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REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

RFBT1-Obligation and Contracts

LECTURE NOTES

OBLIGATION which he received by will or by the law of intestacy from


the estate of the deceased, the payment is valid and
OBLIGATION – originate from the latin word obligatio, means cannot be rescinded by the payer. (1429)
tying or binding.  When a will is declared void because it has not been
executed in accordance with the formalities required by
Civil obligations - is a juridical necessity to give, to do or law, but one of the intestate heirs, after the settlement
not to do. It give a right of action to compel their of the debts of the deceased, pays a legacy in
performance compliance with a clause in the defective will, the
 Juridical necessity to give, to do or not to do (1156) payment is effective and irrevocable. (1430)
 Right of action to compel their performance
 Right to enforce the obligation against the obligor in a Sources of obligation (1157)
court of law in case of breach 1. Law (obligation ex lege)– Not presumed (1158)
a. Law
ELEMENTS: - Taxes, duty of husband and wife to support family,
1. Active subject (obligee/creditor/lender/plaintiff/he who minimum wage, workmen compensation act.
has the right ) – the one in whose favor the obligation is b. Quasi contract (obligation ex quasi contractu)
constituted (Chapter 1, Title XVII) – juridical relation resulting
2. Passive subject - obligor/debtor/borrower/defendant/he from lawful, voluntary and unilateral act to the
who has the obligation) – the one who has the duty of end that no one shall be unjustly enriched or
giving, doing or not doing benefited at the expense of another.
3. Object – prestation; the conduct which has to be Rule: No meeting of the mind hence consent of the
observed by the debtor/obligor parties is not required. It is quasi contract not an
4. Vinculum Juris/ juridical tie /legal tie/ causa/ causa implied contract.
debendi/ causa obligations – This arise form law, 1. Nominate quasi contract
contract, quasi contract, delict and quasi delict. a. Solutio indebiti – Something is received
when there is no right to demand it, and it
Natural obligations - not being based on positive law but was unduly delivered thru mistake, the
on equity and natural law, do not grant a right of action to recipient has the duty to return it.
enforce their performance, but after voluntary fulfillment by b. Negotiorum gestio – When a person
the obligor, they authorize the retention of what has been voluntary takes charge of another’s
delivered or rendered by reason thereof. (Art. 1423) abandoned business or property without the
 Based on equity and natural law owner’s authority where reimbursement
 Duty not to recover what has voluntary been paid must be made for necessary and useful
although payment was no longer required. expenses.
 Basic understanding of right and wrong based on an Requisites:
understanding of a right and wrong. a.) Property or business is abandoned or
 Based on conscience neglected
b.) The manager is unauthorized (express or
Illustration of Natural obligation implied)
 When a right to sue upon a civil obligation has lapsed by c.) The unauthorized manger voluntary take
extinctive prescription, the obligor who voluntarily charge the abandoned property.
performs the contract cannot recover what he has 2. Innominate quasi contract
delivered or the value of the service he has rendered. Art. 2164. When, without the knowledge of the
(1424) person obliged to give support, it is given by a
 When without the knowledge or against the will of the stranger, the latter shall have a right to claim the
debtor, a third person pays a debt which the obligor is same from the former, unless it appears that he
not legally bound to pay because the action thereon has gave it out of piety and without intention of
prescribed, but the debtor later voluntarily reimburses being repaid.
the third person, the obligor cannot recover what he has Art. 2165. When funeral expenses are borne by
paid. (1425) a third person, without the knowledge of those
 When a minor between eighteen and twenty-one years relatives who were obliged to give support to the
of age who has entered into a contract without the deceased, said relatives shall reimburse the third
consent of the parent or guardian, after the annulment person, should the latter claim reimbursement.
of the contract voluntarily returns the whole thing or Art. 2166. When the person obliged to support
price received, notwithstanding the fact the he has not an orphan, or an insane or other indigent person
been benefited thereby, there is no right to demand the unjustly refuses to give support to the latter, any
thing or price thus returned. (1426) third person may furnish support to the needy
 When a minor between eighteen and twenty-one years individual, with right of reimbursement from the
of age, who has entered into a contract without the person obliged to give support. The provisions of
consent of the parent or guardian, voluntarily pays a this article apply when the father or mother of a
sum of money or delivers a fungible thing in fulfillment of child under eighteen years of age unjustly
the obligation, there shall be no right to recover the refuses to support him.
same from the obligee who has spent or consumed it in Art. 2167. When through an accident or other
good faith. (1427) cause a person is injured or becomes seriously
 When, after an action to enforce a civil obligation has ill, and he is treated or helped while he is not in
failed the defendant voluntarily performs the obligation, a condition to give consent to a contract, he shall
he cannot demand the return of what he has delivered or be liable to pay for the services of the physician
the payment of the value of the service he has rendered. or other person aiding him, unless the service
(1428) has been rendered out of pure generosity.
 When a testate or intestate heir voluntarily pays a debt Art. 2168. When during a fire, flood, storm, or
of the decedent exceeding the value of the property other calamity, property is saved from

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destruction by another person without the b) There must be damage or injury
knowledge of the owner, the latter is bound to c) There must be a direct relation of cause and
pay the former just compensation. effect between the fault or negligence on the one
Art. 2169. When the government, upon the hand and the damage or injury on the other
failure of any person to comply with health or hand ( proximate cause )
safety regulations concerning property,
undertakes to do the necessary work, even over  Culpa aquiliana (not synonymous with tort)
his objection, he shall be liable to pay the Obligation expressly arising from Quasi delict
expenses. 1. The father and, in case of his death or
Art. 2170. When by accident or other fortuitous incapacity, the mother, are responsible for the
event, movables separately pertaining to two or damages caused by the minor children who live
more persons are commingled or confused, the in their company.
rules on co-ownership shall be applicable. 2. Guardians are liable for damages caused by the
Art. 2171. The rights and obligations of the minors or incapacitated persons who are under
finder of lost personal property shall be governed their authority and live in their company.
by articles 719 and 720. 3. The owners and managers of an establishment or
Art. 2172. The right of every possessor in good enterprise are likewise responsible for damages
faith to reimbursement for necessary and useful caused by their employees in the service of the
expenses is governed by article 546. branches in which the latter are employed or on
Art. 2173. When a third person, without the the occasion of their functions.
knowledge of the debtor, pays the debt, the 4. Employers shall be liable for the damages caused
rights of the former are governed by articles by their employees and household helpers acting
1236 and 1237. within the scope of their assigned tasks, even
Art. 2174. When in a small community a though the former are not engaged in any
nationality of the inhabitants of age decide upon business or industry.
a measure for protection against lawlessness, 5. The State is responsible when it acts through a
fire, flood, storm or other calamity, anyone who special agent; but not when the damage has
objects to the plan and refuses to contribute to been caused by the official to whom the task
the expenses but is benefited by the project as done properly pertains.
executed shall be liable to pay his share of said 6. Teachers or heads of establishments of arts and
expenses. trades shall be liable for damages caused by
Art. 2175. Any person who is constrained to pay their pupils and students or apprentices, so long
the taxes of another shall be entitled to as they remain in their custody.
reimbursement from the latter.  The possessor of an animal or whoever may
make use of the same is responsible for the
c. Delict (obligation ex maleficio or delicto) damage which it may cause, although it may
Governing rules: escape or be lost. This responsibility shall cease
1. Pertinent provisions of the RPC and other penal only in case the damage should come from force
laws subject to Art 2177 Civil Code. majeure or from the fault of the person who has
 Art 100, RPC – Every person criminally liable suffered damage. (2183)
for a felony is also civilly liable 
2. Chapter 2, Preliminary title, on Human Relations 2. Contract (obligation ex contractus) – Meeting of mind
( Civil Code ) between two (2) person whereby one binds himself with
3. Title 18 of Book IV of the Civil Code – on respect to another to give something or render some
damages service. (1306) It has a force of law between the
contracting party and must be complied with n good faith
Civil liability arising from crime includes: (1159)
1. Restitution – The thing itself must be returned or
restored. Kinds of obligation according to subject matter
2. Reparation - The court shall determine the 1. Real obligation
amount of damage, taking into consideration the a. Specific or determinate object – particularly
price of the thing, whenever possible, and its designated or physically segregated from all
special sentimental value to the injured party others of the same class.
3. Indemnification - Indemnification for Loss of the object without fault of debtor –
consequential damages shall include not only obligation extinguish
those caused the injured party, but also those b. Generic or indeterminate – Thing refers to a
suffered by his family or by a third person by class, to a genus and cannot be pointed out with
reason of the crime. particularity.
Loss of the object without fault of the debtor –
Effect of acquittal in criminal case: Obligation remain. Genus nunquam perit
 when acquittal is due to reasonable doubt – no (Generic never perishes)
civil liability 2. Personal obligation
 when acquittal is due to exempting a. Positive personal obligation (to do)
circumstances – there is civil liability b. Negative personal obligation (not to do)
 when there is preponderance of evidence – there
is civil liability Duty of debtor to deliver specific thing
1. Preserve the thing (1163)
d. Quasi delict (obligation ex quasi maleficio or quasi Rule: Diligence of good father of a family (ordinary
delicto) (Chapter 2, Title XVII and special law) – Act diligence)
or omission causes damage to another, there being Except:
fault or negligence, is obliged to pay for the damage a. Law (ex: common carrier)
done there being no pre existing contractual relation b. Stipulation
between the parties. 2. Deliver the fruits (1164)
Elements:  Natural fruit – Spontaneous product of the soil, and
a) There must be fault or negligence attributable to the young and other products of animals. (No human
the person charged intervention)

