reason for a contracting party which does not affect the other party and which does not preclude the existence of a different consideration

Motivation of the parties is independent from the cause of the contract and therefore does not form an essential part of it

General rule: motive or particular purpose of a party in entering into a contract does not affect the validity nor existence of the contract

o Exception: when the realization of such motive or particular purpose has been made a condition upon which the contract is made to depend

Elementary in the law of contracts is the principle that no judicial action is necessary for the annulment of a void contract

o Any such action would be merely declaratory Cause is the objective, intrinsic, and juridical reason for the existence

of the contract itself, while motive is the psychological, individual, or personal purpose of a party to the contract.

General principle--the motives of a party do not affect the validity or existence of a contract.

o Exceptions: When motive predetermines the purpose of the contract, such as:

1. When the motive of a debtor in alienating property is to defraud his creditors, the alienation is rescissible;

2. When the motive of a person in giving his consent is to avoid a threatened injury, as in the case of intimidation, the contract is voidable; and

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

1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy.

Absence of the cause, being one of the essential elements of a contract, do not create a contract as there can be no meeting of the minds

1353. The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded upon another cause which is true and lawful.

General rule: false cause stated in a contract makes the contract void

Exception: when a contract, though stating a false consideration, has in fact a real consideration, the contract is not void

o The contract is at least a relatively simulated one


1354. Although the cause is not stated in the contracts, it is presumed that it exists and is lawful, unless the debtor proves the contrary.

Unless the contrary is proved, a contract is presumed to have a good and sufficient consideration.

This presumption applies when no cause is stated in the contract.

1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence.

A valuable consideration, however small or nominal, if given or stipulated in good faith is, in the absence of fraud, sufficient

In case of lesion or inadequacy of cause: o General rule: the contract is not subject to annulment.

In cases provided by law, however, such as those mentioned in Art 1381, the lesion is a ground for rescission of the contract.

Gross inadequacy naturally suggests fraud and is evidence thereof, so that it may be sufficient to show it when taken in connection with other circumstances.

Chapter 3: Forms of Contracts

1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised.

General Rule: contracts are valid and binding from their perfection regardless of form, whether they be oral or written

o Once the 3 elements exist, the contract is generally valid and obligatory, regardless of the form, oral or written, in which they are couched

Exceptions: 1. Contracts for which the law itself requires that they be in some

particular form (writing) in order to make them valid and enforceable a. Donation of immovable property and Donations of movables worth

more than P5,000—requires to be embodied in a public instrument

b. Contracts to pay interest on loans(mutuum)—must be ―expressly stipulated in writing‖

c. Agreements contemplated by Arts. 1744, 1773, 1847 and 2134 of the New Civil Code

2. Contracts that the law requires to be proved by some writing (memorandum) of its terms—those covered by the old Statute of Frauds, now Art. 1403(2) of the Civil Code

A certain form may be prescribed by law for any of the following requisites, for:

1. Validity—non-observance renders the contract void and of no effect 2. Enforceability—non-compliance will not permit, upon the objection

of a party, the contract, although otherwise valid, to be proved or enforced by action

3. Greater efficacy or convenience or to bind third persons—if not done, would not adversely affect the validity or enforceability of the contract between the contracting parties themselves

FORM – in some kind of contracts only as contracts are generally consensual; form is a manner in which a contract is executed or manifested

Kinds of Forms: 1. Informal – may be entered into whatever form as long as there is

consent, object and cause 2. Formal – required by law to be in certain specified form such as:

a. donation of real property b. stipulation to pay interest c. transfer of large cattle d. sale of land thru agent e. contract of antichresis f. contract of partnership g. registration of chattel mortgage h. donation of personal property in excess of 5,000

3. Real – creation of real rights over immovable property must be written

1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract.


A party, who desires to have his contract reduced in the particular form required by law, can file an action to compel the other party to comply with such form

If the requirement of law is directory only and has no bearing on the validity or enforceability of the contract, the parties can enforce the contract and, at the same time, demand that it be reduced in the form required by law

1358. The following must appear in a public document:

1. Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein are governed by Arts. 1403, No. 2 and 1405

2. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains

3. The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person

4. The cession of actions or rights proceeding from an act appearing in a public document

All other contracts where the amount involved exceeds 500 pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Arts. 1403, No. 2and 1405.

Failure to put in a public or private document or writing the transactions or matters herewith will not render the agreement void or invalid

o They shall still be effective as between the parties o The requirement of this article is only for the purpose of greater

efficacy, of convenience or of binding third persons

This article nowhere provides that the absence of written form will make the agreement invalid or unenforceable

Contract of Sale—a consensual contract, which means that the sale is perfected by mere consent

o No particular form is required for its validity

Under Art. 1498, when the sale is made through a public instrument, the execution thereof is equivalent to the delivery of the thing

Delivery may either be [a] actual (real) or [b] constructive

o The delivery of a parcel of land may be done by placing the vendee in control and possession of the land (real) or by embodying the sale in a public instrument (constructive)

Chapter 4: Reformation of Instruments

1359. When, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed.

If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument but annulment of the contract.

Reformation applies only to written contracts contained in an instrument or series of instrument

o This connotes a valid contract

2 fundamental matters must be shown before reformation can be availed: o Failure to prove these two may lead to the creation of an entirely

new contract not within the contemplation of the parties 1. The instrument embodying the contract does not reveal the true

intention of the parties 2. The existence of a real and actual contract entered into by the parties

In actions for reformation, the onus probandi is upon the party who insists that the contract should be reformed

An action for reformation is in personam, not in rem, even when real estate is involved

o It is merely an equitable relief granted to the parties where through mistake or fraud, the instrument failed to express the real agreement or intention of the parties

An action for reformation can be filed within 10 years from the time the cause of action accrues, since the suit is based on a written contract

o The cause of action accrues upon the a. Knowledge of the ground for reformation, or b. From the date of the execution of the instrument embodying the

contract


if the cause or causes for reformation were already known at the time of the execution of the said instrument embodying the contract

Action for reformation may be barred by laches

An action for reformation of instrument is instituted as a special civil action for declaratory relief under the Rules of Court

o Since the purpose of an action for declaratory relief is to secure an authoritative statement of the rights and obligations of the parties for their guidance in the enforcement thereof, or compliance therewith

o It may be entertained only before the breach or violation of the law or contract to which it refers

1360. The principles of the general law on the reformation of instruments are hereby adopted insofar as they are not in conflict with the provisions of this Code. 1361. When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, said instrument may be reformed.

For mistake to be a cause for reformation, mistake must be 1. Mutual, and 2. Generally involve factual matters

Relief by way of reformation of a written agreement will not be granted unless the proof of mutual mistake is of the clearest and most satisfactory character

1362. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show their true intention, the former may ask for the reformation of the instrument.

If the mistake is unilateral and reformation is sought—it must be shown that the other party has acted fraudulently or inequitably resulting in the drafting of a document which does not correspond to the actual contract agreed upon by the parties

General Rule: mistake of law or ignorance of law is not a ground for reformation because parties must, as a rule, submit to the legal ramifications of their written contracts clearly pursuant to their true intent and meaning

1363. When one party was mistaken and the other knew or believed that the instrument did not state their real agreement, but concealed that fact from the former, the instrument may be reformed.

Mutual mistake—knowledge by one party of the other’s mistake regarding the expression of the agreement

1364. When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist, the instrument does not express the true intention of the parties, the courts may order that the instrument be reformed.

However, oversight may not be attributed to all the parties to the contract and therefore, it cannot be considered a valid reason for the reformation of the same contract

1365. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper.

In reforming instruments, courts do not make another contract for the parties

They merely inquire into the intention of the parties and, having found it, reform the written instrument (not the contract) in order that it may express the real intention of the parties

1366. There shall be no reformation in the following causes:

1. Simple donations inter vivos wherein no condition is imposed 2. Wills 3. When the real agreement is void

Any disposition in a will or an unconditional donation bequeathing or donating something is an act of liberality

o Wills and donations are gratuitous o They do not involve any meeting of the minds of the parties before

the document is even drafted

Reformation implies that there must be a prior agreement between the parties

o If such prior agreement is void, it cannot be given legal effect


1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation.

A party seeking to enforce an agreement necessarily acknowledges that the instrument embodies the contract intended by the parties

o Hence, he is estopped from filing a case for reformation alleging that the contract does not contain the true intention of the parties

1368. Reformation may be ordered at the instance of either party or his successors-in-interest, if the mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns.

Persons who are given legal standing to initiate an action for reformation:

1. If mistake is mutual—either party or his successor-in-interest 2. If the cause for reformation is some other grounds—such as fraud or

vitiated consent—the injured party or his heirs and assigns

1369. The procedure for the reformation of instruments shall be governed by rules of court to be promulgated by the Supreme Court.

Rule 63 of the 1997 New Rules of Civil Procedure o In an action for declaratory relief, any person interested under a deed,

will, contract or other written instrument, […] before the breach or violation thereof, bring an action in the appropriate RTC to determine any question of construction or validity arising, and for the declaration of his rights and duties, thereunder

o If before the final termination of the case, a breach or violation of an instrument should take place, the action may thereupon be converted into an ordinary action, and the parties shall be allowed to file such pleadings as may be necessary or proper

Summary of Chapter 4: Reformation of Contracts

REFORMATION OF CONTRACTS – remedy to conform to real intention of parties due to mistake, fraud, inequitable conduct, accident

CAUSES/GROUNDS: 1. Mutual: instrument includes something w/c should not be there or

omit what should be there a. Mutual b. Mistake of fact c. Clear and convincing proof

d. Causes failure of instrument to express true intention 2. Unilateral

a. one party was mistaken b. other either acted fraudulently or inequitably or knew but

concealed c. party in good faith may ask for reformation

3. Mistake by 3rd persons – due to ignorance, lack of skill, negligence , bad faith of drafter, clerk, typist

4. Others specified by law – to avoid frustration of true intent

Requisites for Reformation to be allowed: 1. There is a written instrument 2. There is meeting of minds 3. True intention not expressed in instrument 4. Clear and convincing proof 5. Facts put in issue in pleadings

NOTE: prescribes in 10 years from date of execution of instrument

WHEN REFORMATION NOT AVAILABLE: 1. Simple donation inter vivos 2. Wills 3. When real agreement is void 4. Estoppel when party has brought suit to enforce it

Chapter 5: Interpretation of Contracts

1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former.

