Law of Obligations and Contracts

The Law of Obligations and Contracts is the body of rules which deals with the nature and sources of obligations and
the rights and duties arising from agreements and particular contracts.

Republic Act 386 – Civil Code of the Philippines

Books of the Civil Code
Preliminary Title (Art 1 – 36) – Preliminary Title
Book 1 (Art 37 – 413) – Persons
Book 2 (Art 414 – 711) – Property, Ownership and its Modifications
Book 3 (Art 712 – 1155) – Different Modes of Acquiring Ownership
Book 4 (Art 1156 – 2270) – Obligations and Contracts
Article 3 of the Civil Code ‐ Ignorance of the law excuses no one from compliance therewith.

TITLE I
OBLIGATIONS
(Arts. 1156-1304, Civil Code)

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

Juridical necessity means that the rights and duties arising from an obligation are “legally enforceable”; the courts may
be called upon to ensure the performance of the obligation.

Article 1157. Obligations arise from: (1) Law; (2) Contracts; (3) Quasi‐contracts; (4) Acts or omissions punished by law; and
(5)Quasi‐delicts.

Sources of Obligations
1. Law — when they are imposed by law itself.
Ex: A wife was about to deliver a child. Her neighbor brought her to hospital. Who should pay the hospital bill –
Husband or Neighbor?
Obligations derived from law are not presumed.
Ex. In a newspaper ad, there was an offer to replace 30 sachets of Tide for one Venetian cut Glass until the end of the
year. At the end of the year, you present your tide sachets, but Tide refused to honor it anymore since the ad was
posted more than half a year ago. Decide.
2. Contracts — when they arise from the stipulation of the parties.
Ex: The obligation to repay a loan or indebtedness by virtue of an agreement.
3. Quasi-contracts — juridical relations based on the principle that no one shall be unjustly enriched or benefited at the
expense of another.
Ex: The obligation to return money paid by mistake or which is not due.
4. Crimes or acts or omissions punished by law — when they arise from civil liability which is the consequence of a
criminal offense.
Ex. Support for impregnated rape victim; loss of earning capacity of murder victim
5. Quasi-delicts or torts — when they arise from damage caused to another through an act or omission, there being
fault or negligence, but no contractual relation exists between the parties.
Ex. A 3‐year‐old child was bitten by a dog of her neighbor. As a result, she got infected by rabies and died. Can the
neighbor be held liable for the acts of the dog?
Ex. A signboard hanging out of a building dropped on a car resulting in total wreck. The car owner sues the building
owner and demand to replace the car. Building owner cites the strong wind as force majeure condition indicating no fault
on his part. Decide.
Four Essential Requisites of an Obligation
1. A passive subject (debtor or obligor) — the person who is bound to the fulfillment of the obligation

Obligations and Contracts

 2. An active subject (creditor or obligee) — the person who is entitled to demand the fulfillment of the obligation
3. Object or prestation (subject matter of the obligation) — the conduct required to be observed by the debtor. It
may consist in giving, doing, or not doing.
To have a valid prestation as to make the obligation binding, the object of the prestation must have the following
requisites:
a. it must be possible physically or legally;
b. it must be definite or determinate as to its kind – anything that can be particularly designated or physically
segregated from all other of its kind.
c. it must be capable of monetary or pecuniary estimation.
4. A juridical or legal tie (efficient cause) — that which binds or connects the parties to the obligation. The tie in an
obligation can easily be determined by knowing the source of the obligation.

Obligations and Contracts

 Scenario: Under a building contract, X bound himself to build a house for Y for P3,000,000.00.

Obligations and Contracts

 Passive Subject: Active Subject:
Object or prestation: Juridical or legal tie:

Form of obligations: Can be oral, or in writing, or partly oral and partly in writing.

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

Article 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied
with in good faith.
A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give
something or to render some service.
1.Binding force
2.Requirement of a valid contract

Compliance in Good Faith

Compliance in good faith means compliance or performance in accordance with the stipulations or terms of the
contract or agreement. Sincerity and honesty must be observed to prevent one party from taking unfair advantage over the other.

Article 1160. Obligations derived from quasi‐ contracts shall be subject to the provisions of Chapter 1, Title XVII of this Book.

Kinds of Quasi-contracts:
Negotiorum gestio ‐ When a person voluntarily takes charge of the management of a business or property of another
that has been neglected or abandoned, without any power from the latter, as a consequence of which, he is obliged to
continue the same until the termination of the affair or to require the owner to substitute him. Ex. NPA infested area
Fishpond
Solutio indebiti ‐ when a person unduly delivers a thing through mistake to another who has no right to demand it.
(Mellon bank vs. Javier ‐ Central in this controversy is the issue as to whether or not a taxpayer who merely states as a
footnote in his income tax return that a sum of money that he erroneously received and already spent is the subject of
a pending litigation and there did not declare it as income is liable to pay the 50% penalty for filing a fraudulent return.)

The requisites of a solutio indebiti are:

(a) There is no right to receive the thing delivered; and
(b) The thing was delivered through mistake.

Article 1161. Civil obligations arising from criminal offenses shall be governed by the penal laws, subject to the provisions of
article 2177, and of the pertinent provisions of Chapter 2, Preliminary Title, on Human Relations, and of Title XVIII of this Book,
regulating damages. When a crime is committed, one is liable both criminally and civilly for the consequence of his actions or
omissions.