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 Industrial fruit - Produce by lands of any kind
through cultivation or labor. FRAUD NEGLIGENCE
 Civil fruit – Rents of building, price of lease of lands
There is deliberate There is no deliberate intent to
and other property and the amount of perpetual or
intent to cause cause damage.
life annuities or other similar income.
damage.
Liability cannot be Liability may be mitigated.
Rule: The creditor has the right to the fruits of the thing
mitigated.
from the time the thing to deliver arises.
Waiver for future Waiver for future negligence may
Exception: Obligation to deliver the fruits arises from:
fraud is void. be allowed in certain cases:
a. Suspensive condition – fulfillment of the condition
a) gross – can never be excused
b. Suspensive period – arrival of the period
in advance; against public
c. Arise from law, quasi contract, delict, quasi delict –
policy
provision of law
b) simple – may be excused in
3. Deliver of accessions and accessories (1166)
certain cases
 Accessions - fruits of a thing/ addition/ improvement
upon a thing. (i.e. House/trees on a land)
 Accessories – thing joined with the principal for III. Delay (mora)
embellishment, better use or completion (i.e. Key of a. Ordinary delay – Failure to pay on the period
house, bracelet of a watch) fixed by the parties without demand judicial or
4. Deliver the thing itself extrajudicial
 Actual b. Legal delay – Failure to pay after demand by the
 Constructive creditor (judicial/extrajudicial)
a. Traditio symbolica – delivery of key 1. Mora solvendi - Delay of debtor
b. Traditio brevi manu – A possessor of a thing not 1.1 Mora solvendi ex re – Debtor delay/default
as an owner, becomes the possessor as owner in real obligation
(i.e. Lessor sells the thing leased to the lessee) 1.2 Mora solvendi ex persona – Debtor
c. Taditio longa manu – mere consent or delay/default in personal obligation
agreement of the parties. (pointing out the 2. Mora accipiendi – – default on part of creditor;
object) Creditor is guilty of default when he
d. Traditio constitutum possessorium – A possessor unjustifiably refuses to accept payment or
of a thing as an owner retains possession no performance at the time
longer as an owner, but in some other capacity. payment/performance can be done
This is the opposite of tradition brevi manu. (i.e. 3. Compensatio morae – both parties (debtor and
A possessor vendor stay as tenant on the creditor) are in default (in reciprocal
vendee) obligations); the effect: is as if there is no
e. Execution of a public instrument
Elements of legal delay:
Rule: (1) The obligation must be due, enforceable and already
a. Before delivery of the thing – Creditor has personal liquidated or determinate in amount
right (jus in personam or jus ad rem). (1164) (2) There must be non-performance
b. Creditor acquires real right (jus in re) only at the (3) There must be a demand, unless demand is not
time of delivery. required

5. Damages in case of breach Effects of legal delay:


With the fault of the debtor (1170) a. if determinate thing - debtor bears risk of loss (even
I. Fraud (dolo) when there is fortuitous event)
a. Dolo causante - (consent is defective – b. debtor liable for damages/interest
voidable) c. resolution (Art 1170, in proper cases)
b. Dolo incidente (fraud in performance –
damages) Rule: No demand (judicial or extrajudicial) no delay
Period (1169)
a. Future fraud – Responsibility arising from Exception:
fraud is demandable in all obligation. Any 1. Law
waiver of an action for future fraud is void. 2. Stipulation
(1171) same rule in case of negligence which 3. Time is of the essence
shows bad faith. (1173) 4. Demand would be useless
b. Past fraud – can be waive 5. Performance of one party in case of reciprocal
II. Negligence (culpa) – Omission of diligence obligation
required by the nature of the obligation and IV. Contravention of tenor of obligation
corresponds with circumstances of the person,
time and place. (1173) It is also demandable in
every kind of obligation but such liability may be Without the fault of the debtor
regulated by the courts according to the Requisites of fortuitous event (Nakpil & Sons vs. CA):
circumstances. (1172) 1. The cause of the breach of the obligation must be
a. Culpa contractual – performance of the independent of the will of the debtor
contract 2. The event must be either unforeseeable or
b. Culpa criminal – Result from criminal act unavoidable
c. Culpa aquiliana – No pre existing contract 3. The event must be such as to render it impossible for
the debtor to fulfill his obligation in a normal manner
Degree of Culpa under the Roman Law are as follows: 4. The debtor must be free from any participation in, or
1.) Culpa lata – grave negligence aggravation of injury to the creditor
2.) Culpa levis – ordinary negligence
3.) Culpa levissima – slight negligence Rule: Not liable in case of Fortuitous event (1174)
Exception:
FRAUD DISTINGUISHED FROM NEGLIGENCE 1. Law
a. Delay

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b. Promised to deliver the same thing to 2 or property right has been invaded. (Damages awarded to
more person who do not have the same vindicate a right)
interest 4. Temperate – More than nominal but less than actual.
c. Lost of generic thing Awarded when some pecuniary loss have been suffered
d. Obligation arising from crime but its amount can not, from the nature of the case be
2. Stipulation proved with certainty. (Exact amount of damage cannot
3. Assumption of risk be ascertained)
5. Actual or compensatory – value of loss suffered but also
Duty of debtor (Generic thing) include profits which the creditor failed to obtain.
1. Deliver the thing based on quality intended by the Pecuniary loss must be duly proved.
parties. 6. Liquidated – those agreed upon by the parties to a
2. Damages in case of breach contract to be paid in case of breach.(Damage
predetermined before hand)
Duty of debtor to do (Positive personal obligation)
 If a person obliged to do something fails to do it, the  Usurious transaction shall be governed by special law.
same shall be executed at his cost. (1175)
This same rule shall be observed if he does it in  Presumption (1176)
contravention of the tenor of the obligation. a. Receipt of principal without reservation as to interest
Furthermore, it may be decreed that what has been - interest is already paid
poorly done be undone. (1167) b. Receipt of a later installment of debt without
reservation as to prior installment – later installment
Duty of debtor not to do (Positive personal obligation) have been paid.
 When the obligation consists in not doing, and the
obligor does what has been forbidden him, it shall REMEDIES OF CREDITORS - generally transmissible
also be undone at his expense. (1168) (except: law, stipulation, personal obligation):
1. Exact performance - specific, substitute, equivalent
3 kinds of Performance: 2. Attach and execute debtor's property which is not
1. SPECIFIC PERFORMANCE - performance of the exempt (art 2236)
prestation itself 3. Accion subrogatoria - Exercise all rights and actions
2. SUBSTITUTE PERFORMANCE - someone else performs except those inherent in the person (parental
or something else is performed at the expense of debtor authority, hold office, carry out agency
3. EQUIVALENT PERFORMANCE - damages Requisites:
a. Creditor must have right of return against debtor
Real Obligations to do b. The debt is due and demandable
Remedies Obligation (Personal c. There is a failure of the debtor to collect his own
Obligation) debt from 3rd persons either through malice or
Sp Gene To do Not to do negligence
eci ric d. Debtor's assets are insufficient
fic e. The right of account is not purely personal
SPECIFIC undo the 4. Accion pauliana - (impugn or rescind acts or
PERFORMANCE Y Y NO things contracts done by the debtor to defraud the
already creditors.
done Requisites:
EQUIVALENT Can only a. There is a credit in favor of plaintiff
PERFORMANCE Y Y be Y b. The debtor has performed an act subsequent to
demande the contract, giving advantage to other persons
d if c. The creditor is prejudiced by the debtor's act
obligatio which are in favor of 3rd parties and rescission
n is not will benefit the creditor
very d. The creditor has no other legal remedy
personal e. The debtor's acts are fraudulent
SUBSTITUTE Undo the
 All right by virtue of obligation are transmissible (1178)
PERFORMANCE N Y Y things
Exception: Law and stipulation
already
done at Primary classification of obligation under the civil
debtor's Code
expense 1. Pure –without condition and period
RESCISSION/  Immediately demandable
CANCELLATION Y Y Y 2. Conditional
a.) effect
Damages (MENTAL)  Suspensive – give rise to obligation
1. Moral – Include physical suffering, mental anguish,  Resolutory – extinguish the obligation
fright, serious anxiety, besmirched reputation, wounded b.) Form
feelings, moral shock, social humiliation and similar  Express – clearly stated
injury.  Implied – merely inferred
2. Exemplary or corrective – imposed by way of example or c.) Possibility
correction for the public good. It may be awarded if the  Possible – capable of fulfillment
defendant acted in a wanton, fraudulent, reckless,  Impossible (1183)
oppressive or malevolent manner. (bad faith). a. Physically impossible – Nature of the thing
3. Nominal – Adjudicated in order that a right of the b. Legally impossible – contrary to law, moral, good
plaintiff, which has been violated or invaded by the customs, public order or public policy
defendant, may be vindicated or recognized and not for d.) Cause or origin
the purpose of indemnifying the plaintiff for any loss  Potestatiive - depend upon will of one of the
suffered by him. Awarded in every case where any contracting parties (debtor/creditor) (1182)