Purpose of Interpretation: to be able to know the intent of the parties so that the contract can be properly implemented

Interpretation—the act of making intelligible what was before not understood, ambiguous, or not obvious

o A method by which the meaning of language is ascertained

Interpretation of Contract—the determination of the meaning attached to words written or spoken which make the contract

Reformation—remedy in equity by means which a written instrument is made or construed so as to express or conform to the real intention of the parties


Latin Maxim: o Expresso unius exclusion alterius—the mention of one thing implies the

exclusion of another thing

General Rule: the intention of the parties is reflected from the wordings of the contract, hence, the literal meaning of its stipulations shall control

o The task is to be discharged by looking to the words they used to project that intention in their contract, all the words not just a particular word or two, and words in context not words in isolation

o The title of a contract does not necessarily determine its true nature

Parties to a contract must be careful in examining the language or the wordings of their contract, and they must be diligent enough to read the same before entering into it so that no complications can arise in the future

―renewal of a contract‖—connotes the death of the old one and the birth or emergence of a new one

―extension of the period of lease‖—operated on its own force to create an additional term

o The period of lease must be construed to be for the benefit of both parties

o The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively upon the free and uncontrolled choice of the lessee between continuing the payment of the rentals or not, completely depriving the owner of any say in the matter

It is a fundamental principle that a court may not make a new contract for the parties or rewrite their contract under the guise of construction

1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered.

The reasons and surrounding circumstances behind a contract’s execution are of paramount importance to place the interpreter in the situation occupied by the parties concerned at the time of the writing

1372. However general the terms of a contract may be, they shall not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree.

Latin Maxims: o Noscitur a sociis—general and unlimited terms are restrained and limited

by particular terms that follow

o Ejusdem generis—a general term joined with a specific one will be deemed to include only things that are like, of the same genus as, the specific one

However broad may be the terms of a contract, it extends only to those things concerning which it appears the parties intended to contract

The terms employed are servants, and not masters, of an intent

They are interpreted so as to subserve, and not to subvert, such intent

1373. If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual.

Where the instrument is susceptible of 2 interpretations, one which will make it invalid and illegal and another which will make it valid and legal, the latter interpretation should be interpreted

Construction of the terms of a contract which would amount to impairment or loss of right is not favored

Conservation and preservation, not waiver, abandonment or forfeiture of a right is the rule

1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.

The various provisions of a contract must be read as a whole and not in isolation

Each provision must be related to each other in order to clearly know the total import and application of the law and so that a harmonious whole will be attained

―thus, the requirements of contract as to notice—as to the time of giving, form and manner of service thereof—must be strictly observed because in an obligation where a period is designated, it is presumed to have been established for the benefit of both the contracting parties. Thus, the unilateral termination of the contract in question by the herein petitioners is violative of the principle of mutuality of contracts‖

1375. Words which may have different significations shall be understood in that which is most in keeping with the nature and object of the contract.


1376. The usage or customs of the place shall be borne in the mind in the interpretation of the ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily established.

The office of the custom or usage is to explain the meaning of words and phrases used in a written contract and to annex thereto certain incidents which circumstances indicate the parties intended when the words used do not necessarily exclude the operation of such custom or usage but they may not be used to contradict nor vary the plain meaning of the contract

Usage may be admissible to explain what is doubtful; it is never admissible to contradict what is plain

1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.

This is based on the maxim verba accipiuntur forties contra proferentem or the rule contra proferentem which translates to ―against the profferer‖ or ―against the person who drafter or tendered the documents‖

1378. When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.

If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have been the intention or will of the parties, the contract shall be null and void.

Hence, if the object of the contract is a particular house of the seller in QC and he owns two houses in the said locality, the contract will be considered void if it cannot be determined which house is the object of the contract

1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the construction of contracts.

Rule 123 of the Rules of Court is now Rule 130 of the New Rules of Court

Kinds of Defective contracts: a. Rescissible c. Unenforceable b. Voidable d. Void or Inexistent

Chapter 6: Rescissible Contracts 1380. Contracts validly agreed upon may be rescinded in the cases established by law,

Contracts under this are valid, but may subsequently be terminated on legal grounds

Their being rescissible is not principally premised on a breach of trust by the other party, but on some economic damage as a result of inequitable conduct by one party

If the contract is in fraud of creditors, which is a ground for rescission, but it is likewise simulated in that there is absolutely no consideration, the contract is not rescissible under this chapter but clearly void ab initio

1381. The following contracts are rescissible:

1. Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than ¼ of the value of the things which are the object thereof

2. Those agreed upon in representation of absentees, if the latter suffer the lesion in the preceding number

3. Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claim due them

4. Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority

5. All other contracts specially declared by law to be subject of rescission

Lesion—implies an economic damage

Guardianship: Any act of ownership or disposition undertaken by the guardian on behalf of his ward without court approval is void

o If there is court approval, the transaction is valid whether or not there is lesion

o If the guardian performs acts of administration (e.g. repairing) and the ward suffers economic loss because there was no need to make a useless transaction, then the contract entered into by the guardian is rescissible provided that the ward suffers lesion by more than ¼ of the value of the things which are the object of the contract

Absentee: Provisional Absentee—when a person disappears from his domicile, his whereabouts being unknown, and without leaving an agent


to administer his property, the judge, at the instance of an interested party, a relative, or a friend, may appoint a person to represent him in all that may be necessary

o 2 years having elapsed without any news about the absentee or since the receipt of the last news, and 5 years in case the absentee has left a person in charge of the administration of his property, his absence may be declared by the court

The court, then, may appoint an administrator or a representative to manage the properties of the absentee

Contracts in Fraud of Creditors: contract entered into in bad faith by the parties which was purposely designed to evade the due obligations in favor of creditors who have no other way to collect their debts

o Fraud is not presumed, it must be proved by clear preponderance of evidence

o It is essential that it be shown that both contracting parties have acted maliciously and with fraud and for the purpose of prejudicing said creditors and that the latter are deprived by the transaction of all means by which they may effect collection of their claims

o All these circumstances must concur in a given case o ―in fraud of creditors‖—necessarily refers to actual creditors of the

debtor or obligee

Things under litigation: if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority

―right of first refusal‖—in the event the debtor decides to sell his property, he must first offer the same to the creditor

o A contract of sale therefore, entered into in violation of a right of first refusal of another person, while valid, is rescissible

1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were affected, are also rescissible.

―in a state of insolvency‖—a debtor whose liabilities already exceed his assets and who can barely pay off his debts

If he pays off a creditor whose credit has not yet become due, that payment can be rescinded

1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same.

A cause of action for rescission under this chapter can only be made in a proper and direct action for that purpose and not on a mere motion incidental to another case

Rescission—a relief which the law grants on the premise that the contract is valid for the protection of one of the contracting parties and third persons from all injury and damage the contract may cause, or to protect some incompatible and preferential right created by the contract

―accion pauliana‖—the action to rescind contracts made in favor of creditors, must be commenced within 4 years

Accion pauliana presupposes: 1. A judgment 2. The issuance by the trial court of a writ of execution for the

satisfaction of the judgment; and 3. The failure of the sheriff to enforce and satisfy the judgment of the

court

It requires that the creditor has exhausted the property of the debtor o The date of the decision of the trial court is immaterial o What is important is that the credit of the plaintiff antedates that of

the fraudulent alienation by the debtor of his property o After all, the decision of the trial court against the debtor will retroact

to the time when the debtor became indebted to the creditor

1384. Rescission shall be only to the extent necessary to cover the damages caused. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.


In restitution, the parties shall be placed in the same position where they were before they entered into the assailed contract

If the object of the contract cannot be restored because of loss, damages may be claimed from the person responsible for the loss

1386. Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts approved by the courts.

Once judicially approved, such contract cannot anymore be the subject of rescission

1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve the sufficient property to pay all debts contracted before the donation.

Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission.

In additions to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence. 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them.

If there are 2 or more alienations, the first acquirer shall be liable first, and so on successively.

In the event that the transferee in bad faith transfers the property to a subsequent buyer who is likewise in bad faith, the latter shall have the obligation to return said property if it is still possible to do so. If not, he shall be liable for damages

However, if such buyer is in good faith, his purchase of the property is perfectly valid, thereby making it impossible for the first transferee to return the property, in which case, such first transferee shall be liable for damages

1389. The action to claim rescission must be commenced within 4 years.

For persons under guardianship and for absentees, the period of 4 years shall not begin until the termination of the former’s incapacity, or until the domicile of the latter is known.

