EXTINGUISHMENT OF OBLIGATION

Art. 1231 Obligations are extinguished

1. By payment of performance

2. By the loss of the thing due

3. By the condonation or remission of the debt

4. By the confusion or merger of the rights of the

creditor and debtor

5. By compensation

6. By novation

Other causes: annulment, rescission, fulfillment of a

resolutory condition, and prescription

Death is not a valid cause for the extinguishment of a

civil obligation. Had the only basis been the

commission of estafa, it is clear that the

extinguishment of the criminal responsibility would

also extinguish the civil liability, provided that death

comes before final judgment.

PAYMENT OR PERFORMANCE

Art. 1232

Payment is that mode of extinguishing obligations

which consists of:

a. The delivery of money; or

b. The performance in any other manner of an

obligation

Payment must be complete in order to be considered

valid

For payment to properly exist, the creditor has to

accept the same, expressly or implicitly

Art. 1233

Requisites for a valid payment:

1. The very thing or service contemplated must be

paid.

2. Fulfillment must be complete.

If the debt is a monetary obligation, by delivery of the

money. The amount paid must be full, unless

otherwise stipulated in the contract.

If the debt is the delivery of a thing or things, by

delivery of the thing or things.

If the debt is the doing of a personal undertaking, by

the performance of said personal undertaking.

If the debt is not doing of something, by refraining

from doing the action.

An alleged creditor has the burden of sowing that a

valid debt exists.

Once he does this, the debtor has the burden of

proving that he has paid the same. If a promissory

note is still in the creditor’s possession, the

presumption is that it has not yet been paid.

A debtor is justified in demanding that a creditor issue

a receipt when the debt is paid.

Art. 1234

In case of substantial performance, the obligee is

benefited. So the obligor should be allowed to recover

as if there had been a strict and complete fulfillment,

less damages suffered by the oblige.

The liability of the debtor for damages suffered by the

creditor in case of substantial performance does not

arise under the conditions set forth in Art. 1235.

Inasmuch as substantial performance in good faith

may already be equivalent to “fulfillment” or

“payment”, it follows that the right to rescind cannot

be used simply because there have been slight

breaches of the obligation.

Substantial performance or compliance is a

performance according to the fair intent of the

contract, with an attempt in good faith to perform.

Fair dealing and equity demand a faithful compliance

of one’s contractual obligations.

Art. 1235

The obligation is deemed fully complied with when

the obligee accepts the incomplete or irregular

performance without expressing any protest or

objection.

The mere receipt of a partial payment is not

equivalent to the required acceptance of performance

as would extinguish the whole obligation.

A creditor who fives a receipt for a partial payment

does not necessarily acquiesce to such incomplete

payment. His actuations may show his dissatisfaction.

Art. 1236

The creditor can refuse payment by a stranger except:

a. If there is a stipulation allowing this; or

b. If said third person has an interest in the

fulfillment of the obligation (co-debtor,

guarantor, joint debtor)

The third person may pay:

a. With the knowledge and consent of the debtor.

(The payor is entitled to reimbursement and

subrogation to such rights).

b. Without the debtor’s knowledge or against his

will. (The payor is not entitled to subrogation;

he is only allowed beneficial reimbursement).

Art. 1237

The payor (in behalf of the debtor) cannot compel the

creditor to subrogate him in his rights when the

payment was done without the knowledge or against

the will of the debtor.

Subrogation is the act of putting somebody into the

shoes of the creditor, enabling the former to exercise

all the rights and actions that could have been

exercised by the latter.

Subrogation vs Reimbursement

In subrogation, recourse can be had to the mortgage

or guaranty or pledge; in reimbursement, there is

no such recourse.

In subrogation, the debt is extinguished in one

sense, but a new creditor, with exactly the same

rights as the old one, appears on the scene. In

reimbursement, the new creditor has different

rights, so it is as if there has indeed been an

extinguishment of the obligation.

In subrogation, there is something more than a

personal action of recovery; in reimbursement,

there is only a personal action to recover the

amount.

In both, there can be recovery of what the stranger

“has paid” (not necessarily the amount of the credit)

Art. 1238

Payment made by a third person who does not intend to

be reimbursed by the debtor is deemed to be a

donation, which requires the debtor’s consent. But the

payment is valid as to the creditor who has accepted it.

No one should be compelled to accept the generosity

of another.

The consent of the debtor is indispensable.

Art. 1239

Payment by an incapacitated person:

a. Payment is not valid – if accepted

b. Creditor cannot even be compelled to accept it

c. The remedy of consignation would not be proper

Art. 1240

To whom payment must be made:

a. To the person in whose favor the obligation has

been constituted (the creditor)

b. To the successor-in-interest (heirs)

c. To any person authorized to receive it

Art. 1241

Payment to an incapacitated person:

1. Payment to a person incapacitated to manage or

administer his property is valid only:

a. If the incapacitated person has kept the

thing delivered; or

b. Insofar as the payment has been beneficial

to him.

Payment to a third party not duly authorized:

1. The payment is valid but only to the extent of

benefit to the creditor.

2. Instances when benefit to the creditor is

presumed:

a. If after the payment the third person

acquires the creditor’s rights;

b. If the creditor ratifies the payment to the

third person;

c. If by the creditor’s conduct, the debtor has

been led to make the payment.

Art. 1242

Payment made in good faith to any person in possession

of the credit shall release the debtor.

Payment by payor must be made in good faith.

The payee must be in possession of the credit itself

(not merely the document evidencing the credit).

Art. 1243

Payment made to the creditor by the debtor after the

latter has been judicially ordered to retain the debt shall

not be valid.

The judicial order may have been prompted by an

order of attachment, injunction or garnishment.

Interpleader is the action in which a certain person in

possession of a certain property wants claimants to

litigate among themselves for the same.

Injunction is a judicial process by virtue of which a

person is generally ordered to refrain from doing

something.

Art. 1244

Debtor cannot compel creditor to accept a different

object

Instances when Art. 1244 does not apply:

1. In case of facultative obligations;

2. In case there is another agreement resulting in

either:

a. Dation in payment; or

b. Novation

3. In case of waiver by the creditor (expressly or

impliedly)

Art. 1245

Dation in payment (datio in solutum; adjudicacion en

pago) is that mode of extinguishing an obligation

whereby the debtor alienates in favor of the creditor,

property for the satisfaction of monetary debt.

Sale vs Dation in Payment

In Sale:

There is no pre-existing credit

This gives rise to obligations

The cause or consideration here is the price or the

obtaining of the object

There is greater freedom in the determination of the

price

The giving of the price may generally end the

obligation of the buyer

In Dation in Payment

There is a pre-existing credit

This extinguishes obligations

The cause or consideration here is the

extinguishment of the debt r the acquisition of the

object offered in credit

There is less freedom in determining the price

The giving of the object in lieu of the credit may

extinguish completely or only partially the credit

Conditions under which a dation in payment would be

valid:

1. If the creditor consents

2. If the dation in payment will not prejudice the

other creditors

3. If the debtor is not judicially declared insolvent

Art. 1246

If the obligation consists in the delivery of a specific

thing, the very thing must be delivered.

However, if the obligation is to deliver a generic thing,

the purpose of the obligation and other circumstances

shall be taken into consideration to determine the

quality or kind of thing to be delivered.

Art. 1247

The extrajudicial expenses of payment are for the

account of the debtor. The reason is that the

obligation is extinguished when payment is made and

it is the debtor who is primarily benefited.

Art. 1248

In order that payment may extinguish an obligation, it

is necessary that there be complete performance of

the prestation.

The creditor may accept but he cannot be compelled

to accept partial performance.

The debtor has the duty to comply with the whole of

the obligation but he cannot be required to make

partial payments if he does not wish to do so.

Exceptions when partial performance is allowed:

1. When there is a stipulation to this effect;

2. When the different prestations are subject to

different conditions or different terms;

3. When a debt is in part liquidated and in part

unliquidated, in which case performance of the

liquidated part may be insisted upon either by

the debtor or the creditor;

4. When a joint debtor pays his share or the

creditor demands the same;

5. When a solidary debtor pays only the part

demandable because the rest are not yet

demandable on account of their being subject to

different terms and conditions;

6. In case of compensation, when one debt is larger

than the other, it follows that a balance is left;

7. When work is to be done by parts.

Art. 1249

Legal tender is that which a debtor may compel a

creditor to accept in payment of the debt.

Promissory notes, checks, bills of exchange and other

commercial documents are not legal tender and,

therefore, the creditor cannot be compelled to accept

them. This is true even though the check is certified,

or is a MC. But the creditor may accept them, without

the acceptance producing the effect of payment.