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 Casual – depend upon chance or will of a third a. First infractor shall be equitably tempered.
person b. If cannot determined the first infractor –
 Mixed – partly upon chance and partly upon will Obligation extinguish and each shall bear own
of third person damages.
e.) Mode
 Positive – performance Art. 1189. When the conditions have been imposed
 Negative – omission with the intention of suspending the efficacy of an
f.) Numbers obligation to give, the following rules shall be
 Conjunctive – several conditions, all must be observed in case of the improvement, loss or
complied with deterioration of the thing during the pendency of the
 Disjunctive – several conditions, one or some condition:
must be complied with (1) If the thing is lost without the fault of the
g.) Divisibility debtor, the obligation shall be extinguished;
 Divisible – susceptible of partial performance (2) If the thing is lost through the fault of the
 Indivisible – not susceptible of partial debtor, he shall be obliged to pay damages; it is
performance understood that the thing is lost when it perishes, or
goes out of commerce, or disappears in such a way
Conditional obligation that its existence is unknown or it cannot be
 Future and uncertain event or past event unknown to recovered;
parties (1179) (3) When the thing deteriorates without the fault
 Resolutory condition immediately demandable of the debtor, the impairment is to be borne by the
 When the debtor binds himself to pay when his creditor;
means permit him to do so, the obligation shall be (4) If it deteriorates through the fault of the
deemed to be one with a period. (1180) debtor, the creditor may choose between the
 Acquisition or extinguishment of obligation depend rescission of the obligation and its fulfillment, with
upon the happening of the condition (1181) indemnity for damages in either case;
 Positive condition + determinate time = extinguish (5) If the thing is improved by its nature, or by
as soon as the time expire or become indubitable time, the improvement shall inure to the benefit of
that the event will not take place (1184) the creditor;
 Negative condition + determinate time = Effective (6) If it is improved at the expense of the
form the time indicated elapsed or evident that event debtor, he shall have no other right than that
cannot occur. (1185) granted to the usufructuary.
 Constructive fulfillment - The condition shall be
deemed fulfilled when the obligor voluntarily 3. With a period - Future and certain. If uncertain it is
prevents its fulfillment. (1186) conditional. (1193)
 Retroactivity of the conditional obligation. (1187) a.) Effect
a. Reciprocal – fruit and interest deemed mutually 1. Suspensive (Ex die) – arrival- give rise to
compensated obligation. Before arrival of the period no right to
b. Unilateral – Debtor appropriate the fruits an demand. (1193)
interest except Nature and circumstances of  Payment before arrival of the period
obligation the intention of the person constituting (Payment made by mistake), the debtor is
the same was different. unaware of the period – may recover with
c. Obligation to do or not to do – court shall the fruits and interests. (1195)
determine the retroactivity.  Loss, deterioration, improvement before
 Before condition is fulfilled (1188) arrival of the period. Apply Art 1189.
c. Creditor bring action for the preservation of 2. Resolutory (In diem) – arrival- extinguish the
his right obligation. The obligation is immediately
d. Debtor may recover payment by mistake demandable.
 Loss, deterioration, improvement before condition is b.) Source
fulfilled 1. Legal – provided by law
2. Conventional/voluntary – by agreement
Without fault With fault 3. Judicial – fixed by the court
(Debtor) (Debtor) c.) Definiteness
Loss Extinguish Damages 1. Definite – fixed or known when it will come
Deterioration Impairment borne Rescission or 2. Indefinite – not fixed or not known when it will
by the creditor fulfillment + come.
damages
General Rule: The court is not authorized to fix a period:
Nature or Time Expense of the (Reason: The court cannot make a contract for the
debtor parties)
Improvement Benefit of the Right only of a Exception: Court authorizes to fix the period. (1197)
creditor usufruct a.) No period fixed but period was intended (nature and
 Condition for purpose of extinguishing obligation circumstances)
(resolutory) – return to each other what they have b.) Period depend upon the sole will of the debtor.
received. In case of loss, deterioration or
improvement – same rule above to the party bound  Court shall determine such period as probably
to return (1190) contemplated by the parties. Once fixed by the
 Power to rescind is implied in reciprocal obligation in courts, the period cannot change by them. (by the
case one of the obligor should not comply with what court not party)
is incumbent upon him. (1191)
a. Injured party may choose fulfillment or General Rule:
Rescission + damages. Whenever period is designated, it is presumed for the
b. Court decree the rescission unless there is just benefit of both creditor and debtor except when
cause authorizing the fixing of a period. expressly provided otherwise. (1196)
 Both parties committed a breach(1192) Hence, neither the creditor can demand performance nor
the debtor pay before arrival of the period.

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(4) if all is lost due to fortuitous event, obligation is
Exception: extinguished
The debtor shall lose every right to make use of the (5) if all is lost due to creditor's fault, the obligation
period: (1198) Hence, immediately demandable. is extinguished
1. When after the obligation has been contracted, he
becomes insolvent, unless he gives a guaranty or Summary: Rule on loss
security for the debt; 1. Debtor choice – Last item lost
2. When he does not furnish to the creditor the 2. Creditor’s choice - Any item lost through the fault of the
guaranties or securities which he has promised; debtor
3. When by his own acts he has impaired said
guaranties or securities after their establishment, Art. 1205. When the choice has been expressly given to the
and when through a fortuitous event they disappear, creditor, the obligation shall cease to be alternative from the
unless he immediately gives new ones equally day when the selection has been communicated to the
satisfactory; debtor.
4. When the debtor violates any undertaking, in Until then the responsibility of the debtor shall be governed
consideration of which the creditor agreed to the by the following rules:
period; (1) If one of the things is lost through a fortuitous event,
5. When the debtor attempts to abscond. he shall perform the obligation by delivering that which
the creditor should choose from among the remainder,
4. Alternative obligation or that which remains if only one subsists;
a. Simple – only one prestation is due (2) If the loss of one of the things occurs through the fault
b. Compound of the debtor, the creditor may claim any of those
1. Conjunctive – Several prestation and all are due subsisting, or the price of that which, through the fault
2. Distributive – 2 or more prestation is due of the former, has disappeared, with a right to
a. Alternative – several prestation are due but damages;
performance of one is sufficient. (3) If all the things are lost through the fault of the debtor,
b. Facultative – Only one is due but debtor may the choice by the creditor shall fall upon the price of
substitute any one of them, also with indemnity for damages.
The same rules shall be applied to obligations to do or not to
Gen rule: Right of choice belong to the debtor (1200) do in case one, some or all of the prestations should become
except when expressly grated to the creditor. impossible. (1136a)

Limitation on the right of choice: 5. Facultative - When only one prestation has been agreed
a. Impossible upon, but the obligor may render another in substitution
b. Unlawful (1206)
c. Not the object of obligation Before substitution
d. Only one is practicable (1202). In this case the  Loss of the object without fault – not liable
debtor loss the right of choice and the alternative  Loss of the object with fault of the debtor - Liable
obligation is converted into a simple obligation.
 Loss/deterioration of the substitute with or without
 Choice produces no effect except from the time it fault of the debtor – Not liable
has been communicated. (1201)
 Communication of choice convert alternative After substitution
obligation to a simple obligation. (1205)  Loss of the object with or without fault – not liable
 Creditor fault , the debtor cannot make a choice =  Loss of the substitute with fault – liable
rescind the contract + damages (1203)  Loss of the substitute without fault – not liable
 All object loss – Debtor is liable for damages (last
object) Rule:
 Right of choice always to debtor
Right of choice: General rule: right of choice belongs to  Only one prestation is due but the debtor may
debtor substitute
a. The choice is with debtor
(1) If only 1 is left either because of fortuitous DISTINCTIONS BETWEEN ALTERNATIVE AND
events or due to debtor's acts, perform what is FACULTATIVE OBLIGATIONS
left. The effect is that the debtor loses the right ALTERNATIVE FACULTATIVE
of choice a) Various things are due a) Only one thing is due but
(2) if the choice is limited because of the creditor's but the giving a substitute may be given
acts, the debtor has the right of resolution and principally of one is to render
damages sufficient payment/fulfillment easy
(3) if all are lost due to debtor, the creditor is b) If one of prestations is b) If principal obligations is
entitled to damages illegal, others may be void and there is no
(4) if some are lost, the debtor can choose from the valid but obligation necessity of giving the
remaining remains substitute; nullity of P
carries with it nullity of S
b. The choice is with creditor c) If it is impossible to give c) If it is impossible to
(1) if one or some are lost due to fortuitous event, all except one, the last one give the principal, the
the creditor chooses the remainder must still be given substitute does not
(2) if one or some is lost because of the fault of have to be given; if it is
debtor, the creditor may choose either the impossible to give the
remainder or the value of any which substitute, the principal
disappeared, and damages in either case must still be given
(3) if all is lost due to the debtor's fault, the creditor d) Right to choose may be d) The right of choice is
may choose the value of any if some is lost due given either to debtor or given only to the debtor
to debtor's fault, the creditor chooses the creditor
remainder

