SAN BEDA UNIVERSITY
COLLEGE OF LAW
SY. 2020 – 2021
OBLIGATIONS AND CONTRACTS REVIEWER
SPARTA NOTES
Cruz, Kyla Raine M.
Mambuay, Mujaheed Abdul Jamil S.
Makilan, Hannah Angelica C.
Marasigan, Joanne Catherine A.
Suyat, Gian Jeruie F.
Tang, Francesca Marie C.
Valenzuela, Diane Faie O.
1C
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OBLIGATIONS AND CONTRACTS
TITLE I – OBLIGATIONS
CHAPTER 1 GENERAL PROVISIONS
Article 1156. An obligation is a juridical
necessity to give, to do or not to do. (n)
Obligations –
•
•
•
•
•
A tie of law which binds us, according to the
rules of our civil law, to render something
(Institute of Justinian)
A legal relation between one person and
another, who is bound to the fulfillment of a
prestation which the former may demand of
him (Manresa).
The juridical necessity to comply with a
prestation (Sanchez Roman).
A juridical necessity to give, to do or not to do
(Civil Code of the Philippines).
A juridical relation whereby a person (called
the creditor) may demand from another
(called the debtor) the observance of a
determinate conduct, and in case of breach,
may obtain satisfaction from the assets of the
latter (Justice J.B.L. Reyes)
Essential Elements of Obligation:
1.
2.
3.
4.
A juridical tie (or vinculum juris)
Object or prestation
Active subject (obligee or creditor)
Passive subject (obligor or debtor)
Juridical Tie or Vinculum Juris
•
•
•
Legal relationship or tie
Essentially binds the parties to the object of
the obligation (or prestation), by virtue of
which the debtor is bound to the creditor to
fulfill a determinate prestation.
The efficient cause or the very reason for the
existence of the obligation.
Object of the Obligation
Prestation:
•
•
The object of obligation
The particular conduct required to be
observed by the obligor (debtor) and which
can be demanded by the oblige (creditor).
Object of the obligation vs subject matter of the
contract
Object of the
obligation
The object is always
a particular conduct
of the obligor called
the prestation.
•
Subject matter of
the contract
The
object
or
subject matter may
either be a thing, a
right, or a service.
A prestation may consist either in giving,
doing or not doing.
Obligation to give vs Obligation to do
Obligation to give
Compliance with it
is
intimately
connected with the
thing
to
be
delivered.
Also called real
obligation.
Obligation to do
Compliance
with
the obligation is
incumbent upon the
person obliged.
Also called personal
obligation.
Reason for distinction: for purposes of determining
the remedies available to the obligee in case of
breach of obligation.
•
•
In obligation to give, the obligee may avail of
the remedy of compelling the obligor to give
or deliver what is due.
In obligation to do, the obligor may not be
compelled against his will, to perform the act
that he is bound to render.
Reason: Obligation to do may not be resorted
because it amounts to involuntary servitude – an act
prohibited by the Constitution.
Active and Passive Subjects
Obligee (creditor)
Obligor (debtor)
Has the right to Bound to perform
demand
the the prestation.
prestation.
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Denominated as the
active
subject
because he is the
one who has the
power to demand
the performance of
the prestation.
The
obligor
is
referred to as the
passive
subject
because his action
is dependent of the
action
of
the
creditor.
Illustration:
•
•
The enumeration is exclusive.
An obligation enforced on a person, and the
corresponding right granted to another, must
be rooted in at least one of these five
sources.
Makati Stock Exchange, Inc. vs Campos
•
A practice or custom is not a source of legally
demandable or enforceable right.
The obligee may choose either:
The sources may be classified generally as:
1. To exact fulfillment of the prestation from the
obligor
2. To condone the obligation
3. To remain inactive for a certain period of time
sufficient enough to extinguish the obligation
by way of prescription.
Legal Sanctions
Juridical Necessity
•
•
Implies the existence of legal sanctions that
may be imposed upon the obligor (debtor) in
case of breach of the obligation.
These legal sanctions do not include the
imprisonment of the debtor for mere nonpayment of the debt or non-performance of
an obligation.
Reason: Section 20, Article III of the 1987
Constitution provides that no person shall be
imprisoned for debt of non-payment of a poll tax.
Article 1157. Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law;
and
(5) Quasi-delicts. (1089a)
Sources of Obligations
Reference: Rabuya 2019
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1. Emanating from law
2. Emanating from private acts
The sources of obligations emanating from private
acts may either arise from:
1. Licit acts (contracts and quasi-contracts)
2. Elicit acts (delicts and quasi-delicts)
•
•
Contracts – are result of bilateral actions of
the parties because it requires consent.
Quasi-contracts, Delicts, Quasi-Delicts –
are products of the unilateral action of the
debtor.
Obligations emanating from law vs Obligations
emanating from acts
Obligations
emanating from
law
It is the law which
creates
the
obligation in view of
the organization of
juridical institutions
and
the
social
interest.
Obligations
emanating from
acts
There is always
some individual act
which gives rise to
the obligation, and
the law intervenes
only to provide a
sanction or prevent
an injustice.
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. (1090)
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Obligations arising from law
Example:
1. The obligation of tax payers to pay taxes in
accordance with existing tax statues.
2. The obligation of the spouses to render
mutual help and support in accordance with
the provisions of the Family Code of the
Philippines.
•
•
•
In contracts, quasi-contracts, delicts, and
quasi-delicts, the source of the obligation is
the act or acts of the parties, which may
either be unilateral or bilateral, and the aw
merely recognizes its existence, regulates it
and sanctions the same.
Obligations derived from law are not
presumed.
Only those expressly determined in the Civil
Code or in special law are demandable.
Article 1159. Obligations arising from contracts
have the force of law between the contracting
parties and should be complied with in good
faith. (1091a)
Implied contract vs quasi-contract
Implied contract
quasi-contract
Requires consent of Not predicated on
the parties.
consent, being a
product of unilateral
act.
Note: in contract law, this principle is known as the
obligatory force of contract, which presupposes the
existence of a valid and enforceable contract.
Article 1160. Obligations derived from quasicontracts shall be subject to the provisions of
Chapter 1, Title XVII, of this Book. (n)
Obligations arising from quasi-contract
(Obligatio Ex Cuasi Contractu)
Definition: Article 2142. Certain lawful, voluntary
and unilateral acts give rise to the juridical relation of
quasi-contract to the end that no one shall be
unjustly enriched or benefited at the expense of
another.
•
Obligations arising from contracts
Contract – a meeting of minds between two
persons whereby one binds himself, with respect to
the other, to give something or to render some
services.
•
The obligation is not contractual in nature in
the absence of the element of consent,
whether implied or express. Neither is the
obligation based on delict or quasi-delict, if
the act which gives rise to it is not unlawful.
Basis: nemo cum alterius detrimento locupletari
protest – no man shall enrich himself at the expense
of another.
Consent is the essence of a contract.
Characteristics of Quasi-Contract:
Implied Contract – arises where the intention of the
parties is not expressed, but an agreement in fact,
creating an obligation, is implied or presumed from
their act, or where there are circumstances which,
according to the ordinary course of dealing and the
common understanding of men, show a mutual
intent to contract.
1. It arises from a lawful act.
2. It arises from a voluntary act.
3. It arises from a unilateral act.
•
It is based on the presumed will or intent of
the obligor dictated by equity and by
principles of absolute justice.
Some of the principles are the following:
1. It is presumed that a person agrees to that
which will benefit him.
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2. Nobody wants to enrich himself unjustly at
the expense of another.
3. We must do unto others what we want them
to do unto us under the same circumstances.
Forms of Quasi-contract
•
•
Forms of quasi-contract are not exclusive.
Basis: Article 2143. The provisions for quasicontracts in this Chapter do not exclude other
quasi-contracts which may come within the
purview of the preceding article.
authorized by the
owner.
The owner must
have been aware of
the
gestor’s
intervention.
•
•
A. Negotiorum Gestio
•
•
•
Arises when a person, called the officious
manager or gestor, voluntarily takes charge
of the agency or management of the
business of property of another which has
been neglected or abandoned, without any
power from the latter.
It was developed to govern the management
of an absent person’s affairs.
The owner of the business or property must
either be physically absent or has failed to
appoint a proper agent to administer the
business or property because the concept
explicitly covers abandoned or neglected
property or business.
•
On the part of the officious or gestor
•
•
•
•
Negotiorum Gestio vs Implied Agency
Negotiorum
Implied Agency
Gestio
It is necessary that Contractual
in
the gestor must not nature, there being
have been tacitly present the element
of
consent,
In order for the juridical relation negotiorum
gestio to arise, it is necessary that the gestor
must acted in good faith.
He must have acted for another out of a
sense of duty to render assistance to those
in need and not for his own sake or his own
interests.
In order for the gestor to be entitled to
reimbursement, it is also important that he
must acted on behalf of the owner but with
the intention of demanding indemnification
for expenses he incurred.
Obligations Created in Negotiorum Gestio
Requisites:
1. A person voluntarily assumes the agency o
management of the business or property of
another.
2. The property or business is neglected or
abandoned.
3. There is no authorization from the owner,
either expressly or impliedly.
4. The assumption of agency or management is
done in good faith.
although
given
tacitly.
The owner knew of
the
gestor’s
intervention and yet
did not interpose
any objection.
•
Once the gestor intervenes, he cannot just
quit and abandon the property or the
business. The law requires him to continue
with the agency or management until the
termination of the affairs and its incidents or
until the owner appears and substitutes him
in such management.
If the owner suffers damage by reason his
fault or negligence, he is liable to pay
damages to the owner.
The gestor may delegate to another person
all or some of his duties but he shall remain
liable to the owner for the acts of the
delegate.
In case there will be two or more gestors,
their responsibility to the owner shall be
solidary, unless the management was
assumed to save the thing or business from
eminent danger, in which case the liability
shall be merely joint.
The gestor is not liable for any loss or
damage to the property or business by
reason of fortuitous event.
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Exception:
1. Undertakes risky operations which the owner
was not accustomed to embark upon.
2. Prefers his own interest to that of the owner.
3. Fails to return the property or business after
demand by the owner
4. Assumes the management in bad faith
5. Manifestly unfit to carry on the management,
except when the same was assumed to save
the property or business from eminent
danger.
6. Prevents, by his intervention, a more
competent person from taking up the
management, except when the same was
assumed to save the property or business
from eminent danger.
•
In case the gestor has entered into contracts
with the third persons in the performance of
his duties as such, he is the one personally
liable to the third persons with whom he dealt
with, even though he acted in the name of the
owner.
Expectations:
1. The owner has ratified the management,
either expressly or tacitly.
2. When the contract refers to the things
pertaining to the owner of the business.
Note: in the case of ratification of the management
of the business, the effects of an express agency will
be produced, even if the business may not have
been successful. The relationship between the
gestor and the owner will cease to be that of
negotiorum gestio, but will become contractual in
nature.
expressly ratified, in any of the following
situations:
a. If the owner enjoys the advantages of
the officious management.
b. If the management had for its
purpose the prevention of an
imminent and manifest loss, although
no benefit may have been derived.
c. Even if the owner did not derive any
benefit and there has been no
imminent and manifest danger tot the
property or business, provided that
the gestor has acted in good faith and
the property or business is intact
ready to be returned to the owner.
Extinguishment of Negotiorum Gestio
1. Repudiation of the officious management by
the owner.
2. Putting an end to such officious management
by the owner.
3. Death, civil interdiction, insanity or
insolvency of the owner or the gestor.
4. Withdrawal from the management by the
gestor, but without prejudice to his liability for
damages should the owner suffer damages.
SOLUTION INDEBITI
Basis: based on the ancient principle that no one
shall enrich himself unjustly at the expense of
another.
Definition: Article 2154. If something is received
when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it
arises. (1895)
Application:
On the part of the owner
The owner of the business or property becomes
liable to the gestor for:
1. Obligations incurred in his interest.
2. Necessary and useful expenses; and
3. Damages suffered by the gestor in the
performance of his duties, although the
officious management may not have been
1. A payment is made when there exists no
binding relation between the payor, who has
no duty to pay, and the person who received
the payment.
2. The payment is made through mistake, and
not through liberty or some other cause.
•
It is presumed that there was mistake in the
payment if something which had never been
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due or had already been paid has delivered;
but he from whom the return is claimed may
prove that the delivery was made out of
liberty or for any other cause.
4. That the plaintiff has no other action based
on contract, quasi-contract, crime, or quasidelict.
Difference:
Exception: payment by reason of mistake in the
construction or application of a doubtful or difficult
question of law may come within the scope of
(solution indebiti).
Solution Indebiti vs In Rem Verso
Accion in Rem Verso
Definition: Article 22. Every person who through an
act of performance by another, or any other means,
acquires or comes into possession of something at
the expense of the latter without just or legal ground,
shall return the same to him.
Accion in Rem
Verso
Considered merely
an auxiliary action,
available
when
there is no other
remedy on contract,
quasi-contract,
crime, or quasidelict.
The obligation of
the debtor to return
is based on law.
Similarities:
•
Accion in Rem
Solution Indebiti
Verso
Based on the principle of unjust
enrichment
which
is
essentially
contemplates payment when there is no
duty to pay, and the person who receives
the payment has no right to receive it.
There is unjust enrichment when:
•
1. A person is unjustly benefited.
2. Such benefit is derived at the
expense of or with damages to
another.
Unjust enrichment – exists when a person unjustly
retains a benefit to the loss of another, or when a
person retains a money or property of another
against the fundamental principles of justice, equity,
and good conscience.
Elements of Accion in Rem:
1. The defendant has been enriched
2. The plaintiff has suffered loss
3. That the enrichment of the defendant is
without just or legal ground.
Solution Indebiti
The obligation to
return is based on
quasi-delict.
Mistake
is
an
essential element.
If there is mistake in the payment, the
available remedy is an action to recover the
undue payment based on the principle of
solutio indebiti and the availability of this
remedy on quasi-contract shall preclude any
recovery based on accion in rem verso.
In accion in rem verso, while the defendant is
enriched without just or legal ground, such
enrichment must not be by reason of any
mistake in payment by the plaintiff.
Obligation of Debtor in Solutio Indebiti
•
A creditor-debtor relationship is created
under a quasi-contract whereby the payor
becomes the creditor who then has the right
to demand the return of payment made by
mistake, and the person who has no right to
receive such payment becomes obligated to
return the same.
The recipient of the payment is exempt from the
obligation to restore if the following requisites are
present:
1. Be believed in good faith that the payment
was being made of a legitimate and
subsisting claim.
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2. He destroyed the documents, or allowed the
action to prescribe, or gave up the pledges,
or cancelled the guarantees of his right.
•
•
•
The debtor, should he acted in good faith in
accepting the undue payment, shall be
likewise be liable to pay interest if the sum of
money is involved, or shall be liable for fruits
received or which should have been received
(by the creditor) if the thing produces fruits.
The debtor shall likewise be answerable for
any loss or impairment of the thing from any
cause, and for damages to the person who
delivered the thing (the creditor (, until it is
recovered.
Should the debtor acted in good faith, he
shall be responsible for the impairment or
loss of the same or its accessories and
accession insofar as he has thereby been
benefited. If he has alienated the thing, his
obligation is only to return the price or to
assign the action to collect the sum.
Other forms of Quasi-Contract
1. Giving of Legal Support and Payment of
Funeral Expenses
•
•
•
If such support is given by a stranger without
the knowledge of the person obliged to give
support, the former has a right to claim
reimbursement from the latter, unless it
appears that the stranger gave it out of piety
and without intention of being repaid.
The obligation to refund the amount is not by
virtue of law, but based on quasi-contract.
When the person to be supported is either an
orphan, or an insane or other indigent
person, or a minor child and the person
obliged to give support unjustly refuses to
give it, any third person who furnished
support to the needy individual has a right to
claim reimbursement from the person
obliged to give it.
Acts of a good Samaritan
Example: when a person is injured or become
seriously ill by reason of an accident or other cause
and he is treated or helped while he is not in a
condition to give consent to a contract, he is liable to
pay for the services of the physician or other person
aiding him, unless the service has been rendered out
of pure generosity.
Third Person Pays Debt or Taxes of Another
Anyone who is constrained to pay the taxes of
another shall be entitled to reimbursement from the
latter.
Acts of Consideration of General Welfare
When the government, upon the failure of any
person to comply with health or safety regulations
concerning property, undertakes to do the necessary
work, even over his objection, he shall be liable to
pay the expenses.
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.
(1092a)
Obligations arising from delicts (Obligatio Ex
Delicto)
Basis of Civil Liability in Crimes or Delicts
Article 100. Civil liability of a person guilty of felony. Every person criminally liable for a felony is also
civilly liable. (Revised Penal Code)
A crime has dual character:
1. As an order
2. As an offense against the private person
injured by the crime unless it involves the
crime of treason, rebellion, espionage,
contempt and others wherein no civil liability
arises on the part of the offender either
because there are no damages to be
compensated or there is no private person
injured by the crime.
•
Civil liability exists in a crime only if there is a
private offended party who suffered damage.
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•
•
In cases where there are no private persons
injured by the crime, such as treason,
rebellion, espionage, contempt and the likes,
no civil liability arises on the part of the
offender.
Criminal liability will give rise to civil liability
only if the same felonious act or omission
results in damage or injury to another and is
the direct and proximate cause thereof.
Effect of Acquittal of the Accused
2 kinds of Acquittal:
1. On the ground that the accused is not the
author of the act or omission complained of.
•
This instance closes the door to civil
liability, for a person who has been
found to be not the perpetrator of any
act or omission cannot and can never
be held liable for such act or
omission.
Basis: The extinction of the penal action does not
carry with its extinction of the civil action. However,
the civil action based on delict shall be deemed
extinguished if there is a finding in a final judgment
in the criminal action that the act or omission from
which the civil liability may arise did not exist. (Last
paragraph, Section 2, Rule 111 of the 2000 Revised
Rules of Criminal Procedure).
•
•
•
Applies only to a civil action arising
from crime or ex delicto and not to
civil action arising from quasi-delict or
culpa aquiliana.
Civil liability arising from quasi-delict
or culpa aquiliana, the same will not
be extinguished by an acquittal,
whether it be on ground f reasonable
doubt or that accused was not the
author of the act or omission
complained of.
An acquittal or conviction in the
criminal case is entirely irrelevant in
the civil case based on quasi-delict or
culpa aquiliana.
2. Based on reasonable doubt on the guilt of the
accused.
•
Even if the guilt of the accused has not been
satisfactorily established, he is not exempt
from civil liability (based on the crime) which
may be proved by preponderance of
evidence only.
Basis: Article 29. When the accused in a criminal
prosecution is acquitted on the ground that his guilt
has not been proved beyond reasonable doubt, a
civil action for damages for the same act or omission
may be instituted. Such action requires only a
preponderance of evidence. Upon motion of the
defendant, the court may require the plaintiff to file a
bond to answer for damages in case the complaint
should be found to be malicious.
If in a criminal case the judgment of acquittal is
based upon reasonable doubt, the court shall so
declare. In the absence of any declaration to that
effect, it may be inferred from the text of the decision
whether or not the acquittal is due to that ground.
(Civil Code)
•
•
•
A person acquitted of a criminal charge is not
necessarily free from civil liability because
the quantum of proof required in criminal
prosecution (beyond reasonable doubt) is
greater than that required for civil liability
(mere preponderance of evidence).
In order to completely free from civil liability,
a person’s acquittal must be based of fact
that he did not commit the offense.
If the acquittal is based merely on reasonable
doubt, the accused may still be held liable
since this does not mean he did not commit
the act complained of.
The acquittal will not bar a civil action in the following
cases:
1. The acquittal is based on reasonable doubt
as only preponderance of evidence is
required in civil action.
2. Where the court declared the accused’s
liability is not criminal but only civil in nature.
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3. Where the civil liability does not arise from or
is not based upon the criminal act of which
the accused was acquitted.
Article 1162. Obligations derived from quasidelicts shall be governed by the provisions of
Chapter 2, Title XVII of this Book, and by special
laws. (1093a)
Does Article 29 of the Civil Code require filing of a
separate civil action to recover the civil liability ex
delicto in case of acquittal based on reasonable
doubt?
Obligations arising from quasi-delicts
(Obligation Ex Cuasi Delicto)
Ans: No. In the case of Padilla vs Court of Appeals,
the court may acquit an accused based on
reasonable doubt and, at the same time, order the
payment of civil liability already proved in the same
case without need for separate civil action.
Definition: Article 2176. Whoever by act or
omission causes damage to another, there being
fault or negligence, is obliged to pay for the damage
done. Such fault or negligence, if there is no preexisting contractual relation between the parties, is
called a quasi-delict and is governed by the
provisions of this Chapter. (1902a)
Reason: this will prevent the needless clogging of
court dockets and the unnecessary duplication of
litigation.
Rule of Implied Institution
Rule: when a criminal action is instituted, the civil
action for the recovery of civil liability arising from the
offense charged is deemed instituted with the
criminal action, unless the offended party waives the
civil action, reserves the right to institute it separately
or institutes the civil action prior to the criminal
action. However, it must be made clear that the civil
action which is deemed instituted with the criminal
action is one which is based on the delict.
Effect of Death of Accused Pending Appeal
•
•
•
•
As to criminal liability, Article 89, par.1 of the
RPC is clear that the same is totally
extinguished by his death
As to civil liability on the same crime, People
vs Bayotas explained that the civil liability
arising from the crime or delict (or civil liability
ex delicto) is also extinguished.
The death of the accused prior to final
judgement terminates his criminal liability
and only the civil liability directly arising from
and based solely on the offense committed,
i.e. civil liability ex delicto.
The claim for the civil liability survives
notwithstanding the death of the accused, if
the same may also be predicted on a source
of obligation other than delict, i.e., civil
liability based on quasi-delict.
Requisites:
1. Damage suffered by the plaintiff.
2. Fault or negligence of the defendant.
3. Connection of cause and effect between the
fault or negligence of defendant and the
damage incurred by the plaintiff.
Reason: man should subordinate his acts to the
precepts of prudence and if he fails to observe them
and causes damage to another, he must repair the
damage.
Scope of Quasi-delict
Crime vs Quasi-delict
Crime
Affects the public
interest.
Penal
Code
punishes
or
corrects the criminal
act.
Delicts are not as
broad as quasidelicts because the
former are punished
only if there is a
penal law clearly
covering them.
Quasi-delict
Affects only private
concern.
Civil
Code,
by
means
of
indemnification,
merely repairs the
damages.
Quasi-delict
includes all acts in
which any kind of
fault or negligence
intervenes.
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Reference: Rabuya 2019
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Similarities
Crime
Quasi-delict
An act or omission characterized by fault
or negligence is committed, that such act
or omission is unlawful, and that the same
causes damage or injury to another.
Effect of Pre-existing Contractual Relations
•
•
Is the concept of quasi-delict limited only to fault or
negligence not punishable by law?
Ans: No. In the case of Barredo vs Garcia and
Almario, “same negligent act causing damages” may
produce civil liability arising from crime under Article
100 of the RPC or create an action fro quasi-delict
under Articles 2176 to 2194 of the Civil Code.