Scope of Civil Liability:

The extent of the civil liability arising from crimes is governed by the Revised Penal Code and the Civil Code. This civil liability
includes:
(1) Restitution;
(2) Reparation for the damage caused; and
(3) Indemnification for consequential damages.

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Article 1162. Obligations derived from quasi‐‐‐delicts shall be governed by the provisions of Chapter 2, Title XVII of this
Book, and by special laws.

Obligations Arising from Quasi-delicts:

A quasi‐delict is an act or omission by a person which causes damage to another giving rise to an obligation
to pay for the damage done, there being fault or negligence but there is no pre‐existing contractual relation between
the parties.

Requisites of Quasi-delicts:
Before a person can be held liable for quasi‐‐‐delict, the following requisites must be present:
1. There must be an act or omission;
2. There must be fault or negligence;
3. There must be damage caused;
4. There must be a direct relation of cause and effect between the act or omission and the damage;
5. There is no pre‐existing contractual relation between the parties.

Crime Distinguished from Quasi-delicts:

1. In crime, there is criminal or malicious intent or criminal negligence, while in quasi‐delict, there is only negligence;
2. In crime, the purpose is punishment, while in quasi‐delict, indemnification of the offended party;
3. Crime affects public interest, while quasi‐delict concerns private interest
4. In crime, there are generally two liabilities: criminal and civil, while in quasi‐delict, there is only civil liability;
5. Criminal liability can not be compromised or settled by the parties themselves, while the liability for quasi‐ delict can
be compromised as any other civil liability;
6. In crime, the guilt of the accused must be proved beyond reasonable doubt, while in quasi‐delict the fault or
negligence of the defendant need only be proved by preponderance (i.e., superior or greater weight) of
evidence.

Some Classifications of Obligations:

According to Subject Matter or Prestation:

1. Real obligation (obligation to give) ‐ the subject matter is a thing which the obligor must deliver to the obligee
Ex: X (the seller) binds himself to deliver a piano to Y
2. Personal obligation (obligation to do or not to do) ‐ the subject matter is an act to be done or not to be done.

Types of personal obligation:

a)Positive personal obligation ‐ obligation to do or to render service
Ex: X binds himself to repair the piano of Y.
b) Negative personal obligation ‐ obligation not to do (which naturally includes obligations “not to
give”)
Ex: X obliges himself not to build a fence on a certain portion of his lot in favor of Y who is entitled to a right
of way over the lot.

Ex: The obligation of the head of a family that lives in a building or a part thereof to answer for damages
caused by things thrown or falling from the same; the obligation of the possessor of an animal to pay for the
damage which it may have caused.

According to Sanction:
1. Civil obligation ‐ obligations which give to the creditor or obligee a right under the law to enforce their
performance in courts of justice.
2. Natural obligations ‐ not being based on positive law but on equity and natural law, do not grant a right of action to
enforce their performance although in case of voluntary fulfillment by the debtor, the latter may not recover what

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 has been delivered or rendered by reason thereof.; precept based on “do good and avoid evil” .

According to number of parties obliged:

1. Unilateral obligation – only one party is obliged to perform the obligation.
2. Bilateral obligation – two parties are obliged to perform their respective obligations.
a.) Bilateral reciprocal obligation – the parties perform their respective obligations simultaneously.
b.) Bilateral non‐reciprocal obligation – the parties do not have to perform their obligations simultaneously.

Nature and Effect of Obligations

(a) Specific v. Generic Thing

1. Specific is designated or physically segregated from others of the same class.
2. Generic refers to a class or genus and cannot be determined with particularity.

(b) Duties of debtor in delivery of generic thing

1. To deliver a thing which must neither be of superior nor inferior quality
2. To pay damages in case of breach

(c) Duties of debtor in delivery of specific thing

1. To deliver the thing which he has obligated himself to give
2. To take care of the thing with the proper diligence of a good father of a family
¨ the ordinary care that an average or reasonably prudent person exercises over his property
¨ another standard of c are may be required by law or by stipulation of the parties
3. To deliver all the accessions and accessories
4. To pay damages in case of breach

(d) Remedies of Creditors in breach of obligation

1. To give determinate Thing
a. To compel specific performance
b. To recover damages
2. To give Indeterminate Thing
a. To ask for performance of the obligation
b. To ask that obligation be complied with by another at expense of debtor
c. To recover damages
3. To do
a. To have the obligation performed at debtor’s expense
b. To recover damages
4. Not to do
a. Undone at his expense
b. To recover damages
(e) Rules on Fruits
1. Kinds of fruits
a. Natural – product of the soil, young and other products of animals
b. Industrial – produced thru cultivation or labor
c. Civil – derived by juridical relations
2. Creditor has rights to the fruits from the time the obligation to deliver arises
3. Real rights acquired only when delivered to him
a. Real rights ‐ right over a specific thing without any passive subject, directed against the whole word.
b. Personal rights – right to demand from another debtor the fulfillment of the latter’s obligation
(f) Accessions and accessories
¨ Accessions – fruits of a thing or additions to or improvement upon a thing

Obligations and Contracts

 ¨ Accessories – joined to or included with the principal thing for better use or completion.
1. Even if not mentioned, accessories follow the principal
2. But obligation to deliver accessions or accessories does not include the principal