Page 6 of 18 RFBT1
6. Joint /Solidary to be jointly and severally liable thereon. (Sec 17, g, Act
a.) Individual – one debtor and one creditor 2031)
b.) Collective – Two or more debtor and two or more 5. Joint payees or joint indorsees who indorse are deemed
creditor to indorse jointly and severally. (Sec 68, Act 2031)
1. Joint – 2or more debt/credit as there are
debtor/creditor (mancomunada, Kinds of solidarity
mancomunadamente, pro rata, proportionately, 1. Parties bound
We promise to pay signed by 2 or more person) a. Passive solidarity – Debtor
2. Solidary - Each debtor/creditor is bound to b. Active solidarity – Creditor
pay/right to demand payment the entire c. Mixed solidarity – both creditor and debtor
compliance of the obligation ( Joint and/or 2. Source
severally, solidaria, in solidum, juntos o a. Conventional – by agreement
separademente, Individually and/or collectively, b. Legal solidarity – imposed by law
I promise to pay signed by 2 or more persons, c. Real solidarity – nature of the obligation
each will pay the whole value) 3. Legal tie
a. Uniform – bound by the same stipulation
Gen Rule: Joint obligation b. Non-uniform or varied – not subject to the same
Exception: stipulation
a. Law
b. Stipulation Invisibility vs solidarity
c. Nature of obligation requires solidarity (real 1. Prestation vs. juridical tie or legal tie
solidarity) 2. Debtor guilty of breach is only liable vs. all debtor
are liable
Solidarity imposed by law (under the New Civil Code) 3. Exist even only 1 debtor and 1 creditor vs. at least 2
1. 2 or more heirs take possession of the estate - loss or debtor/creditor
destruction of a thing devised or bequeathed, even 4. Other debtor not liable in case of insolvency of one
though only one of them should have been negligent. debtor vs. other debtor are proportionately liable
(Art. 927)
2. Death or injury is due to the negligence of a fellow Solidarity creditor
worker, the latter and the employer shall be solidarily  Can do useful to but not prejudicial to other solidary
liable for compensation. (Art. 1712) creditor
3. The collapse of building or structure within fifteen years  Cannot assign without the consent of the other
(15) from completion of the structure, the engineer or solidary creditor
architect who supervises the construction shall be  Novation, compensation, confusion or remission by
solidarily liable with the contractor. (Art 1723) solidary creditor extinguish the obligation but liable
4. Any wrongful act or omission of any partner acting in the to the other solidary creditor
ordinary course of the business of the partnership or  Debtor may pay any one of the solidary creditor.
with the authority of co-partners, loss or injury is caused Except when one of the solidary creditor demand
to any person. (Art. 1822 and 1824 judicial or extrajudicial payment must be made to
5. Partner received money or property from 3rd person and him.
misapplies it or Partnership receives money or property
of a 3rd person and such property was misapplied by any Solidary debtor
partner while in partnership custody. (Art 1823 and  Creditor can proceed to any solidary debtor as long
1824) as the debt has not been fully collected
6. Even when the agent has exceeded his authority, the  Payment by one of solidary debtor extinguishes the
principal is solidarily liable with the agent if the former obligation. If 2 or more debtor offers, the creditor
allowed the latter to act as though he had full powers. may choose which offer to accept.
(Art. 1911)  Solidary debtor who pay, may claim from his co-
7. Two or more persons have appointed an agent for a debtor + interest from the date of payment (except
common transaction or undertaking, - Liable to the when not yet due, no interest for intervening
agent for all the consequences of the agency. (Art. 1915) period)
8. Two or more bailees (Commodatum) to whom a thing is  Insolvency of one of solidary debtor – to be borne by
loaned in the same contract (1945) all his co-debtor in proportion to the debt of each.
9. The responsibility of two or more officious managers Payment by solidary debtor after the obligation has
(negotiorum gestio) shall be solidary, unless the prescribed or become illegal – Not entitled to
management was assumed to save the thing or business reimbursement.
from imminent danger. (Art. 2146)  Remission made by the creditor of the share of one
10. The owner and his driver in a motor vehicle mishaps, if of the solidary debtor – Does not release such
the former, who was in the vehicle, could have, by the solidary debtor toward other co-debtor when the
use of the due diligence, prevented the misfortune. (Art. debt was totally paid before remission.
2184)  Remission of whole obligation obtained by one of the
11. The responsibility of two or more persons who are liable solidary debtors – not entitled for reimbursement
for quasi-delict. (Art. 2194)  Loss without fault of any debtor– obligation
extinguished
Solidarity under special Law (related law only)  Loss with fault of any debtor – All debtor are liable
1. Liability of directors for watered stocks. (Sec. 65, BP without prejudice to the action against guilty or
68) negligent debtor.
2. When the director or trustee who willfully and knowingly  Loss due to fortuitous event after delay by any of
vote for or assent to patently unlawful acts of the the solidary debtor – same all debtor are liable.
corporation or who are guilty of gross negligence or bad  Claim for Compensation under Workmen’s
faith in directing the affairs of the corporation or acquire compensation law. (Sec 2, workmen compensation
any personal or pecuniary interest in conflict with their law)
duty (Sec 31 BP 68)  Article 19, 20, 21, 22 of the Civil code (Human
3. Workmen compensation act relations)
4. Where an instrument containing the word "I promise to
pay" is signed by two or more persons, they are deemed Defense of solidary debtor

Page 7 of 18 RFBT1
a. Nature of the obligation – payment , fraud, 3. Debtor cannot exempt himself from performance and
prescription, remission, illegality, absence of to pay only the penalty (except when expressly
consideration, res judicata, non performance of granted to him). Neither can the creditor demand the
suspensive condition fulfillment of the obligation and the satisfaction of
b. Those personal to him - incapacity, mistake, the penalty at the same time, unless this right has
violence, minority. (personal or complete defense) been clearly granted him. (1227) However, if
c. Those personal to the other. creditor choose performance but become impossible
without his fault, the penalty may be imposed.
7. Divisible – Capable of partial fulfillment
8. Indivisible – Not capable of partial fulfillment Causes for reduction of penalty:
Kinds of division a. Principal obligation has been partly or irregularly
a. Qualitative division – based on quality complied with;
b. Quantitative division – based on quantity b. Penalty is iniquitous or unconscionable
c. Ideal or intellectual division – exist only in mind of
the parties  Nullity of the penal clause does not carry of the
Kinds of indivisibility principal obligation but the nullity of the principal
a. Legal indivisibility – by law carries with that of the penal clause. (Rule:
b. Conventional indivisibility - by agreement Accessory follows the principal)
c. Absolute or natural indivisibility – nature of the
object/prestation Extinguishment of Obligation
Art. 1231. Obligations are extinguished:
 Divisibility or indivisibility is determined by the (1) By payment or performance:
purpose or intention of the parties not the possibility (2) By the loss of the thing due:
or impossibility of partial performance. (except of (3) By the condonation or remission of the debt;
nature indivisibility) (4) By the confusion or merger of the rights of creditor and
 Divisible or indivisible refer to the object of he debtor;
obligation not on the cause or legal tie. (5) By compensation;
 Joint indivisible obligation give rise to indemnity for (6) By novation.
damages – one debtor does not comply with his
undertaking. Other causes of extinguishing an obligation
a. Effect – Obligation is converted into one for a. Annulment
damages. Specific performance or rescission is b. Rescission
not a remedy because the other debtors are c. Fulfillment of a resolutory condition
willing to fulfill. d. Prescription
 Obligation to give definite thing and not susceptible e. Arrival of resolutory period
of partial performance – Indivisible f. Death of the party
 Object the execution of a certain number of days of g. Mutual desistance/withdrawal
work – Divisible h. Compromise
 Accomplishment of work by metrical units or i. Impossibility of performance
analogous things j. Happening of a fortuitous event
 Nature are susceptible of partial performance –
Divisible 1. Payment or performance – not only delivery of money
 Obligation not to do – Determined by the character but also the performance in any other manner of an
of the prestation in each particular case. obligation. (1232)
Gen rule: There must be total performance. Partial or
9. Obligation with a penal clause – Penalty shall substitute irregular performance does not extinguish obligation.
the indemnity for damages and the payment of interests (1233)
in case of non-compliance (absence of agreement). Exception:
a. Principal a. Substantial performance in good faith. (1234)
b. Accessory Requisites of Substantial Performance
Kinds of penal clause 1. Attempt in Good Faith to perform without willful
a. Origin or intentional departure
1.) Legal penal clause - by law 2. Deviation is slight
2.) Conventional penal clause – by agreement 3. Omission/Defect is technical or unimportant
b. Purpose 4. Must not be so material that intention of parties
1.) Compensatory penal clause – take the place of is not attained
damages (1226) Effect of Substantial performance in good faith
2.) Punitive penal clause – imposed as punishment for 1. Obligor may recover as though there has been
breach strict and complete fulfillment, less damages
c. Demandability or effect suffered by the obligee
1.) Subsidiary or alternative penal clause - only penal 2. Right to rescind cannot be used for slight breach
clause can be enforce. b. Creditor accepts performance knowing its
2.) Joint or cumulative – both principal and penal clause incompleteness or irregularity without expression of
can be enforce protest. (principle of estoppels)(1235)

1. The penal clause shall substitute the indemnity for  Creditor may refuse to accept payment
damages and the payment of interest in case of non 1. Payment by 3rd person
compliance. (1226) However, Penalty may be 2. Partial performance
enforced only when it is demandable. 3. When the debtor has no capacity to alienate or
2. Proof of actual damages suffered by the creditor not free disposal of the thing
necessary to enforce the penalty. (1228)
However damages shall be paid  General rule: Creditor not bound to accept
a. There is stipulation performance by 3rd person. (1236) The creditor is
b. Obligor refuses to pay the penalty bound to accept payment only by:
c. Guilty of fraud in the fulfillment of the obligation. 1. Debtor

Page 8 of 18 RFBT1
2. Has interest in the performance of obligation
(guarantor, surety)
3. 3rd person if there is stipulation.
But the payment in any case valid if the creditor accepts.
The option to accept is granted to the creditor.

 Payment by 3rd person to creditor may recover to


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

 Payment by one who does not have free disposal of


the thing due and capacity to alienate – Not valid
without prejudice to natural obligation. (1239)
 Payment must be to the person in whose favor the
obligation has been constituted. (creditor , creditor
successor in interest, any person authorized to
receive payment) (1240)
a. Payment to a person who is incapacitated to
administer his property shall be valid if he has
kept the thing delivered or insofar as the
payment has been beneficial to him.
b. Payment to 3rd person shall also be valid insofar
as it has redounded to the benefit of the
creditor. (1241)

Payment to 3rd person : Presumed that it redounded to


the benefit of the creditor:
a. 3rd person acquires the creditor’s right (subrogation)
b. Creditor ratifies the payment to the 3rd person
(ratification)
c. Creditors' led to believe that the 3 rd person had
authority to receive the payment (Estoppels)
 Payment made in good faith to any person in
possession of the credit shall release the debtor.
(1242)
Requisites:
1. Payment by debtor must be made in good faith
2. Creditor must be in possession of the credit &
not merely the evidence of indebtedness
 Payment made to the creditor by the debtor after the
latter has been judicially ordered to retain the debt
shall not be valid. (1243)
 Debtor cannot compel the creditor to receive a
different one although of the same value or more
valuable than that which is due. (1244)
 Obligation to do or not to do, an act or forbearance
cannot be substituted by another act or forbearance
against the obligee’s will. (1242 par 2)
 Obligation to deliver an indeterminate or generic
thing whose quality and circumstances have not
been stated. (1246)
a. Creditor cannot demand a thing of superior
quality.
b. Debtor cannot deliver a thing of inferior quality.
 Extrajudicial expense – account of the debtor
 Judicial expense – The Rules of court apply. Judicial
expense is shouldered by the losing party.