The demandability of the original obligation is

suspended. The creditor must cash the instrument,

and it is only when it is dishonored, that he can bring

an action for nonpayment of the debt.

Art. 1250

The purchasing value of the currency at the time of

the establishment of the obligation shall be the basis

of payment, in case of any extraordinary increase or

decrease in the purchasing power of the currency

which the parties could not have reasonably foreseen.

Art. 1251

Where payment must be made

1. If there is a stipulation, in the place designated.

2. If there is a stipulation and the thing to be

delivered is specific, the payment shall be made

at the place where the thing was, at the

perfection of the contract.

3. If there is no stipulation

a. If it is an obligation to deliver a

determinate specific thing, then in the

place where the thing might be a t the time

the obligation was constituted.

b. If the obligation is any other thing,

delivery must be made at the domicile of

the debtor.

APPLLICATION OF PAYMENTS

Art. 1252

Special forms of payment

1. Application of payments

2. Dation in payment

3. Assignment in favor of creditors (“cession”)

4. Tender of payment and consignation

Application of payment is the designation of the debt to

which should be applied the payment made by a debtor

who owes several debts in favor of the same creditor.

Requisites for Application of Payment

1. There must be two or more debts

2. The debts must be of the same kind

3. The debts are owed by the same debtor in favor

of the same creditor

4. All the debts must be due, unless the contrary has

been stipulated

5. The payment is not enough to extinguish all the

debts

It is the debtor who is given by the law the right to

select which of his debts he is paying. This right is not

absolute. He must indicate at the time of making the

payment, not afterwards, which particular debt is

being paid.

The right to make the application once exercised is

irrevocable unless the creditor consents to the

change. The revocation in the application will not be

allowed if third persons would be prejudiced.

The debtor makes the designation. If not, the creditor

makes it, by so stating in the receipt that he issues. If

neither has made the application, then application is

made by operation of law.

If the creditor makes the application without the

knowledge and consent of the debtor, the application

is not valid.

Art. 1253

Interest earned paid ahead of principal.

The debtor cannot insist that his payment be credited

to the principal instead of the interest. However, if the

creditor agrees, this is all right.

Art. 1254

Rules incase no application of payment has been

voluntarily made:

1. Apply it to the most onerous

2. If the debts are of the same nature and burden,

application shall be made to all proportionately

The “more burdensome” rule does not apply when the

debtor has made application of the payment.

When it cannot definitely be determined whether one

debt is more burdensome than the other, both will be

considered equally burdensome, and hence payment

must be applied to both pro rata.

PAYMENT BY CESSION

Art. 1255

Cession (or assignment in favor of creditors) is the

process by which a debtor transfers all the properties

not subject to execution in favor of his creditors so that

the latter may sell them, and thus apply the proceeds to

their credits.

Kinds of Assignment

1. Legal

2. Voluntary

Requisites for Voluntary Assignment

1. More than one debt

2. More than one creditor

3. Complete or partial insolvency of debtor

4. Abandonment of all debtor’s property not

exempt from execution (unless exemption is

validly waived by debtor) in favor of creditors;

5. Acceptance or consent on the part of the

creditors (for it cannot be imposed on an

unwilling creditor)

Effect of Voluntary Assignment

1. The creditors do not become the owners; they

are merely assignees with authority to sell (if

ownership is transferred, this becomes a dation

in solutum)

2. The debtor is released up to the amount of the

net proceeds of the sale. The balance remains

collectible.

3. Creditors will collect credits in the order of

preference agreed upon, or in default of

agreement, in the order ordinarily established

by law.

Cession vs Dacion en Pago

In Dacion en Pago

Does not affect all the properties

Does not require plurality of creditors

Only the specific or concerned creditor’s consent is

required

May take place during the solvency of the debtor

Transfers ownership upon delivery

This is really an act of novation

In Cession

Affects all the properties of the debtor

Requires more than one creditor

Requires consent of all the creditors

Requires full or partial insolvency

Does not transfer ownership

Not an act of novaiton

TENDER OF PAYMENT AND CONSIGNATION

Tender of payment is the act of offering the creditor

what is due him together with a demand that the

creditor accept the same.

Consignation is the act of depositing the thing due with

the court or judicial authorities whenever the creditor

cannot accept or refuses to accept payment.

Art. 1256

Tender of payment without consignation does not

extinguish the debt; consignation must follow.

Requisites for a Valid Tender of Payment

1. It must be made in legal tender

2. It must include whatever interest is due

3. It must be unconditional

4. The obligation must already be due

When Consignation is Sufficient even Without a

Prior Tender

1. When the creditor is absent or unknown or does

not appear at the place of payment

2. When the creditor is incapacitated to receive

payment at the time it is due

3. When, without just cause, the creditor refuses to

give a receipt

4. When two or more person claim the same right

to collect

5. When the title of the obligation has been lost

6. When the debtor had previously been notified by

the creditor that the latter would not accept any

payment

Art. 1257

Essential Requisites for Consignation

1. Existence of a valid debt

2. Valid prior tender, unless tender is excused

3. Prior notice of consignation

4. Actual consignation (deposit)

5. Subsequent notice of consignation

Effects of the Deposit

1. The property is “in custodial egis”

2. Be exempted from attachment and execution

3. If the property is perishable by nature, the court

may order the sale of the property

4. The debtor, by consigning the thing, practically

makes himself the agent or receiver of the court.

This is true when the object involved is real

property. The proper thing to do is to ask the

court for a receivership.

Art. 1258

Consignation, by depositing the thing or sum due with

the proper judicial authority, is necessary to effect

payment.

As tender of payment must precede consignation, the

tender must be proved by the debtor in the proper

case.

In other cases, when tender is not required, only prior

notice to interested persons of the consignation needs

be probed.

Art. 1259

Creditor bears expenses of consignation. If not

properly made, the debtor bears the expenses.

Art. 1260

Effects if Consignation has been Duly Made

1. The debtor may ask the judge to order the

cancellation of the obligation.

2. The running of interest is suspended.

3. Before the creditor accepts, or before the judge

declares that consignation has been property

made, the obligation remains. No judicial

approval is needed if all the essential requisites

for a valid consignation are present.

Effects of Improper Consignation

1. The obligation remains.

2. If at the time of consignation the debt was

already due and requisites for consignation are

absent, the debtor is in default.

When the Debtor may Withdraw the Thing Consigned

1. As a matter of right

a. Before the creditor has accepted the

consignation

b. Before there is a judicial declaration that

the consignation has been properly made

2. As a matter of privilege: when after the

consignation had been properly made, the

creditor authorizes the debtor to withdraw the

thing

Art. 1261

The creditor shall lose every preference which he may

have over the thing, and the co-debtors (solidary

debtors), guarantors, and sureties shall be released.

LOSS OF THE THING DUE

When is There a Loss:

1. When the object perishes

2. When it goes out of commerce

3. When it disappears in such a way that

a. Its existence is unknown

b. Or it cannot be recovered

Art. 1262

Loss of a determinate thing is the equivalent of

impossibility of performance in obligations to do

referred to in Art. 1266.

An obligation to give may consist of an obligation:

a. To give a generic thing (genus never perishes)

b. To give a specific thing

In order that an obligation may be extinguished by the

loss of the thing, the following requisites must be

present:

1. The obligation is to deliver a specific or

determinate thing;

2. The loss of the thing occurs without the fault of

the debtor; and

3. The debtor is not guilty of delay.

When the loss of thing will not extinguish liability even

in the absence of fault or delay:

1. When the law so provides (1170, 1165, 1263);

2. When the stipulation so provides;

3. When the nature of the obligation requires the

assumption of risk (1174 par. 2); and

4. When the obligation to deliver a specific thing

arises from a crime.

Instances when the Law requires liability even in the

case of a Fortuitous Event

1. When the debtor is in default;

2. When the debtor has promised to deliver the

same thing to two or more persons who do not

have the same interest;

3. When the obligation arises from a crime;

4. When a borrower has lent the thing to another;

5. When the thing loaned has been delivered with

appraisal of the value

6. When the payee in solutio indebiti is in bad faith.

Effect of Loss on an Obligation to Deliver a Specific

Thing

a. General rule – the obligation is extinguished

b. Exceptions –

1. If the debtor is at fault (Art. 1262)

2. When the debtor is made liable for a

fortuitous event because

i. Of a provision of law

ii. Of a contractual stipulation

iii. The nature of the obligation requires

the assumption of risk on the part of

the debtor

Art. 1263

The obligation continues to exist because a generic

thing does not really perish.