The prescriptive period begins to run after the aggrieved party has unsuccessfully exhausted all possible remedies to enforce the obligation or to recover what has been lost, thus:

1. For persons under guardianship—the period begins from the time the incapacity terminates and the aggrieved party has unsuccessfully exhausted all possible remedies to enforce the obligation or to recover what has been lost

2. For absentees—the period begins from the time he learns of the contract and has successfully exhausted all other remedies to be able to enforce his rights or recover what has been lost

o Domicile—the place of habitual residence o Domicile of Juridical persons—the place where their legal

representative is established or where they exercise their principal function

3. For contracts entered into in fraud of creditors—the period begins from the time of the discovery of the fraud and after he or she has unsuccessfully exhausted all possible remedies to enforce the obligation or to recover what has been lost

4. For contracts entered into with respect to things under litigation without the knowledge and approval of the litigants or of competent judicial authority—the period begins from the time of knowledge of the transaction and unsuccessfully exhausted all possible remedies to enforce the obligation or to recover what has been lost

Summary of Rescissible Contracts

RESCISSIBLE CONTRACTS – Those which have caused a particular economic damage either to one of the parties or to a 3rd person and which may be set aside even if valid. It may be set aside in whole or in part, to the extent of the damage caused REQUISITES:

I. Under art 1381: Contracts entered into by persons exercising fiduciary capacity:

1. Entered into by guardian whenever ward suffers damage by more than 1/4 of value of object


2. Agreed upon in representation of absentees, if absentee suffers lesion by more than ¼ of value of property

3. Contracts where rescission is based on fraud committed on creditor (accion pauliana)

4. Objects of litigation; contract entered into by defendant w/o knowledge or approval of litigants or judicial authority

5. Payment by an insolvent – on debts w/c are not yet due; prejudices claim of others

6. Provided for by law – arts. 1526, 1534, 1538, 1539, 1542, 1556, 1560, 1567 and 1659

II. Under art 1382 - Payments made in a state of insolvency 1. Plaintiff has no other means to obtain reparation. 2. Plaintiff must be able to return whatever he may be obliged to return

due to rescission 3. The things must not have been passed to 3rd parties who did not act

in bad faith 4. It must be made within the prescribed period (of 4 years) Obligation created by the rescission of the contract: Mutual Restitution 1. Things w/c are the objects of the contract and their fruits 2. Price with interest Mutual Restitution Not Applicable When 1. creditor did not receive anything from contract 2. thing already in possession of party in good faith; subject to

indemnity only; if there are 2 or more alienations – liability of 1st infractor

BADGES OF FRAUD 1. consideration of the conveyance is inadequate or fictitious 2. transfer was made by a debtor after a suit has been begun and while

it is pending against him 3. sale upon credit by an insolvent debtor evidence of indebtedness or

complete insolvency 4. transfer of all his property by a debtor when he is financially

embarrassed or insolvent 5. transfer made between father and son where there is present any of

the above circumstances 6. failure of the vendee to take exclusive possession of the property

Rescission in Art. 1191 Rescission in 1381 It is a principal action retaliatory in character

It is a subsidiary remedy

Only ground is non-performance There are 5 grounds to rescind.

of one‘s obligation or what is incumbent upon him

Non-performance by the other party is not important

Applies only to reciprocal obligation

Applies to both unilateral and reciprocal obligations

Only a party to the contract may demand fulfillment or seek the rescission of the contract

Even a 3rd person who is prejudiced by the contract may demand the rescission of the contract

Court may fix a period or grant extension of time for the fulfillment of the obligation

Court cannot grant extension of time for fulfillment of the obligation

Its purpose is to cancel the contract

Its purpose is to seek reparation for the damage or injury cause, thus allowing partial rescission of the contract

Chapter 7: Voidable Contracts 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties.

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, or fraud

These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification.

Ratification—any defect or infirmity causing its annullable nature can be cured by the party aggrieved or injured

The effects of an annulment operate prospectively and do not retroact to the time the contract, such as sale, was made

1391. The action for annulment shall be brought within 4 years. This period shall begin:

In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases.

In case of mistake or fraud, from the time of the discovery of the same.


And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases.

Prescriptive period—time within which an aggrieved party can file a case in court to make a claim or to assert a right or to correct a wrong

It is a rule that an extra-judicial demand by a creditor shall interrupt the running of a prescriptive period. However, this rule only applies to a determinate conduct that can be demanded.

1392. Ratification extinguishes the action to annul a voidable contract. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right.

Ratification—the act of curing the defect which made the contract annullable

There can be no ratification by a corporation of acts performed by an officer if he has not been given apparent authority by the corporation, or if his acts are not later validated by the corporation

1394. Ratification may be effected by the guardian of the incapacitated person.

Guardian—tasked with the administration of the person and properties of the ward

1395. Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment.

Ratification is a unilateral act o Generally done by the injured party and not by the party causing the

injury

1396. Ratification cleanses the contract from all its defects from the moment it was constituted. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they

contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract.

Thus, strangers to a contract cannot sue either or both of the contracting parties to annul and set aside that contract

This provision follows Art. 1311 which provides that ―contracts take effect only between the parties, their assigns and heirs […]‖

It is the existence of an interest in a particular contract that is the basis of one’s right to sue for nullification of that contract and that essential interest in a given contract is, in general, possessed only by one who is a party to the contract

Exception: when a person, who is not the party obligated principally or subsidiarily in a contract, is prejudiced in his rights with respect to one of the contracting parties

o But, it is indispensable to show the detriment which positively would result to him from the contract in which he had no intervention

o Limitation of the exception: that contract may be nullified only to the extent that such nullification is absolutely necessary to protect the plaintiff’s lawful rights

Preemptive or Redemptive Rights of a lessee—under PD 1517, this exists only in respect of the urban land under lease on which he had resided for 10 years or more

1398. An obligation having been annulled, the contracting parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law.

In obligations to render service, the value thereof shall be the basis for damages. 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him.

It must be noted that the bank cannot file a case against the minor

It can only recover by way of a counterclaim in a complaint for annulment filed by the minor when he reaches the age of majority


1400. Whenever the person obliged by the decree of annulment to return the thing can not do so because it has been lost through his fault, he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date.

When the object to be returned cannot be returned, because it was lost by the person obliged to return it due to the fault of the said person, the value of the object, its fruits and interest shall be given instead to satisfy the order of restitution

1401. The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings.

If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff.

It is a rule that no one can come to court with unclean hands

If an incapacitated person purchases a car and later he files a case to annul the contract of sale, the mere fact that the car has been lost will not abate the proceedings for annulment

o This is so because the incapacitated person is not obliged to make any restitution except when it has benefited him

However, if the incapacitated person loses the car through his own fault, then the case will be dismissed

1402. As long as one of the contracting parties does not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him.

Summary of Voidable Contracts

VOIDABLE CONTRACTS – intrinsic defect; valid until annulled; defect is due to vice of consent or legal incapacity CHARACTERISTICS: 1. Effective until set aside 2. May be assailed or attacked only in an action for that purpose 3. Can be confirmed ( NOTE: confirmation is the proper term for

curing the defect of a voidable contract)

4. Can be assailed only by the party whose consent was defective or his heirs or assigns

WHAT CONTRACTS ARE VOIDABLE: 1. Minors ( below 18 ) 2. Insane unless acted in lucid interval 3. Deaf mute who can‘t read or write 4. Persons specially disqualified: civil interdiction 5. In state of drunkenness 6. In state of hypnotic spell MISTAKE o false belief into something o REQUISITES:

1. Refers to the subject of the thing which is the object of the contract 2. Refers to the nature of the contract 3. Refers to the principal conditions in an agreement 4. Error as to person - when it is the principal consideration of the

contract 5. Error as to legal effect - when mistake is mutual and frustrates the

real purpose of parties VIOLENCE o serious or irresistible force is employed to wrest consent INTIMIDATION o one party is compelled by a reasonable and well grounded fear of an

imminent and grave danger upon person and property of himself, spouse, ascendants or descendants (moral coercion)

UNDUE INFLUENCE o person takes improper advantage of his power over will of another

depriving latter of reasonable freedom of choice o Martinez vs. Hongkong and Shanghai Bank The doctrine on reluctant consent provides that a contract is still

valid even if one of the parties entered it against his wishes or even against his better judgment. Contracts are also valid even though they are entered into by one of the parties without hope of advantage or profit.

FRAUD o thru insidious words or machinations of contracting parties, other is

induced to enter into contract w/o w/c he will not enter (dolo causante)

KINDS OF FRAUD IN THE PERFORMANCE OF OBLIGATION OR CONTRACTS


1. Causal Fraud (dolo causante) – deception of serious character without which the other party would not have entered into; contract is VOIDABLE (Art. 1338)

2. Incidental Fraud (dolo incidente) – deception which are not serious and without which the other party would still have entered into the contract; holds the guilty party liable for DAMAGES (Art. 1344)

3. Tolerated Fraud – includes minimizing the defects of the thing, exaggeration of its good have; LAWFUL misrepresentation

o NOTE: Expression of an opinion – not fraud unless made by expert and

other party relied on the former‘s special knowledge Fraud by third person – does not vitiate consent; only action for

damages except if there is collusion between one party and the third person, or resulted to substantial mistake, mutual between parties

CAUSES OF EXTINCTION OF ACTION TO ANNUL 1. PRESCRIPTION - Period to bring an action for Annulment

a. Intimidation, violence, undue influence - 4 years from time defect of consent ceases

b. Mistake, fraud – 4 years from time of discovery c. Incapacity - From time guardianship ceases

Carantes vs. CA, 76 SCRA 514, discovery of fraud must be reckoned to have taken place from the time the document was registered in the office of the register of deeds. Registration constitutes constructive notice to the whole world

2. RATIFICATION o REQUISITES

a. knowledge of reason rendering contract voidable b. such reason must have ceased, except in case of ratification

effected by the guardian to contracts entered into by an incapacitated,

c. the injured party must have executed an act which expressly or impliedly conveys an intention to waive his right

3. LOSS OF THE THING which is the object of the contract through fraud or fault of the person who is entitled to annul the contract

o NOTE: Object is lost through a fortuitous event, the contract can still be

annulled, but the person obliged to return the same can be held liable only for the value of the thing at the time of the loss, but without interest thereon.

Ratification cleanses the contract of its defects from the moment it was constituted.