Place of payment (1251)


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

Page 9 of 18 RFBT1
Gen Rule: The creditor cannot be compelled to receive
partial performance. Neither may the debtor be required d. Tender of payment (extrajudicial) and consignation
to make partial payment.(1248) (judicial) – Creditor refuse to accept payment
Exception: without just cause
1. Express stipulation  Must comply with the rules on payment (must be
2. Debt is part liquidated and in part unliquidated. total)
3. Different prestation are subject to different terms or  Unconditional and total
conditions which affect some of them.  Actual. Manifestation of a desire or intention to
pay is enough.
 The payment of debts in money shall be made in the  The debtor must show possession of the thing at
currency stipulated, and if it is not possible to deliver the time of the offer (tender).
such currency, then in the currency which is legal  Before creditor accepts the consignation or
tender in the Philippines. (1249) before judicial declaration, the debtor may
 The delivery of promissory notes payable to order, or withdraw the thing deposited.
bills of exchange or other mercantile documents shall  Should the creditor authorize to withdraw the
produce the effect of payment only when they have thing consigned – He lose every preference over
been cashed, or when through the fault of the the thing (co-debtor, guarantors and sureties are
creditor they have been impaired. released)
In the meantime, the action derived from the original Tender of payment alone cannot extinguish valid
obligation shall be held in the abeyance. debt. However, consignation alone when allowed
 In case an extraordinary inflation or deflation of extinguished obligation.
the currency stipulated should supervene, the value
of the currency at the time of the establishment Requisites:
of the obligation shall be the basis of payment, 1. Existence of valid debt which is due and
unless there is an agreement to the contrary(1250) demandable
2. Tender of payment by the debtor
Nota Bene: 3. Refusal without justifiable reason by the creditor
Section 52. Legal Tender Power. - All notes and coins to accept it.
issued by the Bangko Sentral shall be fully guaranteed by 4. Previous notice of consignation to persons
the Government of the Republic of the Philippines and shall interested in the fulfillment of the obligation.
be legal tender in the Philippines for all debts, both public (guarantor, mortgagee, solidary debtors, solidary
and private: Provided, however, That, unless otherwise creditors).
fixed by the Monetary Board, coins shall be legal tender 5. Consignation of the thing
in amounts not exceeding Fifty pesos (P50.00) for 6. Subsequent notice of consignation to in
denominations of Twenty-five centavos and above, and in interested parties.
amounts not exceeding Twenty pesos (P20.00) for
denominations of Ten centavos or less. (R.A. 7653) When tender of payment not required
1. Creditor is absent or unknown or does not
Hence, Philippine currency notes have no limit to their legal appear in the place of payment
tender power. However, pursuant to BSP Circular No. 537, 2. Creditor is incapacitated at the time of payment
Series 2006 (Dated: July 18, 2006), coins in denomination of 3. Creditor refuse to give receipt without just cause
1-,5- and 10-piso shall be legal tender in amounts not 4. Two or more person claim the same right to
exceeding P1,000.00 while coins in denomination of 1-,5- collect
and 10- and 25 sentimo shall be legal tender in amounts 5. Title of the obligation has been lost
not exceeding P100.00.
Dation in payment vs. Payment by cession
Special forms of payment 1. One creditor vs. several creditor
a. Dation in payment / Adjudication or dacion en pago 2. Debtor not insolvent vs. debtor insolvent
– governed by law on sales 3. Not all property of the debtor vs. all property of
 Property is alienated to the creditor in the debtor
satisfaction of debt in money 4. Creditor become the owner vs. creditor acquire
b. Application of payment only the right to dispose the thing and apply the
1. One debtor and one creditor proceeds to their credit proportionately.
2. Two or more debts 5. Act of novation vs. not act of novation
3. Debt must be of the same kind
4. The payment for the debt applied must be due 2. Loss of determinate thing
5. Payment must not sufficient to cover all the Kinds of loss
debts a. Physical loss – perishes
Note: Not really a special form of payment b. Legal loss – goes out of commerce
c. Civil loss – thing disappears in a such way that its
 Debtor has the 1st choice – must indicate at the existence is unknown.
time of payment
 If the debtor does not apply, the creditor may Loss of a thing due
make the designation. Specify in the receipt 1. Obligation to give specific thing
which debt is being paid a. Total loss
 In the absence of above, debt which is most 1. Loss with the fault of the debtor – (Liable)
onerous to the debtor 2. Loss without the fault of the debtor -
 If the same nature and burden – applied to all of Fortuitous event (not liable)
them proportionately. Exception:
 Payment applies to interest, then to principal. 1. Law
a. Delay
c. Payment by cession b. Promised to deliver the same thing to
1. Two or more creditors 2 or more person who do not have
2. Debtor must be partially insolvent the same interest
3. Assignment/cession must be accepted by the c. Lost of generic thing
creditors.

Page 10 of 18 RFBT1
d. Obligation to deliver a specific thing voluntarily, unless the contrary is proved. (1272)
arises from crime. (1268)  The renunciation of the principal debt shall
2. Stipulation extinguish the accessory obligations; but the waiver
3. Assumption of risk of the latter shall leave the former in force. (1273)
b. Partial loss – Court shall determine under the (accessory follows the principal)
circumstances (importance of the partial loss of  It is presumed that the accessory obligation of
the object) whether partial loss is as to be pledge has been remitted when the thing pledged,
equivalent to a complete or total loss. (i.e. after its delivery to the creditor, is found in the
Broken leg - horse for race or horse to be possession of the debtor, or of a third person who
slaughtered) owns the thing. (1274)
2. Obligation to do
 The debtor in obligations to do shall also be 4. Merger/confusion – The character of creditor and debtor
released when the prestation becomes legally or are merged in the same person. (1275)
physically impossible without the fault of the  Merger which takes place in the person of the
obligor. (1266) principal debtor or creditor benefits the guarantors.
a. Impossibility at the beginning - void (principal obligation is extinguish as well as
b. Impossibility after the constitution of the accessory obligation) Confusion which takes place in
obligation the person of any of the latter does not extinguish
 When the service has become so difficult as to be the obligation. (Only accessory obligation is
manifestly beyond the contemplation of the extinguished) (1276)
parties, the obligor may also be released  Confusion does not extinguish a joint obligation
therefrom, in whole or in part. (1267) except as regards the share corresponding to the
creditor or debtor in whom the two characters
Kinds of impossibility concur. (1277)
 Physical impossibility – (Accident/death)
 Legal impossibility – Ordinance declaring an area 5. Compensation - When two person, in their own right,
residential zone (i.e. obligation to construct are creditors and debtors of each other, (1278)
commercial building; Lawyer appointed as judge)
Confusion vs. Compensation
General rule: When a thing is loss in possession of the 1. Only one person who is a debtor and creditor of
debtor it is presumed that it was loss due to his fault. (1265) himself vs. two person involved, each of whom is a
Exception: debtor and a creditor of the other
1. Earthquake 2. Only one obligation vs. 2 obligation
2. Flood 3. Impossiblity of payment vs. indirect payment
3. Storm
4. Other natural calamity Kinds of compensation
1. Effect or extent
 The obligation having been extinguished by the a. Total – Both obligation are of the same amount
loss of the thing, the creditor shall have all the b. Partial – Two obligation are of different amount
rights of action which the debtor may have against 2. Cause or origin
third persons by reason of the loss. (1269) a. Legal – Takes place by operation of law
b. Voluntary – by agreement
3. Condonation/remission of debt - Condonation or c. Judicial – takes place by order from a court in a
remission is essentially gratuitous, and requires the litigation.
acceptance by the obligor. It may be made expressly d. Facultative – can be set up only by one of the
or impliedly. One and the other kind shall be subject to parties.
the rules which govern inofficious donations. Express
condonation shall, furthermore, comply with the forms of Art. 1279. In order that compensation may be proper, it is
donation (1270) necessary: (Legal compensation)
1.) That each one of the obligors be bound principally, and
Kinds of remission that he be at the same time a principal creditor of the
a. Extent other;
1. Complete – cover the entire obligation 2.) That both debts consist in a sum of money, or if the
2. Partial – Not cover the entire obligation things due are consumable, they be of the same kind,
b. Form and also of the same quality if the latter has been
1. Express – verbal or in writing stated;
2. Implied – Inferred from conduct 3.) That the two debts be due;
Voluntary delivery of private document 4.) That they be liquidated and demandable;
evidencing the credit by the creditor to the 5.) That over neither of them there be any retention or
debtor (Art 1271) controversy, commenced by third persons and
c. Date of effectivity communicated in due time to the debtor. (1196)
1. Intervivos – take effect during lifetime of the
donor  The parties may agree upon the compensation of debts
2. Mortis cause – effective upon death of the donor which are not yet due.(1282)
 If one of the parties to a suit over an obligation has a
 The delivery of a private document evidencing a claim for damages against the other, the former may set
credit, made voluntarily by the creditor to the it off by proving his right to said damages and the
debtor, implies the renunciation of the action which amount thereof. (1283)
the former had against the latter.  When one or both debts are rescissible or voidable, they
If in order to nullify this waiver it should be claimed may be compensated against each other before they are
to be inofficious, the debtor and his heirs may uphold judicially rescinded or avoided. (1284)
it by proving that the delivery of the document was  The debtor who has consented to the assignment of
made in virtue of payment of the debt. (1271) rights made by a creditor in favor of a third person,
 Whenever the private document in which the debt cannot set up against the assignee the compensation
appears is found in the possession of the debtor, it which would pertain to him against the assignor, unless
shall be presumed that the creditor delivered it the assignor was notified by the debtor at the time he