•
Air France vs Carrascoso
•
The existence of a contract between the
parties does not bar the commission of a tort
(quasi-delict) by one against the other and
the consequent recovery of damages,
therefore, when the act that breaks the
contract is also of a tort.
•
When an act which constitutes a breach of
contract would have itself constitutes the
source of a quasi-delictual liability had no
contract existed between the parties, the
contract can be said to have been breached
by tort, thereby allowing the rules on tort to
apply.
In situations where there is already a contract
between the parties prior to the commission
of the quasi-delict and such commission is
the very reason for the breach of the
contract, the injured party may recover under
contract or quasi-delict.
If the injured party opts to recover under
contract, the source of obligation is the
contract itself and not the negligence
committed during the performance of the
obligation already in existence.
If the recovery is based on quasi-delict, it is
the negligence itself which is the source of
the obligation.
In every commission of a crime through
negligence (or culpa), the private offended
party may recover civil liability either under
delict or quasi-delict.
What if the crime is committed through dolo? Will the
Barredo ruling also apply?
Ans: In Elcano vs Hill, the concept of quasi-delict
includes voluntary and negligent acts which may be
punishable by law. Article 2176 covers not only acts
committed with negligence, but also act which are
voluntary and intentional.
•
•
The term “fault” in Article 2176 covers
deliberate and intentional acts, while
“negligence” refers to cases of omission of
the required diligence (or unintentional)
When the quasi-delict is committed through
negligence or culpa, it is referred to as culpa
aquiliana or culpa extra-contractual.
Prohibition Against Double Recovery
• The law provides for a prohibition against
double recovery from both delict and quasidelict.
The existence of a contract between the
parties prior to the occurrence of the fault or
negligence precludes the commission of
quasi-delict.
The pre-existing contract between the parties
may bar the applicability of the lay on quasidelict, the liability may itself be deemed to
arise from quasi-delict, i.e. the acts which
breaks the contract may also be a quasidelict.
•
•
•
Basis: Article 2177. Responsibility for fault or
negligence under the preceding article is entirely
separate and distinct from the civil liability arising
from negligence under the Penal Code. But the
plaintiff cannot recover damages twice for the same
act or omission of the defendant. (n)
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Culpa Aquiliana (Culpa extra-contractual) vs
Culpa Contractual
Culpa Aquiliana
Culpa Contractual
Its
source
the Breached
of
negligence of the contract is premised
torfeasor
upon
the
negligence in the
performance of a
contractual
obligation.
The negligence or The negligence or
culpa is substantive culpa is considered
and independent, as an accident in
which
of
itself the performance of
constitutes
the an
obligation
source
of
an already existing –
obligation between the vinculum exists
persons
not independently
of
formerly connected the breach of the
by any legal tie.
voluntary
duty
assumed by the
parties
when
entering into the
contractual relation.
The
negligence The mere proof of
should be clearly the existence of the
established
contract and the
because it is the failure
of
its
basis of the action. compliance justify,
prima
facie,
a
corresponding right
of relief.
Liability of employer for an act or omission of his
employee
1. Recovery under Contract of Carriage
• The liability devolves upon the employer
because the driver is not a party to the
contract of carriage and may not be held
liable under the contract.
2. Recovery Under Delict or Crime
•
•
The employee is directly and primarily liable,
while the employer is subsidiary liable.
If the cause of action against the employee is
based on delict, it is not correct to hold the
employer jointly and severally liable with the
employee.
Before the employer’s subsidiary liability is enforced,
adequate evidence must exist establishing that:
1. They are indeed the employers of the
convicted employees.
2. They are engaged in some kind of industry.
3. The crime was committed by the employees
in the discharge of their duties.
4. The execution against the latter has no been
satisfied due to insolvency.
•
The employer cannot relieve himself of
liability of proving that he exercised all the
diligence of a good father of a family in the
selection and supervision of his employees.
This is because of the very nature of the
obligation.
3. Recovery under Quasi-delict
•
•
The offended party may choose to recover
only from the employee for the latter’s
negligence pursuant to Article 2176 of the
Civil Code, or directly from the employer
pursuant to the latter’s vicarious liability
under Article 2180 of the Civil Code, or from
both.
The employer may also be held liable under
the doctrine of vicarious liability or imputed
negligence.
Doctrine of vicarious liability
• A person who has not committed the act or
omission which caused damage or injury to
another may nevertheless be held civilly
liable to the latter either directly or
subsidiarily under certain circumstances.
• Whenever an employee’s negligence causes
damage or injury to another, there instantly
arises a presumption juris tantum that there
was negligence on the part of the employer,
either in the selection of the employees or the
supervision over him after the selection.
• The theory of presumed negligence is clearly
deducible from the last paragraph of Art.
2180 which provides that the responsibility
therein mentioned shall cease if the
employers prove that they observed all the
diligence of a good father to prevent
damages.
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Reference: Rabuya 2019
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Suyat, Tang, Valenzuela – 1C – 2020-2021
CIVIL AND NATURAL OBLIGATIONS
Article 1423. Obligations are civil or natural. Civil
obligations give a right of action to compel their
performance. Natural obligations, not being based
on positive law but on equity and natural law, do not
grant a right of action to enforce their performance,
but after voluntary fulfillment by the obligor, they
authorize the retention of what has been delivered or
rendered by reason thereof. Some natural
obligations are set forth in the following articles.
actually rendered
ineffective.
Though
not
enforceable through
a court action, can
possibly produce a
certain legal effect.
Within the domain
of law being a true
obligation capable
of producing legal
effects.
Civil Obligations
• One which gives a right of action to compel
its performance.
• One which provides for a legal sanction in
case of its breach.
• The creditor is authorized to invoke the
power of the State, through the courts, either
to compel its performance or to demand any
other alternative relief.
Basis of Natural Obligation: Article 1424. When a
right to sue upon a civil obligation has lapsed by
extinctive prescription, the obligor who voluntarily
performs the contract cannot recover what he has
delivered or the value of the service he has
rendered.
Natural Obligations
• One which does not grant a right of action to
enforce its performance, but after voluntary
fulfillment by the debtor, it authorizes the
retention of what has been delivered or
rendered by reason thereof.
• This kind of obligation does not provide for
legal sanction in case of non-performance.
• The debtor may not be compelled by the
coercive power of the State, exercised
through our courts, to perform this kind of
obligation because its performance depends
exclusively upon his conscience.
• It grants the creditor the right to retain what
has been delivered by reason thereof after
the same has been voluntarily fulfilled by the
debtor.
Distinguished from purely moral obligations
Natural Obligation
Purely Moral
Obligation
There is a juridical There is no juridical
tie which could give tie.
a cause of action
but because of
some
special
circumstances
is
Not possible to
produce
legal
consequences.
Within the domain
of the morals.
Note: When the civil code classifies obligations into
civil and natural only, does not recognize the
existence of a purely moral obligation.
Reason: a purely moral obligation is not within the
domain of the law since it is incapable of producing
any legal effect.
Legal Effects of Natural Obligation
1. The creditor is authorized to retain what has
been delivered or rendered by reason of the
voluntary fulfillment of natural obligation.
2. A natural obligation may again be covered
into a civil obligation, either by reason of
novation or when it has been made the
subject matter of a contract of guaranty,
pledge or mortgage.
Requirement of Voluntary Fulfillment
• The creditor acquires the right to retain what
has been delivered or paid to him only in
cases where the fulfillment of a natural
obligation is voluntary on the part of the
debtor.
• In order for such fulfillment to be considered
voluntary, it is not sufficient that the act be
done spontaneously or free from any
coercion.
• It is also necessary that the act be free from
any error or mistake.
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Basis:
Article 1956. No interest shall be due unless it has
been expressly stipulated in writing. (1755a)
Article 1957. Contracts and stipulations, under any
cloak or device whatever, intended to circumvent the
laws against usury shall be void. The borrower may
recover in accordance with the laws on usury. (n)
delivered or the value of the service he has
rendered.
2. When a third person pays a debt which had
already prescribed, he cannot demand
reimbursement from the debtor if the
payment was made without the knowledge or
against the will of the latter.
When action to enforce obligation has failed
•
Payment of monetary interest is allowed only if:
1. There was an express stipulation for the
payment of interest.
2. The agreement for the payment of interest
was reduced in writing.
•
•
If the borrower pays interest when there has
been no stipulation therefore, the provisions
of the Code concerning solutio indebiti or
natural obligations shall apply, as the case
may be.
The term “voluntarily fulfillment” in Article
1423 requires that the performance of the
obligation must not only be spontaneous but
must also be free from error or mistake.
Example: if the defendant voluntarily performs the
obligation after the action for its enforcement has
failed, he cannot demand the return of what he has
delivered or the payment of the value of the service
he has rendered.
When payment of deceased’s debt exceeds
inheritance
•
Instances of Natural Obligations
•
The enumeration of natural obligations in
Article 1424 to 1430 is not exclusive.
Basis: Last sentence of Article 1423 when it says tat
“some natural obligations are set forth in the
following articles.”
When debt has prescribed
•
When the action to enforce a civil obligation
has failed, it is plain that the civil obligation
ceases for another action to enforce the
same obligation is already barred by the
principle of res judicata.
•
With respect to monetary debts left by the
decedent, the rule is that the heir shall be
liable thereto only up to the extent of the
value of the property he received from the
decedent.
The obligation to pay the debt up to the value
of the inherited property is a civil one, while
the obligation to pay the excess is only
natural.
Payment of Legacy in Void will
•
A will is void and shall be disallowed if the
formalities required by law have not been
complied with.
When the right to sue upon a civil obligation
has lapsed by extinctive prescription, the
obligation ceases to be civil one and
becomes natural obligations.
Example:
1. Obligor voluntarily performs the contract; he
cannot anymore recover what he has
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Reference: Rabuya 2019
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CHAPTER 2
Nature and Effect of Obligations
Article 1163. Every person obliged to give
something is also obliged to take care of it with
the proper diligence of a good father of a family,
unless the law or the stipulation of the parties
requires another standard of care. (1094a)
Article 1164. The creditor has a right to the fruits
of the thing from the time the obligation to
deliver it arises. However, he shall acquire no
real right over it until the same has been
delivered to him. (1095)
Real and Personal Obligations
Real Obligations
Personal
Obligations
It consists of giving Consists either in
doing or not doing.
Compliance
is Compliance
is
connected with the incumbent upon the
thing to be delivered person obliged.
Obligation to give
•
Involves the delivery of a movable or
immovable thing in order to create a real
right, or for the use of the recipient, or for its
simple possession, or in order to return to its
owner.
If the obligation to
give consists in the
delivery of a specific
o determinate thing.
It is particularly
designated
or
physically
segregated from all
others of the same
class,
If the obligation
consists merely in
that of delivering
any member of the
genus or class.
Only the genus or
class has been
determined, without
the same being
designated
and
distinguished from
all others of the
same class.
Positive and Negative Personal Obligations
Positive Personal
Obligations
Obligation to do
Negative Personal
Obligations
Obligation not to do
Accessory Obligations in Determinate (Specific)
Obligations
Three accessory
obligations
obligations
in
determinate
1. The obligation to preserve the thing to be
delivered.
2. The obligation to deliver the fruits, if the
creditor is already entitled to them.
3. The obligation to deliver the accessions and
accessories.
Duty to Preserve Specific Thing Due
Obligation to do
•
Includes all kind of work in service.
Obligation not to do
•
Consists in abstaining from such acts.
Specific and Generic Obligations
Specific
Obligations
Determinate
obligation
Generic
Obligations
Indeterminate
obligation
General Rule: the only way by which the debtor may
be able to comply with his determinate obligation is
by delivering the exact thing which is due.
Basis: Article 1244. The debtor of a thing cannot
compel the creditor to receive a different one,
although the latter may be of the same value as, or
more valuable than that which is due.
Note: accessory obligation finds no application to an
obligation to give an indeterminate thing.
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Reference: Rabuya 2019
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Degree of Diligence Required
•
The debtor in indeterminate obligation is
bound to observe the proper diligence of a
good father of a family in taking care of the
thing to be delivered.
Meaning: The law refers to the diligence required of
a reasonable prudent person.
General Rule: The bonus pater familias rule applies
in determining the diligence required of the debtor in
fulfilling his obligation to preserve the determinate
thing due.
Exception: this rule does not apply when the law
and the stipulation of the parties requires another
standard of care.
Example: when the debtor is already guilty of delay
or if he has promised to deliver the same thing to two
or more persons who do not have the same interest.
Reason: because the debtor shall already be
responsible for fortuitous event until he has effected
the delivery.
Basis: If the obligor delays, or has promised to
deliver the same thing to two or more persons who
do not have the same interest, he shall be
responsible for any fortuitous event until he has
effected the delivery.
Can the parties agree on a standard of care lower
than that of the good father of a family?
Ans: The parties can validly agree even on a
standard of care lower than that of the bonus pater
familias, i.e. an agreement providing only for slight
care.
•
It shall be lawful for the parties to require a
degree of diligence higher than that of then
good father of a family, such as extraordinary
care and even for liability by reason of
fortuitous event.
Duty to deliver fruits
When Creditor Acquires Rights Over Fruits
In determinate obligations, is the debtor bound to
deliver the fruits of the determinate thing due?
Ans: Yes, if the creditor already acquired rights over
fruits.
•
It is necessary to determinate the exact time
when a creditor acquires a right over the
fruits of the determinate thing due.
When is the obligation to deliver the determinate
thing due deemed to have risen?
Ans:
In obligation arising from law, quasi-contracts, quasidelicts, and delicts, the specific provision applicable
to them determine the time when the obligation to
deliver arises.
In obligation arising from contracts, arises upon the
perfection of the contract because as such time, the
parties are bound not only to the fulfillment of what
has been expressly stipulated but also to all the
consequences which, according to their nature, may
be in keeping with good faith, usage and law.
When the Creditor Acquires Real Right
Personal Right
The power of one
person to demand
of another, as a
definite
passive
subject,
the
fulfillment
of
a
prestation to give, to
do, or not to do.
•
Real Right
The
power
belonging
to
a
person
over
a
specific
thing,
without a passive
subject individually
determined, against
whom such right
may be personally
exercised.
The creditors acquire a real right over a thing
only upon its delivery and this principle
applies not only to the specific thing due, but
also to its fruits.
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Basis: non nudis pactis, sed traditione dominia
rerum transferentur (the owner of thing is transferred
not by mere agreement, but by tradition or delivery.
•
Prior to the delivery, the right of the debtor
over the determinate thing due and its fruits
is merely a personal right – which is simply
the right to demand from the debtor the
delivery of yhe determinate thing due and its
fruits, in proper cases.
accessions and accessories, even though they
may not have been mentioned. (1097a)
Article 1167. If a person obliged to do something
fails to do it, the same shall be executed at his
cost.
This same rule shall be observed if he does it in
contravention of the tenor of the obligation.
Furthermore, it may be decreed that what has
been poorly done be undone. (1098)
Duty to Deliver the Accessions and Accessories
Basis: Article 1166. The obligation to give a
determinate thing includes that of delivering all its
accessions and accessories, even though they may
not have been mentioned.
Accessories – refer to those things which, being
intended for the ornamentation, use or preservation
of another or more importance, have for their object
the completion of the later for which they are
indispensable or convenient.
Article 1168. When the obligation consists in not
doing, and the obligor does what has been
forbidden him, it shall also be undone at his
expense. (1099a)
Remedies of Creditor in Case of Breach of
Obligation
Breach of Determinate Obligation
•
Example: Key in case of house, machinery in case
of factory.
Accessions – includes cases of natural accessions,
such as alluvium, avulsion and formation of islands,
and cases of industrial accessions, in the form of
building, planting and sowing.
Article 1165. When what is to be delivered is a
determinate thing, the creditor, in addition to the
right granted him by article 1170, may compel
the debtor to make the delivery.
If the thing is indeterminate or generic, he may
ask that the obligation be complied with at the
expense of the debtor.
If the obligor delays, or has promised to deliver
the same thing to two or more persons who do
not have the same interest, he shall be
responsible for any fortuitous event until he has
effected the delivery. (1096)
•
The debtor cannot compel the creditor to
receive a different one, although the latter
may be the same value as, or more valuable
than that which is due.
In case of breach of the obligation, the
creditor can compel his debtor to make the
delivery.
Basis: When what is to be delivered is a determinate
thing, the creditor, in addition to the right granted him
by article 1170, may compel the debtor to make the
delivery.
•
•
•
•
•
The creditor can also recover damages
against the debtor
The right to compel delivery and to recover
damages are cumulative and not alternative.
If the source of obligation is contract, the
creditor has an alternative remedy aside from
an action for specific performance.
In proper cases, he may cause the rescission
of the contract.
In case of breach of the obligation, in addition
to his right recover damages.
Article 1166. The obligation to give a determinate
thing includes that of delivering all its
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Breach of Generic Obligations
•
•
•
Compel the performance of the obligation at
the expense of the obligor.
The delivery shall be done by someone else
and not by the debtor himself, but the
expenses that will be incurred in performing
the obligation shall be borne by the latter.
The creditor may compel the debtor himself
to make the delivery.
Note: the action to compel is still denominated as
one for specific performance even if what is to be
delivered is a generic thing.
•
•
•
•
Whether the thing due is determinate or
generic, the action to compel delivery is for
specific performance.
The only difference being that in determinate
obligations the debtor may not compel the
creditor to accept a different one other than
what is due, while in generic obligations, the
delivery of any member of the genus or class
will suffice.
If the debtor does not make the delivery, the
obligation may be performed by someone
else at his expense.
The creditor still has the right to recover the
same from the debtor by virtue of the basic
rule on liability for damages by reason of
non-fulfillment of obligations expressed in
Article 1170 of the Civil Code.
Breach of Positive Personal Obligations
•
•
An obligation to do is considered breached
not only when it is not performed, but also
when the performance is poor or in
contravention of the tenor of the obligation.
In either case, the debtor cannot be
compelled, against his will, to execute the act
which he bound himself to do.
Basis: Involuntary Servitude – Section 18, Article III
of the Constitution.
Alternative mode of fulfilling the obligation in case
the debtor refuses to comply with his undertaking:
1. The law authorizes the creditor to have the
act executed by himself or by another at the
expense of the debtor, in addition to his right
to recover damages.
2. The law grants the creditor to demand for the
undoing of what has been don, at the
expense of the debtor (if done poorly)
Breach of Negative Personal Obligations
•
•
An obligation not to do is considered
breached when the debtor does what has
been forbidden him.
The remedy of the creditor is to demand for
the undoing of what has been done, at the
debtor’s expense, in addition to his right to
recover damages.
Article 1169. Those obliged to deliver or to do
something incur in delay from the time the
obligee judicially or extrajudicially demands
from them the fulfillment of their obligation.
However, the demand by the creditor shall not be
necessary in order that delay may exist:
(1) When the obligation or the law
expressly so declare; or
(2) When from the nature and the
circumstances of the obligation it
appears that the designation of the time
when the thing is to be delivered or the
service is to be rendered was a
controlling motive for the establishment
of the contract; or
(3) When demand would be useless, as
when the obligor has rendered it beyond
his power to perform.
In reciprocal obligations, neither party incurs in
delay if the other does not comply or is not ready
to comply in a proper manner with what is
incumbent upon him. From the moment one of
the parties fulfills his obligation, delay by the
other begins. (1100a)
Article 1170. Those who in the performance of
their obligations are guilty of fraud, negligence,
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or delay, and those who in any manner
contravene the tenor thereof, are liable for
damages. (1101)
debtor is fulfilling the obligation by not doing
what is forbidden him.
Requisite:
When is there a breach of obligation?
•
•
•
There is a breach not only when it is not
performed, but also when it is performed in
contravention of its tenor.
if the no-fulfillment of the obligation is not due
to the debtor’s fault but by reason of
fortuitous event, the debtor is not liable.
If the non-fulfillment of the obligation is due
to the fault of the debtor because he is guilty
of delay, fraud, negligence, or he
contravenes in any manner the tenor thereof,
he becomes liable to the creditor for
damages.
1. That the obligation be demandable and
already liquidated.
2. That the debtor delays performance.
3. That the creditor requires the performance
judicially or extrajudicially.
•
•
A debtor is deemed to have violated his
obligation to the creditor from the time the
latter makes a demand.
Absent any demand from the obligee, oral or
written, the effects of default do not rise and
the obligor does not incur delay, as a rule.
Exceptions to Requirement of Demand
Delay or Default (Mora)
•
Is the non-fulfillment of the obligation with
respect to time.
Three kinds of mora:
1. Mora solvendi – default on the part of the
debtor to perform, which may either be:
a. Mora solvendi ex re – referring to
obligations to give.
b. Mora Solvendi ex persona –
referring to obligations to do.
2. Mora Accipiendi – default on the part of the
creditor to receive.
3. Compensatio Morae – default of both
parties in reciprocal obligations.
1. When the obligation expressly so declares
2. When the la expressly so declares.
3. When from the nature and the circumstances
of the obligation it appears that the
designation of the time when the thing is to
be delivered or the service is to be rendered
was a controlling motive for the
establishment of the contract.
4. When demand would be useless, as when
the obligor has rendered it beyond his power
to perform.
With respect to the first two exceptions:
•
Mora Solvendi
•
•
•
Delay in the fulfillment of the obligation, by
reason of a cause imputable to the debtor, or
because of dolo (malice) or culpa
(negligence).
Must be either malicious or negligent,
otherwise, the debtor cannot be held liable
for damages.
The delay may occur only in obligations
which are positive (to give and to do), but not
in obligations not to do, for in the latter the
It is not enough that the law or the agreement
of the parties fixes a date for performance; it
must further state expressly that after the
period lapses, default will commence.
Example: a partner who has undertaken to
contribute a sum of money and fails to do so. In such
case, the law expressly says that the partner
concerned thereby becomes a debtor of the
partnership for the interest and damages from the
time he should have complied with his obligation.
With respect to the third exception:
•
It is essential that the time is the controlling
motive for the establishment of the contract.
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•
In determining whether time is the essence
in the contract, the ultimate criterion is the
actual or apparent intention of the parties and
before time may be so regarded by a court,
there must be a sufficient manifestation,
either in the contract itself or the surrounding
circumstances of that intention.
Example: time is the essence in exchange contracts
because of the speculative and fluctuating value of
the stocks. However, even where time is of the
essence, a breach of the contract in the respect by
one of the parties may be waived by the other party’s
subsequent treating the contract as still in force.
With respect to the fourth exception:
•
When the debtor has rendered the obligation
beyond his power to perform demand is no
longer necessary, as the same would only be
useless formality.
Example: a seller sold the same thing (a movable
property) to two persons but he delivered the thing
sild to the second buyer, who had no knowledge of
the existence of the first sale. The seller shall incur
in delay immediately after the lapse of the period
agreed upon for the delivery of the thing sold to the
first buyer as demand would already be useless
considering that the seller has rendered the
obligation beyond his power to perform.
Rule on counting the prescriptive period:
•
•
•
The time for prescription for all kinds of
actions, when there is no special provision
which ordains otherwise, shall be counted
from the day they may be brought.
It is the legal possibility of bringing the action
which determines the starting point for the
computation of the prescriptive period for the
action, and not necessarily the time of the
making of an extrajudicial demand.