Exceptions:

1. If the generic thing is delimited

2. If the generic thing has already been segregated

or set aside, in which case, it has become

specific.

An obligation to pay money is generic.

Art. 1264

In certain cases, partial loss may indeed be equivalent

to a complete loss.

Art. 1265

Presumption that loss was due to debtor’s fault

The presumption of fault does not apply in the case of

a natural calamity

Art. 1266

Loss in personal obligation without the debtor’s fault –

a. A legal impossibility; or

b. A physical impossibility

This impossibility must take place after the

constitution of the obligation

If the obligation is impossible from the very

beginning, the obligation is void.

Art. 1267

Refers to moral impossibility or impracticability due

to change of certain conditions (a treaty or agreement

remains valid only if the same conditions prevailing at

the time of contracting continue to exist at the time of

performance).

Impossibility of performance releases the obligor.

Art. 1268

Another instance where a fortuitous event does not

exempt the debtor from liability.

The obligation subsists except when the creditor

refused to accept the thing (e.g., property stolen from

him) without justification, after it had been offered to

him. The creditor/offended party is in mora

accipiendi.

Art. 1269

The creditor is given the right to proceed against the

third person responsible for the loss. There is no need

for an assignment by the debtor. The rights of action

of the debtor are transferred to the creditor from the

moment the obligation is extinguished, by operation

of law to protect the interest of the latter by reason of

the loss.

CONDONATION OR REMISSION OF THE DEBT

Art. 1270

Condonation or remission is the gratuitous

abandonment by the creditor of his rights against the

debtor.

Essential Requisites for Remission

1. There must be an agreement

2. The parties my be capacitated and must consent

3. There must be subject matter

4. The cause or consideration must be liberality

5. The obligation remitted must have been

demandable at the time of remission

6. The remission must not be inofficious

7. Formalities of a donation are required in the

case of an express (not implied) remission

8. Waivers or remissions are not to be presumed

generally

Classes of Remission

a. As regards to its effect or extent

1. Total

2. Portion

b. As regards its date of effectivitiy

1. Inter vivos (during life)

2. Mortis cause (after death)

c. As regards its form

1. Implied or tacit (this requires no

formality; conduct is sufficient)

2. Express or formal (this requires the

formalities of a donation or a will)

Art. 1271

With the delivery of the private instrument, a

remission or renunciation is presumed.

Example of implied or tacit remission.

If the debt is not yet paid, the creditor would need the

document to enforce payment. In case he voluntarily

delivers it to the debtor, the only logical inference is

that he is renouncing his right. However, evidence is

admissible to show otherwise.

Art. 1272

If the document is later found in the hands of the

debtor and it is now known how he came into

possession of the same, the presumption is that it was

voluntarily delivered by the creditor. This

presumption of voluntary delivery gives rise to the

presumption of remission.

If the document is found in the possession of a joint

debtor, only his debt has been remitted.

If the document is found in the possession of a

solidary debtor, the whole obligation has been

remitted.

Art. 1273

Renunciation of the principal debt extinguishes the

accessory obligation.

Art. 1274

If the thing pledged is later found in the hands of the

debtor or the third person only the accessory

obligation of the pledge is presumed remitted, not the

obligation itself. The debtor shall continue to be

indebted by the does not have to return the thing

pledged.

The presumption is only disputable, for the debtor or

the third person may be in possession of the property

by theft or because it had been sent for repairs, or for

similar causes.

CONFUSION OR MERGER OF RIGHTS

Art. 1275

Confusion or merger is the meeting in one person of the

qualities of creditor ad debtor with respect to the same

obligation.

Requisites of a Valid Merger

1. It should take place between the principal

debtor and creditor. There can be no confusion

or merger if the debtor and creditor represent

(different) juridical entities even if the offers of

both are the same.

2. The merger must be clear and definite

3. The very obligation involved must be the same

or identical.

Mere transfer to a third person rights belonging to

both the debtor and the creditor but not the credit as

against the debt does not result in merger.

Real rights, such as usufruct over property, may be

extinguished by merger when the naked owner

himself becomes the usufructuary.

If the reason for the confusion ceases, the obligation is

revived.

If the mortgagee becomes the owner of the property

that had been mortgaged to him, the mortgage is

naturally extinguished but the principal obligation

may remain.

Art. 1276

The extinguishment of the accessory obligation does

not carry with it that of the principal obligation.

Merger which takes place in the person of the

guarantor, while it extinguishes the guaranty, leaves

the principal obligation in force.

Art. 1277

Confusion in a solidary obligation

There is only one obligation and every debtor is

individually responsible for the payment of the

whole obligation.

Confusion in a joint obligation

There are as many debts as there are debtors

and as many credits as there are creditors, the

debts and/or credits being considered distinct

and separate from one another.

The confusion will extinguish only the share

corresponding to the creditor or debtor in

whom the two characters concur.

Art. 1278

Compensation is the extinguishment to the concurrent

amount of the debts of two persons who, in their own

right, are debtors and creditors of each other.

Compensation vs Payment

While payment must be compete and indivisible,

in compensation, partial extinguishment is

always permitted.

Payment involves action or delivery; true

compensation (legal compensation) takes place

by operation of law.

Kinds of Compensation

a. According to its effect or extent

1. Total

2. Partial

b. According to its origin or cause

1. Legal – takes place by operation of law

2. Voluntary or conventional – due to the

agreement of the parties

3. Judicial – must be pleaded; can be made

effective only by an order from the court

4. Facultative – one of the parties has the

choice of claiming the compensation or

of opposing it

Art. 1279

Requisites of Legal Compensation

1. The parties are principal creditors and principal

debtors of each other.

2. Both debts consist in a sum of money, or of

consumable things of the same kind and quality.

3. The two debts are due or demandable.

4. The two debts are liquidated.

5. No retention or controversy commenced by a

third person.

Art. 1280

The guarantor is given the right to set up

compensation. The reason is that the extinguishment

of the principal obligation as a consequence of

compensation carries with it the accessory obligations

such as guaranty.

Art. 1281

Compensation may be total or partial. When the two

debts are of the same amount, there is a total

compensation.

Art. 1282

Voluntary or conventional compensation takes place

by agreement of the parties even if all the requisites

for legal compensation are not present. It is sufficient

that the contract of the parties, which declares the

compensation, is valid.

Art. 1283

(Judicial) Compensation may also take place when so

declared by a final judgment of a court in a suit. A

party may set off his claim for damages against his

obligation to the other party by proving his right to

said damages and the amount thereof.

Art. 1284

Rescissible (Art. 1381) and voidable obligations (Art.

1390) are valid until they are judicially rescinded or

avoided. Prior to rescission or annulment, the debts

may be compensated against each other.

To avoid unfairness if rescission or annulment is later

on decreed by the court, it is as if no compensation

ever took place. The decree acts retroactively.

Art. 1285

Where compensation has taken place before

assignment:

When compensation takes effect by operation of law

or automatically, the debts are extinguished to the

concurrent amount (Art. 1290).

If subsequently, the extinguished debt is assigned by

the creditor to a third person, the debtor can raise the

defense of compensation with respect to the debt. The

remedy of the of the assignee is against the assignor.

Of course, the right to the compensation may be

waived by the debtor before or after the assignment.

Where compensation has taken place after assignment:

Assignment with the consent of the debtor –

compensation cannot be set up as defense because

there has been consent and, therefore, a waiver.

Assignment with the knowledge but without the

consent of the debtor – compensation can be set up

regarding debts previous to the cession or

assignment. This refers to debts maturing before the

assignment (that is, before the notice); here, legal

compensation has already taken place.

Assignment without the knowledge of the debtor –

debtor can set up compensation as defense for all

debts maturing prior to his knowledge of the

assignment (whether the debts matured before or

after the assignment). The crucial time here is the

time of knowledge of the assignment, not the time of

assignment itself.

Art. 1286

The indemnity contemplated above does not refer to

the difference in the value of the things in their

respective places but to the expenses of monetary

exchange and expenses of transportation. Once these

expenses are liquidated, the debts also become

compensable. The indemnity shall be paid by the

person who raises the defense of compensation.

Art. 1287

When legal compensation cannot take place

1. Where one of the debts arises from a depositum

– a deposit is constituted from the moment a

person receives a thing belonging to another

with the obligation of safely keeping it and of

returning the same. It is the depositary who

cannot claim compensation. The depositor is

allowed to claim.

2. When one debt arises from the obligations of a

depositary.