Page 11 of 18 RFBT1
gave his consent, that he reserved his right to the  Test: Is the old and new obligation having an
compensation. (1285) independent existence. Positive - compatible (No
 If the creditor communicated the cession to him but the novation); Negative – incompatible - Novation.
debtor did not consent thereto, the latter may set up the  Conventional subrogation be clearly establish (1300)
compensation of debts previous to the cession, but not and it requires the consent of the original parties and
of subsequent ones. of the third person. (1301)
 If the assignment is made without the knowledge of the  Legal subrogation is not presumed except in cases
debtor, he may set up the compensation of all credits provided for by law. (1300)
prior to the same and also later ones until he had  When the principal obligation is extinguished in
knowledge of the assignment. (1198a) consequence of a novation, accessory obligations
 Compensation takes place by operation of law, even may subsist only insofar as they may benefit third
though the debts may be payable at different places, but persons who did not give their consent. (1296)
there shall be an indemnity for expenses of exchange or  If the new obligation is void, the original one shall
transportation to the place of payment. (1286) subsist, unless the parties intended that the former
 If a person should have against him several debts which relation should be extinguished in any event. (1297)
are susceptible of compensation, the rules on the  The novation is void if the original obligation was
application of payments shall apply to the order of the void, except when annulment may be claimed only
compensation. (1289) by the debtor or when ratification validates acts
which are voidable. (1298)
Art. 1287. Compensation shall not be proper when one of  If the original obligation was subject to a suspensive
the debts arises from a depositum or from the obligations of or resolutory condition, the new obligation shall be
a depositary or of a bailee in commodatum. under the same condition, unless it is otherwise
Neither can compensation be set up against a creditor who stipulated. (1299)
has a claim for support due by gratuitous title, without  Subrogation transfers to the persons subrogated the
prejudice to the provisions of paragraph 2 of article 301. credit with all the rights thereto appertaining, either
(1200a) against the debtor or against third person, be they
Art. 1288. Neither shall there be compensation if one of the guarantors or possessors of mortgages, subject to
debts consists in civil liability arising from a penal offense. stipulation in a conventional subrogation. (1303)
(n)  A creditor, to whom partial payment has been made,
may exercise his right for the remainder, and he
6. Novation – Obligations may be modified by: (1) shall be preferred to the person who has been
Changing their object or principal conditions; (2) subrogated in his place in virtue of the partial
Substituting the person of the debtor; (3) Subrogating a payment of the same credit. (1304)
third person in the rights of the creditor. (1291)

Kinds of novation
1. Origin
a. Legal – operation of law
b. Conventional – agreement of the parties
2. How it s constituted
a. Express – Declared in unequivocal term
b. Implied – Old and new obligation are essentially
incompatible with each other
3. Extent or effect
a. Total or extinctive – Old obligation is completely
extinguished
b. Partial or modificatory – Old obligation is merely
modified
4. Subject
a. Real or objective – Object or principal condition
are changed
b. Personal or subjective – person of the debtor is
substituted/ or when a third person is
subrogated in the right of the creditor.
1. Substitution – Person of the debtor is
substituted
1.1.Expromision – 3rd person on his own
initiative and without the knowledge or
against the will of the original debtor
assumes the latter’s obligation with the
consent of the creditor. (Only the
consent of the creditor and 3rd person is
made)
1.2.Delegacion – Creditor accepts a third
person to take the place of the debtor at
the instance of the latter. It requires that
the old debtor be release from the old
obligation. (all parties, old debtor, new
debtor and the creditor must agree)
2. Subrogation – Third person is subrogated in Art. 1302. It is presumed that there is legal
the rights of the creditor. subrogation:
c. Mixed – Combination of real and personal (1) When a creditor pays another creditor who is
novation. preferred, even without the debtor's knowledge;
(2) When a third person, not interested in the obligation,
 Novation is never presumed. pays with the express or tacit approval of the debtor;
(3) When, even without the knowledge of the debtor, a

Page 12 of 18 RFBT1
person interested in the fulfillment of the obligation a. Law
pays, without prejudice to the effects of confusion as to b. Moral
the latter's share. (1210a) c. Good custom
d. Public order
CONTRACTS e. Public policy
2. Mutuality of contract - contract must bind both
Contract - meeting of minds between two persons whereby contracting parties; its validity or compliance cannot be
one binds himself, with respect to the other, to give left to the will of one of them (1308). The principle is
something or to render some service. based on the essential equality of the parties.
 The determination of the performance may be left to
Kinds of contract a third person, whose decision shall not be binding
1. Formation or perfection until it has been made known to both contracting
a. Consensual – perfected by mere consent (1315) parties. (1309)
b. Real – perfected by delivery (i.e. depositum, pledge,  The determination shall not be obligatory if it is
commodatum) (1316) evidently inequitable. In such case, the courts shall
c. Formal or solemn (i.e. Interest must be in writing decide what is equitable under the circumstances
(1956); Contribution of immovable property must be (1310)
in a public instrument, donation of personal property 3. Relativity of contract - Contracts take effect only
where the value exceed P5,000 must be in writing; between the parties, their assigns and heirs (1311)
Donation of immovable property must be in a public Exception:
instrument, Sale of land or interest therein, the a. Where the obligations arising from contract are not
authority of the agent must be in writing) transmissible by nature (personal qualification is
2. Cause or equivalence of value of prestation involved), by stipulation or by provision of law
a. Onerous – equivalent value of prestation (Agency, partnership, commodatum).
b. Gratuitous or lucrative – no equivalent prestation b. Stipulation in favor of third person (stipulation pour
c. Remunerative - the prestation is the benefit or autrui) (1311 par 2)
service that had been rendered previously. If a contract should contain some stipulation in favor
3. Importance or dependence of one upon another: of a third person, he may demand its fulfillment
a. Principal – can stand alone provided he communicated his acceptance to the
b. Accessory – depend upon the existence of another obligor before its revocation. A mere incidental
contract benefit or interest of a person is not sufficient. The
c. Preparatory – not considered the contract as an end contracting parties must have clearly and
by itself but as a mean for entering in future deliberately conferred a favor upon a third person
transaction or contract. c. Contract creating real right (1312)
4. Parties obligated d. Contact entered into to defraud the creditors. (1313)
a. Unilateral – only one party has obligation e. Contract which have been violated thru the
b. Bilateral – both party has obligation inducement of 3rd person (1314)
5. Name or designation
a. Nominate – has a name given by law Elements of a Contract
b. Innominate – no name given by law 1. Essential elements
1. Do ut des (I give that you may give) no longer a. Common (Consent, Object, Cause)
innominate. This is now called Barter b. Special
2. Do ut facias (I give that you may do) 1.) Form – formalities in solemn contract, deliver in
3. Facio ut des (I do that you may give) real contract, registration to bind third person
4. Facio ut facias (I do that you may do) (Real estate mortgage, chattel mortgage)
6. Risk of fulfillment
a. Commutative – real fulfillment, equivalent value are Solemn contract
given (Consent, Object, Cause + Execution of
b. Aleatory – fulfillment depend upon chance. formalities)
7. Time of performance or fulfillment a. Stipulation of interest = writing.
a. Executed – prestation are already complied with b. Contribution of immovable property in
b. Executory – prestations are to be complied with in partnership = inventory of such property +
the future public instrument
8. According to number of person who participated in the c. Donation of personal property where the
drafting of the contract value exceed P5,000 = in writing
a. Ordinary - d. Donation as well as acceptance of real
b. Contract of adhesion – Where the terms and property = Public instrument.
condition of the contract is already drafted by one e. Will = writing + formalities prescribed by
party. The other party only signifies his consent by law.
signing the contract. f. Agent authority in case of sale of immovable
property in behalf of the principal = writing
Stages of contract
1. Preparation (Negotiation, conception or Generacion) Real Contract
– steps taken by the parties leading to the perfection (Consent, Object, Cause + Delivery)
of the contract. a. Deposit
2. Perfection (or birth) – Come to a definite agreement b. Pledge
or meeting of the mind upon the object and the c. Commodatum
cause. 2.) Subject matter
3. Consummation (death or termination) – parties have Real estate Real property No delivery
performed their respective obiigation mortgage
Chattel mortgage Personal No delivery
Characteristics of contract property
1. Freedom of contract - contracting parties may establish Pledge Personal Delivery
such stipulations, clauses, terms and conditions as they property
may deem convenient (1306) Antichresis Real property Delivery
Limitation:

Page 13 of 18 RFBT1
3.) Consideration or cause – Sale (price);
Commodatum (liberality)
2. Natural elements – presumed to exist in certain
contracts
a. Warranty against eviction
b. Warranty against hidden defect
3. Accidental elements (by stipulation) – Exist only when
they are expressly provide by the parties. (i.e.
Conditions, period, interest, penalty, place of payment)

Art. 1318. There is no contract unless the following


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

CONSENT (1319)