Unless stipulated otherwise, an extrajudicial
demand is not required before a judicial
demand can be resorted to.
Autocrop Group vs Intra Strata Assurance
Corporation
•
A demand, whether judicial or extrajudicial, is
not required before an obligation becomes
due and demandable. It is only necessary in
order to put an obligor in due and
demandable obligation in delay, which in turn
is for the purpose of making the obligor liable
for interests or damages for the period of
delay.
Compensation Morae
•
The delay or default on the part of both
parties neither has completed their part in
their reciprocal obligations
Effects of Mora Solvendi
•
•
Reciprocal Obligations
The debtor renders himself liable to the
creditor for damages in case of default.
The debtor remains liable for the loss of the
thing due after he has incurred in delay even
such loss was without his fault or by reason
of a fortuitous evet.
•
•
Basis: Articles 1165 and 1262 of the Civil Code.
Solid Homes, Inc. vs Tan
•
The prescriptive period within which the
oblige may bring an action against the obligor
does not commence to run until a demand is
made.
•
•
Arising from the same cause, and wherein
each party is a debtor and a creditor of the
other, such that the obligation of one is
dependent upon the obligation of the other.
They are to be performed simultaneously, so
that the performance of one is conditioned
upon the simultaneous fulfillment of the
other.
Before a party can demand the performance
of the obligation of the other, the former must
also perform its own obligation.
Delay by the other begins only from the
moment one of the parties fulfills his
obligation.
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•
Any claim of delay or non-performance
against the other could prosper only if the
complaining party had faithfully complied
with its own correlative obligation.
Requirement
Obligation
of
Demand
in
Reciprocal
General Rule: the fulfillment of the parties’
respective obligations should be simultaneous.
•
•
The other party would incur in delay only
from the moment the other party demand
fulfillment of the former’s obligation.
If the period of the fulfillment of the obligation
is fixed, demand upon the oblige is still
necessary before the obligor can be
considered in default and before a cause of
action for rescission will accrue.
Mora Accipendi
•
Relates to the delay om the part of the oblige
in accepting the performance of the
obligation by the obligor.
Requisites:
1. An offer of performance by the debtor who
has the required capacity.
2. The offer must be to comply with the
prestation as it should be performed.
3. The creditor refuses the performance without
just cause.
Article 1171. Responsibility arising from fraud is
demandable in all obligations. Any waiver of an
action for future fraud is void. (1102a)
•
The first kind of fraud merely gives to an
action for damages while the second inf of
fraud is a ground to seek the annulment of
the contract.
No waiver of Action for Future Fraud
•
The prohibition refers to waiver in advance,
or prior to the commission of the fraud, or
prior to the knowledge thereof.
Reason: dictated by reason of public policy;
otherwise, this kind of agreement would leave the
obligation without efficacy.
Exception: the prohibition does not extend to waiver
of effects of fraud already committed and known to
the parties.
Article
1172. Responsibility
arising
from
negligence in the performance of every kind of
obligation is also demandable, but such liability
may be regulated by the courts, according to the
circumstances. (1103)
Article 1173. The fault or negligence of the
obligor consists in the omission of that diligence
which is required by the nature of the obligation
and corresponds with the circumstances of the
persons, of the time and of the place. When
negligence shows bad faith, the provisions of
articles 1171 and 2201, paragraph 2, shall apply.
If the law or contract does not state the diligence
which is to be observed in the performance, that
which is expected of a good father of a family
shall be required. (1104a)
Negligence (Culpa)
Fraud (Dolo)
Distinguished from fraud:
One of the parties may resort to dolo or fraud only
during the fulfillment of the obligation or for the
purpose of inducing another to enter into a contract.
•
•
In the first, the obligation already exists and
fraud is committed only during its
performance.
In the second, it is fraud which gives rise to
obligation.
•
•
Fraud connotes some kind of dishonesty,
malice or bad faith on the part of one of the
parties.
It is distinguished from negligence by the
presence of deliberate intent, which is
lacking in the latter.
Culpa Aquilana vs Culpa Contractual
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Culpa Aquilana
Also known as
culpa
extra
contractual,
wrongful
or
negligent act or
omission
which
creates
vinculum
juris and gives rise
to an obligation
between to persons
not formally bound
by
any
other
obligation.
Governed by Article
2176
an
the
immediately
following articles.
Has its source the
negligence of the
tortfeasor.
The negligence or
culpa is substantive
and independent,
which
of
itself
constitutes
the
source
of
an
obligation between
persons
not
formerly connected
by any legal tie.
The
negligence
should be clearly
established
because it is the
basis of the action.
•
occurring only during the performance of an
already existing obligation.
Culpa Contractual
Refers to the fault or
negligence incident
in the performance
of an obligation
which is already
existed, and which
increases
the
liability from such
already
existing
obligation.
When negligence exists
Governed
by
Articles 1170 –
1174.
Basis: The fault or negligence of the obligor consists
in the omission of that diligence which is required by
the nature of the obligation and corresponds with the
circumstances of the persons, of the time and of the
place.
Is premised upon
the negligence in
the performance of
a
contractual
obligation.
The negligence or
culpa is considered
as an accident in
the performance of
an
obligation
already existing –
the vinculum exists
independently
of
the breach of the
voluntary
duty
assumed by the
parties
when
entering into the
contractual relation.
The mere proof of
the existence of the
contract and the
failure
of
its
compliance justify,
prima
facie,
a
corresponding right
of relief, without
need of proving the
negligence.
•
•
•
•
There is no exact formula in determining the
existence of negligence.
As to whether the debtor is guilty of
negligence, the same shall depend on the
circumstances of each case.
If the law or contract does not state the
degree of diligence is to be observed in the
performance of an obligation, then that which
is expected of a good father of a family or
ordinary diligence shall be required.
The test to determine whether negligence
attended the performance of an obligation is:
Did the defendant in doing the alleged
negligent act use that reasonable care and
caution which an ordinarily prudent person
would have used in the same situation?
Negligence – the omission to do something which a
reasonable man, guided by those considerations
which ordinarily regulate the conduct of human
affairs, would do, or the doing or something which a
prudent and reasonable man would not do.
When Culpa is Equivalent to Dolo
•
•
While an action for future cannot be waived,
the same rule cannot apply, with equal force,
to an action for future negligence.
The negligence connotes that absence of
intent, therefore not serious as fraud, and the
waiver of an action for future negligence is
not contrary to public policy, such waiver is
generally considered as valid.
It is clear that the culpa or negligence
referred to in Article 1170 is culpa contractual
because the provision speaks of negligence
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Waiver of an
action for future
negligence
VALID
Stipulation
providing for
absolute
exemption from
liability.
VOID – because
against
public
policy.
Rule with respect to negligence showing bad faith:
•
•
Definition of Fortuitous Event
•
•
•
Tantamount to fraud and shall therefore be
governed by the provisions on fraud.
Any waiver of an action for future negligence
showing bad faith is also void.
Are extraordinary events not foreseeable or
avoidable, “events that could not be
foreseen, or which, though foreseen, were
inevitable.
Such event must be totally independent of
the will of the debtor, or that it is produced by
some other cause not imputable to him.
If there is impossibility to foresee the event,
it does not matter that it is avoidable. In the
same way, if there is impossibility to avoid
the event, it does not matter that it could have
been foreseen.
Caso Fortuito and Force Majure
Contravention of Tenor of Obligation
•
•
Every debtor who fails in performance of his
obligation is bound to indemnify7 for the
losses and damages caused thereby.
It is not necessary that there should be either
bad faith or negligence in order that there
may be liability for damages.
Article 1174. Except in cases expressly specified
by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation
requires the assumption of risk, no person shall
be responsible for those events which could not
be foreseen, or which, though foreseen, were
inevitable. (1105a)
Caso Fortuito
Force Majure
Both terms refer to causes independent of
the will of the obligor.
Independent
not Arises from an
only of the will of the unavoidable
debtor but also of happening, or from
human will.
an act, lawful or
unlawful of a person
other
than
the
debtor, which act
renders impossible
of
the
debtor
compliance with his
obligation.
Effects and Requisites of Fortuitous Event
Fortuitous Event
•
•
The impossibility of performing the obligation
may provide the debtor with a legal excuse
for his non-performance, if the same occurs
without his fault and prior to him incurring
delay.
This impossibility may happen in two ways:
either because the specific thing to be
delivered in an obligation “to give” is lost or
destroyed, or the prestation in an obligation
“to do” becomes physically or legally
impossible.
•
•
No person shall be responsible for a
fortuitous event.
It excuses the debtor from liability for nonperformance of the obligation.
Requisites:
1. The cause of the breach of the obligation
must be independent of the will of the debtor.
2. The event must be either unforeseeable or
unavoidable.
3. The event must be such as to render it
impossible for the debtor to fulfill his
obligation in a normal manner.
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4. The debtor must be free from any
participation in, or aggravating of the injury to
the creditor.
Note: The burden of proving that the loss was due
to a fortuitous event rests on him who invokes it,
being a case of exemption from liability.
•
•
In order for a fortuitous event to exempt one
from liability, it is necessary that one has
committed no negligence or misconduct that
have occasioned the loss.
The principle embodied in the act of God
doctrine strictly requires that the act must be
one accessioned exclusively by the violence
of nature and all human agencies are to be
excluded from creating or entering into the
cause of the mischief. When the effect, the
cause of which is to be considered, is found
to be in part the result of the participation of
man the whole occurrence is thereby
humanized and removed from the rules
applicable to the acts of God.
Co vs CA
•
Robbery per se, just like carnapping, is not
fortuitous event. It does not foreclose the
possibility of negligence on the part of the
debtor.
Additional characteristic of fortuitous event:
•
Its occurrence must be such to render it
impossible for a party to fulfill his obligation
in a normal manner.
Exceptions to Rule on Non-liability for fortuitous
event
Even when the requisites are present, the debtor
shall remain liable even if the loss or damages is by
reason of fortuitous event in the following instances:
1. When the law expressly provides for liability
even for fortuitous event.
2. When the stipulation of the parties expressly
provides for liability for fortuitous event.
3. When the nature of the obligation requires
the assumption of risk.
Basis: Article 1262. An obligation which consists in
the delivery of a determinate thing shall be
extinguished if it should be lost or destroyed without
the fault of the debtor, and before he has incurred in
delay.
When by law or stipulation, the obligor is liable even
for fortuitous events, the loss of the thing does not
extinguish the obligation, and he shall be
responsible for damages. The same rule applies
when the nature of the obligation requires the
assumption of risk. (1182a)
When Law Expressly Provides for Liability
(See page 79 of Rabuya Book)
Express Stipulation
•
•
The law allows the parties to stipulate on a
kind of diligence from that expected of a
good father of a family, or the so-called
“ordinary diligence.”
In Art. 1174, the law expressly authorizes
the parties to provide for liability even for
fortuitous event.
Assumption of Risks
•
Liability attaches even if loss was due to a
fortuitous event if the nature of the obligation
requires assumption.
Example:
The petitioner’s car was carnapped while it was in
the possession of the private respondent for repair,
the Court held the private respondent liable for the
loss of the car due to carnapping.
Article 1175. Usurious transactions shall be
governed by special laws. (n)
Usury Law in the Philippines
Is the Usury Law still effective, or has it been
repealed by Central Bank Circular No. 905, adopted
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on December 22, 1982, pursuant to its power under
PD No.116, as amended by PD No. 1684?
the creditor without reservation as to prior
installments.
Answer:
Article 1176 in relation to Article 1253
Medel vs Court of Appeals
•
CB Circular No. 905 did not repeal nor in any
way amend the Usury Law, but simply
suspended the latter’s effectivity.
First Metro Investment Corp. vs Estate Del Sol
Mountain Reserve, Inc.
•
The illegality of usury is wholly the creature
of legislation. A Central Bank Circular cannot
repeal law. Only a law can repeal another
law.
Florendo vs CA
•
By virtue of the CB Circular 905, the Usury
Law has been rendered ineffective.
Article 1176
Relevant
on
questions
pertaining to the
effects and nature
of obligations in
general.
Presumption does
not resolve the
question of whether
the
amount
received by the
creditor
is
a
payment for the
principal or interest.
The
amount
received by the
creditor
is
the
payment for the
principal.
Note:
•
The imposition of an unconscionable rate of
interest on a money debt, even if knowingly
and voluntarily assumed, is immoral and
unjust.
Article 1176. The receipt of the principal by the
creditor without reservation with respect to the
interest, shall give rise to the presumption that
said interest has been paid.
The receipt of a later installment of a debt
without reservation as to prior installments, shall
likewise raise the presumption that such
installments have been paid. (1110a)
Two presumptions Established:
1. That interest has been paid if payment of the
principal is received by the creditor without
reservation with respect to the interest.
2. That prior installment has been paid if
payment of a later installment is received by
Resolves the doubt
by presuming that
the creditor waives
the payment of
interest because he
accepts
payment
for the principal
without
any
reservation.
•
Article 1253
Specifically
pertinent
on
questions involving
application
of
payments
and
extinguishment of
obligations.
The
presumption
resolves
doubts
involving payment
of interest-bearing
debts.
The doubt pertains
to the application of
payment;
the
uncertainty is on
whether the amount
received by the
creditor is payment
for the principal or
the interest.
Resolves doubt by
providing
a
hierarchy:
payments shall first
be applied to the
interest; payment
shall
then
be
applied
to
the
principal only after
the interest has
been fully-paid.
The rule under Article 1253 that payments
shall first be applied to the interest and not to
the principal shall govern if two facts exists:
(1) the debt produces interest, and (2) the
principal remains unpaid.
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Article 1177. The creditors, after having pursued
the property in possession of the debtor to
satisfy their claims, may exercise all the rights
and bring all the actions of the latter for the same
purpose, save those which are inherent in his
person; they may also impugn the acts which the
debtor may have done to defraud them. (1111)
General Remedies of Creditor to Protect and
Satisfy His Credit
Three Successive Measures
The following successive measures must be taken
by a creditor before he may bring an action for
rescission of an allegedly fraudulent sale:
Requisites:
1. That the creditor has a right of credit against
the debtor although at the moment it is not
liquidated.
2. The credit must be due and demandable.
3. Failure of the debtor to collect, that is,
inaction of the debtor, whether the same be
willful or negligent.
4. Insufficiency of the assets in the hands of the
debtor although the creditor need not bring a
separate action to show this exhaustion or
insolvency of the debtor but he can prove the
same in the very action to exercise the
subrogatory action.
Accion Pauliana
1. Exhaust the properties of the debtor through
levying by attachment and execution upon all
the property of the debtor, except such as are
exempt by law from execution.
2. Exercise all the rights and actions of the
debtor, save those personal to him (accion
subrogatoria)
3. Seek rescission of the contracts executed by
the debtor in fraud of their rights (accion
pauliana)
•
•
Without availing of the first and second
remedies, the creditor cannot resort to the
third measure.
An action for rescission is a subsidiary
remedy; it cannot be instituted except when
the party suffering damage has no other legal
means to obtain reparation for the same.
Accion Subrogatoria
•
•
In situations where the creditor cannot in any
way recover the credit because the debtor
has no property or has property insufficient
to satisfy his debts but he has credits or
rights and bring all the actions of the debtor,
except those which are inherent on his
person.
This action of the creditor is indirect because
the creditor cannot in his own name file the
action but in the name of the debtor.
•
•
•
The rescissory action to set aside contracts
in fraud of creditors.
Essentially a subsidiary remedy accorded
under Article 1383 of the Civil Code which
the party suffering damage can avail of only
when he has no other means to obtain
reparation for the same.
The provision applies only when the creditor
cannot recover in any other manner what is
due him.
Requisites:
1. That the plaintiff asking for rescission has a
credit prior to the alienation, although
demandable later.
2. That the debtor has made a subsequent
contract conveying a patrimonial benefit to a
third person.
3. That the creditor has no other legal remedy
to satisfy his claim, but would benefit by
rescission of the conveyance to the third
person.
4. That the act being impugn is fraudulent.
5. That the third person who received the
property conveyed, if by onerous title, has
been an accomplice in the fraud.
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An accion pauliana presupposes the following:
1. A judgement
2. The issuance by the trial court of a writ of
execution for the satisfaction of the
judgement.
3. The failure of the sheriff to enforce and
satisfy the judgment of the court.
•
•
It requires that the creditor has exhausted the
property of the debtor.
The date of the decision of the trial court is
immaterial. What is important is that the
credit of the plaintiff antedates that of the
fraudulent alienation by the debtor of his
property.
•
•
Essential Feature
•
•
Article 1178. Subject to the laws, all rights
acquired in virtue of an obligation are
transmissible, if there has been no stipulation to
the contrary. (1112)
CHAPTER 3
Different Kinds of Obligations
•
•
Article
1179. Every
obligation
whose
performance does not depend upon a future or
uncertain event, or upon a past event unknown
to the parties, is demandable at once.
•
Pure Obligations
•
•
•
•
Is one where the performance does not
depend upon a condition.
In order to become pure, it is sufficient that it
contains no condition.
It must not be subjected to a term or period.
That in which no condition is placed, nor a
day fixed for its compliance.
Olivarez Realty Corporation vs Castillo
Immediate demandability of an obligation
does not imply a need for its immediate or
instantaneous compliance.
The court may still give the debtor a
reasonable time within which to comply with
the obligation and the same is not
inconsistent with the idea of the obligation
being immediately demandable nor alter its
character as pure.
Other obligations which are also immediately
demandable
SECTION 1
Pure and Conditional Obligations
Every obligation which contains a resolutory
condition shall also be demandable, without
prejudice to the effects of the happening of the
event. (1113)
Pure obligation, or obligations whose
performance do not depend upon a future or
uncertain event, or upon a past event
unknown to the parties, are demandable at
once.
Obligations with a resolutory period also take
effect at once but terminate upon arrival of
the day certain.
Obligations which are subject to a resolutory
condition or a resolutory term are also
demandable at once.
In resolutory condition, the existence or
effectivity of the obligation is subject to
extinguishment or termination upon the
happening of an event or upon arrival of a
day certain.
In pure obligations, there is no event nor
period that may affect the obligation’s
existence or effectivity.
Article 1180. When the debtor binds himself to
pay when his means permit him to do so, the
obligation shall be deemed to be one with a
period, subject to the provisions of article 1197.
(n)
Article 1181. In conditional obligations, the
acquisition of rights, as well as the
extinguishment or loss of those already
acquired, shall depend upon the happening of
the event which constitutes the condition. (1114)
Conditional Obligation
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•
The acquisition or rights, as well as the
extinguishment or loss of those already
acquired, shall depend upon the happening
of the event that constitutes the condition.
Any uncertain event which wields an
influence on a legal relation.
Every future and uncertain event upon which
an obligation or provision is made to depend.
•
•
•
Condition
•
Potestative, Casual, and Mixed
•
Potestative – its fulfillment depends upon
the exclusive will of either f the parties to the
juridical relation.
Casual – if its fulfillment depends upon
chance or the will of either of the parties and
partly upon chance or the will of a third
person.
Mixed – if its fulfillment is dependent partly
upon the will of either of the parties and partly
upon chance or the will of a third person.
Condition vs Term
Impossible and Possible
Condition
Uncertain to
happen
Term
Certain to happen
•
•
Example:
•
Death – it is a term – for while such event
may be in future, its happening is something
that is certain.
As to whether a condition can be fulfilled or
not.
The impossibility in the latter case being
either physical or legal.
Positive or Negative
•
Depending upon whether the condition is an
act or omission.
Note:
Divisible or indivisible
•
•
for an event to be considered a condition, it
is necessary that the happening of which
must be something that is uncertain.
The event must be a future one to satisfy the
requirement of uncertainty – for the
happening of an event that has already
occurred in the past is no longer uncertain.
When debtor binds himself to pay when his
means permit to do so
•
•
•
•
Conjunctive and Alternative
•
When the debtor binds himself to pay “when
his means permit him to do so,” the obligation
shall be considered to be one with a term.
Classification of Conditions
Whether by its nature, by agreement or
under the law, the condition can be
performed in parts.
If it can be performed in parts – DIVISIBLE.
If it cannot be performed in parts –
INDIVISIBLE.
•
•
According to as to whether, when there are
several, all of them or only one must be
performed.
If all are required to be performed –
CONJUNCTIVE.
If only one is required to be performed –
ALTERNATIVE.
Suspensive and Resolutory
Express and Implied
Suspensive
Resolutory
Gives rise to an Results
in
the
obligation.
extinguishment of
the obligations.
•
•
According as to whether a condition is stated
or merely inferred.
If stated – EXPRESS
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•
If merely inferred – IMPLIED.
Suspensive and Resolutory Conditions
Suspensive
Conditions
Also
called
condition precedent
or antecedent.
If
fulfilled,
the
obligation arises.
Resolutory
Conditions
Also
called
condition
subsequent.
If
fulfilled,
the
obligation
extinguishes.
If not fulfilled, the If not fulfilled, the
legal tie does not legal relation is
make
its consolidated.
appearance.
While the doubt Its effects flow, but
lasts, the obligation over it hovers a
does not appear, threat of extinction.
but its existence is a
hope.
which is not performed, such party may refuse to
proceed with the contract or he may waive
performance of the condition x x x.
Gonzales vs Lim
If the condition was imposed on an obligation of a
party which was not complied with, the other party
may either:
1. Refuse to proceed with the agreement.
2. Waive the fulfillment of the condition.
Obligations Subject to a resolutory Condition
Resolutory Condition
•
•
Obligations Subject to a Suspensive Condition
•
•
•
The
acquisition
or
rights
(and
correspondingly the existence of the debts)
shall depend upon the happening of the
event which constitutes the condition.
The birth or effectivity of the obligation only
takes place if and when the event
constituting the condition happens or fulfilled,
and if the suspensive condition does not take
place, the parties would stand as of the
conditional obligation had never existed.
Condition imposed on the perfection of a
contract
•
The failure of such condition would prevent
the juridical relation itself from coming into
existence.
Condition imposed merely on the performance
of an obligation
•
The other party may either refuse to proceed
or waive said condition.
Basis: Article 1545. Where the obligation of either
party to a contract of sale is subject to any condition
Extinguishes the obligation upon its
fulfillment.
Where the extinguishment or loss of rights
already acquired shall depend upon the
happening of the event which constitutes the
condition.
An obligation subject to a resolutory
condition is immediately demandable but it is
extinguished upon the happening of the
condition.
During Pendency
•
•
The obligation is immediately demandable
as if it were a pure obligation. But once the
resolutory condition is fulfilled, the obligation
is extinguished and the parties are required
to return to each other what they have
received.
The same condition which is resolutory on
the part of the creditor is also deemed
suspensive on the part of the debtor because
that latter has an expectancy or hope that
what he had delivered will be returned to him
upon the fulfillment of the resolutory
condition.
Article 1182. When the fulfillment of the
condition depends upon the sole will of the
debtor, the conditional obligation shall be void.
If it depends upon chance or upon the will of a
third person, the obligation shall take effect in
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conformity with the provisions of this Code.