(g) Legal Delay

1. From the time obligee judicially or extra‐judicially demand fulfillment; not mere notice
2. No demand from creditor necessary in following cases:
a. When obligation or law expressly so declares
b. Time is of the essence (controlling motive)
c. When demand would be useless
3. In reciprocal obligation, from the moment one party fulfills his obligation, delay by the other begins.
4. Kinds of Delay
a. Mora solvendi – delay on the part of debtor
b. Mora acccipiendi – delay of creditor
c. Compensatio mora – delay in reciprocal obligation
5. Effects of Delay
a. Liable for interest and damages
b. Liable even for fortuitous event when the obligation is to deliver a determinate thing
(h) Fortuitous Events
1. Any event which cannot be foreseen or which though foreseen is inevitable, independent of the will or from
aggravation of the debtor, render impossible the fulfillment of obligation
2. No person shall be responsible for fortuitous events, except:
a. Where expressly specified by law or stipulated in contract
b. When nature of the obligation requires assumption of risk
c. When debtor is guilty of fraud, negligence, delay or contravention of the terms of the obligation
d. When debtor promises to deliver same thing to two or more persons
e. When obligation to deliver arises from criminal offense
f. When obligation is generic
(i) Fraud (deceit or dolo) Deliberate or intentional evasion of the normal fulfillment of an obligation;
1. Dolo incidente (Incidental Fraud) ‐ committed in the performance of pre‐existing obligation, remedy is damages.
2. Dolo causante (Causal Fraud) – Fraud employed at the time of the execution of a contract in order to secure
consent, remedy is annulment bec of vitiation of consent
3. Demandable in all obligations
4. Waiver of future fraud is void
(j) Negligence (culpa) Omission of that diligence which is required by the nature of the obligation, but no malice
1. Culpa contractual – Negligence in the performance of contractual obligation,
a. Pre‐existing contract
b. Liable for damages based on breach of contract
c. Proof of contract and breach is enough for recovery of damage
d. Negligence of employee conclusive presumption of employer’s negligence
e. Proof of due diligence in the selection of employee not a defense
2. Culpa aquiliana – Negligence between parties not so related by any pre‐existing contract,
a. Obligation for damages based on quasi‐delict
b. No pre existing contract
c. Negligence must be proved for recovery of damage
d. Negligence of employee prima facie presumption of employer’s negligence
e. Due diligence in the selection and supervision of employee is a valid defense
3. Can be regulated by the Court depending on circumstance
4. Waiver of future negligence allowed
(k) Presumptions
1. Receipt of principal without reservation as to interest = presumption of interest paid
2. Receipt of later installment of debt without reservation of prior ones = presumption that prior ones paid

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(l) Remedies to satisfy claim
1. Exhaust property of debtor
2. Subrogated to rights and actions of debtors, except those inherent to person
3. Impugn all of acts by debtor done to defraud creditor

Kinds of Obligations:

1. Pure obligation is one which is not subject to any conditions and no specific date is mentioned for its fulfillment and is,
therefore, immediately demandable.
Example: Mr. D obliges himself to pay Mr. C 1,000,000. the obligation is immediately demandable because there is no
condition & no date is mentioned for its fulfillment
2. Conditional obligation is one which is superseded by a condition under which it was created and which is not yet
accomplished.
A condition is past event unknown to the parties or a future uncertain event which has an influence on an obligation.

Kinds of conditions:
a.) Suspensive condition – is one the happening of which will give rise to the obligation.
Example: Your father promised to give a car when you graduate.
b.) Resolutory condition – is one the happening of which will extinguish the obligation.
Example: Your father promised to give you a monthly allowance until you graduate.
c.) An express condition is one created by express words. Express conditions are usually denoted by language such as
"if", "on condition that", "provided that", "In the event that", and "subject to" to make an event a condition.
Example: A is to ship sacks of corn to B, and B agrees to either return them if they don't satisfy him, or pay for
them. The contract states, "B's duty to pay for the sacks of corn shall be conditional upon his being satisfied with
them." This is an express condition.
d.) Implied condition – A contractual condition that the parties have implicitly agreed to by their conduct or the
nature of the transaction.
Example: Ethel contracts to have Fred build her a lamp; this implies that Ethel will instruct Fred on what kind of
lamp to build, either by choosing from a catalog or perhaps giving Fred plans and with a description. Letting Fred
know what kind of lamp to build is an implied‐in‐fact condition that has to happen before Fred actually has any
duty to build it.

3. Obligation with a period is an obligation which contains a stipulation defining a period in time yet to occur.

Types of Periods:
a. Suspensive period – the obligation begins only upon the arrival of the stipulated date.
Example: Mark is obliged to pay the house amortization starting July 2009.
b. Resolutory period – the obligation is valid only up to the stipulated date.
Example: Tina bound herself to support Ariel until he reaches the age of 21.
4. Alternative obligation is an obligation that has one or more prestations/means to which the obligation can be
fulfilled. Once any one prestation has been accomplished, the obligation is satisfied and terminated.
Example: Gino obliged himself to deliver to Jerick a piano, a TV set or a refrigerator.
5. Facultative obligation is one wherein only one prestation is agreed upon but the debtor may render another in
substitution.
Example: Conrado obliged himself to give Mario a Guess perfume but they agreed that Conrado may substitute CK in
case there is no available stock.
6. Divisible obligation is obligation which is are susceptible to only partial performance. This comes initially on the
agreement by all parties on how the obligation is to be complied with and guided by the provision of law which
imposes the obligation.
Obligations and Contracts
 Example: A tenant is bound to pay two hundred dollars a year rent to his landlord, the obligation is entire, yet, if his
landlord dies and leaves two sons, each will be entitled to one hundred dollars; or if the landlord sells one undivided
half of the estate yielding the rent, the purchaser will be entitled to receive one hundred dollars, and the seller the
other hundred.
7. Indivisible obligation is an obligation that cannot be subdivided, cannot be performed in part and agreed upon as a
whole and single obligation.