3. Where one of the debts arises from the

obligations of a bailee in commodatum – a

commodatum is a gratuitous contract whereby

one of the parties delivers to another something

not consumable so that the latter may use the

same for a certain time and return it.

4. Where one of the debts arises from a claim for

support due by gratuitous title

Art. 1288

Where one of the debts consists in civil liability

arising from a penal offense.

Art. 1289

If a debtor has various debts which are susceptible of

compensation, he must inform the creditor which of

them shall be the object of compensation. If he fails to

do so, then the compensation shall be applied to the

most onerous obligation.

Art. 1290

Compensation takes place automatically even in the

absence of agreement between the parties, and

extinguishes reciprocally both debts to the amount of

their respective sums. As it takes place by operation of

law and without any act of the parties, it is not

required that the parties have full legal capacity to

give or receive.

NOVATION

Art. 1291

Novation is the extinction of an obligation through the

creation of a new one which substitutes it. It is the

substitution or change of an obligation by another,

which extinguishes or modifies the first, either by

changing its object or principal conditions, or

substituting anther in place of the debtor, or

subrogating a third person in the rights of the creditor.

Obligations may be modified by:

1. Changing their object or principal conditions

2. Substituting the person of the debtor

3. Subrogating a third person in the right of the

creditor

Kinds of Novation

a. According to its object or purpose

1. Real or objective – changing the object

or the principal conditions of the

obligation

2. Personal or subjective – change of

persons

i. Substituting the person of the

debtor (expromision or

delegacion)

ii. Subrogating a third person in the

rights of the creditor (changed of

creditor may be by agreement

“conventional subrogation” or by

operation of law “legal

subrogation”)

b. According to the form of its constitution

1. Express

2. Implied – when the two obligations are

essentially incompatible with each other

c. According to its extent or effect

1. Total or extinctive novation – when the

old obligation is completely

extinguished

i. Presupposes a confluence of 4

essential requisites: (1) a

previous valid obligation; (2) an

agreement of all the parties

concerned to a new contract; (3)

the extinguishments of the old

obligations; and (4) the birth of a

valid new obligation

2. Partial or modificatory – the obligation

is merely modified. Should there be any

doubt as to whether the novation is total

or partial, it shall be presumed to be

merely modificatory.

Requisites for Novation

1. The existence of a valid old obligation

2. The intent to extinguish or to modify the old

obligation by a substantial difference

3. The capacity and consent of all the parties

4. The validity of the new obligation

The consent of the creditor to the change of debtors,

whether in expromision or delegacion, is an

indispensable requirement.

Art. 1292

Novation is never presumed. It must be clearly and

unmistakable established either by the express

agreement of the parties or acts of equivalent import

or by the incompatibility of the two obligations with

each other in every material respect.

The test is whether they can stand together, each one

having an independent existence. If they cannot, they

are incompatible, and the subsequent obligation

novates the first.

Novation is classified into:

a. Express novation – it is declared in unequivocal

terms

b. Implied novation – complete or substantial

incompatibility

Implied novation is done by making substantial

changes:

a. In the object or subject matter of the contract

b. In the cause or consideration of the contract

c. In the principal terms or conditions of the

contract

Art. 1293

Kinds of personal or subjective novation:

1. Change of the debtor (passive)

2. Change of the creditor (active)

Substitution of the Debtor

a. Expromision –

1. The initiative comes from a third person

2. It is essential that the old debtor be

released from his obligation.

3. There must be a clear and categorical

agreement that the original debtor is

released from his obligation. Without

such agreement, the old debtor would

not be released from his obligation.

b. Delegacion –

1. Where the initiative comes from the

debtor;

2. The three parties (old debtor, new

debtor, and creditor) concerned must

agree.

3. The old debtor must be released from

the obligation.

Requisites for Expromision

1. The initiative must come from a third person

2. The new debtor and the creditor must consent

3. The old debtor must be excused or released

from his obligation (The old debtor’s consent or

knowledge is not required)

Requisites for Delegacion

1. The initiative comes from the old debtor

2. All the parties concerned must consent or agree

a. May be given in any form

b. May be express, or may be implied from

his acts

c. May be before or after the new debtor

has given his consent

d. May be conditional, but the same has to

be fulfilled; otherwise, there is no valid

delegacion

Rights of the new debtor:

a. Beneficial reimbursement if payment was made

without the knowledge or against the will of the

old debtor

b. Reimbursement and subrogation if it was made

with the old debtor’s consent

Art. 1294

In expromision, the new debtor’s insolvency or non-

fulfillment of the obligation will not revive the action

of the creditor against the old debtor whose

obligation is extinguished by the assumption of the

debt by the new debtor.

Art. 1295

The insolvency was already existing and of public

knowledge at the time of delegation.

Or the insolvency was already existing and known to

the debtor at the time of delegation.

If the non-fulfillment of the obligation is due to other

causes, the old debtor is not liable.

Art. 1296

Applies in particular to extinctive novation.

Accessory obligations or stipulations made in favor of

third persons remain unless said third persons have

their consent to the novation. Their rights to the

accessory obligations (which for them is really a

distinct one) should not be prejudices without their

consent.

Art. 1297

The general rule is that there is no novation if the new

obligation is void and, therefore, the original one shall

subsist for the reason that the second obligation being

inexistent, it cannot extinguish or modify the first.

To the rule is excepted the case where the parties

intended that the old obligation should be

extinguished in any event.

If the new obligation is voidable, the old obligation is

novated because a voidable obligation is valid until

annulled.

If the new obligation is subject to a condition and said

condition does not materialize, the old obligation

subsists.

If a new obligation was intended, but the new contract

was never perfected for lack of the necessary consent,

the old obligation continues.

Art. 1298

If the old obligation is void, there is no valid novation.

If the old obligation was voidable and has already

been annulled, there is no more obligation.

If the old obligation and has not yet been annulled:

a. Annulment may be claimed only by the debtor.

b. Or when ratification validates acts which are

voidable.

Rule if the old obligation was extinguished by loss:

a. If the loss was purely because of a fortuitous

event without liability on the part of the debtor,

the novation is void for there would be no

obligation to novate.

b. If the loss made the debtor liable, there is still an

existing monetary obligation that may be the

subject of novation.

Effect on voidable obligation of novation by

expromision:

a. The debtor is no doubt released from his

obligation to the creditor, for the substitution

was not done thru his initiative.

b. But when the new debtor, after payment, sues

the old debtor for beneficial reimbursement, the

old debtor can set up whatever defenses he

could have set against the creditor.

Art. 1299

If the first obligation is subject to a suspensive or

resolutory condition, the second obligation is deemed

subject to the same condition unless the contrary is

stipulated by the parties in their contract.

The efficacy of the new obligation depends upon

whether the condition affects the old condition is

complied with or not.

If the condition is suspensive, and it is not complied

with, no obligation arises.

If the condition is resolutory and it is complied with,

the old obligation is extinguished.

Art. 1300

Subrogation is the transfer to a third person of all the

rights appertaining to the creditor, including the right to

proceed against guarantors, or possessors of mortgages,

subject to any legal provision or any modification that

may be agreed upon.

Kinds of Subrogation

1. Conventional or Voluntary – this requires an

agreement (must be clearly established and the

consent of the original parties and of the

creditor.

2. Legal – this is not presumed, except in cases

expressly mentioned in the law.

Art. 1301

In conventional subrogation, the consent of all the

parties is an essential requirement.

The debtor loses the right to present against the new

creditor any defense which he, the debtor, could have

set up against the old debtor.

As between conventional subrogation and assignment

of the credit, the latter, insofar as the creditor is

concerned, should be preferred, for it has advantages,

without the corresponding disadvantages of

conventional subrogation.

Assignment of Credit vs Conventional Subrogation

In Assignment of Credit:

Here is mere transfer of the same right or credit

(the transfer did not extinguish the credit)

Does not require the debtor’s consent (mere

notification to him is sufficient)

The defect in the credit or right is not cured simply

by assigning the same

In Conventional Subrogation

Extinguishes the obligation, and creates a new one

This requires the debtor’s consent

The defect of the old obligation may be cured in

such a way that the new obligation becomes entirely

valid

Art. 1302

Three cases of legal subrogation:

1. When a creditor pays another creditor who is

preferred, even without the debtor’s knowledge.

2. When a third person without interest in the

obligation pays with the express or tacit

approval of the debtor.

3. When a third person with interest in the

obligation pays even without the knowledge of

the debtor.

Art. 1303

The credit and all the appurtenant rights, either

against the debtor, or against third person, are

transferred.