(1115)
Mixed
•
Article 1183. Impossible conditions, those
contrary to good customs or public policy and
those prohibited by law shall annul the
obligation which depends upon them. If the
obligation is divisible, that part thereof which is
not affected by the impossible or unlawful
condition shall be valid.
When the fulfillment of a condition is
dependent partly on the will of one of the
contracting parties, or of the obligor, and
partly on chance, hazard or the will of a third
person.
Effect Upon Obligation
Potestative Condition
The condition not to do an impossible thing shall
be considered as not having been agreed upon.
(1116a)
Article 1184. The condition that some event
happen at a determinate time shall extinguish
the obligation as soon as the time expires or if it
has become indubitable that the event will not
take place. (1117)
Article 1185. The condition that some event will
not happen at a determinate time shall render the
obligation effective from the moment the time
indicated has elapsed, or if it has become
evident that the event cannot occur.
•
•
•
•
If no time has been fixed, the condition shall be
deemed fulfilled at such time as may have
probably been contemplated, bearing in mind
the nature of the obligation. (1118)
•
Article 1186. The condition shall be deemed
fulfilled when the obligor voluntarily prevents its
fulfillment. (1119)
Article 1182 declares void a conditional
obligation when the fulfillment of the
condition depends upon the sole will of the
debtor.
A condition a once facultative and resolutory
may be valid though the condition is made to
depend upon the will of the debtor.
The obligation is void when the condition is
potestative to the debtor and, at the same
time suspensive, because to allow such
conditions would be sanctioning illusory
obligations.
If the condition is at the same time resolutory,
although dependent upon the debtor’s will,
the obligation is not illusory because the
debtor is naturally interested in the fulfillment
of the resolutory condition in order to
reacquire rights which have already been
vested in the creditor.
The rule that the conditional obligation itself
is void applies only to obligation which
depends for its perfection upon a condition
which is potestative to the debtor and not to
a pre-existing obligation.
Potestative, Casual and Mixed Conditions
Osmena vs Rama
Potestative
•
•
•
also referred to as facultative.
When its fulfillment depends exclusive upon
the will of one of the contracting parties.
Where the so-called potestative condition is
imposed not on the birth of the obligation but
on its fulfillment, only the condition is
avoided, leaving unaffected the obligation
itself.
Casual
•
Is one the fulfillment of which depends upon
chance, hazard, or the will of a third person.
“She imposed the condition that she would pay the
obligation if she sold her house.”
•
If
that
statement
acknowledgement of
found
in
her
the indebtedness
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•
should be regarded as a condition, it was a
condition which depended upon her
exclusive will, and is therefore, void.
Only the condition is avoided because the
potestative condition was imposed only on
the fulfillment of a pre-existing obligation.
Trillana vs Quezon College
•
The potestative condition was imposed on
the birth of the obligation and not on its
fulfillment.
“She will pay the full value of subscription after she
had harvested fish.” Damasa died without paying for
subscription.
•
•
•
Osemna Case
The
condition
referred merely to
the fulfillment of an
already
existing
indebtedness.
Article 1182 is silent on the effect of a
condition that is solely dependent on the will
of the creditor.
The obligation does not become illusory even
if the same is conditional and the fulfillment
of the condition is dependent on the sole will
of the creditor because in the very nature of
things the creditor is naturally interested in
the fulfillment of the condition as the same
will give rise to the acquisition of rights in his
favor.
“Their payment should be made by Fernando
Hermosa, Sr. as soon as he receives funds derived
from the sale of his property in Spain.”
•
Mixed Conditions
fulfillment
of
In such cases of mixed conditions, what will happen
if the part that depends on chance or on the will of a
third person was already fulfilled but the debtor
intentionally prevents the fulfillment of the part that
depends on him?
•
The doctrine of constructive fulfillment of
suspensive condition will apply.
Requisites:
1. The condition is suspensive.
2. The obligor actually prevents the fulfillment of
the condition.
3. He acts voluntarily.
•
When the condition is casual, or when the
fulfillment of the condition depends upon
chance or upon the will of a third person, the
obligation is valid and shall take effect in
conformity with the provisions of the Civil
Code.
The obligation was valid because the
condition of the obligation was not a purely
potestative one, depending exclusively upon
the will of the debtor, but a mixed one,
depending partly upon the will of the debtor
and partly upon chance.
Doctrine
of
Constructive
suspensive condition
Casual Conditions
•
The law is silent as to the effects of mixed
conditions upon the obligation.
The law appears to sanction the validity of an
obligation subject to a mixed condition
although the fulfillment of which depends
partly upon the will of the debtor.
Hemosa vs Longara
The obligation was void pursuant to Article
1182 because the condition is dependent
upon the debtor’s sole will.
Trillana Case
The condition would
have served to
create
the
obligation to pay.
•
•
•
•
There must be intent on the part of the
obligor to prevent the fulfillment of the
condition and there must be actual
prevention of the fulfillment.
Mere intention of the debtor to prevent the
happening of the condition, or to place
ineffective obstacles to its compliance,
without actually preventing the fulfillment, is
sufficient.
If the requisites are present, Article 1186
declares that the part of the condition which
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depends on the debtor shall be deemed
fulfilled.
International Hotel Corporation vs Joaquin
•
Thee doctrine of constructive fulfillment of a
suspensive condition was not applicable
because of the absence of intent on the part
of the obligor to prevent the fulfillment of the
condition.
•
Impossible Conditions
•
Note: the doctrine of constructive fulfillment of
suspensive condition applies only to cases of mixed
conditions where a part of the condition depends on
the will of the debtor and finds no application to
potestative conditions that depend exclusively on the
debtor because in the latter case the conditional
obligation itself is void.
also upon the will of third persons who could
in no way be compelled to fulfill the
condition.
Under the doctrine of constructive fulfillment
of a suspensive condition, it is the debtor
himself who intentionally prevents the
fulfillment of the condition.
•
•
Conditions are considered physically
impossible when they are incompatible with
or contrary to nature.
Conditions are deemed juridically impossible
if they are contrary to good customs, public
policy or those prohibited by law.
A condition is possible if it is valid and
allowed by law.
Effects of Impossible Condition
Rule on Constructive fulfillment of Mixed
Conditional Obligation
On obligations
•
In mixed conditions that depend partly on the will of
the debtor and partly upon the will of the third person,
what will happen to the obligation if the debtor has
done all in his power to comply with the obligation
but the condition has nit been fulfilled because its
fulfillment likewise depend upon the will of third
persons who could in no way be compelled to fulfill
the condition?
•
When the condition was not fulfilled but the
obligor did all his power to comply with the
obligation, the condition should be deemed
satisfied. Stated otherwise, the debtor will
be deemed to have sufficiently performed
his part of the obligation, if he has done all
that was in his power, even if the condition
has not been fulfilled in reality.
Note:
•
Under the rule on constructive fulfillment of
a mixed conditional obligation, the obligor
did all in his power to comply with the
obligation and the condition is not fully
complied because its fulfillment depended
not only upon the effort of the obligor but
Reference: Rabuya 2019
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The obligation is void if it depends upon an
impossible condition.
Exception: if the obligation is divisible, the part
thereof which is not affected by the impossible or
unlawful condition shall be valid.
•
A condition not to do an impossible thing
shall be considered as not having been
agreed upon, in which case, the obligation is
to be regarded as pure as if there were no
condition.
On Simple and Remuneratory Donations
Pure and simple donations – is one where the
underlying cause is plain gratuity.
Remuneratory or Compensatory Donation – is
one made for the purpose of rewarding the donee for
past services, which services do not amount to a
demandable debt.
•
Under Article 727, illegal or impossible
conditions in simple and remuneratory
donations shall be considered as not
imposed.
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•
•
•
•
The simple or remuneratory donation
remains valid even if it depends upon an
impossible condition.
With respect to onerous donations, or those
which imposes upon the done a reciprocal
obligation or those made for valuable
consideration, the cost of which is equal to or
more than the thing donated.
Under Article 733, donations with an onerous
cause shall be governed by the rules on
contracts.
An onerous donation is void if it depends
upon an impossible condition, applying the
rule in Article 1183.
•
Example:
I will give B a car if he becomes a lawyer before he
turns 25.
•
On testamentary dispositions
•
•
•
A testamentary disposition in a last will and
testament remains valid if the same depends
upon an impossible condition.
Article 873 provides that impossible
conditions and those contrary to law or good
customs shall be considered as not imposed
and shall in no manner prejudice the heir,
even if the testator should otherwise
provide.
Those impossible conditions imposed on will
are simply disregarded and do not, as a
consequence, affect the validity of
testamentary dispositions.
•
•
•
Positive and Negative Conditions
Positive Conditions
•
•
Article 1184
Those which require the happening of an
event.
Negative Conditions
•
•
Article 1185
Those which require the non-happening of
an event.
If the condition is both positive and
suspensive, the non-happening of the event
which constitutes as the condition shall
The obligation is certain not to exist from the
moment B reaches the age of 25 and has not
graduated from the law school, although he
may eventually pass the bar examinations
and become lawyer afterwards.
The obligation is certain not to exist if B is still
in his second year in the College of Law
when he turns 24, for in the latter situation, it
is definite that the event will not take place.
If the condition is both positive and
resolutory, the non-happening of the event
which constitutes as the condition shall result
in the consolidation of rights that have
already been acquired by the creditor.
If the resolutory condition is required to
happen at a determinate time, the right of the
creditor becomes absolute “as soon as the
time expires or if it has become indubitable
that the event will not take place.”
Example:
I am giving B my collection of law books but if my
son, C, becomes a lawyer when he turns 25, those
law books will have to be given back to C.
•
Effects of Positive Conditions
•
prevent the obligation from coming into
existence.
If the suspensive condition is required to
happen at a determinate time, the obligation
is sure not to exist “as soon as the time
expires or if it has become indubitable that
the event will not take place.
•
The right of B over said law books will
become absolute from the moment C
reaches the age of 25 and has not graduated
from the law school, although he may
eventually pass the bar examinations and
become a layer afterwards.
The obligation shall also become effective if
B marries another when she turns 24, for in
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the latter situation, it is evident that the event
which serves as the condition can no longer
occur.
(3) When the thing deteriorates without
the fault of the debtor, the impairment is
to be borne by the creditor;
Article 1187. The effects of a conditional
obligation to give, once the condition has been
fulfilled, shall retroact to the day of the
constitution of the obligation. Nevertheless,
when the obligation imposes reciprocal
prestations upon the parties, the fruits and
interests during the pendency of the condition
shall be deemed to have been mutually
compensated. If the obligation is unilateral, the
debtor shall appropriate the fruits and interests
received, unless from the nature and
circumstances of the obligation it should be
inferred that the intention of the person
constituting the same was different.
(4) If it deteriorates through the fault of
the debtor, the creditor may choose
between the rescission of the obligation
and its fulfillment, with indemnity for
damages in either case;
In obligations to do and not to do, the courts
shall determine, in each case, the retroactive
effect of the condition that has been complied
with. (1120)
Article 1188. The creditor may, before the
fulfillment of the condition, bring the appropriate
actions for the preservation of his right.
The debtor may recover what during the same
time he has paid by mistake in case of a
suspensive condition. (1121a)
Article 1189. When the conditions have been
imposed with the intention of suspending the
efficacy of an obligation to give, the following
rules shall be observed in case of the
improvement, loss or deterioration of the thing
during the pendency of the condition:
(5) If the thing is improved by its nature,
or by time, the improvement shall inure to
the benefit of the creditor;
(6) If it is improved at the expense of the
debtor, he shall have no other right than
that granted to the usufructuary. (1122)
Article 1190. When the conditions have for their
purpose the extinguishment of an obligation to
give, the parties, upon the fulfillment of said
conditions, shall return to each other what they
have received.
In case of the loss, deterioration or improvement
of the thing, the provisions which, with respect
to the debtor, are laid down in the preceding
article shall be applied to the party who is bound
to return.
As for the obligations to do and not to do, the
provisions of the second paragraph of article
1187 shall be observed as regards the effect of
the extinguishment of the obligation. (1123)
Effects of Suspensive Condition
Prior fulfillment of Suspensive Condition
(1) If the thing is lost without the fault of
the debtor, the obligation shall be
extinguished;
•
(2) If the thing is lost through the fault of
the debtor, he shall be obliged to pay
damages; it is understood that the thing
is lost when it perishes, or goes out of
commerce, or disappears in such a way
that its existence is unknown or it cannot
be recovered;
•
•
The right is yet to be acquired and the debt is
yet to exist – the parties are not yet actual
debtor and creditor of each other, as the legal
tie does not make its appearance yet.
When the obligation assumed by a party to a
contract is expressly subjected to a
suspensive condition, the obligation cannot
be enforced against him unless the condition
is complied with.
If the debtor has paid by reason of mistake
prior to the fulfillment of the condition, he has
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the right to recover the undue payment
based on the principle of solution indebiti.
Reciprocal Obligations
•
Reason: the payment is not due since the obligation
has not come into existence yet.
•
•
•
It is necessary that the recovery of what had
been paid by mistake should be done prior to
the fulfillment of the suspensive condition.
Once the suspensive condition is fulfilled, the
effects of such conditional obligation shall
retroact to the day of its constitution, thus,
effectively barring any action for recovery
based on solution idebiti.
The payor must not have been aware that the
condition has not yet been fulfilled.
Purpose: The obvious purpose of such modification
is to avoid the necessity of mutual accounting for the
fruits and interests received.
Unilateral Obligations
•
But what if the payor is aware that the condition is
not yet fulfilled but he makes the payment
voluntarily? Can he still recover the payment?
•
•
If the intention is to do away with the
condition and to convert the obligation into a
pure one, it is obvious that the payment
already becomes due and may no longer be
recovered.
If the intention is simply to make the delivery
even prior to the fulfillment of the condition
but upon the expectation that the condition
would happen, it is only logical and just that
the debtor be allowed to recover what he has
paid if it will become clear that the event will
not anymore take place.
Retroactive Effect of fulfillment of suspensive
condition
The second paragraph of Article 1187
modifies the application of the rule of
retroactivity by providing for the mutual
compensation of the fruits and interest that
may have accrued during the pendency of
the condition.
It is the debtor who shall be entitled to the
fruits and interests received up to the day the
condition is fulfilled, unless from the nature
and circumstances of the obligation it should
be inferred that the intention of the person
constituting the same was different.
In obligation to do or not to do
•
•
The does not provide for a specific formula in
determining the effects of the fulfillment of
the suspensive condition.
The second paragraph of Article 1187
entrusts to the sound discretion of the court
the determination of such effects in each
case.
Effects of Loss of Specific Thing Due During
Pendency of Condition
(1) If the thing is lost without the fault of the
debtor, the obligation shall be extinguished;
Obligation to Give
•
•
Once the condition is fulfilled, the effects of a
conditional obligation to give retroact to the
day on which the obligation was constituted,
as if it were a pure obligation from the first
day.
The rule of retroactivity of the effects of
conditional obligation to give, once the
condition has been fulfilled, is without
prejudice to the existence of a preferred right
of a third person who may have dealt with the
same property in good faith.
(2) If the thing is lost through the fault of the
debtor, he shall be obliged to pay damages;
it is understood that the thing is lost when it
perishes, or goes out of commerce, or
disappears in such a way that its existence is
unknown or it cannot be recovered;
(3) When the thing deteriorates without the
fault of the debtor, the impairment is to be
borne by the creditor;
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(4) If it deteriorates through the fault of the
debtor, the creditor may choose between the
rescission of the obligation and its fulfillment,
with indemnity for damages in either case;
(5) If the thing is improved by its nature, or by
time, the improvement shall inure to the
benefit of the creditor;
(6) If it is improved at the expense of the
debtor, he shall have no other right than that
granted to the usufructuary.
•
•
•
These rules are necessary in view of the
retroactive effects of the happening of the
suspensive condition.
These rules will only apply in the event that
the condition is fulfilled.
These rules apply only to specific or
determinative obligation.
Effect of loss during pendency of condition
•
If the obligation is generic in the sense that
the object thereof is designated merely by its
class or genus without any particular
designation or physical segregation from all
others of the same class, the loss or
destruction of anything of the same kind in
the debtor’s possession will not have the
effect of extinguishing the obligation, even if
such loss or destruction is without the
debtor’s fault an before he has incurred in
delay.
Basis: The genus of a thing can never perish.
Genus nunquan perit.
•
•
If the thing is lost through the fault of the
debtor, the obligation to give a determinate
thing is not extinguished
Once the suspensive condition is fulfilled, the
effects thereof shall still retroact to the day of
the constitution of the obligation but the
obligation of the debtor is converted into
payment of damages to the creditor.
The determinate thing is lost when it perishes, or
goes out of commerce, or disappears in such a way
that its existence is unknown or it cannot be
recovered.
Perishes – when it dies, in the case of animate
objects; when it rots in the case of perishable goods.
Goes out of commerce – when its possession has
become unlawful, as where it has been used as an
instrument in the commission of a crime, or it can no
longer be the object of contracts, as where the land
which is the subject-matter of the obligation to give
has been expropriated for public use.
Disappears in such a way that its existence is
unknown – when for example in the case of wild
animal, it has escaped and regained its freedom and
cannot be found.
Cannot be recovered – when for instance in the
case of a ship, it sunk in the middle of the sea.
•
If during the pendency of the condition the
thing is lost without the lost of the debtor,
such as when the thing is lost by reason of
fortuitous
event,
the
obligation
is
extinguished even if later on the suspensive
condition is fulfilled.
Even if the thing is lost by reason of fortuitous event,
the loss of the thing does not extinguish the debtor’s
obligation in the following situations:
1. When by law, the obligor is liable even for
fortuitous event.
2. When by stipulations, the obligor is liable
even for fortuitous event.
3. When the nature of the obligation requires
the assumption of risks.
Effects of deterioration of specific thing due
during pendency of condition
If the thing deteriorates during the pendency of the
suspensive condition and the condition is later on
fulfilled, the following rules shall apply:
1. If the deterioration occurs without the fault of
the debtor, the same is to be suffered by the
creditor who bears the risks.
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2. If the deterioration is through the fault of the
debtor, the creditor may choose between:
a. The rescission of the obligation, with
indemnity for damages.
b. The fulfillment of the obligation, with
indemnity for damages.
Effects of improvement of specific thing due
during pendency of condition
•
•
If the thing improves by nature without the
intervention of the debtor, such improvement
inures to the benefit of the creditor because
he also suffers the deterioration of the thing
without the fault of the debtor.
If the thing is improved at the debtor’s
expense, he is only granted the rights of a
usufructuary
in
relation
to
such
improvements
upon the
condition.
•
•
Not entitled to the reimbursement of the
expenses he incurred in connection with the
improvements that he may have introduced
on the property.
He is granted a right to remove the
improvements of the removal will not cause
injury to the property.
He may set off his liability for damages
caused to the property with the value of the
said improvement.
Effects of Resolutory Condition
During Pendency of Condition
•
•
•
An obligation with a resolutory condition is
immediately demandable but without
prejudice to the effects of the happening of
the condition.
During the pendency of the condition, the
obligation is immediately demandable as if it
were a pure obligation.
The same condition which is resolutory on
the part of the creditor is also deemed
suspensive on the part of the debtor because
the latter has an expectancy or hope that
what he had delivered will be returned to him
of
the
resolutory
Effects of fulfillment of resolutory condition
•
•
•
Usufructuary
•
fulfillment
•
•
If the resolutory conditions fulfilled, the
obligatory relation in its entirety is
extinguished.
Both the rights of the creditor and the duties
of the debtor are extinguished; so that if the
resolutory condition does takes place, the
parties would stand as if the conditional
obligation had never existed.
Since the obligatory relation is extinguished
in its entirety, all the effects that were
produced by the obligation would have to be
erased since the parties would have to go
back to their status prior to the constitution of
the obligation – and this is accomplished by
returning to each other whatever they may
have received by reason of the obligation,
including fruits and interests.
In obligation to do or not to do, the effects of
the fulfillment of the resolutory condition shall
be determined by the court in case, following
the provisions of paragraph 3 of Article 1190,
in relation to paragraph 2 or Article 1187.
In case of loss, deterioration or improvement
of the thing to be returned during the
pendency of the resolutory condition.
Article 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is
incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the obligation,
with the payment of damages in either case. He
may also seek rescission, even after he has
chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed,
unless there be just cause authorizing the fixing
of a period.
This is understood to be without prejudice to the
rights of third persons who have acquired the
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thing, in accordance with articles 1385 and 1388
and the Mortgage Law. (1124)
Article 1192. In case both parties have
committed a breach of the obligation, the liability
of the first infractor shall be equitably tempered
by the courts. If it cannot be determined which of
the parties first violated the contract, the same
shall be deemed extinguished, and each shall
bear his own damages. (n)
•
•
•
Tacit Resolutory condition in reciprocal
obligations
Reciprocal obligations are those arises from
the same cause and in which each party is a
debtor and a creditor of the other at the same
time, such that the obligations of one are
dependent upon the obligations of the other.
They are to be performed simultaneously, so
that the performance of one is conditioned
upon the simultaneous fulfillment by the
other.
For one party to demand the performance of
the obligation of the other party, the former
must also perform its own obligation.
Implied right to rescind (or resolution)
•
•
•
The condition is imposed by law and applies
even if there is no corresponding agreement
thereon between the parties.
Reciprocal obligations a party incurs in delay
once the other party has performed or is
ready and willing to perform may rescind the
obligation if the other does not perform, or is
not ready and willing to perform.
The remedy of resolution applies only to
reciprocal obligations such that a party’s
breach thereof partakes of a tacit resolutory
condition which entitles the injured party to
rescission.
Example:
A contract of sale creates reciprocal obligations. The
seller obligates itself to transfer the ownership of and
deliver a determinate thing, and the buyer obligates
itself to pay therefor a price certain in money or its
equivalent.
Remedies in Case of Breach of Reciprocal
Obligations
Specific Performance
•
Applies only to reciprocal obligations
Reciprocal
Mutual
Prestations
obligations
There must be They are mutually
reciprocity between obligated, but the
them
obligations are not
reciprocal.
Both relations must
arise from the same
cause, such that
one obligation is
correlative to the
other.
A person may be
the
debtor
of
another by reason
of an agency, and
his
creditor
by
reason of a loan.
•
The remedy of requiring exact performance
of a contract in the specific form in which it
was made, or according to the precise terms
agreed upon.
It pertains to the actual accomplishment of a
contract by a party bound to fulfill it.
Resolution
•
•
The unmaking of a contract for a legally
sufficient reason.
It does not merely terminate the contract and
release the parties from further obligations to
each other, but abrogates the contract from
its inception and restores the parties to their
original positions as if no contract gas been
made.
Mutual Restitution
•
Entails the return of the benefits that each
party may have received as a result of the
contract, is thus required.
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•
The right of rescission of a party to an
obligation is predicated on a breach of faith
by the other party ho violates the reciprocity
between them, and not some injury to
economic interests on the part of the party
plaintiff.
providing that a violation of the terms of the contract
would cause its cancellation even without judicial
intervention.
Calilap – Asmeron vs Development Bank of the
Philippines
•
Is it absolute?
•
•
The right to rescind under Article 1191 is not
absolute.