Obligations deemed indivisible:

1. Obligations to give definite things;
2. Obligations which are not susceptible of partial performance;
3. Obligations provided by law to be indivisible even if the thing or service is divisible;
4. Obligations intended by the parties to be indivisible even if the thing or service is divisible.

Obligations considered under the law to be divisible:

1. Execution of a number of days of work;
2. Accomplishment of work by metrical units;
3. Analogous things which by nature are susceptible to partial performance;
4. Obligations to pay in installment.

8. Obligation with a penal clause is an obligation which stipulate a penalty if in case, the obligation is not met. These
penalties shall substitute for the indemnity for damages and interests associated with non‐compliance.
‐ A penal clause is an accessory undertaking to assume greater liability in case of breach. It is a form of guaranty for
the fulfillment of an obligation by establishing an aggravation of responsibility.
‐ A principal obligation is one that can withstand by itself and does not depend for its validity or existence upon
another obligation.
‐ An accessory obligation is one that is attached to a principal obligation and cannot stand alone.

Purposes of attaching a penal clause:

1. To ensure its performance.
2. To substitute a penalty for the indemnity for damages and the payment of interest in case of non‐
compliance
3. To punish the debtor for non‐compliance of his obligation.

Kinds of penal clause:

1. Subsidiary penal clause – when only the penalty can be demanded.
Ex. Capitol motors agreed in a contract to deliver to Mr. Santos the latest model of Mercedez Benz on or
before February 1, 2009. In case they fail to do so, they’ll have to pay a penalty of Php10,000 to Mr.
Santos.
2. Joint penal clause – when both the principal obligation and the penalty can be enforced.
Ex. ABC Builders Inc. bound themselves to build the 7‐ storey Administration building of XYZ Realty Corp.
for the amount of Php1M in 6 months time. In case of delay in the construction, ABC builders will have
to pay a penalty of Php5,000 for every week’s delay.
9. Joint obligation – the whole liability is to be paid proportionately by the different debtors and is to be demanded also
proportionately by the different creditors.
Example: A and B owe C and D Php10,000.
10. Solidary obligation – Each creditor has a right to demand, and each debtor is bound to render compliance, with the
entire prestation; but as to co‐debtor he is liable only for his share

A. Instances when obligation is solidary:

Obligations and Contracts

 i. When obligation expressly states so
ii. When law requires solidarity:
1. If 2 or more heirs take possession of estate
2. Partners in partnership
3. If principal allowed agent to act as though he has full power
4. If 2 or more appointed an agent for common undertaking or transaction
5. 2 or more people to whom a thing is loaned
6. 2 or more officious managers, unless management was assumed to save thing from imminent
danger
7. 2 or more persons liable for quas‐ delict
8. 2 or more payees when there has been payment of what is not due
9. Principal, accomplices, and accessories of a felony.
iii. When nature of obligation requires solidarity
Ex. Accident fr “Kabit” system
B. “Solidarily”, “Jointly and severally”, in solidum, together and/or separately, “I promise to pay”
C. Creditors and debtors need not be bound in the same manner and by the same periods and conditions
D. Not same as indivisible obligation
i. Solidary refers to vinculum; Indivisibility refers to prestation
ii. Solidary requires plurality of subjects
iii. In solidary, all debtors liable for breach of obligation; In indivisibility, only debtor guilty of breach of
obligation is liable for damage
iv. In indivisible obligation, other debtors not liable for insolvency; if solidary debtor becomes insolvent, the
co‐debtors bore his debt in proportion
E. Solidary creditors may do whatever may be useful to others, but not anything which may be prejudicial to the
others
F. A solidary creditor cannot assign his rights without the consent of the others, except if to co‐creditors
G. Debtor must pay to the creditor who made demand, if none demanded, then he may pay any one of the solidary
creditor
H. Novation, compensation, confusion or remission of a solidary creditor shall extinguish the obligation but the
creditor who did these acts shall be liable to the other creditors
I. No re‐imbursement if payment made after obligation prescribed or illegal
J.. Remission of the whole obligation obtained by a solidary debtor does not entitle him to reimbursement from his
co‐debtors
K. Defenses available to solidary debtors
I. Derived from nature of obligation
§ Payment, fraud, prescription, remission, illegality, non performance of condition
ii. Personal to the debtor
§ Insanity, incapacity, mistake, violence, minority
iii. Personal to the other solidary debtors
§ Partial defense