Art. 1319. Consent is manifested by the meeting of the offer


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

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


Art. 1321. The person making the offer may fix the time, OPTION PERIOD (1324)
place, and manner of acceptance, all of which must be Art. 1324. When the offerer has allowed the offeree a certain
complied with. period to accept, the offer may be withdrawn at any time
Art. 1322. An offer made through an agent is accepted from before acceptance by communicating such withdrawal,
the time acceptance is communicated to him. (n) except when the option is founded upon a consideration, as
Art. 1323. An offer becomes ineffective upon the death, civil something paid or promised. (n)
interdiction, insanity, or insolvency of either party before
acceptance is conveyed.
Art. 1325. Unless it appears otherwise, business
advertisements of things for sale are not definite offers, but
mere invitations to make an offer.
Art. 1326. Advertisements for bidders are simply invitations
to make proposals, and the advertiser is not bound to accept
the highest or lowest bidder, unless the contrary appears.
Art. 1327. The following cannot give consent to a contract:
(7) Unemancipated minors;
(8) Insane or demented persons, and deaf-mutes who do
not know how to write. (1263a)
Art. 1328. Contracts entered into during a lucid interval are
valid. Contracts agreed to in a state of drunkenness or
during a hypnotic spell are voidable. (n)

Vices of Consent
1. Error or mistake
 In order that mistake may invalidate consent, it
should refer to the substance of the thing which is
the object of the contract, or to those conditions
which have principally moved one or both parties to

Page 14 of 18 RFBT1
enter into the contract. the ground of
Mistake as to the identity or qualifications of one of mistake
the parties will vitiate consent only when such Fraud with Voidable Voidable. As if
identity or qualifications have been the principal connivance/ exercised by the
cause of the contract. knowledge by the party benefited by
A simple mistake of account shall give rise to its party benefited by the fraud.
correction.(1331) the fraud
 When one of the parties is unable to read, or if the Undue influence Voidable Valid
contract is in a language not understood by him, and
mistake or fraud is alleged, the person enforcing the Absolute Relative simulated
contract must show that the terms thereof have simulated or
been fully explained to the former. (1332) fictitious contract
 There is no mistake if the party alleging it knew the The parties do not The parties conceal their true
doubt, contingency or risk affecting the object of the intend to be bound agreement. (1345)
contract. (1333) at all. (1345)
 Mutual error as to the legal effect of an agreement VOID When it does not prejudice a third
when the real purpose of the parties is frustrated, (1346) person and is not intended for any
may vitiate consent. (1334) purpose contrary to law, morals,
good customs, public order or
2. Violence - when in order to wrest consent, serious or public policy binds the parties to
irresistible force is employed. (1335) their real agreement. (1346)
3. Intimidation - when one of the contracting parties is
compelled by a reasonable and well-grounded fear of an
imminent and grave evil upon his person or property, or OBJECT OF CONTRACTS
upon the person or property of his spouse, descendants  All things which are not outside the commerce of men,
or ascendants, to give his consent. (1335) including future things, may be the object of a contract.
To determine the degree of intimidation, the age, sex All rights which are not intransmissible may also be the
and condition of the person shall be borne in mind. object of contracts.
A threat to enforce one's claim through competent  No contract may be entered into upon future
authority, if the claim is just or legal, does not vitiate inheritance except in cases expressly authorized by
consent. law.
4. Undue influence - when a person takes improper  All services which are not contrary to law, morals, good
advantage of his power over the will of another, customs, public order or public policy may likewise be
depriving the latter of a reasonable freedom of choice. the object of a contract. (1347)
The following circumstances shall be considered: the  Impossible things or services cannot be the object of
confidential, family, spiritual and other relations between contracts. (1348)
the parties, or the fact that the person alleged to have  The object of every contract must be determinate as to
been unduly influenced was suffering from mental its kind. The fact that the quantity is not determinate
weakness, or was ignorant or in financial distress. shall not be an obstacle to the existence of the contract,
(1337) provided it is possible to determine the same, without
5. Fraud - when, through insidious words or machinations the need of a new contract between the parties. (1349)
of one of the contracting parties, the other is induced to
enter into a contract which, without them, he would not CAUSE OF CONTRACTS
have agreed to.  To be a valid cause, it must be lawful, true and real,
 Failure to disclose facts, when there is a duty to definite or determinate as to its kind and possible.
reveal them, as when the parties are bound by  In onerous contracts the cause is understood to be, for
confidential relations, constitutes fraud. (1339) each contracting party, the prestation or promise of a
 The usual exaggerations in trade, when the other thing or service by the other; in remuneratory ones, the
party had an opportunity to know the facts, are not service or benefit which is remunerated; and in contracts
in themselves fraudulent. (1340) of pure beneficence, the mere liberality of the
 A mere expression of an opinion does not signify benefactor. (1350)
fraud, unless made by an expert and the other party  The particular motives of the parties in entering into a
has relied on the former's special knowledge. (1341) contract are different from the cause thereof. (1351)
 Misrepresentation by a third person does not vitiate  Contracts without cause, or with unlawful cause, produce
consent, unless such misrepresentation has created no effect whatever. The cause is unlawful if it is contrary
substantial mistake and the same is mutual. (1342) to law, morals, good customs, public order or public
 Misrepresentation made in good faith is not policy. (1352)
fraudulent but may constitute error. (1343)  The statement of a false cause in contracts shall render
 In order that fraud may make a contract voidable, it them void, if it should not be proved that they were
should be serious and should not have been founded upon another cause which is true and lawful.
employed by both contracting parties. (1344) (1353)
Incidental fraud only obliges the person employing it to  Although the cause is not stated in the contract, it is
pay damages. presumed that it exists and is lawful, unless the debtor
proves the contrary. (1354)
Employed by Employed by 3rd  Except in cases specified by law, lesion or inadequacy of
one of the person cause shall not invalidate a contract, unless there has
contracting been fraud, mistake or undue influence. (1355)
party
Violence Voidable Voidable FORM OF CONTRACTS
Intimidation Voidable Voidable  Contracts shall be obligatory, in whatever form they may
Fraud without Voidable Valid, unless it have been entered into, provided all the essential
connivance/ result to substantial requisites for their validity are present. However, when
knowledge by the mistake and the the law requires that a contract be in some form in order
party benefited by same is mutual. It that it may be valid or enforceable, or that a contract be
the fraud can be annulled on proved in a certain way, that requirement is absolute

Page 15 of 18 RFBT1
and indispensable. In such cases, the right of the parties repurchase. (1365)
stated in the following article cannot be exercised.  When one of the parties has brought an action to
(1356) enforce the instrument, he cannot subsequently ask
 If the law requires a document or other special form, as for its reformation. (1367)
in the acts and contracts enumerated in the following  The procedure for the reformation of instrument shall
article, the contracting parties may compel each other to be governed by rules of court. (1369)
observe that form, once the contract has been perfected.
This right may be exercised simultaneously with the INTERPRETATION OF CONTRACTS
action upon the contract. (1357)  If the terms of a contract are clear and leave no doubt
 The following must appear in a public document: (1358) upon the intention of the contracting parties, the literal
(1) Acts and contracts which have for their object the meaning of its stipulations shall control. (1370)
creation, transmission, modification or If the words appear to be contrary to the evident
extinguishment of real rights over immovable intention of the parties, the latter shall prevail over the
property; sales of real property or of an interest former.
therein a governed by articles 1403, No. 2, and  In order to judge the intention of the contracting parties,
1405; their contemporaneous and subsequent acts shall be
(2) The cession, repudiation or renunciation of principally considered. (1371)
hereditary rights or of those of the conjugal  However general the terms of a contract may be, they
partnership of gains; shall not be understood to comprehend things that are
(3) The power to administer property, or any other distinct and cases that are different from those upon
power which has for its object an act appearing or which the parties intended to agree. (1372)
which should appear in a public document, or should  If some stipulation of any contract should admit of
prejudice a third person; several meanings, it shall be understood as bearing that
(4) The cession of actions or rights proceeding from an import which is most adequate to render it effectual.
act appearing in a public document. (1373)
All other contracts where the amount involved  The various stipulations of a contract shall be interpreted
exceeds five hundred pesos must appear in together, attributing to the doubtful ones that sense
writing, even a private one. But sales of goods, chattels which may result from all of them taken jointly. (1374)
or things in action are governed by articles, 1403, No. 2  Words which may have different significations shall be
and 1405. (1280a) understood in that which is most in keeping with the
nature and object of the contract. (1375)
REFORMATION OF INSTRUMENTS  The usage or custom of the place shall be borne in mind
Art. 1359. When, there having been a meeting of the in the interpretation of the ambiguities of a contract, and
minds of the parties to a contract, their true intention shall fill the omission of stipulations which are ordinarily
is not expressed in the instrument purporting to embody established. (1376)
the agreement, by reason of mistake, fraud, inequitable  The interpretation of obscure words or stipulations
conduct or accident, one of the parties may ask for the in a contract shall not favor the party who caused
reformation of the instrument to the end that such true the obscurity. (1377)
intention may be expressed.  When it is absolutely impossible to settle doubts by the
If mistake, fraud, inequitable conduct, or accident has rules established in the preceding articles, and the
prevented a meeting of the minds of the parties, the proper doubts refer to incidental circumstances of a gratuitous
remedy is not reformation of the instrument but annulment contract, the least transmission of rights and interests
of the contract. shall prevail. If the contract is onerous, the doubt shall
be settled in favor of the greatest reciprocity of interests.
Art. 1366. There shall be no reformation in the following If the doubts are cast upon the principal object of
cases: the contract in such a way that it cannot be known
(1) Simple donations inter vivos wherein no condition is what may have been the intention or will of the
imposed; parties, the contract shall be null and void. (1378)
(2) Wills;  The principles of interpretation stated in Rule 123 of
(3) When the real agreement is void. the Rules of Court shall likewise be observed in the
construction of contracts. (1379)
 Reformation can be avail only of the innocent party.
 Reformation may be ordered at the instance of either DEFECTIVE CONTRACTS
party or his successors in interest, if the mistake was 1. Rescissible contract – Rescissible contract is valid until
mutual; otherwise, upon petition of the injured party, or rescinded. It is allowed by reason of injury or damage
his heirs and assigns. (1368) to one parties or to a third person.
 When reformation proper The following contracts are rescissible: (1381)
a. Mutual mistake of the parties causes the failure of a. Those which are entered into by guardians whenever
the instrument to disclose their real agreement the wards whom they represent suffer lesion by
(1361) more than one-fourth of the value of the things
b. One party was mistaken and the other acted which are the object thereof;
fraudulently or inequitably in such a way that the  Not applicable when approved by court (1386)
instrument does not show their true intention.  Prescriptive period: Four years from the
(1362) termination of incapacity
c. When one party was mistaken and the other b. Those agreed upon in representation of absentees, if
knew or believed that the instrument did not state the latter suffer the lesion stated in the preceding
their real agreement, but concealed that fact from number;
the former. (1363)  Not applicable when approved by court (1386)
d. When through the ignorance, lack of skill,  Prescriptive period: Four years from the date the
negligence or bad faith on the part of the domicile of the absentee is known.
person drafting the instrument or of the clerk c. Those undertaken in fraud of creditors when the
or typist, the instrument does not express the true latter cannot in any other manner collect the claims
intention of the parties. (1364) due them;
e. If two parties agree upon the mortgage or pledge of  The action to claim rescission must be
real or personal property, but the instrument states commenced within four years (1389)
that the property is sold absolutely or with a right of  Alienation which are presumed to have been