For a contracting party to be entitled to
rescission (resolution), the other contracting
party must be in substantial breach of the
terms and conditions of their contract.
Reason: rescission will not be permitted for a slight
or casual breach of the contract, but only for such
breaches that are substantial and fundamental as to
defeat the object of the parties in making the
agreement.
Right to Rescind Must Be Invoked Judicially
•
•
•
The party entitled to rescind should apply to
the court for a decree of rescission.
The right cannot be exercised solely on a
party’s own judgement that the other
committed a breach of the obligation.
The operative act which produces the
resolution of the contract is the decree of the
court.
Where both parties committed infractions
•
•
•
•
The general rule is that in the absence of a
stipulation, a party cannot unilaterally and
extrajudicially rescind a contract.
Where there is nothing in the contract empowering
the injured party to rescind it without resort to the
courts, the injured party’s action in unilaterally
terminating the contract is unjustified.
Exception: A judicial action for the rescission of a
contract is nit necessary where the contract provides
that it may be revoked and cancelled for violation of
any of its terms and conditions.
The rationale for the foregoing is that in
contracts providing for automatic revocation,
judicial intervention is necessary not for
purposes of obtaining a judicial declaration
rescinding a contract already deemed
rescinded by virtue of an agreement
providing for rescission even without judicial
intervention, but in order to determine
whether or not the rescission was proper.
•
None of them can seek judicial redress for
the cancellation or resolution of their contract
and they are therefore bound to their
respective obligations thereunder.
As to their liability for damages to each other,
that will depend on whether it can be
determined which of them first violated the
contract.
If it cannot be determined which of the parties
first violated the contract, the parties’
respective claims for damages are deemed
extinguished and each of them shall bear its
own damage.
The second infractor is not liable for
damages at all because the damages for the
second breach are compensated instead by
mitigation of the first infractor’s liability for
damages arising form his earlier breach.
Article 1192 does not really exculpate the
second infractor from liability because the
second infractor is actually punished for his
breach by mitigating the damages to be
awarded to him from the previous breach of
the other party.
Reason: The law on obligations and contracts does
not prohibit parties from entering into agreement
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Reference: Rabuya 2019
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SECTION 2
Obligations with a Period
Article 1193. Obligations for whose fulfillment a
day certain has been fixed, shall be demandable
only when that day comes.
Obligations with a resolutory period take effect
at once, but terminate upon arrival of the day
certain.
A day certain is understood to be that which
must necessarily come, although it may not be
known when.
If the uncertainty consists in whether the day will
come or not, the obligation is conditional, and it
shall be regulated by the rules of the preceding
Section. (1125a)
Article 1194. In case of loss, deterioration or
improvement of the thing before the arrival of the
day certain, the rules in article 1189 shall be
observed. (n)
It may only suspend
the demandability of
the obligation, but
without affecting its
existence, or cause
its termination, but
without annulling its
existence.
“if the uncertainty
consists in whether
the day will come or
not.”
The period must
end on a day
certain.
“That which must
necessarily come,
although it may not
be known when.”
It may cause the
obligation to exist or
to cease to exist.
Classification of Term
Suspensive period (ex die)
•
Is one that must necessarily come before the
performance of the obligation can be
demanded.
Resolutory period (in diem)
Article 1195. Anything paid or delivered before
the arrival of the period, the obligor being
unaware of the period or believing that the
obligation has become due and demandable,
may be recovered, with the fruits and interests.
(1126a)
Obligations with a term or period
•
Is that whose consequences or effects are
subjected in one way or another to the
expiration of said term or period.
Term or Period
•
•
The period which results in the termination of
the obligation upon its arrival.
Definite – if the date is fixed or when the date of the
happening of the event is known.
Indefinite – if the event is sure to happen but the
exact timing of its happening is not known.
Legal – fixed by law.
Conventional – fixed by the party.
Judicial – fixed by the courts.
A space of time which, exerting an influence
in an obligation as a result of a juridical act,
either suspends its demandability or
produces its extinguishment.
Condition
Term
The happening of The even is certain
the
event
is to happen.
something that is
uncertain.
Effects of Suspensive and Resolutory Periods
Suspensive Term or Period
•
If the term or period is suspensive, the
obligation becomes demandable only when
the day certain arrives.
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•
•
•
•
•
•
The term or period does not affect the
existence of the obligation not its effectivity.
What is suspended by the term is only the
demandabilty of the obligation.
The obligation already exists but it cannot as
yet be enforced against the debtor because
the obligation is not yet demandable.
The right of action only arises when the date
fixed has arrived and the obligation is
enforceable only when the day comes.
The period of prescription is to be counted on
that day and not from the date of the
obligation.
If delivery or payment has been made prior
to the arrival of the day certain, Article 1195
authorizes the debtor to recover what has
been delivered prematurely, together with
fruits and interest, but only if the debtor made
the delivery or payment “being unaware of
the period or believing that the obligation has
become due and demandable.
(See rules ss to the extent of what may be
recovered on pages 133 – 134.)
•
Should the debtor effected the premature
delivery with knowledge of the period or with
knowledge that the obligation was not yet
due and demandable at that time, there can
be no recovery of what has been paid or
delivered in because the debtor is deemed to
have waived the benefit of the term or period,
thus making the obligation immediately
demandable.
Resolutory Term or Period
•
Obligations with a resolutory period take
effect at once, but terminate upon arrival of
the day certain.
The effects of the
arrival of the day
certain in
obligations with a
resolutory term.
Effects of the
fulfillment of a
resolutory
condition in
conditional
obligations
The termination of The obligation is
the
obligation extinguished upon
contemplated
in the fulfillment of the
Article 1193 does condition and the
not annul the fact of parties
will
be
its existence.
restored to their
status prior to the
constitution of the
obligation, such that
they will be required
to return to each
other what they
have received.
A period does not
carry with it, except
when there is a
special agreement,
the
same
accompaniment of
retroactive effects
that
follow
a
condition.
Effects of Loss, Deterioration or Improvement
Prior to Arrival of Day Certain
•
Pursuant to Article 1194, the same rule
established in Article 1189 relating to the
loss, deterioration or improvement of the
thing due during the pendency of a
suspensive condition are also applicable in
case of loss, deterioration or improvement of
the thing due prior to the arrival of the day
certain in obligations with a suspensive term.
Article 1196. Whenever in an obligation a period
is designated, it is presumed to have been
established for the benefit of both the creditor
and the debtor, unless from the tenor of the same
or other circumstances it should appear that the
period has been established in favor of one or of
the other. (1127)
Article 1197. If the obligation does not fix a
period, but from its nature and the
circumstances it can be inferred that a period
was intended, the courts may fix the duration
thereof.
The courts shall also fix the duration of the
period when it depends upon the will of the
debtor.
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Reference: Rabuya 2019
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Suyat, Tang, Valenzuela – 1C – 2020-2021
In every case, the courts shall determine such
period as may under the circumstances have
been probably contemplated by the parties.
Once fixed by the courts, the period cannot be
changed by them. (1128a)
Article 1198. The debtor shall lose every right to
make use of the period:
(1) When after the obligation has been
contracted, he becomes insolvent, unless
he gives a guaranty or security for the
debt;
(2) When he does not furnish to the
creditor the guaranties or securities
which he has promised;
cannot make and effective tender and consignation
of the payment.
•
•
Tenor of Obligation or Other Circumstances
•
•
(3) When by his own acts he has impaired
said guaranties or securities after their
establishment, and when through a
fortuitous event they disappear, unless
he immediately gives new ones equally
satisfactory;
(4) When the debtor violates any
undertaking, in consideration of which
the creditor agreed to the period;
•
•
•
(5) When the debtor attempts to abscond.
(1129a)
Benefit of Period
Disputable Presumption
•
•
In case it does not appear, either from any
circumstances, or from the tenor of the
contract, that the designated period has been
established for the benefit of one of the
parties only, it is presumed to have been
established for the benefit of both the creditor
and the debtor.
This presumption applies only when the
parties to a contract themselves have fixed
the period.
If the period is for the benefit of the debtor
only, he may validly pay at any time before
the period expires but he may oppose a
premature demand for payment.
If the period is for the benefit of the creditor
only, he may demand performance at any
time but the debtor cannot compel him to
accept payment before the period expires.
The tenor of the obligation may already
indicate for whose benefit the period has
been established.
If the obligation expressly provides that the
period is for the benefit of both parties, then
there is no need to apply the presumption
established in Article 1196.
The tenor of the obligation may also indicate
that the period is for the benefit of the debtor.
The inquiry need not be limited to the tenor
of the obligation.
The required proof need not be supplied by
the contract itself as evidence aliunde may
be taken into account. In contracts of loan,
the circumstance that the loan bears an
interest is indicative of the fact that the period
is for the benefit of both parties: the term
benefits the debtor by the use of the money,
as well as the creditor by the interest.
Instances that the loan is in favor of both parties:
•
•
•
The desire of the creditor to protect himself
against the sudden decline in the purchasing
power of the currency due to its fluctuating
nature.
If the creditor receives other benefits by
reason of the term in lieu of the interest.
Payment cannot be made by the debtor
before the stipulated term without the
consent of the creditor.
When debtor loses benefit of period
Reason: The legal import of the presumption is that,
prior to the arrival of the stipulated period, the
creditor cannot demand payment, and the debtor
•
When any of these instances takes place, the
obligation is converted into a pure obligation
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and, therefore, becomes immediately due
and demandable, even if the period has not
expired.
Insolvency
•
•
•
When Court is Authorized to Fix Period
Instances when Courts are authorized to fix
period
It is sufficient that the debtor is in a state of
financial difficulty or that he is unable to pay
his debts in the ordinary course of business.
The debtor may still retain the right to such
period even after he becomes insolvent,
provided he gives guaranty or security for the
debt.
Failure to furnish security
•
(5) When the debtor attempts to abscond.
The debtor to have lost the benefit of the
period by reason of her failure to give and
register the security agreed upon in the form
of the two deeds of mortgage.
But the debtor may preserve the benefit of
the period by constituting the securities or
guaranties he has failed to give, even when
the article makes no reservation to this effect.
1. When the obligation does not fix a period, but
from its nature and the circumstances it can
be inferred that a period was intended.
2. When the duration of the period when it
depends upon the will of the debtor.
3. In case of breach of reciprocal obligation, the
court may refuse to order rescission if there
is a just cause for the fixing of a period.
4. In lease of urban lands, the court may fix a
longer period in case daily, weekly or
monthly is paid and the lessee has occupied
the premises for more than one month, or
more than six months, or more than one
year, respectively.
When a period is intended but no period was
fixed
Impairment or Loss of Security
Example:
Effects of the
debtor’s own act
Mere impairment of
the guaranties or
securities
is
sufficient in order
for the debtor to
lose every right to
make use of the
period.
In an obligation to construct a house, the general
rule provided in Article 1197 of the Civil Code
applies, which provides that the courts may fix the
duration thereof because the fulfillment of the
obligation itself cannot be demanded until after the
court has fixed the period for compliance therewith
and such period has arrived.
Fortuitous Event
The law requires
total disappearance
of the guaranties or
securities
before
the debtor can lose
such right. The
debtor
may
preserve the benefit
of the period if he
immediately gives
new but equally
satisfactory
guaranties
or
securities.
Other Grounds:
(4) When the debtor violates any
undertaking, in consideration of which the
creditor agreed to the period;
Courts are not authorized to fix duration of the period
in the following instances:
1. When no period was intended by the parties.
2. When the obligation is payable on demand
because it is a pure obligation and not one
with a period.
3. When the performance of the obligation was
fixed within a reasonable time because a
period was already fixed, a reasonable time;
and that the court should do is to determine
if that reasonable time had already elapsed
or not when suit was filed.
4. When the law itself provides for the period.
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Reference: Rabuya 2019
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Suyat, Tang, Valenzuela – 1C – 2020-2021
When Duration
Debtor’s Will
•
•
•
•
•
of
Period
Depends
Upon
Article 1182 declares the conditional
obligation void when the fulfillment of the
condition depends upon the sole will of the
debtor.
When what is left to the will of the debtor is
only the duration of the period, the second
paragraph of Article 1197 considers the
obligation as valid and said provision
authorizes the courts to fix the period in such
a situation.
When the debtor binds himself to pay when
his means permit him to do so, the obligation
shall be deemed to be one with a period,
subject to the provisions of article 1197, and
not a conditional obligation.
What is left to the will of the debtor is not the
existence or validity of the obligation but
merely the duration of the term for its
fulfillment.
The courts are also authorized to fix the
period because the duration thereof depends
upon the will of the debtor:
o When the term of the lease has been
upon the will of the debtor.
o When the debtor promises to pay his
indebtedness consisting of the sum of
money “little by little.” Or “in partial
payments,” or “as soon as possible,”
or “as soon as I have money.”
Action to Fix Period
•
•
•
•
The only action which the obligor must
comply with his obligation for the reason that
the fulfillment of the obligation itself cannot
be demanded until after the court has fixed
the period for its compliance and such period
has arrived.
Plaintiff may not ask for the performance of
the obligation without first asking for the
fixing by the court of the period or term.
The period should first be determined,
because in the absence of such term or
period, there can be no breach of contract or
failure to perform the obligation.
Where a prior and separate action fix a
period would be more formality and serve no
other purpose but delay, there is no
necessity for such prior action.
The action
which should
be brought in
accordance
with Article
1197
The right to have
the period judicially
fixed is born from
the date of the
agreement
itself
which contains the
undetermined
period.
The action to
enforce the
obligation
In which case the
action to enforce
the
same
prescribes within a
period of 10 years
from the time the
right
of
action
accrues, the action
to have the court fix
the period also
prescribes
within
the same period.
Extrajudicial
demand
is
not
essential for the
creation of this
cause of action to
have the period
fixed.
It
exists
by
operation of law
from the moment
such an agreement
subject
to
an
undetermined
period is entered
into, whether the
period
depends
upon the will of the
debtor alone, or of
the
parties
themselves,
or
where from the
nature and the
circumstances
of
the obligation it can
be inferred that a
period
was
intended.
Period fixed by Court is Final
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•
•
•
•
When the authority granted by Article 1197 is
exercised by the courts, the same do not
amend or modify the obligation concerned.
Whenever a period is fixed, the court merely
enforces or carries out an implied stipulation
in the contract in question.
In fixing said period, the Court merely
ascertains the will of the parties and gives
effect thereto.
From the very moment the parties gave their
acceptance and consent to the period fixed
by the court, said period acquired the nature
of a covenant; because the effect of such
acceptance and consent by the parties is
exactly the same as if they had expressly
agreed upon it, and, it having been agreed
upon by them, it became a law governing
their contract, and it is evident that the court
has no power to change or modify the same.
Basis: Once fixed by the courts, the period cannot
be changed by them.
Classification of Obligations based on number of
prestations (objects)
Conjunctive Obligation
•
•
Distributive Obligation
•
•
ARTICLE 1199. A person alternatively bound by
different prestations shall completely perform
one of them.
•
Article 1200. The right of choice belongs to the
debtor, unless it has been expressly granted to
the creditor.
The debtor shall have no right to choose those
prestations which are impossible, unlawful or
which could not have been the object of the
obligation. (1132)
Article 1201. The choice shall produce no effect
except from the time it has been communicated.
(1133)
Article 1202. The debtor shall lose the right of
choice when among the prestations whereby he
is alternatively bound, only one is practicable.
(1134)
Questions as to who may exercise the right
to choose which prestation is to be
performed, as to when the choice becomes
effective and as to the effect of loss of one or
some of the prestations are required to be
addressed.
Alternative Obligation
SECTION 3
Alternative Obligations
The creditor cannot be compelled to receive part
of one and part of the other undertaking. (1131)
The various prestations are all due and
demandable at the same time.
Compliance may arise when the obligation
involves several prestations but the debtor is
requiring to perform only one prestation in
order for the obligation to extinguished.
There is more than one object (prestation),
and the fulfillment of one is sufficient,
determined by the choice of the debtor who
generally has the right of election.
The debtor is required to completely perform
only one of them and such performance
extinguishes the obligation.
Right of Choice
Who may Choose?
•
•
•
In the absence of a contrary agreement, it is
the debtor who has the right to choose which
of the available prestations he is to perform.
The right of choice only be exercised by the
creditor if he is expressly granted such right
in the agreement of the parties.
The right of choice may be granted to a third
person by express agreement of the parties
because said agreement is not prohibited by
law nor contrary to morals, good customs,
public order, or public policy.
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When choice or election becomes effective
•
The election becomes effective only from the
moment that the same has been
communicated to the other party.
But when is the choice considered to have been
communicated to the other party?
Dean Capistrano
The law does not require the creditor’s concurrence
to the choice; if it did, it would have destroyed the
very nature of alternative obligations, which
empowers the debtor to perform completely one of
them.
Cognition Theory
Effect of Choice
•
•
The election or notice has no effect until it
comes to the knowledge of the other party.
Being followed under the Spanish Civil Code.
Posting Rule or Mailbox Rule
•
•
•
Applying the cognition theory, the choice is
deemed to have been communicated from
the time that the other party gains knowledge
of the election made by the other.
If the right choice has been expressly
granted to a third person, both the creditor
and the debtor must be duly notified of the
choice made by such third person.
Note: In alternative obligations, the election
becomes effective from the moment the choice is
made known to the other party. What is required by
Article 1201 is mere notice to the other party and not
his consent.
Ong Guan Can vs Century Insurance Co., Ltd.
•
•
•
Also called deposited acceptance
An election made through a letter is effective
from the time the notice is posted.
The Civil Code of the Philippines has adopted the
cognition theory.
•
•
The object of the notice is to give the creditor
the opportunity to express his consent, or to
impugn the election made by the debtor.
The election takes legal effect only when
consented by the creditor, or if impugned by
the latter, when declared proper by a
competent court.
•
The right of election is extinguished when the
party who may exercise that option
categorically and unequivocally makes his or
her own choice known.
The choice becomes irrevocable and binding
upon he who made it and he will not
thereafter be permitted to renounce his
choice and take an alternative which was at
first open to him.
As a consequence, the obligation ceases to
be alternative and is converted into a pure or
simple one.
Limitations on Right of Choice
•
•
•
Whether the right of choice pertains to the
debtor or to the creditor, he has no right to
choose those prestations which are
impossible, unlawful or which could not have
been the object of the obligations
The one who has the right of choice can still
exercise his right because the obligation
remains to be alternative, meaning there are
still two or more prestations which can be
performed.
If all the prestations, except one, are
impossible or unlawful, it follows that the
debtor can choose and perform only one.
Article 1203. If through the creditor's acts the
debtor cannot make a choice according to the
terms of the obligation, the latter may rescind the
contract with damages. (n)
Article 1204. The creditor shall have a right to
indemnity for damages when, through the fault
of the debtor, all the things which are
alternatively the object of the obligation have
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been lost, or the compliance of the obligation
has become impossible.
Where loss is due to fortuitous events
•
The indemnity shall be fixed taking as a basis the
value of the last thing which disappeared, or that
of the service which last became impossible.
•
Damages other than the value of the last thing or
service may also be awarded. (1135a)
Article 1205. When the choice has been
expressly given to the creditor, the obligation
shall cease to be alternative from the day when
the selection has been communicated to the
debtor.
•
The alternative character of the obligation is
retained if there are still tow or more
prestations which subsist.
Should only one prestation subsist while the
others are lost by reason of a fortuitous
event, the alternative character of the
obligation ceases and obligation becomes a
simple one.
Should all prestations be lost by reason of a
fortuitous event, the obligation is deemed
extinguished provided that the lost occurs
before the debtor has incurred in delay.
Where loss is due to debtor’s fault
Until then the responsibility of the debtor shall
be governed by the following rules:
•
(1) If one of the things is lost through a
fortuitous event, he shall perform the
obligation by delivering that which the
creditor should choose from among the
remainder, or that which remains if only
one subsists;
•
(2) If the loss of one of the things occurs
through the fault of the debtor, the
creditor may claim any of those
subsisting, or the price of that which,
through the fault of the former, has
disappeared, with a right to damages;
(3) If all the things are lost through the
fault of the debtor, the choice by the
creditor shall fall upon the price of any
one of them, also with indemnity for
damages.
The same rules shall be applied to obligations to
do or not to do in case one, some or all of the
prestations should become impossible. (1136a)
Effect of Loss of Object in Alternative Obligation
•
The effect of the loss of one, some or all of
the prestation will depend on who has the
right of choice and the reason for the loss of
the same.
•
•
•
If the loss of one of the things occurs through
the fault of the debtor and the right of choice
belongs to the creditor, the latter may claim
any of those subsisting, without the right to
recover damages, or the price of the which,
through the fault of the debtor, has
disappeared, with a right to recover
damages.
The loss of one of the prestations has legal
consequences because the creditor cannot
make a choice according to the terms of the
obligation by reason of the debtor’s fault.
If the right of choice belongs to the debtor,
the loss of the things by reason of his fault
does not produce legal consequence
because he may still perform that which
remains of one only subsists.
Should all the prestations be lost through the
fault of the debtor, the creditor shall be
entitled to recover the value of the last thing
which disappeared or that of the service
which last became impossible, which a right
to recover damages other than the value of
the last thing or service.
If the right of choice belongs to the creditor
and all the things are lost through the fault of
the debtor, the choice by the creditor shall fall
upon the price of any of them, also with
indemnity for damages.
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Reference: Rabuya 2019
Cruz, Mambuay, Makilan, Marasigan
Suyat, Tang, Valenzuela – 1C – 2020-2021
Where the Loss is Due to Creditor’s Fault
•
•
If the loss of the thing occurs through the fault
of the creditor and the right of choice belongs
to the debtor, the latter may either:
o Rescind the contract with damages.
o Choose from among the remainder, if
several prestation still subsist, or
perform that which remains if one
only subsists.
If the right of choice pertains to the creditor,
the loss of one of the things through his fault
does not produce any legal consequences
because the creditor may still choose from
among the remainder, if several still subsist,
or he may ask for the performance of that
which remains if one only subsists.
Loss After Election
•
Is one where only one prestation has been
agreed upon but the obligor may render
another in substitution.
Facultative
Obligation
Only the prestation
agreed upon is due
and subject to the
obligation but not
the substitute which
the debtor has
reserved to himself
the right to preform
in lieu of the first.
Only one prestation
is due.
The right of choice
is always with the
debtor.
If the loss occurs after the choice has been duly
communicated, the following rules shall apply:
1. If what was lost was the chosen prestation
which, for all intents and purposes, is the only
prestation which is due and demandable
under the circumstances, the obligation is
considered extinguished if it was lost without
the fault of the debtor and before he has
incurred in delay. If the same was lost by
reason of the debtor’s fault, his obligation is
converted to indemnification for damages.
2. If what was lost was not the chosen
prestation, the same does not affect the
obligation because said prestation is not
what is due.
Article 1206. When only one prestation has been
agreed upon, but the obligor may render another
in substitution, the obligation is called
facultative.
The loss or deterioration of the thing intended as
a substitute, through the negligence of the
obligor, does not render him liable. But once the
substitution has been made, the obligor is liable
for the loss of the substitute on account of his
delay, negligence or fraud. (n)
Facultative Obligation
If
the
original
prestation
is
impossible
or
unlawful,
the
obligation
is
rendered
invalid
even
if
the
substitute
prestation is valid.