The obligation subsists in all respects before the

novation, except only for the change in the person of

the creditor.

Art. 1304

The creditor to whom partial payment has been made

by the new creditor remains a creditor to the extent of

the balance of the debt.

In case of insolvency of the debtor, he is given a

preferential right to recover the remainder as against

the new creditor.

There are two creditors: (1) the old creditor, who still

remains a creditor as to balance; and (2) the new

creditor who is a creditor to the extent of what he had

paid the old creditor.

CONTRACTS – GENERAL PROVISIONS

Art. 1305

Contract is a juridical convention manifested in legal

form, by virtue of which, one or more persons bind

themselves in favor of another or others, or

reciprocally, to the fulfillment of a prestation to give, to

do or not to do. It is the agreement of two or more

persons for the purpose of creating, modifying or

extinguishing a juridical relation between them.

Elements of a Contract

1. Essential elements – consent, subject matter,

cause or consideration.

2. Natural elements – those found in certain

contracts and presumed to exist, unless the

contract has been stipulated.

3. Accidental elements – these are the various

particular stipulations that may be agreed upon

by the contracting parties in a contract; they

may be present or absent, depending upon

whether or not the parties have agreed upon

them.

Classification of Contracts

a. According to perfection or formation

1. Consensual – perfected by mere consent

2. Real – perfected by delivery

3. Formal or solemn – where special

formalities are essential before the

contract may be perfected; donation

inter vivos

b. According to cause or equivalence of the value

of the prestations

1. Onerous – where there is an interchange

of equivalent valuable consideration

2. Gratuitous or lucrative – one party

receives no equivalent prestation

3. Remunerative – where one prestation is

given for a benefit or service that had

been rendered previously

c. According to importance or dependence of one

upon another

1. Principal – the contract may stand alone

2. Accessory – its existence depends upon

another contract

3. Preparatory – a means thru which future

transaction or contract may be made

d. According to the parties obligated

1. Unilateral – only one of the parties has

an obligation

2. Bilateral – both parties are required to

render reciprocal prestations

e. According to their name or designation

1. Nominate – the contract is given a

particular or special name

2. Innominate – those not given any special

name

f. According to the risk of fulfillment

1. Commutative – the parties contemplate

a real fulfillment; equivalent values are

given

2. Aleatory – the fulfillment is dependent

upon chance; the values vary because of

the risk or chance

g. According to the time of performance or

fulfillment

1. Executed – one completed at the time

the contract is entered into, that is, the

obligation are complied with at this time

2. Executory – one where the prestations

are to be complied with at some future

time; perfected sale

h. According to subject matter

1. Contracts involving things like sale

2. Contracts involving rights or credits

3. Contracts involving services

i. According to obligations imposed and regarded

by the law

1. Ordinary – like sale

2. Institutional – like the contract of

marriage

j. According to the evidence required for its proof

1. Those requiring merely oral or parol

evidence

2. Those requiring written proof –

contracts enumerated under the Statute

of Frauds

k. According to the number of persons actually and

physically entering into the contracts

1. Ordinary – where two parties are

represented by different persons

2. Auto-contracts – where only one person

represents two opposite parties, but in

different capacities

l. According to the number of person who

participated in the drafting of the contract

1. Ordinary

2. A contract of adhesion – like one

prepared by a real estate company for

the sale of real estate

m. According to the nature of the contract

1. Persona

2. Impersonal

Stages of a Contract

1. Preparation – the parties are progressing with

their negotiations; they have not yet arrived at

any definite agreement

2. Perfection – the parties have come to a definite

agreement, the elements of definite subject

matter and valid cause have been accepted by

mutual consent

3. Consummation – the terms of the contract are

performed, and the contract may be said to have

been fully executed

A contract takes effect between the parties who made

it, and also their assigns and heirs, except in cases

where the rights and obligations arising from the

contract are not transmissible by their nature, or by

stipulation, or by provision of law.

A party who has not taken part in a contract cannot

sue or be sued for performance or for cancellation

thereof, unless that he has a real interest affected

thereby.

The general rule of the common law is that every

action must be brought in the name of the infringed.

The person who sustains an injury is the person to

bring an action for the injury against the wrongdoer.

Basic Principles/Characteristics of a Contract

a. Freedom or liberty to stipulate – provided not

contrary to law, morals, good customs, public

order or public policy

b. Obligatory force and compliance in good faith

c. Perfection by mere consent

d. Both parties are mutually bound

e. Relatives – binding on the parties, assigns & heir

The existence of a contract between the parties does

not constitute a bar to the commission of a tort by one

against the other, and the consequent recovery of

damages.

Contracts constitute the law between the parties.

The intent of the parties, as shown by the clear

language used, prevails over post facto explanations

that find no support from the words employed by the

parties or from their contemporary and subsequent

acts showing their understanding of such contracts.

Art. 1306

The constitutional prohibition against the impairment

of contractual obligations refers only to contracts

which are legal, not to void or inexistent ones.

Limitations on the nature of the stipulations

a. The law

b. Morals

c. Good customs

d. Public order

e. Public policy

Limitations imposed by law

a. The contractual stipulations must not be

contrary to mandatory and prohibitive laws.

Directory and suppletory laws need not be

complied with, since these are either

discretionary or merely supply the omissions of

the parties.

b. Contracts must respect the law, for the law

forms part of the contract.

c. In a mortgage contract, a pactum commissorium

(a clause providing that the mortgagee will

automatically own the property mortgaged if

the debt is not paid at maturity) is null an void.

d. The parties to a contract cannot deprive a

competent court of its jurisdiction. Venue, or the

place where the action may be brought, can be

the subject of stipulation.

The law will not aid either party to an illegal

agreement. It leaves the parties where it finds them

The parties generally may agree on any contract, but

the name that they give it should not be controlling,

for a contract is what the parties intended it to be,

not what they call it.

A contract must be judged by its character, nature and

legal qualifications.

Art. 1307

4 Kinds of Innominate Contracts

1. Do ut des – I give that you may give

2. Do ut facias – I give that you may do (barter)

3. Facio ut des – I do that you may give

4. Facio ut facias – I do that you may do

Art. 1308

A party cannot revoke or renounce a contract without

the consent of the other, not can have it set aside on

the ground that he made a bad bargain.

When the fulfillment of the condition depends upon

the sole will of the debtor, the conditional obligation

is void if the condition is suspenive. If the condition

is resolutory, the obligation is valid. Hence, it is all

right for the contract to expressly give to one party

the right to cancel the same.

A contract containing a condition which makes its

fulfillment dependent exclusively upon the

uncontrolled will of one of the contracting parties is

void. (PNB vs Court of Appeals, GR 88880)

The rule that the obligation of contracts should not be

impaired is not absolute. The free exercise of

religious beliefs is superior to contractual rights.

Art. 1309

The determination of the performance of the contract

may be left to a third person. In such case, the

obligation does not depend upon a potestative

condition.

The decision shall bind the parties only after it has

been made known to both of them.

Art. 1310

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.

Art. 1311

General rule: Contract takes effect only between the

parties, their assigns and heirs. This means that only

the parties, their assigns and heirs can have rights

and obligation under the contract (Principle of

Relativity).

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:

o By their nature, by stipulation, or by

provision of law.

o When there is a stipulation pour autrui.

o Where a third person induces another to

vitiate his contract.

o Where third persons may be adversely

affected by a contract where they did not

participate.

o Where the law authorizes the creditor to sue

on a contract entered into by his debtor.

The heirs are not liable beyond the value of the

property they received from the decedent.

In order that an heir can question the validity of

contracts entered into by his predecessor, or bring

an action to annul the same, he must be a

compulsory or forced heir. The compulsory heirs

may not question the deceased’s transaction if they

were illicit or illegal. An action to rescind the

contract can prosper, insofar as the legitimes of the

compulsory heirs are prejudiced because the right

to the legitime is similar to a credit of a creditor

insofar as the right to the legitime may be defeated

by such transaction.

Rights of the predecessor may be transmitted to the

heirs provided they are transmissible.

Stipulation Pour Autrui

If a contract should contain some stipulation in favor

of a third party, he may demand the fulfillment

provided he communicated his acceptance to the

obligor before its revocation.

1. There must be a stipulation in favor of a

third person.

2. The contracting parties must have clearly

and deliberately conferred a favor upon a

third person.

3. A mere incidental benefit or interest of a

person is not sufficient. (X contracts with Y

for the erection of a building which will

enhance the value of Z’s adjoining property.

The fact that Z may incidentally derive some

benefit from the contract gives him no right

to sue X for breach of the contract).