Page 16 of 18 RFBT1
entered into in fraud of creditors incapacitated persons guardianship ceases
a. Gratuitous title - donor did not reserve *Note: If there is registration of the property, count from the
sufficient property to pay all debts contracted date of registration.
before the donation.
b. Onerous title - when made by persons  Ratification extinguishes the action to annul avoidable
against whom some judgment has been contract. (1392)
issued. The decision or attachment need not  Express ratification – Done in writing or orally
refer to the property alienated, and need not  Tacit ratification - with knowledge of the reason which
have been obtained by the party seeking the renders the contract voidable and such reason having
rescission. ceased, the person who has a right to invoke it should
Note: The design to defraud creditors may be execute an act which necessarily implies an intention to
proved in any other manner recognized by the waive his right. (1393)
law of evidence. (1387)  Ratification may be effected by the guardian of the
 Whoever acquires in bad faith the things incapacitated person. (1394)
alienated in fraud of creditors, shall indemnify  Ratification does not require the conformity of the
the latter for damages suffered by them on contracting party who has no right to bring the action for
account of the alienation, whenever, due to any annulment. (1395)
cause, it should be impossible for him to return  Ratification cleanses the contract from all its defects
them. from the moment it was constituted. (1396).
If there are two or more alienations, the first  The action for the annulment of contracts may be
acquirer shall be liable first, and so on instituted by all who are thereby obliged principally or
successively. (1388) subsidiarily. However, persons who are capable cannot
d. Those which refer to things under litigation if they allege the incapacity of those with whom they
have been entered into by the defendant without the contracted; nor can those who exerted intimidation,
knowledge and approval of the litigants or of violence, or undue influence, or employed fraud, or
competent judicial authority; caused mistake base their action upon these flaws of the
 The action to claim rescission must be contract. (1397)
commenced within four years (1389)  An obligation having been annulled, the contracting
e. All other contracts specially declared by law to be parties shall restore to each other the things which have
subject to rescission. been the subject matter of the contract, with their fruits,
 The action to claim rescission must be commenced and the price with its interest, except in cases provided
within four years (1389) by law. In obligations to render service, the value
thereof shall be the basis for damages. (1398)
Limitation on the exercise of rescission  When the defect of the contract consists in the incapacity
1. Contracts can be rescinded only in cases provided by law of one of the parties, the incapacitated person is not
2. Being a subsidiary action, it can be exercised only when obliged to make any restitution except insofar as he has
there is no other legal means to obtain reparation for the been benefited by the thing or price received by him.
same. (1383) (1399)
3. Can be exercised only to the extent necessary to cover  Whenever the person obliged by the decree of
the damages caused. (1384) annulment to return the thing can not do so because it
4. Rescission creates the obligation to return the things has been lost through his fault, he shall return the fruits
which were the object of the contract, together with their received and the value of the thing at the time of the
fruits, and the price with its interest (mutual restitution). loss, with interest from the same date. (1400)
Hence, it can be demanded only if the one claiming  The action for annulment of contracts shall be
rescission can return whatever he may be obliged to extinguished when the thing which is the object thereof
restore. is lost through the fraud or fault of the person who has a
5. It cannot be availed when the things which are the right to institute the proceedings.
object of the contract are legally in the possession of If the right of action is based upon the incapacity of any
third persons who did not act in bad faith. In this case, one of the contracting parties, the loss of the thing shall
indemnity for damages may be demanded from the not be an obstacle to the success of the action, unless
person causing the loss (1385) said loss took place through the fraud or fault of the
6. The action for rescission has not been prescribed. plaintiff (1401)
 As long as one of the contracting parties does not
2. Voidable Contract – The consent is defective by reason restore what in virtue of the decree of annulment he is
of incapacity of one party or vices of consent. It is valid bound to return, the other cannot be compelled to
until annulled. comply with what is incumbent upon him.(1402)
The following contracts are voidable or annullable, even
though there may have been no damage to the 3. Unenforceable contract – Contract that cannot be
contracting parties: (1390) enforce unless ratified.
a. Those where one of the parties is incapable of The following contracts are unenforceable, unless they
giving consent to a contract; are ratified: (1403)
b. Those where the consent is vitiated by mistake, (1) Those entered into in the name of another person by
violence, intimidation, undue influence or fraud. one who has been given no authority or legal
representation, or who has acted beyond his
These contracts are binding, unless they are annulled by powers;
a proper action in court. They are susceptible of (2) Those that do not comply with the Statute of
ratification. Frauds as set forth in this number. In the following
Grounds Prescriptive period cases an agreement hereafter made shall be
Intimidation, violence or 4 years from the time the unenforceable by action, unless the same, or some
undue influence defect of the consent note or memorandum, thereof, be in writing, and
ceases subscribed by the party charged, or by his agent;
Mistake or fraud 4 years from the time of evidence, therefore, of the agreement cannot be
the discovery* of the received without the writing, or a secondary
same evidence of its contents:
minors or other 4 years from the time the (a) An agreement that by its terms is not to be

Page 17 of 18 RFBT1
performed within a year from the making  When the agreement is not illegal per se but is
thereof; merely prohibited, and the prohibition by the law is
(b) A special promise to answer for the debt, designated for the protection of the plaintiff, he may,
default, or miscarriage of another; if public policy is thereby enhanced, recover what he
(c) An agreement made in consideration of has paid or delivered. (1416)
marriage, other than a mutual promise to  When the price of any article or commodity is
marry; determined by statute, or by authority of law, any
(d) An agreement for the sale of goods, chattels person paying any amount in excess of the
or things in action (personal property), at maximum price allowed may recover such excess.
a price not less than five hundred pesos, (1417)
unless the buyer accept and receive part of  When the law fixes, or authorizes the fixing of the
such goods and chattels, or the evidences, or maximum number of hours of labor, and a contract
some of them, of such things in action or pay at is entered into whereby a laborer undertakes to work
the time some part of the purchase money; but longer than the maximum thus fixed, he may
when a sale is made by auction and entry is demand additional compensation for service
made by the auctioneer in his sales book, at the rendered beyond the time limit. (1418)
time of the sale, of the amount and kind of  When the law sets, or authorizes the setting of a
property sold, terms of sale, price, names of the minimum wage for laborers, and a contract is agreed
purchasers and person on whose account the upon by which a laborer accepts a lower wage, he
sale is made, it is a sufficient memorandum; shall be entitled to recover the deficiency. (1419)
(e) An agreement of the leasing for a longer  In case of a divisible contract, if the illegal terms can
period than one year, or for the sale of (real be separated from the legal ones, the latter may be
property) or of an interest therein; enforced. (1420)
(f) A representation as to the credit of a third  The defense of illegality of contract is not available to
person. third persons whose interests are not directly
(3) Those where both parties are incapable of giving affected. (1421)
consent to a contract.  A contract which is the direct result of a previous
illegal contract is also void and inexistent. (1422)
 Statutes of fraud is no longer applicable when:
a. There is total or partial performance (Partially or
totally executed)
b. Failure to object to the presentation of oral
evidence to prove the contract.
 Cannot be assailed by third person (1408)
 Effect of ratification by parents or guardian (1407)
a. Only one party – Voidable contract
b. Both parties- valid

4. Void contract – contract that never exist in the eyes of


law. It has no effect at all and cannot be ratified.

The following contracts are inexistent and void from the


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

Rules in determining contracts void


1. Absence of any of essential requites of contract
(Consent, Object or Cause)
2. Contract that are prohibited by law. (i.e Sale
between husband and wife, donation between
husband and wife)
 The action or defense for the declaration of the
inexistence of a contract does not prescribe. (1410)
 Interest paid in excess of the interest allowed by the
usury laws may be recovered by the debtor, with
interest thereon from the date of the payment.
(1413)
 Where one of the parties to an illegal contract is
incapable of giving consent, the courts may, if the
interest of justice so demands allows recovery of
money or property delivered by the incapacitated
person. (1415)

Page 18 of 18 RFBT1