The loss of the
substitute
prestation prior to
the election does
not make the debtor
liable even if the
same is lost in his
fault.
Alternative
Obligation
All the prestations
are due and subject
to the obligation up
to the time the
election is made.
Several prestations
are due.
The right of choice
generally belongs to
the debtor but may
be granted to the
creditor or to a third
person.
The fact that one of
the prestation is
impossible
or
unlawful does not
affect the validity of
the obligation.
The loss of one of
the
prestations
through the fault of
the debtor prior to
the election may
render the debtor
liable for damages
(if the right of choice
belongs
to
the
creditor)
Right of Choice and Effectivity of Election
•
•
The debtor, by express argument, is granted
the right to perform another prestation in
substitution of the original prestation.
Such right must be expressly agreed upon in
the contract; otherwise, the obligation of the
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•
•
•
•
debtor is a simple one of performing that
which is due.
If the debtor intends to perform the original
prestation he does not have to communicate
such fact to the creditor because the latter is
already
expecting
its
performance
considering that said prestation is what is
due.
If the debtor intends to perform the substitute
prestation, his decision to perform the
substitution prestation does not bind the
creditor “except from the time it has been
communicated” to the latter.
Once the debtor has communicated to the
creditor his decision to perform the other
prestation, the choice becomes irrevocable
and will bind both parties.
As a consequence, the obligation ceases to
be facultative in character and becomes a
simple obligation of performing the chosen
prestation.
Effect of Loss of Substitute Prestation
•
•
•
•
•
•
If the debtor did not communicate to the
creditor that he would be performing the
other prestation in lieu of what has been
agreed upon, it is the original prestation
which is due and not the substitute
prestation.
The loss of the substitute prestation, for
whatever reason, does not affect the
obligation to perform the original prestation.
The loss of the substitute prestation by
reason of fortuitous event does not affect the
obligation for the simple reason that it is not
what is due.
Once the debtor has communicated to the
creditor his decision to perform the other
prestation, it is now the latter prestation
which is due. Its lost will now have an effect
upon the obligation.
If it is lost by reason of the debtor’s fault, the
debtor is liable for the loss of the same.
If the same is lost without his fault and loss
occur prior to him incurring delay, his
obligation is extinguished.
Reference: Rabuya 2019
Cruz, Mambuay, Makilan, Marasigan
Suyat, Tang, Valenzuela – 1C – 2020-2021
SECTION 4
Joint and Solidary Obligations
Article 1207. The concurrence of two or more
creditors or of two or more debtors in one and
the same obligation does not imply that each one
of the former has a right to demand, or that each
one of the latter is bound to render, entire
compliance with the prestation. There is a
solidary liability only when the obligation
expressly so states, or when the law or the
nature of the obligation requires solidarity.
(1137a)
Article 1208. If from the law, or the nature or the
wording of the obligations to which the
preceding article refers the contrary does not
appear, the credit or debt shall be presumed to
be divided into as many shares as there are
creditors or debtors, the credits or debts being
considered distinct from one another, subject to
the Rules of Court governing the multiplicity of
suits. (1138a)
Classification of bligation Based on Plurality of
Subjects
Joint Obligation
Solidary
Obligation
Is one in which each
debtor is liable for
the
entire
obligation, and each
creditor is entitled to
demand the whole
obligation.
An obligation where
there
is
a
concurrence
of
several creditors, or
of several debtors,
or
of
several
creditors
and
debtors, by virtue of
which each of the
creditors has a right
to demand, and
each of the debtor is
bound to render,
compliance with his
proportionate part
of the prestation
which constitutes
the object of the
obligation.
Each creditor can Each creditor may
recover only his enforce the entire
share
of
the obligation, and each
Page | 49
creditor is entitled to demand only a
proportionate part of the credit from each
debtor.
obligation, and each debtor may be
debtor can be made obliged to pay it in
to pay only his part. full.
Meaning of Joint Obligation in Common law vs
Civil Law
Presumption in Favor of Joint Obligation
•
Common Law
Every debtor in a
joint obligation is
liable in solidum for
the whole; and the
only
legal
peculiarity worthy of
remark concerning
the joint contract at
common law is that
the
creditor
is
required to sue all
the debtor at once.
To
avoid
the
inconvenience
of
the
procedural
requirement and to
permit the creditor
in a joint contract to
do what the creditor
in
a
solidary
obligation can do, it
is not unusual for
the parties to a
common
law
contract to stipulate
that the debtors
shall be “jointly and
severally” liable.
Civil Law
Is equivalent to
Spanish
mancomunada
simple
mancomunada
proper, where each
debtor does not
answer except for a
part
of
total
obligation, and to
each
creditor
pertains only a part
in the correlative
rights.
The term joint is
equivalent to the
apportionable joint
obligation
and
solidary
as
to
mancomunidad
solidaria.
Joint Obligations
•
•
There is a concurrence of several creditors,
or of several debtors, or of several creditors
and debtors, by virtue of which each of the
creditors has a right to demand, and each of
the debtor is bound to render, compliance
with his proportionate part of the prestation
which constitutes the object of the obligation.
Is one in which each debtor is liable only for
a proportionate part of the debt, and the
•
In case of concurrence of two or more
creditors or two or more debtors in one and
the same obligation, and in the absence of
express and indubitable terms characterizing
the obligation as solidary, the presumption is
that the obligation is only joint.
It thus becomes incumbent upon the party
alleging that the obligation is indeed solidary
in character to prove such fact with
preponderance of evidence for the wellentrenched rule is that solidary obligation
cannot lightly be inferred. It must be
positively and clearly expressed
Example A, B, and C executed a promissory note
where they say: “We bind ourselves to pay P900,000
to X.” Here, the obligation is presumed joint because
it does not expressly provide for solidarity and
neither the law nor the nature of the obligation
requires solidarity in this situation. None of the three
debtors may be obliged to pay the entire debt, as
each is liable only to pay his share.
Basis: solidarity among debtors supposes an
abnormal increase of a person’s responsibility which
includes that of another. Solidarity among creditors
impresses greater confidence among them because
each may enforce the whole obligation.
•
•
•
Between the abnormal and excessive
responsibility in solidary obligation and the
common and normal liability in joint, the law
presumes in favor of join obligation.
When it is not provided in a judgement that
the defendants are liable to pay jointly and
severally a certain sum of money, none of
them may be compelled to satisfy in full said
judgement.
Even when the body of the court’s decision
characterizes the liability of the defendants
as solidary but in the dispositive portion
thereof the word solidary neither appears nor
can it be inferred therefrom; the liability of the
defendants is merely joint.
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Reference: Rabuya 2019
Cruz, Mambuay, Makilan, Marasigan
Suyat, Tang, Valenzuela – 1C – 2020-2021
•
When there is a conflict between the
dispositive part and the opinion of the court
contained in the text or body of the decision,
the former must prevail over the latter on the
theory that the dispositive portion is the final
order, while the opinion is merely a statement
ordering nothing.
Correlativity of Credits and Debts in Joint
Obligations
In obligation with a plurality of debtors and a plurality
of creditors. Who shall the be considered the creditor
for each debtor and vice versa?
•
Division of Joint Credits and Debts
•
If the law or the obligation itself is silent as to
how the debt and the credit shall be divided
among the joint debtors or the joint creditors,
the same shall be divided into as many equal
shares as there are creditors or debtors.
Example: A, B, and C bound themselves to pay
P900, 000 to X. Here, the amount of the debt shall
be understood to be divided into three equal parts,
and consequently, each of the debtors has to pay
P300, 000 to creditor X, since their respective share
in the obligation has not been determined.
•
The principle also applies when plurality
exists both with respect to the debtors and
creditors, not only to situations where there
are several joint creditors and one debtor or
where there are several joint debtors and one
creditor.
Example: A, B, and C are joint debtors of X, Y, and
Z, also joint creditors, for the sum of P900, 000. As
to debtors A, B, and C, the debt should be divided
into three equal parts, such that each of them shall
be liable to pay P300, 000 only. As to creditors X, Y,
and Z, the credit shall also be divided into three
equal parts, such that each one of them shall be
entitled to demand the amount of P300, 000 only.
•
The division of joint credits and debts may be
established in the obligation itself, in which
case there can be no question as to such
division.
Example: A, B, and C bound themselves to pay
P900, 000 to X. In their obligation, it ws specified that
A is to pay X P500, 00, B P300, 000, and C
P100,000.
If the amount of the debt of one of the debtors
coincides with the credit of one of the
creditors, the former must therefore be the
debtor of the latter.
Example: the respective shares of joint debtors A,
B, and C in the debt are as follows: P3, 000, P2, 000,
P1,000; while the respective shares of joint creditors
X, Y, and Z are as follows: P1, 000, P2, 000, and P3,
000. Here, the credits and debts can be matched, as
follows: Z to A, Y to B, and X to C.
When the number of creditors is greater or less that
that of the debtors or vice versa; or when, although
there is an equal number of credits and debts, they
are unequal to each other and they do not match.
•
Each creditor may ask or each debtor may
pay all in proportion to the respective credits
and debts.
Example #1: A, B, and C are indebted to X and Y
for P900, 000. Applying the presumption of equal
sharing in the debt and credit, the debt shall be
divided into three equal parts, such that each of the
debtor owes 1/3 of the debt. The credit, in turn, shall
also be divided into two equal parts, and
consequently, each of the creditors owns ½ of the
credit. Therefore, X may demand from A ½ of 1/3,
i.e., ½ of P30, 000, or P15,000; from B, also P15,
000 and from C, another P15, 000. The same
solution applies to Y in collecting from A, B, and C.
Example #2: A and B are indebted to X and Y for
the sum of P900,000. The share of A in the debt is
1/3 or P30, 000, while the share of B is 2/3 or P60,
000. X, in turn, owns ¾ of the credit or P67, 500,
while Y own 1.4 of the credits or P22, 500. Here, the
solution is as follows: X may demand from A ¾ of
1/3, i.e., ¾ of P30, 000, or P22, 500; and X may
collect from B ¾ of 2/3, i.e., ¾ of P60, 000, or P45,
000. Y, in turn, may collect from A ¼ of 1/3, i.e., ¼ of
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Reference: Rabuya 2019
Cruz, Mambuay, Makilan, Marasigan
Suyat, Tang, Valenzuela – 1C – 2020-2021
P30, 000, or P7, 500; Y may collect from B ¼ of 2/3,
i.e., ¼ of P60, 000, or P15, 000.
•
The solution that each creditor may ask or
each debtor may pay all in proportion to the
respective credits and debts should also
apply to a situation where there is an equal
number of credit and debt are presumed
equal.
Consequences or Effects of Joint Character of
Obligation
•
•
•
•
The most fundamental effect of joint
obligations is that each creditor can demand
only for the payment of his proportionate
share of the credit, while each debtor can be
held liable only for the payment of his
proportionate share of the debt.
Joint creditor cannot act in representation of
others. Neither can a joint debtor be
compelled to answer for the liability of the
others.
The extinction of the debt of one of the
various debtors does not necessarily affect
the debts of the others.
Prescription, novation, merger, and any other
cause of modification or extinction does not
extinguish or modify the obligation except
with respect to the creditor or debtor affected,
without extending its operation to any other
part of the debt or of the credit.
In view of this essential characteristics of joint
obligation, the following effects shall be produced:
1. The interruption of prescription by the claim
of creditor addressed to a single debtor or by
an acknowledgement made by one of the
debtors in favor of one or more of the
creditors is not to be understood as
prejudicial to or I favor of the other debtors or
creditors.
2. The delay on the part of only one of the joint
debtors does not produce effects with
respect to the others, and if the delay is
produced through the acts of only one of the
joint creditors, the others cannot take
advantage thereof.
3. The vices of each obligation arising from the
personal defect of a particular debtor or
creditor, do not affect the validity of the other
credits or debts.
4. The insolvency of one debtor or his nonperformance does not increase the liability of
his co-debtors, nor authorize the creditor of
the defaulting debtor to claim anything from
his co-debtors.
5. In the divisible joint obligation, the defense of
res judicata is not extended from one debtor
to another.
Article 1209. If the division is impossible, the
right of the creditors may be prejudiced only by
their collective acts, and the debt can be
enforced only by proceeding against all the
debtors. If one of the latter should be insolvent,
the others shall not be liable for his share. (1139)
Article 1210. The indivisibility of an obligation
does not necessarily give rise to solidarity. Nor
does solidarity of itself imply indivisibility. (n)
Joint Indivisible Obligations
Solidarity and Indivisibility
•
Article 1210 expressly clarifies that the
indivisibility of an obligation does not
necessarily give rise to solidarity nor does
solidarity of itself imply indivisibility.
Solidarity
Refers
to
the
vinculum or legal tie
that
binds
the
parties
and,
consequently
therefore, to the
subjects of the
obligation.
Requires plurality of
subjects.
The
solidarity
remains even when
there has been nonperformance of the
debtors
who
Indivisibility
Refers
to
the
prestation
or
objects
of
the
obligation. If the
prestation
is
incapable of partial
performance,
the
obligation
is
indivisible.
Does not require
plurality of subjects.
In case of breach,
the obligation is
converted
into
payment
of
damages and the
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Reference: Rabuya 2019
Cruz, Mambuay, Makilan, Marasigan
Suyat, Tang, Valenzuela – 1C – 2020-2021
become liable for reason
for
damages.
indivisibility ceases
to exist.
Effect of Breach of joint indivisible obligation
•
Concept of Joint Indivisible Obligation
•
•
If in case plurality of subjects, each creditor
cannot demand more than his part or each
debtor cannot be required to pay more than
his share and the prestation is, at the same
time, incapable of partial performance, the
obligation becomes a joint indivisible one.
The presumption that the obligation is merely
joint still applies in case of plurality of
creditors or debtors even when the obligation
is indivisible in nature.
Example: A and B obliged themselves to deliver a
horse to X, the obligation of A and B to X is still
presumed to be joint. As a consequence, neither of
them is liable to perform the entire obligation
because each is liable only for his part. Therefore, in
case one of them becomes insolvent later on, the
other debtor does not become liable for the share of
the insolvent debtor.
•
•
•
•
•
•
•
Indivisible Solidary Obligation
•
The collective action of all debtors is
necessary in order for the obligation to
performed, although each answering only for
his part. Thus, Article 1209 provides that this
kind of obligation, the debt can be enforced
only by proceeding against all the debtors.
In order to make an effective demand the
same must be against al the debtors.
The same principle applies on case of
plurality of creditors.
While Article 1209 states that the right of the
creditor may be prejudiced only by their
collective acts, which may give rise to the
inference that if the act is beneficial, i.e., such
as interrupting the running of the period of
prescription, the act of one may be deemed
sufficient, the fact remains that in a joint
obligation neither of the creditors may
represent the others because the credits are
considered distinct from one another. Hence,
the act of one alone is ineffective even if such
act is beneficial to the others.
Since the collective action of all debtors is
necessary to enforce a joint indivisible
obligation, the obligation is considered
breached form the time anyone of the
debtors does not comply with his
undertaking, in which case, the obligation is
converted into payment of damages.
The reason for the indivisibility ceases to
exist and each debtor becomes liable for his
part of the indemnity.
Those debtors who are not guilty of such
breach and were ready to preform their part
of the obligation are not liable to pay
damages and their liability is limited to their
corresponding portion of the price of the thing
or of the value of the service constituting the
obligation.
In the event that one of the debtors becomes
insolvent, the others shall not be liable for his
share.
•
In the event of the non-performance of the
obligation, the creditor may proceed against
any debtor for the payment of the indemnity,
including the price of the thing or the value of
the service constituting the obligation and the
damages, even if the latter was ready and
willing to perform.
He may recover the damages from the
debtor who was responsible for the breach of
the obligation, in addition to his right to
recover from the others their respective
shares in the price.
Article 1211. Solidarity may exist although the
creditors and the debtors may not be bound in
the same manner and by the same periods and
conditions. (1140)
Solidary Obligations
When Solidary Liability Exists
•
When there is a concurrence of two or more
debtors under a single obligation, obligation
is presumed to be joint. The law further
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Reference: Rabuya 2019
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Suyat, Tang, Valenzuela – 1C – 2020-2021
provides that to consider the obligation as
solidarity in nature, it must expressly be
stated as such, or the law or the nature of the
obligation itself must require solidarity.
Nature of Obligation Requires Solidarity
•
Solidary Liability by Express Stipulation
•
•
•
There is solidary liability when the obligation
expressly so states.
It is not necessary that the agreement should
use precisely the word “solidary” for an
obligation to be so; it is sufficient that the
stipulation states for example, that each of
the debtors can be compelled to pay the
totality of the debt, or that each of them is
obligated to the entire value of the obligation.
•
Equivalent terms may in fact be employed by the
parties to indicate the existence of solidary liability,
as follows:
1. The terms of a contract govern the rights and
obligations of the contracting parties. When
the obligor or obligors undertake to be jointly
and severally liable, it means that the
obligation is solidary. When the promissory
note expressly states that the three
signatories therein are jointly and severally
liable, any one, some or all of them may be
proceeded against for the entire obligation.
2. The phrase juntos o separadamente, used in
the promissory note, is an express
statement, making each of the persons who
signed it individually liable for the payment of
the full amount of the obligation contained
therein.
3. The words individually and collectively have
also been held to create a solidary liability.
4. When a promissory containing the word, I
promise to pay is signed by two or more
persons, they are deemed to be jointly and
severally liable thereon.
•
•
Far Eastern Shipping Company vs Court of
Appeals
•
•
•
Solidary Liability Imposed by Law
(See page 173-174)
Article 1210 clarifies the concept of solidary
liability by stating that the indivisibility of an
obligation does not necessarily give rise to
solidarity.
The facts that the obligation is indivisible
does not necessarily give rise to solidarity in
the absence of express and indubitable
terms characterizing the obligation as
solidary.
Some of the obligations, solidary by nature,
are also provided by law, such as the civil
liability of the principals, accomplices, and
accessories in the commission of a crime,
each within their respective class; the
responsibility of two or more persons who are
liable for a quasi-delict; the obligations of two
or more bailees in a contract of
commodatum, as well as the obligations of
two or more officious managers unless the
management was assumed to save the thing
or business from imminent danger.
The nature of the obligation of the coconspirators in the commission of the crime
requires solidarity, and each debtor may be
compelled to pay the entire obligation.
Joint tortfeasors are solidary liable for the
resulting damage. Joint tortfeasors are each
liable as principals, to the same extent and in
the same manner as if they had performed
the wrongful act themselves.
It would not be an excuse for any of the joint
tortfeasors to assert that his or her individual
participation in the wrong was insignificant as
compared to those of the others.
The damage cannot be apportioned among
them, except by themselves.
They are jointly and severally liable for the
whole amount.
Liwanag
vs
Commission
•
Workmen’s
Compensation
In compensation cases, the liability of
business partners should be solidary;
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Reference: Rabuya 2019
Cruz, Mambuay, Makilan, Marasigan
Suyat, Tang, Valenzuela – 1C – 2020-2021
otherwise, the right of the employee may be
defeated, or at least crippled.
Sunga-Chan vs CA
•
•
When several heirs of a deceased partner
continued
with
the
business
and
management of the partnership against the
will of the other partner, the obligation of said
heirs to undertake an inventory, render an
accounting of partnership affairs is solidary
by its nature.
Since the acts complained of were not
severable in nature, it was impossible to
draw the line between when the liability of the
other starts.
debtor may be
compelled to pay
the entire obligation
to the creditor.
Solidarity Not affected by varied terms and
Condition
•
•
•
Kinds of Solidarity
Active Solidarity
•
•
Is one that exist only among the creditors.
The same may be established only by the
agreement of the parties.
•
Passive Solidarity
•
•
Exists only among the debtors.
May be established by the will of the parties
expressed in a contract or imposed by law or
derived from the nature of the obligation
itself.
•
Exists among the creditors and debtors.
It may be possible
for the obligation
to be joint on the
side
of
the
creditors
and
solidary on the
side of the debtors
Each creditor can
demand only his
share
in
the
obligation but each
It may be possible
for the obligation
to be solidary on
the side of the
creditors but joint
only on the side of
the debtors.
Each creditor can
demand
the
performance of the
entire obligation but
The legal bond of solidarity is not destroyed
by the mere fact that the parties are not
bound by the same periods and conditions.
The vinculum or bond which binds the
creditors and the debtors in solidary
obligations may be uniform, when they are
bound by the same terms and conditions, or
varied, when they are not bound by the same
terms and conditions.
Solidarity is still preserved by recognizing in
the creditor the power, upon the happening
of the condition or the arrival of the term, to
claim this remaining portion from any of the
debtors.
A solidary debtor may avail himself not only
of defenses which are derived from the
nature of the obligation and of those which
are personal to him or pertain to his share,
but also of defenses which personally belong
to another solidary debtor as regards that
part of the debt for which such other solidary
debtor is responsible.
Inchausti $ Co. vs Yulo
•
Mixed Solidarity
each debtor may
only be compelled
to pay his share in
the obligation.
Even though the creditor may have stipulated
with some of the solidary debtors diverse
installments and conditions, this does not
lead to the conclusion that the solidarity
stipulated in the instrument is broken
because “solidarity may exist even though
the debtors ae not bound in the same
manner and for the same periods and under
the same conditions.”
Article 1212. Each one of the solidary creditors
may do whatever may be useful to the others, but
not anything which may be prejudicial to the
latter. (1141a)
Article 1213. A solidary creditor cannot assign
his rights without the consent of the others. (n)
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Reference: Rabuya 2019
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Article 1214. The debtor may pay any one of the
solidary creditors; but if any demand, judicial or
extrajudicial, has been made by one of them,
payment should be made to him. (1142a)
•
Article 1215. Novation, compensation, confusion
or remission of the debt, made by any of the
solidary creditors or with any of the solidary
debtors, shall extinguish the obligation, without
prejudice to the provisions of article 1219.
The creditor who may have executed any of
these acts, as well as he who collects the debt,
shall be liable to the others for the share in the
obligation corresponding to them. (1143)
Article 1212 and Article 1215
•
Active Solidarity
Effects of Active Solidarity
Active Solidarity or Solidarity among the debtors
•
•
A time among several creditors of the same
obligations, by virtue of which, each of them,
as regards his co-creditors, is creditor only as
to his share in the obligation and, in regard to
the common debtor, he represents all of
them.
The effects of active solidarity will depend on
whether the relationship under consideration
is between the solidary creditors and debtors
or
between
the
solidary
creditors
themselves.
•
In relation to acts which are clearly beneficial
to the other solidary creditors, the mutual
agency is pronounced, not only in so far as
the debtors are concerned but even among
the solidary creditors themselves.
•
Consequently, each solidary creditor may
interrupt the period of prescription, place the
debtor in default by making a proper demand
or bring a suit so that the obligation may
produce interest.
Mutual Agency
•
•
The essence of active solidarity.
Every creditor is considered an agent of the
others and he has the power to claim and
exercise the rights of all of them in relation to
their debtor or debtors.
Each creditor is entitled to demand the whole
obligation.