Chapter 8: UNENFORCEABLE CONTRACTS

1403. The following contracts are unenforceable unless they are ratified: 1. Those entered into in the name of another person by one who has

been given no authority or legal representation, or who has acted beyond his powers

2. Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases, an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:

a. An agreement that by its terms is not to be performed within a year from the making thereof

b. A special promise to answer for the debt, default, or miscarriage of another

c. An agreement made in consideration of marriage, other than a mutual promise to marry

d. An agreement for the sale of goods, chattels or things in action, at a price not less than 500 pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action, or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum

e. An agreement for the leasing for a longer period that one (1) year, or for the sale of real property or of an interest therein

f. A representation as to the credit of a third person 3. Those where both parties are incapable of giving consent to a

contract other acts indicating partial performance


If a contract has been entered into without authority, it cannot be enforced

Non-authority is also governed by the principles of agency which are provided for in Art. 1868-1932 of the 1950 Civil Code

Instances of unenforceable contract: 1. When a contract is entered into by parties who are both incapacitated

to enter into a contract o When only one is incapacitated, the contract is voidable

2. When the contract does not comply with the Statute of Frauds

Statute mandates that for certain executor contracts to be enforceable in a court of law, the only evidence that can prove such contract is a written proof of the agreement like some notes or memoranda

Exception to the statute of frauds: existence of a written note or memorandum evidencing the contract

Memorandum—no particular form of language or instrument is necessary to constitute a memorandum or note in writing under the statute of frauds

o Any document or writing, formal or informal, written either for the purpose of furnishing evidence of the contract or for another purpose, which satisfies all requirements of the statute as to contents and signature is a sufficient memorandum or note

o May be written as well with lead pencil as with pen and ink or filled in on a printed form

o May be contained in a single document or in 2 or more papers

For 2 or more writings, their sufficiency will depend on whether, taken together, they meet the requirements of the statute as to contents and the requirements of the statute as to signature

o Paper connected—the rule is frequently applied to 2 or more, or a series of, letters or telegrams, or letters and telegrams sufficiently connected to allow their consideration together; any other documents can be read together when one refers to the other

Examples: a. Letter and an order of court b. A letter and order for goods c. A letter and a deposition d. Letters or telegrams and undelivered deeds, wills correspondence

and related papers e. A check and a letter f. A receipt and a check g. Deeds and a map

h. A memorandum of agreement and a deed i. A memorandum of sale and an abstract of title j. A memorandum of sale and a will k. A memorandum of sale and a receipt l. A contract, deed and instructions to a depository in escrow

o The statute of frauds only applies to executor contracts and not to contracts which have been consummated already or those which have been totally or partially performed

o The contract must be fully made and completed in every respect expect for the writing required by the statute, in order to be enforceable on the ground of part performance

The clearness and definiteness must extend to both the terms and the subject-matter of the contract

An oral contract, to be enforced on this ground must at least have that degree of certainty which is required of written contracts sought to be specifically enforced

o Partial performance can be manifested when improvements are made on the subject property pursuant to the contract, rentals are paid, taking possession on the basis of a verbal contract to purchase the property, payment of taxes and relinquishment of rights, tender of payment coupled with

The enumeration in Par. 2 is exclusive o 2(a)—: contracts which by their terms are not to be performed

within one year, may be taken out of the statute through performance by one party thereto

an agreement orally entered into 1987, for a person to commence the painting of a portrait in 1989, cannot be enforced unless such contract is in writing

If a contract stipulates that a certain type of activity shall be commenced within the year from the making of the contract, but can only be fully accomplished after one year from the same will fall within the Statute of Frauds

However, if a contract is entered into where one party fully completed his undertaking within one year and the other party could only finish his undertaking beyond one year, it is removed from the ambit of the Statute of Frauds

If the contract stipulates that the contract shall be executed immediately upon the signing of the agreement, although it has been reset to another date by agreement of the parties so that it


can be finished only beyond one year, the contract is not within the statute

o 2(b)—: ―special promise‖ is meant to limit the ―statutory provision to express and tacit promises in fact made and does not apply in cases where the duties are created by law without any promissory assent‖

A promise within this must have an obligation of some third person to the promisee, either already existing or subsequently existing; it must be made to the promisee and not to the debtor

This must be in the nature of a collateral or subsidiary obligation and not an original one

It is very clear that a promisor cannot be made to answer for the debt or default of another unless someone else is primarily liable to the creditor

The true test as to whether a promise is within the statute has been said to lie in the answer to the question whether the promise is an original or a collateral one:

a. ―collateral obligation‖—the promisor becomes a surety hence it falls within the statute

S promises C to answer for P’s debt, where there is an obligation which exists between P and C, S’s obligation is collateral to P’s and so within the statute unless some other factors are present

―I will see you, paid‖ or ―I will pay if he does not‖

b. ―original obligation‖—if the promisor becomes primarily liable for the payment of the debt, the promise is not within the statute

if no obligation exists between P and C, S’s promise is said to be original, not within the statute, because he cannot be answering for another’s default

‖while, as a matter of law, a promise, absolute in form, to pay or to be ―responsible‖ or to be the ―paymaster‖

In case the obligation is joint, there is no ―special promise‖

Where the promises are not in form joint but are several or joint and several, more than one obligation results. Here, the question in whose favor the consideration is to inure becomes determinative of whether the statute applies

―debt, default and miscarriages‖—includes all legal obligations which a person can come, contractual or non-contractual, requiring a money payment or any other kind of performance

o 2(c)—: ante-nuptial agreements or marriage settlements must be in writing, signed by the parties and executed before the marriage, to be enforceable. This is mandatory.

A mutual promise to marry will not fall under the statute because a breach of such promise per se is not actionable

o 2(d)—:however, if one has paid, the contract has already been partially performed and therefore it is removed from the ambit of the statute

o 2(e)—: notarization is needed only to bind third persons, and so that the proper registry of property can accept the deed or contract for registration

o 2(f)—: Art. 21 of the Civil Code provides that ―every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due and observe honesty and good faith‖

Unenforceable contracts cannot be enforced unless it is first ratified in the manner provided by law. An unenforceable contract does not produce any effect unless it is ratified. Unenforceable contracts cannot be sued upon unless ratified (Paras, 2003).

As to defectiveness, an unenforceable contract is nearer to absolute nullity than voidable or rescissible contracts.

There are 3 kinds of unenforceable contracts: a. unauthorized contracts; b. those that fail to comply with the Statute of Frauds; c. those where both parties are incapable of giving consent to a

contract.

UNAUTHORIZED CONTRACTS o When a person enters into a contract for and in the name of

another, without authority to do so, the contract does not bind the latter, unless he ratifies the same. The agent, who has entered into the contract in the name of the purported principal, but without authority from him, is liable to third persons upon the contract; it must have been the intention of the parties to bind someone, and, as the principal was not bound, the agent should be. Ex: Without my authority, my brother sold my car, in my name to X. The contract is unauthorized and cannot affect me unless I ratify the


same expressly or implicitly, as by accepting the proceeds of the sale. (Paras)

o Mere lapse of time, no matter how long, is not the ratification required by law of an unenforceable contract (Tipton v. Velasco, 6 Phil 67, as cited in Paras).

STATUTE OF FRAUDS o Meaning: descriptive of statutes which require certain classes of

contracts to be in writing. o Purpose: to prevent fraud and perjury in the enforcement of

obligations depending for their evidence upon the unassisted memory of witnesses by requiring certain enumerated contracts and transactions to be evidenced by a writing signed by the party to be charged.

o Application: This statute does not deprive the parties the right to contract with respect to matters therein involved, but merely regulates the formalities of the contract necessary to render it unenforceable. The statute of frauds, however, simply provides for the manner in which contracts under it shall be proved. It does not attempt to make such contracts invalid if not executed in writing but only makes ineffective the action for specific performance.

o The statute of frauds is not applicable to contracts which are either totally or partially performed, on the theory that there is a wide field for the commission of frauds in executory contracts which can only be prevented by requiring them to be in writing, a fact which is reduced to a minimum in executed contracts because the intention of the parties becomes apparent by their execution, and execution concludes, in most cases, the rights of the parties.

o A note or memorandum is evidence of the agreement, and is used to show the intention of the parties. No particular form of language or instrument is necessary to constitute a memorandum or note as a writing under the Statute of Frauds.

General Rules of Application (mainly Paras): 1. Applies only to executory contracts. But it is not enough for a

party to allege partial performance in order to render the Statute inapplicable; such partial performance must be duly proved, by either documentary or oral evidence;

2. Cannot apply if the action is neither for damages because of the violation of an agreement nor for the specific performance of said agreement;

3. Exclusive, i.e. it applies only to the agreements or contracts enumerated herein;

4. Defense of the Statute may be waived; 5. Personal defense, i.e. a contract infringing it cannot be assailed by

third persons; 6. Contracts infringing the Statute are not void; they are merely

unenforceable; 7. The Statute of Frauds is a rule of exclusion, i.e. oral evidence

might be relevant to the agreements enumerated therein and might therefore be admissible were it not for the fact that the law or the statute excludes oral evidence;

8. The Statute does not determine the credibility or weight of evidence. It merely concerns itself with the admissibility thereof;

9. The Statute does not apply if it is claimed that the contract does not express the true agreement of the parties. As long as true or real agreement is not covered by the Statute, it is provable by oral evidence.

THE SPECIFIC AGREEMENTS UNDER THE STATUTE OF FRAUDS

1. Performance within a year. The 'making' of an agreement, for the purpose of determining WON the period for performance brings the agreement within the Statute, means the day on which the agreement is made, and the time begins to run from the day the contract is entered into, and not from the time that performance of it is entered upon. There must be intention that the performance should not be performed within a year.

2. Guaranty of Another's Debt. Test as to whether a promise is within the Statute: lies in the answer to the question whether the promise is an original or a collateral one. If the promise is original or independent, as to when the promisor is primarily liable, it is outside the Statute. If the promise is collateral, the promise must be in writing.

3. Consideration of marriage. Applies to promises by a 3rd person to one of the parties contemplating the marriage. Thus, a promise made by the father of a prospective bride to give a gift to the prospective husband is covered by the statute.