Modes of Extinguishing Obligations

1. Payment or performance
2. Loss of the thing due
(a) Lost – when perished, went out of commerce, or disappear in such a way that its existence unknown or cannot be
recovered, or becomes legally or physically impossible to perform, or so difficult as to be manifestly beyond the
contemplation of the parties.
(b) The obligation to deliver specific thing is extinguished if
1. Without the fault of debtor, and
2. Debtor not in delay
(c) Fortuitous events or force majure
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 (d) In case of partial loss the court shall determine whether it is so important as to extinguish the obligation
(e) In case lost when the thing is in the possession of debtor, presumption is it is his fault
§ Except earthquake, flood, storm or other natural calamity
(f) Creditor shall have right to go against any third person responsible for the loss.
3. Condonation or remission
a. Act of liberality by virtue of which creditor abandons his right
§ Gratuitous
§ Accepted by debtor
§ Obligation must be demandable
§ Parties must be capacitated
§ Donation not inofficious
§ Forms in express condonation
b. Implied remission
‐ Delivery of private document evidencing credit
‐ If thing pledge is found in the possession of debtor or owner of thing
‐ Renunciation of principal extinguish accessory obligation

4. Confusion or merger of the rights of creditor and debtor

§ Creditor and Debtor merged in the same person
1. Between principal debtor and principal creditor
2. Complete and definite merger
a. Merger of debtor and creditor benefits the guarantor
b. Extinguish only the portion of the joint obligation corresponding to the creditor and debtor merged
c. Merger of one solidary debtor with creditor extinguishes obligation
5. Compensation
a. Persons who in their own rights are debtors and creditors of each other extinguishes the debts to the concurrent
amount
b. Guarantor can set up compensation of what principal debtor may owe creditor
c. Compensation may be total or partial
d. Parties may agree to compensate debts not yet due
e. When one or both debts are rescissible or voidable, they may be compensated before they are judicially
rescinded or avoided
f. Requisites of legal compensation (by operation of law ):
1. Parties are principal creditors and debtors of each other
2. Both debts consist in sum of money or consumable of same kind and quality
3. Both debts are due and demandable
4. Two debts are liquidated (amount is certain)
5. No retention or controversy commenced by 3rd party
g. Compensation after assignment
i. Assignment made with consent of debtor
§ Debtor cannot set up compensation against previous creditor
ii. Assignment with knowledge but without consent
§ Debtor can set up compensation for debts before the notification
§ Debtor cannot set up compensation with respect to debts which matured after notification
iii. Assignment without knowledge of debtor
§ Debtor can set up compensation for debts maturing before he learned of assignment
h. Compensation cannot take place in following case:
i. Debts from Contracts of Depositum (A person receives a thing belonging to another for safekeeping and
of returning the same; not bank deposits)
ii. Debts from Commodatum (One person delivers to another something for him to use and return it)
iii. Claims for support due by gratuitous title

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 iv. Debts from Criminal offense
v. Taxes
6. Novation – extinction of an obligation through the creation of a new one which substitutes it
a. Requisites:
i. Previous valid obligation
ii. Agreement to enter new obligation
iii. Extinguishments of old
iv. Creation of new valid obligation
b. Must be declared in unequivocal terms
c. Or incompatible on every point – Test: Whether old and new contract can stand together each having its own
independent existence
d. Substitution of Debtor
i. Expromision – Without the knowledge or consent of debtor, at the instance of the new debtor
1. Payment by new debtor gives him right to beneficial reimbursment
2. Insolvency or non fulfillment of obligation by new debtor will not give rise to liability of old debtor
ii. Delegacion – Substitution made at the instance of old debtor
1. Payment by new debtor entitles him to reimbursement and subrogation
2. Non fulfillment of obligation by new debtor will not give rise to liability of old debtor
3. Insolvency of new debtor will revive action against old debtor if insolvency was already existing and of
public knowledge, or known to the debtor when he delegated his debt
e. If new obligation is void, the original one shall subsists
f. If original obligation is void, novation is void; except when annulment may be claimed only by debtor or when
voidable acts have been ratified
g. Subrogation – Substitution of Debtor
i. Conventional – By express agreement of the old creditor, debtor and the new creditor
ii. Legal –Without agreement, by operation of law
1. When creditor pays another creditor who is preferred, even without the debtor’s knowledge
2. When a third person, not interested in the obligation, pays with the express or tacit approval of debtor
3. When a third person interested in the fulfillment of obligation pays, even without the knowledge of
debtor
7. Death of a party in personal obligation
8. Annulment or Rescission of contract
9. Arrival of Resolutory period or fulfillment of resolutory condition
10. Impossibility of fulfillment
11. Prescription

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

Different phases or stages in the life of a contract

1. Preparation – Preliminary to formation
2. Perfection – birth of the contract
3. Consummation ‐ fulfillment

Essential characteristics of Contracts

1. Obligatory force – must be complied with in good faith
2. Autonomy – parties are free to enter such stipulations, clauses, terms and conditions
– Clauses and condtions must not be contrary to:
‐ LAW

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 ‐ Morals
‐ Good Customs
‐ Public Order
‐ Public Policy
3. Mutuality – contract must bind both parties
§ Determination can be left to third party, whose decision shall be binding only when communicated to both
parties
§ Unless such determination be evidently inequitable
4. Relativity – takes effect only bet parties, their assigns and heirs
§ Stipulation pour autrui accepted by third party
§ Where third persons comes into possesion of the object of contract creating real rights
§ Where contract is to defraud a third person
Where third person induces a contracting party to violate his contract