4. The stipulation must a part of the contract.

5. The third person communicated his

acceptance to the obligor before its

revocation; acceptance may be in the form of

a demand.

6. There must be no relation of agency

between either of the parties and the third

person.

A stipulation pour autrui need not be in any particular

form, and may even be inferred from the fact that

the beneficiary has enjoyed the same for a

considerable period.

If the stipulation be merely incidental, it is not the

stipulation pour autrui referred to in the law.

If the principal contract of which the stipulation forms

part of is void, the stipulation is generally also void.

Art. 1312

Third persons who come into possession of the object

of a contract over which where is a real right, are

bound thereby even if they were not parties to the

contract.

Art. 1313

The creditor is given the right to impugn the contracts

of his debtor intended to defraud him.

Art. 1314

A stranger may be sued for damages for his

unwarranted interference with the contract. It

presupposes that the contract interfered with is

valid.

Art. 1315

Consensuality of contracts or perfection by mere

consent

A contract is perfected only from the time an

acceptance of an offer is made known to the offeror.

An acceptance which is not made in the manner

prescribed by the offeror is not effective but

constitutes a counter-offer which the offeror may

accept or reject.

The contract is not perfected if the offeror revokes or

withdraws its offer and the revocation or

withdrawal of the offeror is the first to reach the

offeree.

Consensual contracts are perfected from the moment

there is an agreement (consent) on the subject

matter, and the cause or consideration.

If the true intention is not expressed in a written

agreement, in case one has been made, the proper

remedy is reformation.

Art. 1316

Real contracts require consent, subject matter, cause

or consideration, and delivery.

The contract of “carriage” is a real contract, for not

until the carrier is actually used can we consider the

contract perfected.

Art. 1317

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.

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.

Requisite for a person to contract in the name of

another

a. He must be duly authorized (expressly or

impliedly)

b. Or he must have by law a right to represent him

(like the guardian or the administrator)

c. Or the contract must be subsequently ratified

(expressly or impliedly, by word or by deed)

Ratification cleanses the contract from all its defects

from the moment the contract was entered into.

There is a retroactive effect.

ESSENTIAL REQUISITES OF CONTRACTS

Art. 1318

Requisites of a contract:

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 presupposes legal capacity and the

fulfillment of conditions, should any be attached.

If there is absolutely no consent, there is no contract.

If there is a vice of consent, the contract is not void; it

is merely voidable.

Art. 1319

Consent is the meeting of the minds between the parties

on the subject matter and the cause of the contract. It is

the manifestation of the meeting of the offer and the

acceptance upon the thing and the cause which are

constitute the contract.

Requisites of Consent

1. There must be two or more parties.

2. The parties must be capable or capacitated.

3. There must be no vitiation of consent.

4. There must be no conflict between what was

expressly declared and what was really

intended.

5. The intent must be declared properly.

Conformity to an original contract generally

presupposes conformity to a subsequent contract

executed precisely to cure a defect in the original

contract.

Requisites for the Meeting of the Minds

1. An offer that must be certain

2. An acceptance that must

The offer must be certain or definite so that the

liability or the rights of the parties may be exactly

fixed because it is necessary that the acceptance be

identical with the offer to create a contract.

Acceptance is the manifestation by the offeree of his

assent to the terms of the offer.

The acceptance must be identical in all respects with

that of the offer so as to produce consent or meeting

of the minds.

A counter-offer extinguishes the offer. It may or may

not be accepted by the offeror.

It does not matter that the letter of withdrawal may

have been received later by the offeree than receipt

of the letter of acceptance by the offeror. What is

important is that the letter of withdrawal was made

prior to the knowledge of acceptance.

What is important is that at the time of receipt of the

letter of acceptance, there had already been a prior

revocation of said acceptance.

Art. 1320

Acceptance may be express, implied or presumed by

law.

Presumed is where there is failure to repudiate

hereditary rights within the period fixed by law.

Art. 1321

The person making the offer may prescribe the time,

the place, and the manner of acceptance, all of which

must be complied with.

Art. 1322

Both the offer and the acceptance are made thru an

agent.

Any other intermediary is merely a sort of messenger,

who must communicate to the person who sends

him.

There would be no meeting of the minds if the

principal himself made the offer and the acceptance

is communicated to the agent not authorized.

Art. 1323

An offer becomes ineffective upon the death, civil

interdiction, insanity or insolvency of either party

before acceptance is conveyed.

Art. 1324

Option contract is one giving a person for a

consideration a certain period within which to accept

the offer of the offeror. It is separate and distinct from

the contract which will be perfected upon the

acceptance of the offer.

General rule: If the offeror has allowed the offeree a

certain period to accept, the offer may be

withdrawn ay any time before acceptance by

communicating such withdrawal.

To be binding on the person who made a unilateral

promise, the promise must be supported by a cause

or consideration distinct from the price.

Art. 1325

Business advertisements of things for sale are not

definite offers acceptance of which will perfect a

contract but are merely invitations to the reader to

make an offer.

Art. 1326

In an advertisement for bidders, the advertiser is not

the one making the offer. The bidder is the one

making the offer which the advertiser is free to

accept or reject.

Acceptance by the advertiser of a given bid is

necessary for a contract to exist between the

advertiser and the bidder, regardless of the terms

and conditions of his bid.

The advertiser is not bound to accept the highest or

lowest bidder.

Art. 1327

Persons who cannot give consent:

1. Unemancipated minors – refer to those persons

who have not yet reached the age of majority

and are still subject to parental authority

2. Insane or demented persons – no proper

declaration of insanity by the court is required,

as long as it is shown that at the time of

contracting, the person was really insane. If the

contract was made before the declaration of

insanity, the presumption is that he was still

sane at the time of contracting.

3. Deaf-mutes who do not know how to write (and

read)

In general, contract which unemancipated minors

enter into are voidable unless:

o Upon reaching the age of majority, they

ratify the same.

o They were entered into through a guardian.

o They were contracts of life insurance ifo

their parents, spouse, children, siblings.

o They were contracts for necessities.

o They were contracts where the minor

misrepresented his age, and pretended to be

one of major age and is, thus, in estoppel.

o Married minors can validly alienate or

encumber personal property without

parental consent.

o If both parties are minors, the contract is

unenforceable.

Art. 1328

A contract entered into by an insane or demented

person during a lucid interval is valid.

A contract entered into a state of drunkenness, or

during a hypnotic spell voidable and it is not

required that such state was procured by the

circumvention of the other party.

Art. 1329

In general, the contracts entered into by the persons

enumerated in Art. 1327 are voidable. However,

their incapacity may be modified by law, that is,

they can also give valid consent.

Under the RRC, the following are considered

incompetents and may be placed under

guardianship:

o Those under civil interdiction

o Hospitalized lepers

o Prodigals

o Deaf and dumb who are unable to read and

write

o Those of unsound mind even though they

have lucid intervals

o Those who by reason of age, disease, weak

mind and other similar causes, cannot

without outside aid, take care of themselves

and manage their property.

Art. 1330

There is no VALID consent unless:

1. It is intelligent – there is capacity to act

2. It is free and voluntary – there is no vitiation of

consent by reason of violence or intimidation

3. It is conscious or spontaneous – there is

vitiation of consent by reason of mistake, undue

influence or fraud

Causes of Vitiated Consent

a. Mistake or error

b. Fraud or deceit

c. Violence

d. Intimidation

e. Undue influence

A voidable contract is binding and valid, unless

annulled by a proper action in court. It is, however,

susceptible of ratification before annulment.

Annulment may be had even if there be no damage

to the contracting parties.

There must be clear and convincing evidence of the

presence of vitiated consent. Mere preponderance

of evidence on this matter is not sufficient.

Art. 1331

Mistake or error is the false notion of a thing or a fact

material to the contract.

Mistake may be of fact or of law. The article refers to

mistake of fact.

The mistake contemplated by law is substantial

mistake of fact, that is, the party would not have

given his consent had he known of the mistake.

Not every mistake will vitiate consent and make a

contract voidable.

Requisites for Mistake to Vitiate Consent

a. The error must be substantial regarding

1. The object of the contract

2. The conditions which principally moved

or induced one of the parties – error in

quality or in quantity

3. Identity or qualifications – error in

personae

b. The error must be excusable – not cause by

negligence

c. The error must be mistake of fact

Art. 1332

When a person signs a document, the presumption is

that he does so with full knowledge of the contents

of the same. Should he later on allege fraud or

mistake, it is incumbent upon him to prove his

allegation.