4. Sale of personality. Price of the property must be at least P500 and covers both tangible and intangible property. The Statute will not apply where there has been part payment of the purchase price. If there is more than one item, which exceeds P500, the operation of the statute depends upon WON there is a single inseparable contract or several one. If inseparable, Statute applies. If the contract is separable, then each article is taken separately, and the


application of the statute to it depends upon its price. Meaning of ―things in action‖: incorporated or intangible personal property (Paras)

5. Lease or sale of realty. Evidence to prove an oral contract of sale of real estate must be disregarded if timely objections are made to its introduction. But the statute does not forbid oral evidence to prove a consummated sale of real property.

6. Representation as to Credit. Limited to those which operate to induce the person to whom they are made to enter into contractual relations with the 3rd person, but not those representations tending to induce action for the benefit of the person making them. The statute does not cover representations deceitfully made.

INCAPACITATED PARTIES o Ratification by one party converts the contract into a voidable

contract- voidable at the option of the party who has not ratified.

1404. Unauthorized contracts are governed by Art. 1317 and the principles of agency in Title X of this Book.

Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him.

A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party. (1259a)

Requisites for a Person to contract in the name of another: a. he must be duly authorized (expressly or impliedly) or b. he must have by law a right to represent him (like the guardian, or

the administrator) or c. the contract must be subsequently ratified (expressly or impliedly,

by word or by deed).

1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Art. 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefits under them.

The cross-examination on the contract is deemed a waiver of the defense of the Statute of Frauds because ―if the answers of those

witnesses were stricken out, the cross-examination could have no object whatsoever, and if the questions were put to the witnesses and answered by them, they could only be taken into account by connecting them with the answers given by those witnesses on direct examination‖

If A sold to G a particular real property and A benefited from the transaction by already obtaining the purchase price, the contract of sale of the real property can be enforced even if the same was not in writing

The Statute of Frauds may only be invoked in a case for violation of contracts or for specific performance

Two ways of ratification of contracts infringing the Statute are: 1. failure to object to the presentation of oral evidence; 2. acceptance of benefits under them, since the Statute does not

apply to contracts which are partially executed.

Cross examination of the witnesses testifying orally on the contract amounts to a waiver or to a failure to object.

1406. When a contract is enforceable under the Statute of Frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under Art. 1357.

When the agreements provided in Art. 1403(2) are in writing and therefore enforceable, and the law requires that the said written document should be transformed into a public document for its registration in the Registry of Property, the contracting parties may compel each other to observe the form once the contract has been perfected

Art. 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract.

The right of one party to have the other execute the public document needed for convenience in registration, is given only when the contract is both valid and enforceable.

1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated.


If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception.

Under par. 2, the contract shall be completely valid as if it has not been visited by any defect or infirmity at all

Retroactivity of the ratified contract

1408. Unenforceable contracts cannot be assailed by third persons.

The defense of the Statute is personal to the party to the agreement. Thus, it cannot be set up by strangers to the agreement.

Just as strangers cannot attack the validity of voidable contracts, so also can they not attack a contract because of its unenforceability. Indeed the Statute of Frauds cannot be set up as a defense by strangers to the transaction. (Ayson v. CA, 97 Phil. 965).

Summary of Unenforceable Contract:

UNENFORCEABLE CONTRACT – valid but cannot compel its execution unless ratified; extrinsic defect; produce legal effects only after ratified

KINDS/VARIETIES: 1. Unauthorized/No sufficient authority – entered into in the name of

another when: a. no authority conferred b. in excess of authority conferred ( ultra vires ) Note: Curable by RATIFICATION

2. Both parties incapable of giving consent -2 minor or 2 insane persons

Note: Curable by ACKNOWLEDGEMENT 3. Failure to comply with Statute of Frauds

a. Agreement to be performed within a year after making contract b. Special promise to answer for debt, default or miscarriage of

another c. Agreement made in consideration of promise to marry d. Agreement for sale of goods, chattels or things in action at price

not less than 500; exception: auction when recorded sale in sales book

e. Agreement for lease of property for more than 1 year & sale of real property regardless of price

f. Representation as to credit of another

2 WAYS OF CURING UNENFORCEABLE CONTRACTS: 1. Failure of defendant to object in time, to the presentation of parole

evidence in court, the defect of unenforceability is cured 2. Acceptance of benefits under the contract. If there is performance

in either part and there is acceptance of performance, it takes it out of unenforceable contracts; also estoppel sets in by accepting performance, the defect is waived

Chapter 9: VOID AND INEXISTENT CONTRACTS

1409. The following contracts are inexistent and void from the beginning:

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

2. Those which are absolutely simulated or fictitious 3. Those whose cause or object did not exist at the time of the

transaction 4. Those whose object is outside the commerce of men 5. Those which contemplate an impossible service 6. Those where the intention of the parties relative to the principal

object of the contract cannot be ascertained 7. Those expressly prohibited or declared void by law

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.

A contract which is void is no contract at all o The defect in a void contract is permanent and incurable o A void agreement will not be rendered operative by the parties’ alleged

partial or full performance of their respective prestations o A void contract can never be confirmed nor ratified; neither can the

infirmity be cured by equity

In determining a public policy of the State, courts are limited to a consideration of the Constitution, the judicial decisions, the statutes, and the practice of government officers

Courts of justice will not recognize or uphold a transaction which in its object, operation, or tendency, is calculated to be prejudicial to the public welfare, to sound morality or to civic honesty


In order to declare a contract void as against public policy, a court must find that the contract as to consideration or the thing to be done, contravenes some established interest of society, or is inconsistent with sound policy and good morals or tends clearly to undermine the security of individual rights

Good customs—those generally accepted principles of morality which have received some kind of social and practical confirmation

1410. The action or defense for declaration of the inexistence of a contract does not prescribe.

There is no need to judicially file an action to make the contract void

A case is filed merely to declare that the contract, which is already void, is in fact void

The filing of a case to declare the nullity of a void contract or to set up such a defense is imprescriptible

1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to disposal of effects of instruments of a crime shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise.

The law will not aid either party to an illegal agreement 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be governed:

1. When the fault on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other’s undertaking

2. When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply with his promise

Certificate of public convenience—a special privilege conferred by the government

―kabit system‖ is invariably recognized as being contrary to public policy, and, therefore, void and inexistent

1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of the payment.

―interest paid in excess of the interest allowed by the usury laws‖—contemplates the whole amount of the interest

In a loan of P1,000, with interest of 20% per annum or P200 per year, if the borrower pays said P200, the whole P200 is the usurious interest, not just that part thereof in excess of the interest allowed by law

1414. When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one of the parties before the purpose has been accomplished, or before any damage has been caused to a third person. In such case, the courts may, if the public interest will thus be subserved, allow the party repudiating the contract to recover the money or property. 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so demands, allow recovery of money or property delivered by the incapacitated person.

This provision is another exception to the in pari delicto rule

This is, however, within the discretion of the court 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered.


1417. When the price of any article or commodity is determined by statute, or by authority of law, any person paying any amount in excess of the maximum price allowed may recover such excess. 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of labor; and a contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand additional compensation for service rendered beyond the time limit.

This provision is designed to prevent exploitation of employees or laborers

Overtime pay is now regulated by the Labor Code of the Philippines 1419. When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.

If a void provision in a contract directly affects the entirety of the contract, the contract can be considered void

If the provision is independently separable from other provisions, such provision alone shall be considered void

1421. The defense of illegality of contract is not available to third persons whose interests are not directly affected.

GR: there can only be mutuality of obligations in a contract which affects the parties involved therein

Exception: if a third person is greatly prejudiced as his interest is directly affected, he may file a case for the nullification of a contract or set the same as a defense even if such prejudiced person is not a party to the void contract

1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent.

Title 3 NATURAL OBLIGATIONS

1423. Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof. Some natural obligations are set forth in the following articles.

There is a moral but not a legal duty to perform or pay, but the person thus performing or paying feels that in good conscience he should comply with his undertaking which is based on moral grounds

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

Example: if a debtor, despite the lapse of the prescriptive period and knowing that the debt had already prescribed, pays the creditor, such debtor can no longer recover such payment

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

Example: debt has already prescribed but, M, a third person, pays the debt, and later on, the original debtor pays M, such payment shall be considered valid and original debtor cannot recover such amount from the creditor on the ground that M should not have paid him

1426. When a minor between eighteen and twenty-one years of age who has entered into a contract without the consent of the parent or guardian, after the annulment of the contract voluntarily returns the whole thing or price received, notwithstanding the fact the he has not been benefited thereby, there is no right to demand the thing or price thus returned.


1427. When a minor between eighteen and twenty-one years of age, who has entered into a contract without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith. (1160A) 1428. When, after an action to enforce a civil obligation has failed the defendant voluntarily performs the obligation, he cannot demand the return of what he has delivered or the payment of the value of the service he has rendered.

Example: A is indebted to B for P1000 and a civil suit is filed to collect the amount but such was dismissed, A need not pay but, if he voluntarily makes payment, he can no longer recover such payment

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

Example: A is indebted to B for P10000. A later dies, with M as his heir who is entitled only to P500 from the estate of A. if M voluntarily pays X P10000, M can no longer recover such amount

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

Example: M provided in his will that his car shall go to X. Later, the will turns out to be void due to non-compliance of the prescribed form. If, despite the nullity of the will, M’s heir still voluntarily gives the legacy of the car to X, it shall be valid and cannot be revoked anymore

Title 4: ESTOPPEL

1431. Through estoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon.

Doctrine of estoppel—having its origin in equity its applicability to any particular case depends, to a very large extent, upon the special circumstances of the case

Estoppel must be determined after carefully considering the material facts of the case lest injustice may result

Estoppel—characterized as harsh and odious, and not favored in law o When misapplied, estoppels becomes a most effective weapon to

accomplish an injustice, inasmuch as it shuts a man’s mouth from speaking the truth and debars the truth in a particular case

o This cannot be sustained by mere argument or doubtful inference o It must be clearly proved in all its essential elements by clear,

convincing and satisfactory evidence o It applies to questions of fact only, not of law, or about the truth of

which the other party is ignorant

Non-applicability of Estoppel o not applicable against the government suing in its capacity as

sovereign or asserting governmental rights o government cannot be estopped by the mistake and errors of its

officers o does not apply if a law or public policy will be violated

1432. The principles of estoppel are hereby adopted insofar as they are not in conflict with the provisions of this Code, the Code of Commerce, the Rules of Court and Special laws. 1433. Estoppel may be in pais or by deed.