Different Classes of Contracts

I. According to perfection
– Consensual – Perfected by mere agreement of the parties
– Real – Requires not only consent, but also the delivery of the object
II. According to form
– Common – Do not require particular form
– Formal – Those which require particular form, like donation, mortgage
III. According to nature of vinculum
– Unilateral – Obligation of one party only
– Bilateral – Reciprocal obligations for both parties
IV. According to cause
– Onerous – Giving of an equivalent or compensation
– Gratuitous – Given without compensation, just pure liberality
V. According to risks involved
– Commutative – Prestation is pecuniarily appreciable and determined at the moment of celebration of contract
– Aleatory – Pecuniarily appreciable but not yet determined at the moment of celebration, since it depends upon the
happening of an uncertain event. Ex. Insurance
VI. According to name
– Nominate – with specific names or designation in law
– Innominate – no specific name

Essential Requisites of Contracts

‐ Consent of the contracting parties
Object certain subject matter of the contract
‐ Cause of the obligation which is established

Elements of Contract:
1. Concurrence of the offer and the acceptance
 Definite Offer that may be exactly fixed
 Assent to the terms without qualifications or conditions
 Conveyed before the death, civil interdiction, insanity, or insolvency
 Qualified acceptance is a counter offer
 Perfected when acceptance comes to knowledge of offer or offer can be withdrawn anytime before
acceptance, unless option is founded on consideration
 If offer made thru agent, accepted when communicated to the agent
2. By parties with legal capacity to contract

Obligations and Contracts

  Not minors, insane or demented, deaf‐mutes who do not know how to write, incompetents under
guardianship, civil interdiction
 Minor can be liable if he misrepresents his age
 Prohibited by law from entering into contracts
‐ Husband and Wife to each other
‐ Insolvents
‐ Persons prohibited from giving donations
‐ Adultery, concubinage
‐ In consideration of criminal offense
‐ Made to public officer, spouse, by reason of office
‐ Persons with fiduciary relations
‐ Guardian, for property under his guardianship
‐ Agents, for property entrusted to them
‐ Executor/administrator
Public officers, judges, for property under their jurisdiction
 Intelligently, freely given, consciously
‐ Vices of the will
§ Mistake ‐ False notion of a thing or a fact materrial to the contract
Simple mistake gives rise to correction
Render voidable in following cases:
§ Mistake as to object of the contract
Identity of thing, Substance, Condition
Quantity only if principal reason

Mistake of Law will not make it voidable except:

‐ Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated
‐ Mistake as to person
if such identity or qualification is principal cause of contract
‐ Violence – Employment of external physical force, irresistible and serious to wrest consent
‐ Intimidation – Moral compulsion to influence another to give his consent thru fear of imminent or
grave evil
‐ Force employed must be serious or irresistible
‐ Determining cause for the party in entering into the contract
‐ Undue Influence – Improper advantage of his power over the will of another depriving the latter of
reasonable freedom of choice
· Confidential, Family, Spiritual and other relations or
· Person influenced suffering from mental weakness, ignorant, financial distress
§ Fraud – Insidious words or machinations of one of the contracting parties induced the other to enter into a
contract, which without them he would not have agreed; Failure of one party to disclose facts to other party when
there is a duty to reveal them
Dolo incidente (Incidental Fraud) ‐ committed in the performance of pre‐existing obligation, remedy is
damages
Dolo causante (Causal Fraud) – Fraud employed at the time of the execution of a contract in order to secure
consent, remedy is annulment bec of vitiation of consent
o Must be employed by one of the contracting parties,
o but not by both or by third parties
o Must be Serious

Must have induced the other party to enter into the contract
‐ Vices of Declaration

Obligations and Contracts

Freedom to contract guaranteed
The right to enter into contract is one of the liberties guaranteed to the individual by the Constitution. However, the
constitutional prohibition against the impairment of contractual obligations refers only to legally valid contracts. In appropriate
cases, it cannot be invoked as against the right of the state to exercise its police power. In other words, an individual does not
have an absolute right to enter into any kind of contract.

Limitations on contractual stipulations.

There are limitations to the freedom to contract.
(1)Law — Contract entered into must be in accordance with, and not repulsive to, an applicable statute. Its terms are
embodied in every contract. The law thus sets limits.
(2)Police power* — When there is no law in existence or when the law is silent, the will of the parties prevails unless their
contract contravenes the limitation of morals, good customs, public order, or public policy.

Examples: Which of these contracts are valid?

1. A contract whereby X promised to live as the common‐law wife of Y without the benefit of marriage in consideration of P1,
000,000.00 is immoral and, therefore, void.
2. An agreement whereby X is to render service as a servant to Y without compensation as long as X has not paid his debt is
reprehensible and censurable. It is also contrary to law.
3. X entered into a contract whereby X binds himself to slap his father. This contract is void because it is against the good
custom of showing respect to our parents. 4. A stipulation in a contract of lease whereby the landlord can use force to eject the
tenant in case of failure of the latter to pay the rent agreed upon is void as being against public order.

Obligations and Contracts

Classification of contracts according to its name or designation
 Nominate contract or that which has a specific name or designation in law (e.g., commodatum, lease, agent sale, etc.)
 Innominate contract or that which has no specific name or designation in law.