When one of the parties is unable to read or if the

contract is in a language not understood by him, it is

the party enforcing the contract who is duty bound

to show that there has been no fraud or mistake and

that the terms of the contract have been fully

explained to the former.

Art. 1333

If a party knew beforehand the doubt, contingency, or

risk affecting the object of the contract, it is to be

assumed that he was willing to take chances and

cannot, therefore, claim mistake.

Art. 1334

Mistake of law is that which arises from an ignorance

of some provision of law, or from an erroneous

interpretation of its meaning, or from an erroneous

conclusion as to the legal effect of an agreement, on

the part of one of the parties.

Mistake of law does not invalidate consent because

“ignorantia legis neminem excusat”.

Requisites for Mutual Error to Vitiate Consent

a. There must be mutual error

b. The error must refer to the legal effect of the

agreement

c. The real purpose of the parties is frustrated

Art. 1335

To make consent defective, the force employed must

be either serious or irresistible.

If a contract is signed merely because of reverential

fear, the contract is still valid, for by itself is not

wrong.

Requisites for Violence to Vitiate Consent

a. Employment of serious or irresistible force

b. It must have been the reason why the contract

was entered into

Requisites for Intimidation to Vitiate Consent

a. Reasonable and well-grounded fear

b. Of an imminent and grave evil

c. Upon his person, property, or upon the person

or property of his spouse, descendants or

ascendants

d. It must have been the reason why the contract

was entered into

e. The threat must be of an unjust act, an

actionable wrong.

Art. 1336

Even if a third person exercised the violence or

intimidation, the contract may be annulled.

Art. 1337

The influence must be of a kind that so overpowers

the mind of a party as to destroy his free will and

make him express the will of another, rather than

his own.

Requisites for Undue Influence to Vitiate Consent

a. Improper advantage

b. Power over the will of another

c. Deprivation of the latter’s will of a reasonable

freedom of choice.

Art. 1338

Causal fraud is the fraud committed before or at the

time of the celebration of the contract. It is the fraud

used by a party to induce the other to enter into a

contract without which the latter would not have

agreed to.

If the fraud did not have the effect of causal fraud, that

is, it did not by itself alone cause the other

contracting party to give his consent, it gives rise

only to an action for damages.

Kinds of Fraud

a. Fraud in the celebration of the contract

1. Dolo causante (causal fraud) – were it

not for the fraud, the other party would

not have consented.

2. Dolo incidente (incidental fraud) – even

without the fraud the parties would

have agreed just the same, hence the

fraud was only incidental in causing

consent.

b. Fraud in the performance of the obligations

stipulated in the contract. This presupposes the

existence of an already perfected contract.

Art. 1339

A neglect or failure to communicate that which a party

to a contract knows and ought to communicate

constitutes concealment which is equivalent to

misrepresentation.

The injured party is entitled to rescind or annul the

contract whether the failure to disclose the material

facts is intentional or unintentional as long as there

is a duty to reveal them and the party is misled or

deceived in entering into the contract.

If the failure is unintentional, the basis of the action

for annulment is not fraud but mistake or error.

Art. 1340

“Caveat emptor” – let the buyer beware

When the person dealing with merchants and traders

had an opportunity to know the facts, the usual

exaggerations in trade are not themselves

fraudulent.

The law allows considerable latitude to seller’s

statements or dealer’s talk and experience teaches

that it is exceedingly risky to accept it at its face

value.

The law does not consider such exaggeration, even if

known as false by the party making them, as

amounting to fraud that will affect the validity of the

contract.

Art. 1341

To constitute fraud, the misrepresentation must refer

to facts, not opinions. A mere expression of an

opinion does not signify fraud.

In order that it may amount to fraud, the following

requisites must be present:

o It must be made by an expert;

o The other contracting party has relied on

the expert’s opinion;

o The opinion turned out to be false or

erroneous.

Art. 1342

A third person has no connection with a contract.

Consequently, a misrepresentation by him does not

vitiate consent.

The presumption is that both contracting parties are

acting in good faith. However, if the

misrepresentation has created a substantial mistake

and the same is mutual (that it affects both parties),

the contract may be annulled but principally on the

ground of mistake.

If the misrepresentation has been employed by a third

person in connivance with, or at least with

knowledge of the party benefited by the fraud, it is

deemed to have been exercised by such party upon

the other contracting party.

Force or intimidation employed by a third person on

one of the parties makes a contract voidable.

Art. 1343

If the misrepresentation is not intentional but made in

good faith (the person making the false statement

believed it to be true), it is considered a mere

mistake or error.

Art. 1344

In order that causal fraud may vitiate consent under

the article, the following are the requisites:

o It should be serious;

o It should not have been employed by both

contracting parties; they should not be in

pari delicto;

o It should not have been known by the other

contracting party.

The seriousness of the fraud is a question of fact

depending on the circumstances. It does not mean

its influence on the other contracting party, but its

importance.

When fraud is employed by both parties, neither may

ask for annulment as the fraud of one neutralizes

that of the other.

Art. 1345

Simulation of a contract is the act of deliberately

deceiving others, by feigning or pretending by

agreement, the appearance of a contract which is either

non-existent or concealed.

a. Absolute simulation – when the contract does not

really exist and the parties do not intend to be

bound at all; absolutely simulated or fictitious

contracts are inexistent and void.

b.Relative simulation – when the contract entered into

by the parties is different from their true

agreement; the parties are bound by their real

agreement provided it does not prejudice a third

person and is not intended for a purpose contrary to

law, morals, good customs, public order, or public

policy.

c. Third parties should not be prejudiced; as to them, the

apparent or ostensible contract is the one valid. The

contracting parties are in estoppels, and they should

be penalized for their deception.

OBJECT OF CONTRACTS

Art. 1347

Object of a contract is its subject matter; to create or to

end obligations which, in turn, may involve things or

services. Since a contract cannot exist without an

obligation, it may be said that the thing, service, or right

which is the object of the obligation is also the object of

the contract.

Requisites:

The thing or service must be within the

commerce of man;

Must be transmissible;

Must not be contrary to L, M, GC, PO, or PC;

Must not be impossible

Must be determinate as to its kind or

determinable without the need of a new

contract or agreement.

a. Future things may be the object of a contract but by

express provision of law, said future property may

not be donated.

b.Future inheritance cannot be the subject of a contract

except:

a. In the case of marriage settlements

b. In the case of partitions of property inter

vivos by the deceased

c. All rights which not intransmissible may be the object

of contracts.

Art. 1348

Impossibility may be:

Because of the nature of the transaction or

because of the law;

Absolute (objectively impossible)

Relatively (subjectively impossible)

Art. 1349

The object of a contract must be determinate as to its

kind or at least determinable without the necessity of a

new or further agreement between the parties. The

same is true of the quantity of the object of the contract.

It is sufficient that it is possible to determine the same

without the need of a new contract between the parties.

a. The object must be determinate or determinable

b.If the object is not determinate or determinable, the

contract is void for want of the object of the contract

CAUSE OF CONTRACTS

Art. 1350

Cause is the essential and impelling reason why a party

assumes an obligation; the essential or more proximate

purpose which the contracting parties have in view at

the time of entering into the contract.

Classification of Contracts as to Cause

1. Onerous – the prestation or promise of a thing

or service by the other; the parties are

reciprocally obligated to each other; sale, lease

of a thing; partnership

2. Remuneratory – the past service or benefit

which by itself is a recoverable debt; purpose of

the contract is to reward the service that had

been previously rendered by the party

remunerated

3. Gratuitous – the cause is the mere liberality of

the benefactor or giver; commodatum, donation

Art. 1351

Motive is the purely personal or private reason which a

party has in entering into a contract. It is different from

the cause of the contract.

Cause vs Motive

a. Cause is the immediate or direct reason, while

the motive is the remote or indirect reason

b. Cause is always known to the other contracting

party, while motive may be unknown

c. Cause is an essential element of a contract, while

motive is not; and

d. The illegality of the cause affects the validity of a

contract, while the illegality of one’s motive

does not render the contract void.

Art. 1352

Requisites for Cause

It must be present at the time the contract was

entered into

It must be lawful

It must be true or real

Contracts without cause confer no right and produce

no legal effect whatever.

If there is no cause whatsoever, the contract is void.

If the cause is false, the contract is not valid unless

some other cause which is lawful really exists.

If the cause if unlawful, the transaction is null and

void.

If the cause is illegal and one party is innocent he

cannot be compelled to perform his obligation, and

he may recover what he has already given.