Estoppel by deed—a bar which precludes one party to a deed and his privies from asserting as against the other party and his privies any right or title in derogation of the deed, or from denying the truth of any material facts asserted in it

o It is technical in nature and such an estoppel may conclude a party without reference to the moral equities of his conduct

o Where estoppel by deed arises, it is generally limited to an action on the deed itself; in a collateral action, there is ordinarily no estoppel

o Requisites: 1. There must have been a representation or concealment of material

facts 2. The representation must have been with knowledge of the facts


3. The party to whom it was made must have been ignorant of the truth of the matter

4. It must have been made with the intention that the other party would act upon it

Equitable estoppel—estoppel in pais—a term applied usually to a situation where, because of something which he has done or omitted to do, a party is denied the right to plead or prove an otherwise important fact

o Requisites: 1. Conduct amounting to false representation or concealment of

material facts or at least calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert

2. Intent, or at least expectation that this conduct shall be acted upon, or at least influenced by the other party

3. Knowledge, actual or constructive, of the actual facts

Prescription: actions to declare the inexistence of contracts do not prescribe

Laches Prescription

Concerned with the effect of the delay

Concerned with the fact of delay

A question of inequity of permitting a claim to be enforced

A matter of time

Statutory

Equity Applies at law

Based on fixed time

Requisites of Laches: 5. Conduct on the defendant giving rise to the situation of which

complaint is made and for which the complaint seeks a remedy 6. Delay in asserting the complainant’s rights, the complainant having

knowledge or notice of the defendant’s conduct and having been afforded an opportunity to institute a suit

7. Lack of knowledge or notice on the part of the defendant that the complainant would assert the right on which he bases his suit

8. Injury or prejudice to the defendant in the event relief is accorded to the complainant or the suit is not held barred

1434. When a person who is not the owner of a thing sells or alienates and delivers it, and later the seller or grantor acquires title thereto, such title passes by operation of law to the buyer or grantee. 1435. If a person in representation of another sells or alienates a thing, the former cannot subsequently set up his own title as against the buyer or grantee.

A constituted B as his agent to sell a car and he car was in fact sold by B, A cannot later on claim that he was the owner to invalidate the transaction

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

For the reason that they are not the owner and that they only has peaceful possession of the thing

1437. When in a contract between third persons concerning immovable property, one of them is misled by a person with respect to the ownership or real right over the real estate, the latter is precluded from asserting his legal title or interest therein, provided all these requisites are present: 1. There must be fraudulent representation or wrongful concealment

of facts known to the party estopped 2. The party precluded must intend that the other should act upon the

facts as misrepresented 3. The party misled must have been unaware of the true facts 4. The party defrauded must have acted in accordance with the

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

Pledge—constituted by the absolute owner of the thing pledged to secure the fulfillment of a principal obligation


1439. Estoppel is effective only as between the parties thereto or their successors-in-interest.

An equitable estoppel must be mutual and reciprocal

Mutuality being requisite, an estoppel operates neither in favor of, nor against, strangers—that is, persons who are neither parties nor privies to the transaction out of which the estoppel arose

Title 5: TRUSTS

What is a trust? o Trust is a legal relationship between one person having an

equitable ownership in property and another person owning the legal title to such property, the equitable ownership of the former entitling him to the performance of certain duties and the exercise of certain powers by the latter

o It is the right to beneficial enjoyment of property, the legal title of which is vested in another. It is a fiduciary relationship concerning property which obliges the person holding it to deal with the property for the benefit of another

Characteristics of a Trust a. It is a fiduciary relationship. b. Created by law or agreement. c. Where the legal title is held by one, the equitable title or beneficial

title is held by another.

Trust distinguished from Guardianship or Executorship: o In a trust, the trustee or holder has LEGAL title to the property. o A guardian, administrator or executor does not have.

Trust distinguished from a Stipulation Pour Autrui o A trust may exist because of a legal provision or because of an

agreement; a stipulation pour autrui can arise only in the case of contracts.

o A trust refers to specific property; a stipulation pour autrui refers to a specific property or to other things.

Co-Ownership as Trust o A Co-Ownership is a form of trust, with each co-owner being a

trustee for each of the others.

DO TRUSTS PRESCRIBE? o Express trusts DO NOT. Implied Trusts—resulting trusts do not

prescribe but constructive trusts do prescribe

o This article applies whether it is real or personal property. Even if it is oral evidence, said evidence must be trustworthy oral evidence, for oral evidence may be easily fabricated.

Chapter 1: General Provisions

1440. A person who establishes a trust is called the trustor; one in whom confidence is reposed as regards property for the benefit of another person is known as the trustee; and the person for whose benefit the trust has been created is referred to as the beneficiary.

Trustor—a person who establishes a trust

Trustee—a person in whom confidence is reposed as regards property for the benefit of another person

Beneficiary—a person for whose benefit the trust has been created

1441. Trusts are either express or implied. Express trusts are created by the intention of the trustor or of the parties. Implied trusts come into being by operation of law.

Trust—right enforceable solely in equity, to the beneficial enjoyment of property, the legal title to which is bested in another

o Frequently employed to indicate duties, relations and responsibilities which are not strictly technical trusts

Express trusts—those which are created by the direct and positive acts of the parties, by some writing or deed, or will, or by words either expressly or impliedly evincing an intention to create a trust

o The intention to establish a trust is clear

Implied trusts—those which, without being expressed, are deducible from the nature of the transaction as matters of intent, or which are superinduced on the transaction by operation of law as matters of equity, independently of the particular intention of the parties

o The intent to establish a trust is to be taken from circumstances or other matters indicative of such intent

o Usually subdivided into resulting and constructive trusts a. Resulting trust—a trust which is raised or created by the act or

construction of law

A trust raised by implication of law and presumed always to have been contemplated by the parties, the intention as to which is to be found in the nature of their transaction, but not expressed in the deed or instrument of conveyance


The rule of imprescriptibility of the action to recover property held in trust, under this kind, may be applied as long as the trustee has not repudiated the trust

b. Constructive trust—a trust raised by construction of law, or arising by operation of law

a trust not created by words but by the construction of equity in order to satisfy the demands of justice

not a trust in the technical sense

The prescriptibility of an action, under this, for reconveyance is now settled

Rules applied on express trust because under Sec. 38 of Art. 190 provides that the law of prescription does not apply ―in the case of a continuing and subsisting trust‖:

a. A trustee cannot acquire by prescription the ownership of property entrusted to him

b. There is no prescription on an action to compel a trustee to convey property registered in his name in trust for the benefit of the cestui que trust

c. No prescription in an action to recover property held by a person in trust for the benefit of another

d. Property held in trust can be recovered by the beneficiary regardless of the lapse of time

Acquisitive prescription may bar the action of the beneficiary against the trustee in an express trust for the recovery of the property held in trust where:

a. The trustee has performed inequivocal acts of repudiation amounting to an ouster of the cestui que trust

b. Such positive acts of repudiation have been made known to the cestui que trust

c. The evidence thereon is clear and conclusive

Prescription may supervene in an implied trust

Whether the trust is resulting or constructive, its enforcement may be barred by laches

An action for reconveyance of registered land based on an implied trust may be barred by laches

o The prescriptive period for such is 10 years from the date the right of action accrued

1442. The principles of the general law of trusts, insofar as they are not in conflict with this Code, the Code of Commerce, the Rules of Court and Special laws are hereby adopted.

Summary of Chapter 1

Parties to a Trust 1. trustor or settler –he establishes the trust (may at the same time be

the beneficiary) 2. trustee –hold the property in trust for the benefit of another 3. beneficiary or cestui que trust –the person for whose benefit the trust

has been created.

Elements of a Trust: 1. parties to the trust 2. trust property or the trust estate or the subject matter of the trust.

Note: cf this with the ratio of the Mindanao Development Authority v. CA & Ang Bansing case below

1. Express Trusts—created by the parties, or by intention of the trustor

2. Implied Trusts—created by operation of the law; two kinds a. Resulting trust (also bare or passive trusts)—there is intent to

create a trust but it is not effective as an express trust (cf Art. 1451).

b. Constructive Trust—no intention to create a trust is present, but a trust is nevertheless created by law to prevent unjust enrichment

The law of trusts has been much more frequently applied in England and in the US than in Spain, so we may draw freely from American precedents in determining the effects of trusts.

Chapter 2: Express Trusts

1443. No express trusts concerning an immovable or any interest therein may be proved by parol evidence.

Parol evidence—refers to oral evidence

To prove an express trust over immovable properties or any interest therein, there must always be a showing of some document proving the same

A trust may be proven by clear, satisfactory, and convincing evidence


1444. No particular words are required for the creation of an express trust, it being sufficient that a trust is clearly intended.

For as long as the intention to establish a trust is very clear from the proofs, whether by some writing or deed or will or by words, an express trust is created

1445. No trust shall fail because the trustee appointed declines the designation, unless the contrary should appear in the instrument constituting the trust.

In case of refusal to accept the trust by the trustee, the court will appoint a trustee

But, if the appointment of the trustee is a material provision, the trustor can provide that a refusal of the trustee to accept the trust shall result in the failure or nullification of the same

1446. Acceptance by the beneficiary is necessary. Nevertheless, if the trust imposes no onerous condition upon the beneficiary, his acceptance shall be presumed, if there is no proof to the contrary.