In relation to their debtors, each creditor is
considered an agent of the others whether
the act executed by him is beneficial to cocreditors or prejudicial to them. However, in
so far as the relationship existing among the
While Article 1212 prohibits a solidary
creditor from doing anything that may be
prejudicial to the others, this does not mean
that the precept contained in said article is
inconsistent or contradictory with the rule
embodied in Article 1215 that the novation,
compensation, confusion or remission of the
debt made by any of the solidary creditors
shall extinguish the obligation.
Article 1215 sanctions the efficacy of such
prejudicial acts only insofar as it affects the
debtors, but that with relation to the creditors,
Article 1212 means that none of the said
creditors can execute any act prejudicial to
the others without at the same time incurring
the obligation of indemnifying the latter.
•
Effects Among Solidary Creditors
•
•
solidary creditors themselves, their mutual
agency extends only to acts which are
beneficial to the others, but not to anything
which may be prejudicial to them.
While each solidary creditor may extinguish
the obligation by novation, compensation,
confusion, remission, or any other mode, the
creditor who may have executed any of these
acts shall be liable to the others for the share
in the obligation corresponding to them.
Quiombing vs CA
•
Suing for the recovery of the contract price is
certainly a useful act that the plaintiff solidary
creditor could do by himself alone.
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Reference: Rabuya 2019
Cruz, Mambuay, Makilan, Marasigan
Suyat, Tang, Valenzuela – 1C – 2020-2021
•
•
•
Where the obligation of the parties is
solidary, either one of the parties is
indispensable, and the other is not even
necessary (now proper) because complete
relief may be obtained from either.
The complainant having been filed by the
plaintiff solidary creditor; whatever amount is
awarded against the debtor must be paid
exclusively to him.
If the plaintiff eventually collects the amount
due from the solidary debtors, the other
solidary creditor may later claim his share
thereof, but that decision is for him alone to
make.
Effects of Unauthorized assignment of right
•
•
•
•
Article 1213 prohibits the assignment of
rights of a solidary creditor without the
consent of the others,
The rule is premised on the existence of
mutual agency among the creditors, which
implies mutual confidence in them, in
addition to the power of every solidary
creditor to cause the extinguishment of the
debtor’s obligation without the knowledge
and consent of the others.
The prohibition applies therefore only when
the assignment is made to a third person with
whom confidence has not been reposed by
the other co-creditors, but not if the
assignment is made to a co-creditor because
the reason for the prohibition does not exist.
Any payment made by the debtor and
debtors to such assignee is a payment made
to a stranger and, therefore, invalid as a rule.
The debtor may recover, however, from the
assignee the undue payment on the basis of
an accion in rem verso.
2. Any solidary creditor may extinguish the
obligation by novation, compensation,
confusion, remission or any other mode of
extinguishment; but the creditor who may
have executed any of these acts shall be
liable to the others for the share in the
obligation corresponding.
Effect of Demand by Solidary Creditor
•
•
•
In view of the mutual agency existing among
the solidary creditors, their debtor or debtors
may pay any one of them. However, if any
demand, whether judicial or extrajudicial, has
been made by any of the solidary creditors,
payment should be made to him.
Any payment made by the debtor upon
whom the demand has been made to any
other creditor is not valid and does not
extinguish the obligation.
As a consequence, the demanding creditor
can require the debtor to pay again. The
remedy of the debtor in this situation is to
recover the erroneous payment from the
other creditor to whom such payment has
been made.
Mixed Solidarity
•
•
•
Effects Between Solidary Creditors and Debtors
The effects of active solidarity as between th solidary
creditors and their debtors are as follows:
The rule is that each creditor may proceed
against any one of the solidary debtors or
some or all of them simultaneously and each
debtor may pay one of the solidary creditors.
However, when demand, whether judicial or
extrajudicial, has been made by anyone of
the solidary creditors to anyone of the
solidary debtors, payment should be made
only to the demanding creditor.
The prohibition does not affect the other
debtors upon whom no demand has been
made, and hence they can make payment to
any other creditor who did not make the
demand.
Effects of Extinguishment of Obligation
1. The debtors may pay any one of the solidary
creditors; but if any demand, judicial or
extrajudicial, has been made by one of them,
payment should be made to him.
•
The act of extinguishment of obligation,
which is obviously prejudicial to the cocreditors, is valid insofar as the debtors are
concerned and extinguishes the latter’s
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Reference: Rabuya 2019
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Suyat, Tang, Valenzuela – 1C – 2020-2021
obligation; but the creditor who may have
executed such prejudicial act shall be liable
to his co-creditors for the share in the
obligation corresponding to them.
by subsequent instrument, covenanted with
some of the solidary debtors’ different
periods of payment and different conditions,
did not destroy the solidary stipulated in the
original contract.
The effects of such prejudicial acts are as follows:
Novation
Rule for A Surety
•
•
•
•
1.
2.
3.
4.
•
May either be extinctive or modificatory.
It is extinctive when an old obligation is
terminated by the creation of a new
obligation that takes the place of the former;
it is merely modificatory when the old
obligation subsists to the extent it remains
compatible with the amendatory agreement.
An extinctive result either by changing the
object or principal conditions (objective or
real), or by substituting the person of the
debtor or subrogating a third person in the
rights of the creditor (substantive or
personal).
Under this mode, novation would have dual
functions – one to extinguish an existing
obligation, the other to substitute a new one
in its place – requiring a conflux of four
essential requisites:
A previous valid obligation
An agreement of all parties concerned to a
new contract
The extinguishment of the old obligation
The birth of a valid new obligation
Whether the novation consists in the
substitution of the person of the debtor or in
the subrogation of a third person in the rights
of the other creditors, the solidary creditor
who effects the novation shall be liable to his
co-creditors for their shares in the obligation.
•
Reason: an extension of time given to the principal
debtor by the creditor without the surety’s consent
would deprive the surety of his right to pay the
creditor and to be immediately subrogated to the
creditor’s remedies against the principal debtor upon
the maturity date.
Compensated and Merger
•
•
•
Rule for Passive Solidarity
•
An extension of time granted by the creditor
to a solidary debtor does not release the
others from the obligation.
Inchausti & Co. vs Yulo
•
The extension of time granted to several
solidary debtors and the fact that the creditor,
An extension granted to the debtor by the
creditor without the consent of the surety
extinguishes the suretyship.
•
•
Compensation is a mode of extinguishing the
concurrent amount the debts of persons who
in their own right are creditors and debtors of
each other.
Compensation presupposes two persons
who, in their own right and as principals, are
mutually indebted to each other respecting
equally
demandable
and
liquidated
obligations over any of which no retention or
controversy commenced and communicated
in due time to the debtor exists.
When the two debts are of the same amount,
there is a total compensation. Thus, in the
case of total compensation the obligation is
extinguished and the relation between
creditors as a group and debtors as another
group ceases, and there is left only the
resulting liability for reimbursement within
each group.
When the compensation is partial, and there
is doubt as to what part of the debt it should
be applied, the rules on the application of
payment should govern.
In confusion or merger, the obligation is
extinguished when the characters of creditor
and debtor are merged in the same person.
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Reference: Rabuya 2019
Cruz, Mambuay, Makilan, Marasigan
Suyat, Tang, Valenzuela – 1C – 2020-2021
•
•
In solidary obligations, the extinguished is
limited to the portion or share corresponding
tot the creditor or debtor in whom the two
characters concur.
The solidary creditor in whom confusion has
taken place remains liable to the other
solidary debtor who acquires the whole
credit, he can still demand from the other
debtor who acquires the whole credit, he can
still demand from the other debtors their
respective shares therein.
Effect of Payment Made to Solidary Creditor
•
•
•
Remission or Condonation
•
•
•
•
•
•
Remission or condonation is an act of
liberality on the part of the creditor, who
receives no price or equivalent thereof,
renounces the enforcement of the obligation,
which is extinguished in its entirety or in that
part or aspect of the same to which the
remission refers.
To be valid, it requires the acceptance of the
debtor.
When the remission is effected by only one
of the solidary creditors, he becomes liable to
the others for the share in the obligation
corresponding to them.
When several, but not all, of the creditors
make the remission, there can be no action
as between those who made it; but all of
them will be liable for the shares of the
creditors who did not remit, and if one is
insolvent, his share shall be made up by the
others who concurred in the remission.
The creditor who converted the solidary
character of the obligation 0f the debtors into
a joint one does not immediately become
liable to the other solidary creditors because
the obligation of the debtors is not
extinguished yet.
If one of the joint debtors will eventually
become insolvent, in which case the other
joint creditors do not become liable for the
part of the insolvent debtor, the creditor who
effected such conversion shall be liable to
the others for their corresponding share in
the debt of the insolent debtor.
In active solidary, the debtor may pay any
one of the solidary creditors unless a
demand has been made by one of the
creditors, in which case payment should be
made to him.
The creditor who may have collected the
debt shall be liable to his co-creditors for the
share in the obligation corresponding to
them.
As a consequence, the creditor who has
collected the debt is converted into a debtor
liable to his co-creditor for the share
corresponding to each of the latter.
Article 1216. The creditor may proceed against
any one of the solidary debtors or some or all of
them simultaneously. The demand made against
one of them shall not be an obstacle to those
which may subsequently be directed against the
others, so long as the debt has not been fully
collected. (1144a)
Article 1217. Payment made by one of the
solidary debtors extinguishes the obligation. If
two or more solidary debtors offer to pay, the
creditor may choose which offer to accept.
He who made the payment may claim from his
co-debtors only the share which corresponds to
each, with the interest for the payment already
made. If the payment is made before the debt is
due, no interest for the intervening period may
be demanded.
When one of the solidary debtors cannot,
because of his insolvency, reimburse his share
to the debtor paying the obligation, such share
shall be borne by all his co-debtors, in
proportion to the debt of each. (1145a)
Article 1218. Payment by a solidary debtor shall
not entitle him to reimbursement from his codebtors if such payment is made after the
obligation has prescribed or become illegal. (n)
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Reference: Rabuya 2019
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Suyat, Tang, Valenzuela – 1C – 2020-2021
Passive Solidarity
Mutual Guaranty
Passive solidarity or solidarity among the
debtors
•
•
•
•
Is a tie or vinculum among several debtors,
by virtue of which each of them, in relation to
his share in the obligation, but in relation to
the common creditor or creditors, he is bound
to the payment of the whole credit.
Each debtor can be made to answer for the
shares of the others.
There exists among the solidary debtors a
case of mutual guaranty with respect to the
shares of the co-debtors.
A solidary debtor acquires the right to
demand reimbursement from the others for
their corresponding shares once payment of
the entire obligation has been made.
Distinguished from suretyship
•
•
Solidarity signifies that the creditor can
compel any one of the solidary debtors or
the surety alone to answer for the entirety of
the principal debt.
However, while a guarantor may bind
himself solitarily with the principal debtor,
thereby becoming a surety, the liability of a
guarantor is different from that of a solidary
debtor.
Solidary Codebtor
A solidary co-debtor
has no other rights
than
those
bestowed upon him
in
Section
4,
Chapter 3, Title I,
Book IV of the Civil
Code.
Surety
Outside
of
the
liability he assumes
to pay the debt
before the property
of the principal
debtor has been
exhausted, retains
all the other rights,
actions and benefits
which pertain to him
by reason of the
fiansa.
The
civil
law The
Civil
Law
relationship existing suretyship
is,
between the codebtors liable in
solidum is similar to
the common law
suretyship.
The solidary debtor
who effected the
payment to the
creditor may claim
from his co-debtors
only
the
share
which corresponds
to each, with the
interest for the
payment
already
made.
Such
solidary
debtor will not be
able to recover from
the co-debtors the
full amount already
paid to the creditor,
because the right to
recovery extends
only
to
the
proportional share
of the other codebtors, and not as
to the particular
proportional share
of
the
solidary
debtor who already
paid.
Reason: solidary
debtor answer not
only for another’s
debt but also for his
own.
The extension of
time granted by the
creditor to a solidary
debtor does not
release the others
from the obligation.
accordingly, nearly
synonymous with
the common law
guaranty.
Even as the surety
is solitarily bound
with the principal
debtor
to
the
creditor, the surety
who does pay the
creditor has the
right to recover the
full amount paid,
and not just any
proportional share,
from the principal
debtor or debtors.
Such right to full
reimbursement falls
within the other
rights, actions and
benefits
which
pertain to the surety
by reason of the
subsidiary
obligation assumed
by the surety.
Reason: in the
case of the surety,
he alone answers
for another’s debt.
An extension of
time granted to the
debtor
by
the
creditor without the
consent
of
the
surety extinguishes
the suretyship.
Page | 60
Reference: Rabuya 2019
Cruz, Mambuay, Makilan, Marasigan
Suyat, Tang, Valenzuela – 1C – 2020-2021
Inciong, Jr. vs Court of Appeals
•
The liability of a surety is different from that
of solidary debtor and that Inciong signed the
promissory note as solidary co-maker
(debtor) and not as a guarantor. Because the
promissory note involved in the case
expressly states that the three signatories
therein are jointly and severally liable, any
one, some or all of them may be proceeded
against for the entire obligation and the
choice is left to the creditor to determine
against whom he will enforce collection.
Pursuant to the rule that a creditor may sue any of
the solidary debtors, it is clear that solidarity does not
make a solidary obligor an indispensable party in a
suit filed by the creditor.
De Castro vs CA
•
•
Remedies Against Solidary Debtors
•
•
•
When the obligation is solidary, the creditor
may bring his action in toto against the
debtors obligated in solidum.
The creditor may proceed against any one of
the solidary debtors or some or all of them
simultaneously.
The choice is left to the solidary creditor to
determine against whom he will enforce
collection.
The solidary liability of the four co-owners
militates against the theory that the other coowners
should
be
impleaded
as
indispensable parties.
When the law expressly provides for solidary
of the obligation, as in the liability of coprincipals in a contract of agency, each
obligor may be compelled to pay the entire
obligation because Article 1216 of the Civil
Code provides that a creditor may sue any of
the solidary debtors.
La Yebana Co., Inc. vs Valenzuela
•
When the guarantor binds himself solitarily
within the principal debtor to pay the latter’s
debt to his creditor, he cannot and should not
complain that the creditor should thereafter
proceed against him to collect its credit.
Dimayuga vs PCI Bank
•
Since the obligation of the debtors is
solidary, there is nothing improper in the
creditor’s filing of an action against the
surviving the solidary debtors alone, instead
of instituting a proceeding for the settlement
of the estate of the deceased debtor wherein
his claim could be filed.
Philippine National Bank vs Asuncion
•
•
Nothing in Section 6 of Rule 86 prevents a
creditor from proceeding against the
surviving solidary debtors.
The choice is undoubtedly left to the solidary
creditor to determine against whom he will
enforce collection. In case of death of one of
the solidary debtors, he (the creditor) may, if
he chooses, proceed against the surviving
solidary debtors without necessity of filing a
claim in the estate of the deceased debtors.
Reason: the creditor may proceed against any one
of the solidary debtors or against all of them
simultaneously, the fact that an action had been
instituted or that payment had been enforced against
one of them not being a bar thereto as long as there
remains a balance to collect.
Bicol Savings & Loan Association vs Guinhawa
The bringing of an action against the principal debtor
to enforce the payment of the obligation is not
inconsistent with, and does not preclude, the
bringing of another action to compel the surety to
fulfill his obligation under the agreement.
Effect of Payment by Solidary Debtor
Extinguishment of Obligation
•
If two or more solidary debtors offer to pay,
the creditor may choose which offer to
accept.
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Reference: Rabuya 2019
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Suyat, Tang, Valenzuela – 1C – 2020-2021
•
•
If there is also solidarity on the side of the
creditors, a solidary debtor may pay to any
one of the solidarity creditors, except when
demand is made on said solidary debtor, his
payment, in order to be valid and effective,
must be made to such demanding creditor.
Upon payment made by one of the solidary
debtors of the entire obligation, said
obligation is extinguished and the juridical tie
between the creditor or creditors and the
solidary debtors is dissolved thereby.
Effects of Payment by Solidary Debtor
•
•
•
•
•
Payment made by one of the solidary debtors
extinguishes the obligation and the juridical
tie between the creditor on the one hand, and
the solidary debtors, on the other, is
dissolved thereby.
After such payment, Article 1217 gives to a
solidary debtor who has paid the entire
obligation the right to be reimbursed by his
co-debtors for the share which corresponds
to each; provided, however, that such
payment is made before the obligation has
prescribed or become illegal.
If such payment is made after the obligation
has prescribed or become illegal, the
payment by a solidary debtor shall not entitle
him to reimbursement from his co-debtors.
Where one of several persons who are send
upon a joint and several liability elects to pay
the whole, such person is subrogated to the
rights of the common creditor and may
properly be substituted in the same action as
plaintiff for the purposes of enforcing
contribution from his former associates under
article 1145 of the old Civil Code.
If a solidary debtor pays the obligation in part,
he can recover reimbursement from the codebtors only in so far as his payment
exceeded his share in the obligation.
Reason: if a solidary debtor pays an amount equal
to his proportionate share in the obligation, then he
in effect pays only what is due from him. If the debtor
pays less than his share in the obligation, he cannot
demand reimbursement because his payment is less
than his actual debt.
What if, after payment, one of the solidary debtors
become insolvent, how may the same affect the right
of the debtor who paid the entire obligation to
demand reimbursement?
•
The third paragraph of Article 1217 states
that the share of the insolvent debtor shall be
borne by all of the co-debtors, including the
debtor who has paid the debt and who is
seeking reimbursement, in proportion to the
debt of each.
Distinguished from
reimbursement
•
right
of
surety
to
The moment the surety fully answers to the
creditor for the obligation created by the
principal debtor, such obligation is also
extinguished. At the same time, the surety
may seek reimbursement form the principal
debtor for the amount paid, for the surety
does in fact become subrogated to all the
rights and remedies of the creditor.
Joint and Several
Debtor
Article 1217 makes
plain
that
the
solidary debtor who
effected
the
payment to the
creditor may claim
from his co-debtors
only
the
share
which corresponds
to each, with the
interest for the
payment
already
made.
Such
solidary
debtor will not be
able to recover from
the co-debtors the
full amount already
paid to the creditor,
because the right to
recovery extends
only
to
the
proportional share
of the other codebtors, and not as
Surety
As surety is solidary
bound with the
principal debtor to
the creditor, the
surety who does
pay the creditor has
the right to recover
the full amount paid,
and not just any
proportional share,
from the principal
debtor or debtors.
Such right to full
reimbursement falls
within the other
rights, actions and
benefits
which
pertain to the surety
by reason of the
subsidiary
obligation assumed
by the surety.
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Reference: Rabuya 2019
Cruz, Mambuay, Makilan, Marasigan
Suyat, Tang, Valenzuela – 1C – 2020-2021
to the particular
proportional share
of
the
solidary
debtor who already
paid.
•
The remission of the debt may either be for
the whole obligation, or for the full share of
the affected debtor, or only for a part of the
share of the affected debtor.
Remission of Whole Obligation
What is the source of this right to full reimbursement
by the surety?
•
•
•
•
His right is based on Article 2066 which
assures that the grantor who pays for a
debtor must be indemnified by the latter,
such indemnity comprising of, among others,
the total amount of the debt.
Article 2067 establishes that the guarantor
who pays is subrogated by virtue thereof to
all the rights which the creditor had against
the debtor.
While the surety who fully answers to the
creditor for the obligation becomes
subrogated to all the rights and remedies of
the creditor, payment by one solidary debtor
does not create a real case of subrogation
because
the
original
obligation
is
extinguished and a new one is created.
While the creditor may collect the whole
amount of the loan from anyone of the
solidary co-debtors the payment made by
one of the solidary debtors entitles him to
claim from his co-debtors only the share
pertaining to each with interest on the
amount advanced.
Article 1219. The remission made by the creditor
of the share which affects one of the solidary
debtors does not release the latter from his
responsibility towards the co-debtors, in case
the debt had been totally paid by anyone of them
before the remission was effected. (1146a)
Article 1220. The remission of the whole
obligation, obtained by one of the solidary
debtors, does not entitle him to reimbursement
from his co-debtors. (n)
Effects of Remission in Passive Solidarity
•
•
•
A total remission has the effect of
extinguishing the obligation. But the
remission of the whole obligation, obtained
by one of the solidary debtors, does not
entitle him to reimbursement form his codebtors, because the remission is a
gratuitous act.
If there is also solidarity on the side of the
creditors and the remission is made by only
one of them, the obligation is extinguished in
the amount and to the extent in which it is
made; but the creditor who made the
remission becomes liable to his co-creditors
for their shares.
If the remission is made by several, but not
all, of the creditors, there can be no action as
between those who made it; but all of them
will be liable for the shares of the creditors
who did not remit, and if one is insolvent, his
share will have to be borne by those who
concurred in the remission.
Remission of Solidary Debtor’s Share
•
•
•
If the remission is for the solidary debtor’s full
share, he ceases to have any relation with
the creditors, from whom he is thereby
released, unless the continuation of his
solidary relation has been expressly
reserved, in which case he will be a surety for
the debtors. The balance of the debt may not
be collected from him by any one of the
solidary creditors.
If the remission in favor of a solidary debtor
is only partial, not covering his full share, his
character a solidary debtor continues with
respect to the creditors and his co-debtors.
As a consequence, the balance of the debt
can still be collected from him by any one of
the solidary creditors.
Whether the remission shall involve the full
or only a portion of the share of the affected
solidary debtor, the latter shall not be
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released from his personality towards the codebtors, in case the debt had been totally
paid by anyone of them before the remission
was effected.
•
•
Article 1221. If the thing has been lost or if the
prestation has become impossible without the
fault of the solidary debtors, the obligation shall
be extinguished.
•
If there was fault on the part of any one of them,
all shall be responsible to the creditor, for the
price and the payment of damages and interest,
without prejudice to their action against the
guilty or negligent debtor.
If through a fortuitous event, the thing is lost or
the performance has become impossible after
one of the solidary debtors has incurred in delay
through the judicial or extrajudicial demand
upon him by the creditor, the provisions of the
preceding paragraph shall apply. (1147a)
Effect of Loss of thing
impossibility of performance
or
supervening
Paragraph 1, Article 1221. If the thing has been lost
or if the prestation has become impossible without
the fault of the solidary debtors, the obligation shall
be extinguished.
•
•
•
•
The provision contemplates of an obligation
to deliver a determinate thing and an
obligation to do.
Even if the thing is lost or the performance
has become impossible by reason of
fortuitous event, the obligation is not
extinguished if the loss or impossibility of
performance occurred after one of the
solidary debtors has incurred in delay
through the judicial or extrajudicial demand
upon him by the creditor.
The same rule applies if the thing has been
lost or the performance has become
impossible by reason of the fault of any one
of the solidary debtors.
In case of breach of a solidary obligation, all
debtors are liable to the creditor for the price
and the payment of damages and interest.
The damages paid by a solidary debtor who
was not responsible for the breach of the
obligation may be recovered in toto from the
guilty or negligent debtor.
The other creditors cannot be made to pay in
excess of their normal contribution.