Art. 1353

Just because the cause stated is false does not

necessarily mean that the contract is void. The

contract with a statement of a false cause is not

void, but merely revocable or voidable.

Inadequacy of cause is not a ground for relief.

Failure of cause does not render a contract void.

Falsity of cause is where the contract states a valid

consideration but such statement is not true.

Art. 1354

It is not necessary that the cause be expressly stated

in the contract. The presumption is that the cause

exists and is lawful unless the debtor proves the

contrary.

The presumption is only prima facie and must yield to

contrary evidence.

Art. 1355

Lesion is any damage caused by the fact that the price is

unjust or inadequate. It is the injury suffered in

consequence of inequality of situation, by one party

who does not receive the full equivalent for what he

gives in a commutative contract, like a sale.

General rule: lesion or inadequacy of price does not

invalidate a contract.

Exceptions: when together with lesion there has been

fraud, mistake or undue influence.

Lesion may be evidence of the presence of fraud,

mistake or undue influence.

FORM OF CONTRACTS

Art. 1356

The form of a contract refers to the manner in which a

contract is executed or manifested. The contract may be

oral, in writing, or part both. If in writing, it may be in a

public or private instrument.

It is generally recognized that to be a written contract,

all its terms must be in writing.

General rule: contracts are binding and enforceable

reciprocally by the contracting parties, whatever

may be the form in which the contract has been

entered into provided all the three essential

requisites for their validity are present.

Exceptions: the form is required in the following

cases:

a. When the law requires that a contract be in

some form to be valid.

b. When the law requires that a contract be in

some form to be enforceable or proved in a

certain way.

c. When the law requires that a contract be in

some form for the convenience of the parties

or for the purpose of affecting third persons.

Form may be important for validity, enforceability,

and convenience.

Examples of formal contracts: donations of real

property, donations of personal property,

stipulations to pay interest on loans, interest for the

use of the money, transfer of large cattle, sale of

land through an agent, and contracts of antichresis.

Art. 1357

a. Before contracting parties may be compelled to

execute the needed form, it is essential that the

contract be:

a. Valid

b. Enforceable under the Statue of Frauds

Art. 1358

The following must appear in a public document:

Acts and contracts which have for their object,

the creation, transmission, modification or

extinguishment of real rights over immovable

property; sales of real property or of an interest

therein

The cession, repudiation or renunciation of

hereditary rights or those of the conjugal

partnership of gains

The power to administer property, or any other

power which has for its object and act appearing

or which should appear in a public document, or

should prejudice a third person

The cession of actions or rights proceeding from

an act appearing in a public document

b.The contracts covered by this article are valid and

enforceable though not in a public document or in

writing. The public document is required only for

the convenience and greater protection of the

parties and to make the contract binding as against

third persons.

REFORMATION OF INSTRUMENTS

Art. 1359

Reformation is that remedy by mean of which a written

instrument is amended or rectified so as to express or

conform to the real agreement or intention of the

parties when by reason of mistake, fraud, inequitable

conduct, or accident the instrument fails to express such

agreement or intention.

c. When there has been NO meeting of the minds,

because of vitiated consent, the proper remedy is

annulment.

d.Reformation does not invalidate a contract;

annulment invalidates a contract.

Art. 1360

a. In case of conflict between the provisions of the NCC

and the principles of the general law on

reformation, the former prevail. The latter will have

only suppletory effect.

Art. 1361

To justify mutual mistake ass basis for reformation, the

following requisites must occur:

a. The mistake must be of fact;

b. Such mistake must be proved by clear and

convincing evidence;

c. The mistake must be mutual that is, common to

bother parties to the instrument; and

d. The mistake must cause the failure of the

instrument to express their true intention.

Art. 1362

b.The right to ask for reformation is granted only to the

party who was mistaken in good faith. The mistake

is unilateral but the other party acted fraudulently

or inequitably.

Art. 1363

c. The remedy of reformation may be availed of only by

the party who acted in good faith. The concealment

of the mistake by the other party constitutes fraud.

Art. 1364

d.The court may order the reformation of the

instrument if the instrument does not convey the

true intention of the parties because of the:

a. Ignorance

b. Lack of skill

c. Bad faith of the drafter of the instrument,

the clerk, or the typist

Art. 1365

e. If mortgage or pledge is stated as a sale, the

reformation of the instrument is proper, otherwise,

the true intention of the parties would be frustrated.

Such true intention must prevail for the contract

must be complied with in good faith.

Art. 1366

There shall be no reformation in the following cases:

a. Simple donations inter vivos wherein no

condition is imposed – donations are essentially

acts of pure liberality; if the donation is

conditional, reformation may be resorted to so

that the real or true conditions intended by the

donor might be brought out.

b. Will – the making of a will is strictly a personal

act which is free; a will may be revoked any

time.

c. When the real agreement is void – reformation

would be useless.

Art. 1367

f. When a party brings an action to enforce a contract,

he admits it validity and that it expresses the true

intention of the parties. The bringing of the action is

thus inconsistent with reformation.

Art. 1368

Plaintiffs inaction for reformation:

If the mistake is mutual, either party or his

successors in interest

In all other cases:

o The injured party

o His heirs and assigns

g. Before reformation can be granted, the complaint

must allege:

a. That the instrument to be reformed does not

express the real agreement or intention of

the parties;

b. What the real agreement or intention was.

h.It is not the function of the remedy of reformation to

make a new agreement, but to establish and

perpetuate the true existing one.

i. The effect of reformation is retroactive from the time

of the execution of the original contract.

j. Courts do not reform instruments merely for the sake

of reforming them, but only to enable some party to

assert rights under them as reformed.

Art. 1369

Reformation shall be governed by the Rules of Court

INTERPRETAITON OF CONTRACTS

Art. 1370

Interpretation of a contract is the determination of the

meaning of the terms or words used by the parties in

their contract.

In case of conflict between the words of the contract

and the evident intention of the parties, the

intention must prevail.

Where the terms and provision thereof are clear and

leave no doubt as to the intention of the contracting

parties, the literal meaning of its stipulation shall

conrol.

Art. 1371

If the parties have themselves placed an

interpretation to the terms of their contract, such

interpretation must in general be followed.

The contract of the parties may result in estoppels.

The courts may consider the relations existing

between the parties and the purpose of the contract,

particularly when it was made in good faith

between mutual friends.

Art. 1372

Where in a contract there are general and special

provisions covering the same subject matter, the

latter control over the former when the two cannot

stand together.

When the parties express themselves in reference to a

particular matter, the attention is directed to that,

and it must be assumed that it expresses their

intent; whereas, a reference to some general matter,

within which the particular matter may be included,

does not necessarily indicate that the partied had

that particular matter in mind.

Art. 1373

When an agreement is susceptible of several

meanings, one of which would render it effectual, it

should be given that interpretation. Thus, if one

interpretation makes a contract valid and the other

makes it illegal, the former interpretation is one

which is warranted by the rule stated.

Art. 1374

A contract must be interpreted as a whole and the

intention of the parties is to be gathered from the

entire instrument and not from particular words,

phrases, or clauses. All provisions should, if

possible, be so interpreted as to harmonize with

each other.

Art. 1375

If a word is susceptible of two or more meanings, it is

to be understood in that sense which is most in

keeping with the nature and object of the contract in

line with the cardinal rule that the intention of the

parties must prevail.

Art. 1376

The usage or custom of the place where the contract

was entered into may be received to explain what is

doubtful or ambiguous in a contract on the theory

that the parties entered into their contract with

reference to such usage or custom.

It is necessary to prove the existence of usage or

custom, the burden of proof being upon the party

alleging it.

But usage or custom is not admissible to supersede or

vary the plain terms of a contract.

Art. 1377

The party who drew up the contract with ambiguous

terms should be responsible therefor; so the

obscurity must be construed against him.

Generally, the party who causes the obscurity acts

with ulterior motives.

A credit card membership is a contract of adhesion.

Every credit card transaction involves 3 contracts:

sales contract, loan agreement and promise to pay.

Art. 1378

When certain doubts still exist, such doubts shall be

resolved in accordance with the supplementary

rules stated.

If the doubts refer to incidental circumstances of a

gratuitous contract (Art. 1350), such interpretation

should be made which would result in the least

transmission of rights and interests. If onerous,

apply the rule of the greatest reciprocity of

interests.

If the doubt refers to the principal object of the

contract and such doubt cannot be resolved thereby

leaving the intention of the parties unknown, the

contract shall be null and void.

Art. 1379

The principles of interpretation stated in Rule 123

of the Rules of Court shall likewise be observed in

the construction of contracts.