Trust property is designed to benefit a cestui que trust or a beneficiary

Onerous condition—one which the beneficiary is required to perform to make the trust effective or is one which should be done for as long as the trust exists

If there is no onerous condition, it is in sense an act of gratuity or liberality and therefore acceptance of the beneficiary shall be presumed

Summary of Express Trusts

Formalities Re Express Trusts: 1. Express trusts are to be written for enforceability and not for

validity as to between the parties; hence, by analogy, can be included under the Statute of Frauds.

2. By implication, since the article applies to immovable property only, trust over personal property on oral agreement is valid and enforceable between the parties.

3. 3rd Persons—trust must be made in a public instrument and REGISTERED in the Registry of Property, if it concerns Real Property.

How an Express Trust is Created: 1. By conveyance to the trustee by an act inter vivos or mortis causa

(as in a will).

2. By admission of the trustee that he holds the property, only as a trustee.

3. Clear Intent—there must be a clear intention to create a trust. 4. Capacity—The trustor must be capacitated to convey property

(hence, a minor cannot create an express or conventional trust of any kind).

5. Administration of the trust. The trustee must: a. File a bond b. Make an inventory of the real and personal property in trust c. Manage and dispose of the estate and faithfully discharge his

trust in relation thereto, according to the law or terms of the trust as long as they are legal and possible.

d. Render a true and clear account. e. Not acquire property held in trust by prescription as long as the

trust is admitted.

Effect if Trustee Declines

The trust ordinarily continues even if the trustee declines. Why? The Court will appoint a new trustee unless otherwise provided for in the trust instrument (Sec. 3, Rule 98, Rules of Court). A new trustee has to be appointed; otherwise the trust will not exist.

Beneficiary necessarily has to accept either expressly, impliedly or presumably. Acceptance is presumed if the granting of benefit is purely gratuitous (no onerous condition).

How Express Trusts are ended: 1. Mutual agreement by all parties. 2. Expiration of the Term 3. Fulfillment of the resolutory condition 4. Rescission or annulment 5. Loss of subject matter of the trust 6. Order of the court 7. Merger 8. Accomplishment of the purpose of the trust.

Chapter 3: Implied Trusts

1447. The enumeration of the following cases of implied trust does not exclude other established by the general law of trust, but the limitation laid down in Art. 1442 shall be applicable.

Constructive trust—trust ex maleficio, a trust ex delicto, a trust de son tort, an involuntary trust, or an implied trust—a trust be operation of law


which arises contrary to intention and in invitum, against one who, by fraud, actual or constructive, by duress or abuse of confidence, by commission of wrong, or by any form of unconscionable conduct, artifice, concealment or questionable means, or who in any way against equity and good conscience, either has obtained or holds the legal right to property which he ought not, in equity or good conscience, hold and enjoy

A constructive trust is substantially an appropriate remedy against unjust enrichment

1448. There is an implied trust when property is sold, and the legal estate is granted to one party but the price is paid by another for the purpose of having the beneficial interest of the property. The former is the trustee, while the latter is the beneficiary. However, if the person to whom the title is conveyed is a child, legitimate or illegitimate, of the one paying the price of the sale, no trust is implied by law, it being disputably presumed that there is a gift in favor of the child. 1449. There is also an implied trust when a donation is made to a person but it appears that although the legal estate is transmitted to the done, he nevertheless is either to have no beneficial interest or only a part thereof.

M donated a lot and the apartment on it to N. However, despite the donation, M was still to get all the rentals of the apartment. This is an implied trust where the trustee is the done and the beneficiary is the donor

1450. if the price of a sale of property is loaned or paid by one person for the benefit of another and the conveyance is made to the lender or payor to secure the payment of the debt, a trust arises by operation of law in favor of the person to whom the money is loaned or for whom it is paid. The latter may redeem the property and compel a conveyance thereof to him.

A wants to buy the property of Z. X made the payment using his own money to benefit A. The money was a loan to A. The property was placed under the name of X to have an assurance that the debt of A can be paid. In this case, the trustee is the lender. A can later redeem the

property by paying X. Thereafter, A can compel X to convey the property

1451. When land passes by succession to any person and he causes the legal title to be put in the name of another, a trust is established by implication of law for the benefit of the true owner.

B is the only compulsory heir of M who dies. After the payment of debt of M, the net estate will go to B. However, if B causes the title to the estate to be placed in the name of Z, an implied trust is created for the benefit of B

1452. If two or more persons agree to purchase property and by common consent the legal title is taken in the name of one of them for the benefit of all, a trust is created by force of law in favor of the others in proportion to the interest of each. 1453. When property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to another or the grantor; there is an implied trust in favor of the person whose benefit is contemplated.

A told B that the property sold should be in his name because he shall only hold it for the benefit of X, the real owner

1454. If an absolute conveyance of property is made in order to secure the performance of an obligation of the grantor toward the grantee, a trust by virtue of law is established. If the fulfillment of the obligation is offered by the grantor when it becomes due, he may demand the reconveyance of the property to him.

M is indebted to N. A property was conveyed to N by M to secure such indebtedness. N holds the property only in trust for M. Upon payment of the debt, M can demand that the property be returned to his name

1455. When any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the purchase of property and causes the conveyance to be made to him or to a third person, a trust is established by operation of law in favor of the person to whom the funds belong.

B is the trustee of N’s funds for the benefit of Z. B, using the trust fund, purchased a property and placed it under his name or under the name of


X. A trust is created and the trustee is either B or X, and the trust is in favor of Z.

1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes.

T fraudulently made X sign an alleged loan agreement which actually turned out to be an absolute sale of X’s property. The sale is voidable and a trust is deemed created by force of law. The trustee is T and therefore is merely holding the property for the benefit of X.

1457. An implied trust may be proved by oral evidence.

Because it is deducible from the nature of the transactions as matters of intent or which are superinduced on the transaction by operation of law, independently of the particular intention of the parties.

Summary of Implied Trusts

Trusts are recognized only if they are not in conflict with the Civil Code, Code of Commerce, Rules of Court and Special Laws.

This is a resulting trust because a trust is intended. o Example: A buys a piece of land from B. A pays the price so that he (A)

may have the beneficial interest in the land BUT the legal title is given to C. C is the trustee and A is the beneficiary.

This is again a resulting trust where the donee becomes the trustee of the real beneficiary.

o Example: A donated land to B. But it was agreed that B is supposed to have

only 1/3 of the products of said land. There is a trust here and B is the trustee.

This is a constructive trust, the reason of the law being to prevent unjust enrichment.

o Example: A wants to buy land from B but A has no money. So A asks C to

pay for the land. The land is then given in C‘s name. This is supposed to be C‘s security until the debt of A is paid. Here, an implied trust is created. C is a trustee and the beneficiary is A. When A has the money, he may redeem the property from C and compel a conveyance to A.

o NOTE: This is not the same as mortgage. Mortgage is when A borrows money from C and A later buys land in his own name. A then executes a mortgage on the land in favor of C. This is not an implied trust.

Trust Receipts o Partakes of a nature of a conditional sale…the importer being the

absolute owner of the imported merchandise as soon as he has paid its price; until the owner or the person who advanced payment has been paid in full, or if the merchandise has already been sold, the proceeds turned over to him, the ownership continues to be vested in such person.‖

o This is a resulting trust for a trust is intended. Example:

A inherited a piece of land from his father, but A caused the legal title to be put in the name of X, a brother. Here a trust is impliedly established, with X as trustee and A as beneficiary.

o This is a resulting trust in view of the intent to create a trust. Example:

A group of Chinese wanted to buy a lot with a house on it to be used a clubhouse. The name of the property was registered under only one of them. The registered owner leased the property, collected rents and when asked for accounting, refused to on account that he was the owner. Nope, he is a mere trustee and is therefore obliged render proper accounting. The beneficiaries are all members of the club.

o This is a resulting trust in view of the owner‘s intention to create a trust.

Example:

A bought from B a parcel of land and it was conveyed to A on A‘s statement or declaration that he would hold it in behalf of C. Here, A is merely a trustee and C is the beneficiary.

o This is a constructive trust the purpose of the law to prevent unjust enrichment to the prejudice of the true owner.

Example:

A owe‘s B. To guarantee his debt, A sold her parcel of land to B. Here, a trust is created. If A pays his debt when it becomes due, A may demand the resale of property to her.

o This is a constructive trust and this article applies to any trustee, guardian or persons holding a fiduciary relationship (eg, an agent).

Example:


An agent using his principal‘s money purchases land in his own name. He also registers it under his name. Here, he will only be considered a trustee and the principal is the beneficiary. The principal can bring an action for conveyance of the property to himself, so long as the rights of innocent third persons are not adversely affected.

o This is a constructive trust. Example:

A was given a car by B although it should have been given to C. A is considered merely a trustee of the car for the benefit of C.

NOTE: The mistake referred to in this article is one made by a third person, not one who is a party to the contract. If made by any of the parties, then no trust is created.

Title 17: EXTRA-CONTRACTUAL OBLIGATIONS

Chapter 1: Quasi-Contracts

2142. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of another.

A quasi-contract is not an implied contract

A juridical relation is created so that nobody shall enrich himself at the expense of another

2143. The provisions for quasi-contracts in this Chapter do not exclude other quasi-contracts which may come within the purview of the preceding article.

Two obligations treated in the chapter devoted to quasi-contracts: 1. The obligation incident to the officious management of the affairs of

other persons (gestion de negocios ajenos) 2. The recovery of what has been improperly paid (cobro de lo indebido)

However, the number of quasi-contracts is not only confined in these two but may be indefinite as may be the number of lawful acts, the generation of the said obligation

Section 1: Negotiorum Gestio

2144. Whoever voluntarily takes charge of the agency or management of the business or property of another, without any power from the latter, is obliged to continue the same until the termination of the affair and its incidents, or to require the person concerned to substitute him, if the owner is in a position to do so. This juridical relation does not arise in either of these instances:

1. When the property or business is not neglected or abandoned 2. If in fact the manager has been tacitly authorized by the owner

In the first case, the provisions of Arts. 1317, 1403(1), and 1404 regarding unauthorized contracts shall govern.