Kinds of innominate contract

 do ut des (I give that you may give);
 do ut facias (I give that you may do);
 facio ut des (I do that you may give); and
 facio ut facias (I do that you may do).
Do ut des is, however, no longer an innominate contract. It has already been given a name of its own, i.e., barter or
exchange.
Scenario: A, was one of two lawyers who represented B in suit filed by the latter for reinstatement to his position in the Central
Bank. The Court ruled in favor of B against the Central Bank. By reason of misunderstanding as to the amount of attorney’s fees,
A filed a suit against B. B alleged that A was not entitled attorney’s fees because there had been no agreement to that effect.
Court Ruling: The Court declared that the payment of attorney’s fees to A may also be justified by virtue of innominate contract
of facio ut des which is based on the principle that no one shall unjustly enrich himself at the expense of another.

Reasons for innominate contracts

The impossibility of anticipating all forms of agreement on one hand, and the progress of man’s sociological and economic
relationships on the other, justify this provision. A contract will not, therefore, be considered invalid for failure to conform
strictly to the standard contracts outlined in the Civil Code. It is sufficient that it has all the elements of a valid contract.

Rules governing innominate contracts

Innominate contracts shall be governed by:
(1) the agreement of the parties;
(2) the provisions of the Civil Code on obligations and contracts;
(3) the rules governing the most analogous contracts; and
(4) the customs of the place

Determination of performance by a third person

Compliance with a contract cannot be left to the will of one of the contracting parties. However, under the above
provision, the determination of its performance may be left to a third person. In such case, the obligation does not depend
upon a potestative condition. The decision, however, shall bind the parties only after it has been made known to both of them.

Example: Sam sold his parcel of land to Bert. It was agreed that Charlie, a real estate appraiser, would be the one to determine
the reasonable price of the land. Charlie, then, fixed the price after considering all the circumstances and factors affecting the
value of the land. In this case, Charlie must make known his decision to Sam and Bert who will be bound by the same.

Article 1310. The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is
equitable under the circumstances. Effect where determination is inequitable A contracting party is not bound by the
determination if it is evidently inequitable or unjust as when the third person acted in bad faith or by mistake. In such case, the
courts shall decide what is equitable under the circumstances.

Scenario: Santos entered into a contract with Reyes whereby Santos agrees to sell Reyes 10 sacks of rice at a reasonable price
to be determined by their mutual friend Ledesma. This is freely agreed by both parties. Ledesma then fixes the price at P1750
per cavan, having due regard to all circumstances, the market, etc, and informs both Santos and Reyes of his decision. Santos is
then obliged to deiver to Reyes 10 sacks of rice while Reyes is under obligation to pay the reasonable price fixed by the third
person Ledesma. Supposing Ledesma fixes the price of the 10 sacks at P1000 per sack where the current price is P1750. In such
case, Santos need not deliver the 10 sacks of rice because the price fixed by Ledesma is highly inequitable, and unjust. He may
file a case in court for the court to fix the just price.

Persons affected by a contract

Obligations and Contracts

(1) General rule. — Contract takes effect only between the parties, their assigns (i.e., transferees), and heirs. This means that
only the parties, their assigns and heirs can have rights and obligations under the contract. As a rule, the act of declaration, or
omission of a person cannot affect or prejudice another without the latter’s authorization or ratification.
(2) Exceptions. — The cases when a contract are effective only between the parties are when the rights and obligations arising
from the contract are not transmissible: (a) by their nature (like a contract involving personal qualifications, as painting,
singing, etc.); or (b) by stipulation (in accordance with the principle of freedom to contract); or (c) by provision of law (as in
agency, partnership, and commodatum, when death extinguishes the legal relationships).
Examples:
1.Don is indebted to Matt in the amount of P80,000. On the due date of the obligation, Matt dies leaving his son Chad as
his sole heir. Is the right of Matt transmissible to his heir, Chad?
2.Art engages the services of Ben, a lawyer, to defend him on a case. If Ben dies before the case is heard, is the obligation
of B to defend Art transmissible to his son?
3.Cory entered into a contract with Lupita whereby Cory agreed to sell her bungalow to Lupita for P800,000 on June 30,
2002. They stipulated that in case either one of them dies before that date, the right or obligation of the deceased shall not
pass to her heirs. Cory died before June 30, 2002. Could their heirs be compelled to sell the bungalow to Lupita?
4.Martin, Fred and Carlos are partners in a duly organized partnership contributing P1M each to the common fund. In case,
Martin dies, the partnership shall be dissolved. Can the heirs become partners in the stead?
5.Barrera is indebted to Padilla in the amount of P1,000,000. Upon Barrera’s death, he leaves properties valued at
P600,000 to his son Ricardo. Is Ricardo liable to pay Padilla the amount of P600,000, the value of the property which he
inherits from
his father Barrera? Can Padilla compel Ricardo to pay the balance of P400,000?

Obligations and Contracts

Cases when strangers or third persons are affected by a contract
A third person is one who has not taken part in a contract and is, therefore, a stranger to the contract. As a general rule,
a third person has no rights and obligations under a contract to which he is a stranger. He has no standing in law to demand the
enforcement of a contract or question its validity. There are cases, however, when third persons may be affected by a contract.
Among such cases are the following:
(a) In contracts containing a stipulation in favor of a third person (stipulation pour autrui);
(b) In contracts creating real rights;
(c) In contracts entered into to defraud creditors; and
(d) In contracts which have been violated at the inducement of a third person.