In the second case, the rules on agency in Title X of this Book shall be applicable.

Negotiorum gestio is a quasi-contract which should not be performed for profit

Circumstances under which one may undertake to carry out a business matter for another (gestion de negocios ajenos):

1. They relate to determined things or affairs, and that there be no administrator or representative of the owner who is charged with the management thereof

2. That it be foreign to all idea of express or tacit mandate on the part of the owner, for it very often may happen even without his knowledge

3. That the actor be inspired by the beneficent idea of averting losses and damages to the owner or to the interested party through abandonment of the things that belong to him or of the business in which he may be interested, that is, the administration is not for profit

2145. The officious manager shall perform his duties with all diligence of a good father of a family, and pay the damages which through his fault or negligence may be suffered by the owner of the property or business under management.

The courts may, however, increase or moderate the indemnity according to the circumstances of each case.

An officious manages is in a sense an intruder in the business or the property of the owner


However, if his intrusion is with the objective of preserving, managing and taking care of the property without any intent to gain, a quasi-contract is created

2146. If the officious manager delegates to another person all or some of his duties, he shall be liable for the acts of the delegate, without prejudice to the direct obligation of the latter toward the owner of the business.

The responsibility of two or more officious managers shall be solidary, unless the management was assumed to save the thing or business from imminent danger. 2147. The officious manager shall be liable for any fortuitous event:

1. If he undertakes risky operations which the owner was not accustomed to embark upon

2. If he has preferred his own interest to that of the owner 3. If he fails to return the property or business after demand by the

owner 4. If he assumed the management in bad faith

First case—: the business is simply providing a warehouse for dolls, the officious manager stored highly inflammable materials

Second case—: same business, but the officious manager also stored some of his goods in the warehouse. During flood, he chose to save his goods first before that of the owner, the officious manager will be liable for the loss

2148. Except when the management was assumed to save the property or business from imminent danger, the officious manager shall be liable for fortuitous events:

1. If he is manifestly unfit to carry on the management 2. If by his intervention, he prevented a more competent person

taking up the management 2149. The ratification of the management by the owner of the business produces the effects of an express agency, even if the business may not have been successful.

Ratification—the owner agrees to whatever the officious manager has done

2150. Although the officious management may not have been expressly ratified, the owner of the property or business who enjoys the advantages of the same shall be liable for obligations incurred in his interest, and shall reimburse the officious manager for the necessary and useful expenses for the damages which the latter may have suffered in the performance of his duties.

The same obligation shall be incumbent upon him when the management had for its purpose the prevention of an imminent and manifest loss, although no benefit may have been derived. 2151. Even though the owner did not derive any benefit and there has been no imminent and manifest danger to the property or business, the owner is liable as under the first paragraph of the preceding article, provided:

1. The officious manager has acted in good faith, and 2. The property or business is intact, ready to be returned to the

owner 2152. The officious manager is personally liable for contracts which he has entered into with third persons, even though he acted in the name of the owner and third persons. These provisions shall not apply:

1. If the owner has expressly or tacitly ratified the management, or 2. When the contract refers to things pertaining to the owner of the

business 2152. The management is extinguished:

1. When the owner repudiates it or puts an end thereto 2. When the officious manager withdraws from the management,

subject to the provisions of Art. 2144 3. By the death, civil interdiction, insanity or insolvency of the owner

or the officious manager


Section 2: Solutio Indebiti

2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises.

Requisites: 1. That he who paid was not under obligation to do so 2. That payment was made by reason of an essential mistake of fact

Principles of equity cannot be applied if there is a provision of law specifically applicable to a case

2155. Payment by reason of a mistake in the construction or application of a doubtful or difficult question of law may come within the scope of the preceding article.

Genelal Rule: Solution indebiti involves only a mistake of fact

Exception: a mistake of law is required if the mistake is brought about by the construction or application if a doubtful or difficult question of law

Voluntariness is incompatible with protest and mistake

2156. If the payer was in doubt whether the debt was due, he may recover if he proves that it was not due. 2157. The responsibility of two or more payees, when there has been payment of what is not due, is solidary. 2158. When the property delivered or money paid belongs to a third person, the payee shall comply with the provisions of Art. 1984.

Art. 1984. The depositary cannot demand that the depositor prove his ownership of the thing deposited. Nevertheless, should he discover that the thing has been stolen and who its true owner is, he must advise the latter of the deposit. If the owner, in spite of such information, does not claim it within the period of one month, the depositary shall be relieved of all responsibility by returning the thing deposited to the depositor. If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor, the former may return the same.

2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of money is involved, or shall be liable for fruits received or which should have been received if the thing produces fruits.

He shall furthermore be answerable for any loss or impairment of the thing from any cause, and for damages to the person who delivered the thing, until it is recovered.

If the creditor knows that payment is not yet due, yet he accepted such without informing the debtor that it is not yet due, he is therefore in bad faith and shall be liable for interest from the time he accepts payment up to the time he returns it upon demand of the debtor

2160. He who in good faith accepts an undue payment of a thing certain and determinate shall only be responsible for the impairment or loss of the same or its accessories and accessions insofar as he has thereby been benefited. If he has alienated it, he shall return the price or assign the action to collect the sum.

A is obliged to give B a house on Dec. 1. Believing it was due on July, A delivered the house. B likewise did not know that the house is only due on Dec. 1 and accepted it. On Sept., the house was rented but the kitchen was accidentally burned. On Nov., A discovered that the delivery was not yet due and demanded for its return. B can return the house and pay the amount of the kitchen which has been impaired, because B has been benefited by the house when it had been rented

2161. As regards the reimbursement for improvements and expenses incurred by him who unduly received the thing, the provisions of Title V of Book II shall govern. 2162. He shall be exempt from the obligation to restore who, believing in good faith that the payment was being made of a legitimate and subsisting claim, destroyed the document, or allowed the action to prescribe, or gave up the pledges, or cancelled the guaranties for his right. He who paid unduly may proceed only against the true debtor or the guarantors with regard to whom the action is still effective.


2163. It is presumed that there was a mistake in the payment if something which had never been due or had already been paid was delivered; but he from whom the return is claimed may prove that the delivery was made out of liberality or for any other just cause.

The person to whom the payment has been made can show that such payment is a gift or a donation by showing the proper evidence like a valid deed of donation

Section 3: Other Quasi-Contracts

2164. When, without the knowledge of the person obliged to give support, it is given by a stranger, the latter shall have a right to claim the same from the former, unless it appears that he gave it out of piety and without intention of being repaid.

This is under Art. 206 of the Family Code: o When, without the knowledge of the person obliged to give support, it

is given by a stranger, the latter shall have a right to claim the same from the former, unless it appears that he gave it without the intention of being reimbursed

For one to recover under this, it must be alleged and proved that 1. Support has been furnished a dependent of one bound to give support

but who fails to do so 2. The support was supplied by a stranger 3. The support was given without the knowledge of the person charged

with the duty

2165. When funeral expenses are borne by a third person, without the knowledge of those relatives who were obliged to give support to the deceased, said relatives shall reimburse the third person, should the latter claim reimbursement.

The following are obliged to support each other: 1. Spouses 2. Legitimate ascendants and descendants 3. Parents and their legitimate children, and the legitimate and illegitimate

children of the latter 4. Parents and their illegitimate children, and the legitimate and

illegitimate children of the latter 5. Legitimate brothers and sisters, whether full or half-blood

Whenever 2 or more persons are obliged to give support, the liability shall devolve upon the following persons in the following order:

1. Spouses 2. Descendants in the nearest degree 3. Ascendants in the nearest degree 4. Brothers and sisters

2166. When the person obliged to support an orphan, or an insane or other indigent person unjustly refuses to give support to the latter, any third person may furnish support to the needy individual, with right of reimbursement from the person obliged to give support. The provisions of this article apply when the father or mother of a child under eighteen years of age unjustly refuses to support him.

This has been adopted by Art. 207 of the Family Code o When the person obliged to support another unjustly refuses or fails

to give support when urgently needed by the latter, any third person may furnish support to the needy individual with a right of reimbursement from the person obliged to give support. This article shall apply particularly when the father or the mother of a child under the age of majority unjustly refuses to support or fails to give support to the child when urgently needed

2167. When through an accident or other cause a person is injured or becomes seriously ill, and he is treated or helped while he is not in a condition to give consent to a contract, he shall be liable to pay for the services of the physician or other person aiding him, unless the service has been rendered out of pure generosity. 2168. When during a fire, flood, storm, or other calamity, property is saved from destruction by another person without the knowledge of the owner, the latter is bound to pay the former just compensation. 2169. When the government, upon the failure of any person to comply with health or safety regulations concerning property, undertakes to do the necessary work, even over his objection, he shall be liable to pay the expenses.


2170. When by accident or other fortuitous event, movables separately pertaining to two or more persons are commingled or confused, the rules on co-ownership shall be applicable. 2171. The rights and obligations of the finder of lost personal property shall be governed by Arts. 719 and 720.

Art. 719. Whoever finds a movable, which is not treasure, must return it to its previous possessor.

Art. 720. If the owner should appear in time, he shall be obliged to pay, as a reward to the finder, 1/10 of the sum or of the price of the thing found

2172. The right of every possessor in good faith to reimbursement for necessary and useful expenses is governed by Article 546. 2173. When a third person, without the knowledge of the debtor, pays the debt, the rights of the former are governed by Articles 1236 and 1237.

Art. 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor.

Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty or penalty.

2174. When in a small community, a majority of the inhabitants of age decide upon a measure for protection against lawlessness, fire, flood, storm or other calamity, any one who objects to the plan and refuses to contribute to the expenses but is benefited by the project as executed shall be liable to pay his share of said expenses. 2175. Any person who is constrained to pay the taxes of another shall be entitled to reimbursement from the latter.

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