Stipulation pour autrui - It is a stipulation in a contract clearly and deliberately conferring a favor upon a third person who has
a right to demand its fulfillment provided he communicates his acceptance to the obligor before its revocation.
Example: Tom leased his house to Abel for 2 years at an agreed rental of P10,000 a month. They stipulated that the P10000
monthly rental should be given to Mar, a godson of Tom, as his monthly allowance. Mar communicated his acceptance of the
benefit to Abel, the debtor, before Tom could revoke the same. The stipulation in the contract between Tom and Abel
expressly granting a benefit to Mar who accepts the same is known as stipulation pour autrui.

Article 1312. In contracts creating real rights, third persons who come into possession of the object of the contract are bound
thereby, subject to the provisions of the Mortgage Law and the Land Registration Laws.

Article 1313. Creditors are protected in cases of contracts intended to defraud them.
Article 1313 is another qualification to the rule that contracts take effect only between the parties. The creditor is
given the right to impugn the contracts of his debtor intended to defraud him.
Example: Dina is indebted to Cita in the amount of P800,000.00. Dina sells a parcel of land to Tom in order that Cita may not
attach the land in payment of his debt and Dina has no other property. Cita, who is a stranger to the contract between Dina
and Tom, is given by law the right to ask for the rescission or cancellation of the sale in order that he may be paid his claim.

Article 1314. Any third person who induces another to violate his contract shall be liable for damages to the other
contracting party.
Example: Sam agreed to sell his parcel of land to Bert for P900,000.00. Sam sells the land to Charlie instead because of the
inducement of Dina. In this case, Bert can sue Dina for damages. However, the liability of Dina for damages cannot be more
than that of Sam for the latter’s violation of his contract. To hold Dina liable for damages in excess of those that can be
recovered against Sam “would lead to a result at once grotesque and unjust.”

Article 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment
of what has been expressly stipulated but also to all the consequences which, according to their nature, may be keeping with
good faith, usage and law.

Article 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the
obligation.

Classification of contracts according to perfection

Consensual contract or that which is perfected by mere consent (e.g., sale, lease, agency) Real contract or that which is
perfected by the delivery of the thing subject matter of the contract (e.g., deposit, pledge, commodatum, etc.)
Solemn contract or that which requires compliance with certain formalities prescribed by law, such prescribed form being
thereby an essential element thereof (e.g., donation of real property which must be in a public instrument)

Examples:
1.Today Sam and Bert enter into a contract whereby Sam binds himself to sell his car to Bert for P300,000.00. Is the
contract deemed perfected although there has yet no delivery of the car and payment of the price made?
2.Dina borrowed from Cita P200,000.00. As security for the debt, Dina promised to pledge his diamond ring to Cita. Before
the delivery of the ring to Cita, is the contract of pledge perfected? If Dina lat er on refuses to pledge the ring, can Cita
demand the payment of the obligation although it is with a period? Can Cita require Dina to deliver the ring as security?
Effect of perfection of the contract
From the moment the parties come to an agreement on a definite subject matter and valid consideration, they are bound not
only –
(1) to the fulfillment of what has been expressly stipulated but also
(2) to all the consequences which according to their nature, may be in keeping with good faith, usage, and law.
Example: Sam agreed to sell his horse to Bert. It was stipulated that Sam should deliver the horse to Bert the next day. What is
Sam’s obligation then?

Article 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a
right to represent him. A contract entered into in the name of another by one who has no authority or legal representation, or
who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose
behalf it has been executed, before it is revoked by the other contracting party.

Unauthorized contracts are unenforceable.

As a general rule, a person is not bound by the contract of another of which he has no knowledge or to which he has
not given his consent. A contract involves the free will of the parties and only he who enters into the contract can be bound
thereby(see Art. 1311, par. 1.) Thus, a contract entered into in the name of another by one who has no authority is
unenforceable against the former unless it is ratified by him before it is revoked by the other contracting party. An
unauthorized contract is not to be confused with a contract for the benefit of a third person who may demand its fulfillment
provided the requisites mentioned are present.

Unauthorized contracts can be cured only by ratification

The mere lapse of time cannot give efficacy to such a contract. The defect is such that it cannot be cured except by the
subsequent ratification of the person in whose name the contract was entered into or by his duly authorized agent and not by
any other person not so empowered. The ratification must be clear and express so as not to admit of any doubt or vagueness.

Example: Jim owns a motor boat. His friend, Archie, without the knowledge and consent of Jim, enters into a contract of sale of
the motor boat with Ben for P800,000. After the perfection of the contract, Ben goes to Jim to pay P800,000 for the motor boat
and demand its delivery. Jim refuses to accept the payment and to deliver the motor boat to Ben. Under the circumstances, can
Ben juridically compel Jim to accept the payment and deliver the boat? Supposing Jim knowing all the facts regarding the
transaction accepts
the payment for the motor boat, can Ben enforce the contract against him so as to
compel him to deliver the boat?
When a person is bound by the contract of another.
In order that a person may be bound by the contract of another, there are two requisites:
1.The person entering into the contract must be duly authorized, expressly or impliedly, by the person in whose name he
contracts or he must have, by law, a right to represent him (like a guardian or an administrator); and
2.He must act within his power. A contract entered into by an agent in excess of his authority is unenforceable against the
principal, but the agent is personally liable to the party with whom he contracted where such party was not given sufficient
notice of the limits of the powers granted by the principal.
Example: Pat authorized Ann to sell his car for P400,000.00 cash. Ann sold the car to Che for P400,000.00 payable in ten (10)
monthly installments. Can Che compel Pat to accept the monthly installments and to deliver the car?