In case of breach of a joint indivisible
obligation where only the joint debtor
responsible for the breach shall be liable to
the creditor for the payment of damages
while those joint debtors who may have been
ready to fulfill their undertaking shall not
contribute to the indemnity beyond the
corresponding portion of the price of the thing
or of the value of then service in which the
obligation consists.
Article 1222. A solidary debtor may, in actions
filed by the creditor, avail himself of all defenses
which are derived from the nature of the
obligation and of those which are personal to
him, or pertain to his own share. With respect to
those which personally belong to the others, he
may avail himself thereof only as regards that
part of the debt for which the latter are
responsible. (1148a)
Defenses Available to Solidary Debtors
In actions filed by the creditor, a solidary debtor may
invoke three kinds of defenses:
1. Those which are derived from the nature of
the obligation.
2. Those which are personal to the debtor being
sued or pertaining to his share.
3. Those which belong to his co-debtors.
• The foregoing defenses are also available to
a surety who binds himself solidarily liable
with the principal debtor, pursuant to Article
2047 which specifically calls for the
application of the provisions on joint and
solidary obligations to suretyship contracts.
Luzon Surety Co., vs De Marbella
•
The petitioner is liable on its bond does not,
however, mean that execution may issue
against it without prior notice of the action or
proceeding to hold it liable on its bond, and
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without giving it its day in court. The solidary
nature of its liability as surety on the
receiver’s bond does not imply that it can be
condemned to pay without a hearing.
Solidarity simply dispenses with the
necessity of levying first upon the property of
the principal.
Defense Arising from Nature of Obligations
•
Defenses which arises from the nature of the
obligation are all those connected with the
obligation and which may contribute to
weaken or destroy the vinculum juris existing
between the creditor and the principal debtor.
(See examples on page 206)
Defenses Personal to Debtor Being Sued
There are two kinds of defenses which are personal
to the debtor being sued:
1. Those affecting the capacity or consent of
the debtor being sued, such as minority,
insanity, mistake, violence, intimidation,
undue influence, or fraud.
2. Those referring particularly to his portion of
the obligation, such as special terms or
conditions pertaining to his share alone
because solidarity may still exist although the
creditors and debtors may not be bound in
the same manner and by the same terms and
conditions.
•
•
The first kind of defense will completely
absolve the defendant solidary debtor from
any liability to the creditor.
The second kind of defense constitutes only
a partial exemption from liability since they
may be utilized only with respect to the part
of the obligation corresponding to the debtor
sued, but he cans till be sued for the portions
belonging to others not subject to terms or
conditions, because he is solidarily liable.
Defense Personal to Other Debts
•
The defenses which are personal to one of
the solidary debtors may be invoked by
another solidary debtor in the event the latter
is sued, but he may avail himself thereof only
as regards that part of the obligation for
which the debtor to whom the defense
belongs is responsible.
SECTION 5
Divisible and Indivisible Obligations
Article 1223. The divisibility or indivisibility of
the things that are the object of obligations in
which there is only one debtor and only one
creditor does not alter or modify the provisions
of Chapter 2 of this Title. (1149)
Divisible and Indivisible Obligation
Divisible
Obligation
Is that which has for
its object a thing or
an act which in its
delivery
or
performance
is
susceptible
of
division.
Indivisible
Obligation
Is that which does
not
admit
of
division, or even
though it does,
neither the nature of
contract nor the
intention of the
parties permits it to
be fulfilled by parts.
The
basis
is
whether or not the
obligation
is
susceptible
of
partial
fulfillment
according to the
purpose of the said
obligation.
Kinds of Division
1. Qualitative – when the things separated do
not form a homogeneous whole, such as an
inheritance.
2. Quantitative – when a homogeneous whole
is divided either by separating into parts (like
in the case of movables) or by fixing their
limits (like in the case of co-ownership)
3. Ideal – when the thing is not materially
divided but an ideal or fractional portion is
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given to each person as in the case of coownership.
When there is only one creditor and debtor
•
•
The classification of obligations into divisible
and indivisible does not apply when there is
only one creditor and one debtor.
Obligations are to be classified into divisible
and indivisible only when the creditors and
the debtors are several.
Article 1224. A joint indivisible obligation gives
rise to indemnity for damages from the time
anyone of the debtors does not comply with his
undertaking. The debtors who may have been
ready to fulfill their promises shall not contribute
to the indemnity beyond the corresponding
portion of the price of the thing or of the value of
the service in which the obligation consists.
(1150)
1. The nature of the object.
2. The provision of law affecting the prestation
3. The will or the intention of the parties, either
express or tacit.
4. The end or purpose of the obligation.
Nature of Object
•
•
•
Article 1225. For the purposes of the preceding
articles, obligations to give definite things and
those which are not susceptible of partial
performance shall be deemed to be indivisible.
When the obligation has for its object the
execution of a certain number of days of work,
the accomplishment of work by metrical units, or
analogous things which by their nature are
susceptible of partial performance, it shall be
divisible.
However, even though the object or service may
be physically divisible, an obligation is
indivisible if so provided by law or intended by
the parties.
Exception: the obligation will be divisible only when
the work is agreed to be by units of time or measure;
but if the work is agreed to be by units of time or
measure; but if the work is for the execution of a
particular object, and the indication of the unit of time
or measure is mere accidental, the obligation is
indivisible.
Provision of Law or Will of Parties
•
In obligations not to do, divisibility or
indivisibility shall be determined by the
character of the prestation in each particular
case. (1151a)
Test in Determining Divisibility or Indivisibility of
Obligation
The following are the factors to be considered in
determining whether an obligation is divisible or
indivisible:
The indivisibility of the object carries with it
the indivisibility of the obligation.
Article 1225 provides that obligations to give
definite things and those which are not
susceptible of partial performance shall be
deemed to be indivisible.
This kind of indivisibility is referred to as
natural indivisibility and may be of two kinds:
o Absolute – when the nature of the
object does not admit its division. In
obligation to give, those for the
delivery of certain objects, such as
animal or a chair, are indivisible.
o Relative – although the prestation is
susceptible of division, it is
considered an integral, indivisible
amount. In obligations to do
indivisibility is also presumed.
•
The obligation ,ay still be indivisible even
when the object is divisible, by reason of the
provision of law, of the express will of the
parties, or of their presumed will, shown by
the relation of the distinct parts of the object,
each of which may be necessary
complement of the others, or by the purpose
of the obligation which requires the
realization of all the parts.
Article 1225 provides that even though the
object or service may be physically divisible,
an obligation is indivisible if so provided by
law or intended by the parties.
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•
•
•
•
•
These kinds of indivisibility are referred as
legal and contractual indivisibility.
In obligations not to do, divisibility or
indivisibility shall be determined by the
character of the prestation in each particular
case.
The indivisibility of an obligation is tested
against whether it can be subject of partial
performance.
An obligation is indivisible when it cannot be
validly performed in parts, whatever may be
the nature of the thing which is the object
thereof.
The indivisibility refers to the prestation and
not to the object thereof.
SECTION 6
Obligations with a Penal Clause
Article 1226. In obligations with a penal clause,
the penalty shall substitute the indemnity for
damages and the payment of interests in case of
noncompliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid if
the obligor refuses to pay the penalty or is guilty
of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is
demandable in accordance with the provisions
of this Code. (1152a)
Obligations with a Penal Clause
Principal and Accessory Obligations
Principal
Obligations
Those that can
stand
alone
independently
of
the existence of
other
obligations
and
have
their
independent
and
individual purpose.
Accessory
Obligations
Those attached to a
principal obligation
in order to complete
the same or take
their place in case
of breach.
Penal Clause
•
An accessory obligation which the parties
attach to a principal obligation for the
•
purpose of insuring the performance thereof
by imposing on the debtor a special
prestation (generally consisting in the
payment of a sum of money) in the case the
obligation is not fulfilled or is irregularly or
inadequately fulfilled.
An accessory undertaking to assume greater
liability in case of breach.
It is attached to an obligation in order to insure
performance and has a double function:
1. To provide for liquidated damages
2. To strengthen the coercive force of the
obligation by the threat if greater
responsibility in the event of breach.
Penalty and Damages
•
A penalty clause may be imposed essentially
as penalty in case or in the nature if
indemnity for damages.
General Rule: the penalty shall substitute the
indemnity for damages and the payment of interests
in case of noncompliance, if there is no stipulation to
the contrary.
In the following situations, damages and interests
may still be recovered on top of the penalty:
1. When there is a stipulation to that effect.
2. When the obligor having failed to comply with
the principal obligation also refuses to pay
the penalty, in which case the creditor is
entitled to interest in the amount of the
penalty, in accordance with Article 2209.
3. When the obligor is guilty of fraud in the
fulfillment of the obligation.
When Penal Clause Demandable
In order that the penalty may be demandable, it is
necessary that:
1. The total non-fulfillment of the obligation or
the defective fulfillment is chargeable to the
fault of the debtor.
2. That the penalty may be enforced in
accordance with the provisions of law.
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Penalty Distinguished from Condition
•
•
•
The penalty cannot be demanded when the
non-fulfillment of the obligation is not
imputable to the fault or negligence of the
debt but to fortuitous event or due to the fault
of the creditor.
The burden of proof lies with the debtor.
The penal clause is intended to prevent the
obligor form defaulting in the performance of
his obligation.
When is the penalty deemed demandable in
accordance with the provisions of the Civil Code?
Penalty
Constitutes
an
obligation, although
accessory.
May be demanded
in case of nonfulfillment of the
principal obligation,
and even with it
alone.
Condition
Cannot constitute
an obligation.
While a condition
can
never
be
demanded to be
fulfilled, but whether
it happens or not,
only the obligation
which it affects may
be demanded.
Positive Obligation (to give and to do)
•
Demandable when the debtor is in mora;
hence, the necessity of demand by the
debtor unless the same is excused.
Negative Obligations
•
Demandable when the act is done contrary
to that which is prohibited.
When does delay arise?
•
Delay begins from the time the obligee
judicially or extrajudicially demands form the
obligor the performance of the obligation.
Penalty and Liquidated Damages
Lambert vs Fox
•
There was no difference between a penalty
and liquidated damages, so far as legal
results are concerned.
Pamintuan vs CA
•
There is no justification for the Civil Code to
make an apparent distinction between
penalty and liquidated damages because the
settled rule is that there is no difference
between penalty and liquidated damages
insofar as legal results are concerned and
that either may be recovered without the
necessity or proving actual damages and
both may be reduced when proper.
Article 1227. The debtor cannot exempt himself
from the performance of the obligation by paying
the penalty, save in the case where this right has
been expressly reserved for him. Neither can the
creditor demand the fulfillment of the obligation
and the satisfaction of the penalty at the same
time, unless this right has been clearly granted
him. However, if after the creditor has decided to
require the fulfillment of the obligation, the
performance thereof should become impossible
without his fault, the penalty may be enforced.
(1153a)
Right of Debtor
Rule: the debtor cannot exempt himself from the
performance of the principal obligation by paying the
penalty.
Reason: the penal clause is not a substitute for the
performance of the principal obligation.
Exception: the debtor may excuse himself form the
performance of the principal obligation by paying the
penalty if such right has been expressly reserved for
him in the agreement of the penalties.
•
•
If the agreement provides that both the
principal and accessory obligations are due
alternatively, and the obligation may be
satisfied by the performance of one of them,
the obligation becomes alternative one.
If the agreement provides that it is the
principal obligation which is still due after its
non-fulfillment but the debtor is authorized to
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satisfy the obligation by paying the penalty,
the obligation becomes a facultative one.
Right of Creditor
•
In case of total non-fulfillment of the
obligation, the creditor cannot, as a general
rule, demand the fulfillment of the principal
obligation and the satisfaction of the penalty
at the same time.
Exception: the creditor acquires the right to demand
the fulfillment of the principal obligation and the
satisfaction of the penalty at the same time if such
right has been clearly granted to him.
Note: the right of the creditor to demand the
fulfillment of the principal obligation and the
satisfaction of the penalty at the same time need not
be expressly agreed upon. It is sufficient that such
right has been clearly granted to him.
Article 1228. Proof of actual damages suffered
by the creditor is not necessary in order that the
penalty may be demanded. (n)
Proof of Actual Damages Not Needed
•
In case of breach of an obligation with a
penal clause, the obligor would then be
bound to pay the stipulated indemnity without
the necessity of proof of the existence and
the measure of damages caused by the
breach.
Reason: These questions and difficulties are
precisely what has been sought to be avoided by the
parties in stipulating the penalty.
Article 1229. The judge shall equitably reduce
the penalty when the principal obligation has
been partly or irregularly complied with by the
debtor. Even if there has been no performance,
the penalty may also be reduced by the courts if
it is iniquitous or unconscionable. (1154a)
1. If the principal obligation has been partly or
irregularly complied.
2. Even if there has been no compliance if the
penalty is iniquitous or unconscionable.
•
The stipulated penalty might likewise be
reduced when a partial or irregular
performance is made by the debtor.
Laureano vs Kilayco
•
There is no substantial differences between
a penalty and liquidated damages so far as
legal results are concerned is strictly
applicable only to cases wherein there has
been neither partial nor irregular compliance
with the terms of the contract, in which case
the courts would have no authority to
equitably reduce the penalty stipulated.
Article 1230. The nullity of the penal clause does
not carry with it that of the principal obligation.
The nullity of the principal obligation carries with
it that of the penal clause. (1155)
Effects of Nullity of Principal Obligation or
Penalty Clause
•
•
•
•
The penal clause is just an accessory
obligation and its existence, therefore, is
merely subordinated to that of the principal
obligation.
The nullity of the principal obligation carries
with it that of the penal clause.
A principal obligation cans stand-alone
independently of the existence of other
obligations.
The nullity of the penal clause (an accessory
obligation) does carry with t that if the
principal obligation.
Mitigation of Penalty
Courts may equitably reduce a stipulated penalty in
the contract in two instances:
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CHAPTER 4
Extinguishment of Obligations
General Provisions
Article 1231. Obligations are extinguished:
Saura Import and Export Co. vs Development
Bank of the Philippines
•
(1) By payment or performance;
(2) By the loss of the thing due;
Mutual Desistance (mutuo disenso) – derives
from the principle that sicne mutual
agreement can create a contract, mutual
disagreement by the parties can cause its
extinguishment.
Other modes not mentioned in Article 1231:
(3) By the condonation or remission of the
debt;
(4) By the confusion or merger of the
rights of creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations,
such as annulment, rescission, fulfillment of a
resolutory condition, and prescription, are
governed elsewhere in this Code. (1156a)
Modes of Extinguishment of Obligations
1. Ipso Jure – the vinculum created by the
obligation is completely broken by operation
of law (Ex: payment)
2. Ope Exceptionis – the vinculum remains,
but granting the debtor the right to oppose
the same by exception, as in prescription.
(See page 222)
Stronghold Insurance Company vs Republic
Asahi Glass Corp.
•
•
•
The death of either the creditor or the debtor
does not extinguish the obligation and that
only obligations that are personal or are
identified with the persons themselves are
extinguished by death.
Result: will passed on to his estate.
The surety cannot use the death of the bond
principal to escape it monetary obligation
under its performance bond.
1.
2.
3.
4.
5.
Death
Compromise
Resolutory period
Mutual dissent
Withdrawal in certain classes of contracts by
will of the parties such as in agency.
6. Change of civil status
7. Happening of an unforeseen event
Section 1 – Payment or Performance
Art. 1232 – Payment means not only the delivery
of money but also the performance, in any other
manner, of an obligation.
Payment:
•
•
•
The performance of pecuniary obligations or
the delivery of a sum of money.
The effective performance of the agreed
presentation.
The performance, in any other manner, of
any kind of obligation, be it an obligation to
give, to do or not to do.
Rules for valid payment:
Arts. 1233 – 1235: essential ingredients of payment
as a mode of extinguishing obligations, which is its
integrity.
Arts. 1236 – 1239: who may make payment.
Arts. 1240 – 1243: to whom payment must be made.
Arts. 1244 – 1246, 1249, and 1250: identity of the
prestation or the objective element of the payment.
Art. 1251: determination of proper place of payment.
Art. 1247: application of expenses.
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Note: If the rules are not strictly followed by the
debtor, the creditor has a just reason in refusing to
accept the payment and the consignation resorted to
by the debtor shall be ineffectual.
Article 1233. A debt shall not be understood to
have been paid unless the thing or service in
which the obligation consists has been
completely delivered or rendered, as the case
may be. (1157)
Article 1234. If the obligation has been
substantially performed in good faith, the obligor
may recover as though there had been a strict
and complete fulfillment, less damages suffered
by the obligee. (n)
Article 1235. When the obligee accepts the
performance, knowing its incompleteness or
irregularity, and without expressing any protest
or objection, the obligation is deemed fully
complied with. (n)
3. Where the different prestation are subject to
different conditions or terms.
Note: The mere receipt of a partial payment is not,
as a rule, equivalent to the required acceptance of
performance as would extinguish the whole
obligation.
Burden of Proof
•
Bank of the Philippine Islands vs Spouses
Royeca:
•
•
•
Rule No. 1 Integrity of Payment
Payment must be complete
•
•
Completely means that the debtor must
comply in its entirety with the prestation and
that the creditor is satisfied with the same.
The creditor acknowledges such full payment
or proof of full payment is shown to the
satisfaction of the court.
Rule of Partial Payment
•
•
The creditor cannot be compelled to accept
partial payment.
The creditor may not compel the debtor to
make partial payment.
Exceptions:
1. When there is an express stipulation to that
effect
2. Where the obligation is partly liquidated and
partly unliquidated, in which case, the
creditor may demand that the debtor may
affect the payment of the former without
waiting for the liquidation of the latter.
In civil cases, one who plead payment has
the burden of proving it; the burden rests on
the defendant to prove payment.
When the creditor is in possession of the
document of credit, proof of non-payment is
not needed for its presumed.
A promissory note in the hands of the
creditor is a proof of indebtedness rather
than proof of payment.
An uncancelled mortgage in the possession
of the mortgagee is presumed that the
mortgage debt is unpaid.
Guinsatao vs Court of Appeals:
•
Existence of the obligation can be proven by
another documentary evidence such as
written memorandum signed by the parties.
Pacheco vs Court of Appeals
•
A check constitutes an evidence of
indebtedness and is a veritable proof of an
obligation.
Note: After the debtor introduces evidence of
payment, the burden of going forward with the
evidence again shifts to the creditor, who then labors
under a duty to produce evidence to show nonpayment.
Monfort vs Aguinaldo
•
The receipts of payment were deemed to be
the best evidence.
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Receipt vs Voucher
Receipt
Voucher
Written and signed A
documentary
acknowledgement
record of a business
that money has or transaction.
goods has been
delivered.
A way or method of
recording
or
keeping track of
payments made.
•
benefits that the obligee expects to receive
after full compliance, and the extent that the
non-performance defeated the purpose of
the contract.
Even if the performance of the obligation is
already substantial but the obligation is not
fully complied with because of the debtor’s
fault, the debtor may not invoke the principle
of substantial performance in this article.
Effect of Substantial Performance:
Exception to General Rule:
1. If the obligation has been substantially
performed in good faith, the obligor may
recover as though there had been a strict and
complete fulfillment, less damages suffered
by the obligee. (Substantial Performance)
2. When the obligee accepts the performance,
knowing its incompleteness or irregularity,
and without expressing any protest or
objection, the obligation is deemed fully
complied with. (Waiver of Defect)
Principle of Substantial Performance
•
•
•
•
Waiver of Defect
•
Requisites:
1. The obligation has been substantially
performed.
2. The debtor performed the obligation in good
faith.
What Constitutes Substantial Performance:
International Hotel Corporation vs Joaquin, Jr.
•
•
•
Article 1234 applies only when an obligor
admits breaching the contract after honestly
and faithfully performing all the material
elements thereof except for some technical
aspects that cause no serious harm to the
obligee.
It is inappropriate when the incomplete
performance constitutes a material breach of
the contract.
A contractual breach is material if it will
adversely affect the nature of the obligation
that the obligor promised to deliver, the
The debtor is completely released from the
obligation.
He may recover as though there has been a
strict and complete fulfillment.
The creditor cannot require the performance
of the remainder as condition sine qua non
to his liability.
He may recover the damages corresponding
to the value of the portion which the latter
failed to perform.
•
When the obligee accepts the performance,
knowing its incompleteness or irregularity,
and without expressing any protest or
objection, the obligation is deemed fully
complied with.
To imply that creditors accept partial
payment as complete performance of their
obligation, their acceptance must be made
under circumstances that indicate their
intention to consider the performance
complete and to renounce their claim arising
from the defect.
Article 1236. The creditor is not bound to accept
payment or performance by a third person who
has no interest in the fulfillment of the obligation,
unless there is a stipulation to the contrary.
Whoever pays for another may demand from the
debtor what he has paid, except that if he paid
without the knowledge or against the will of the
debtor, he can recover only insofar as the
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payment has been beneficial to the debtor.
(1158a)
payment depends on whether or not he has
an interest in the fulfillment of the obligation.
Article 1237. Whoever pays on behalf of the
debtor without the knowledge or against the will
of the latter, cannot compel the creditor to
subrogate him in his rights, such as those
arising from a mortgage, guaranty, or penalty.
(1159a)
Meaning of “Interest in Fulfillment of Obligation”
Article 1238. Payment made by a third person
who does not intend to be reimbursed by the
debtor is deemed to be a donation, which
requires the debtor's consent. But the payment
is in any case valid as to the creditor who has
accepted it. (n)
Who are considered people with interest?
Article 1239. In obligations to give, payment
made by one who does not have the free
disposal of the thing due and capacity to alienate
it shall not be valid, without prejudice to the
provisions of article 1427 under the Title on
"Natural Obligations." (1160a)
•
The interest referred to must be a pecuniary
or material interest in the fulfillment of the
obligation and not merely social or friendly
interest.
1. Guarantor and a surety – they both
guarantee the fulfillment of the debtor’s
obligation.
2. Accommodation mortgagors – they are liable
to pay the obligation in case the debtor
defaults in the payment of the obligation,
although their liability extend only up to the
value of their properties.
3. Person who are subsidiarily liable to pay the
obligations. (ex. Employers)
Land Bank of the Philippines vs Ong
Rule No. 2: Who may make the payment
Who may compel creditor to accept payment?
•
The creditor cannot be compelled to accept
payment from any person.
Exceptions:
1. The debtor, his heirs, assignees, or duly
authorized representatives.
2. The person authorized by stipulation to make
payment.
3. A third person interested in the fulfilment of
the obligation.
Note: If the creditor refuses to accept payment made
by any of these three persons, such refusal is
without just cause and entitles the debtor to resort to
consignation.
•
The buyer of the debtor’s mortgaged is not a
person interested in the fulfillment of the
debtor’s obligation.
Effects of Payment by Third Person
•
•
•
If the creditor accepts the payment, the same
is valid, at least to the extent in which the
payment may have been beneficial to the
debtor, even if such payment is made by the
third person without the knowledge or
against the will of the debtor.
Article 1236 grants the third person the right
to recover from the debtor, at least up to the
extent in which the payment may have been
beneficial to the debtor.
If the payment by a third person is beneficial
to the debtor, it is clear that only the consent
of the creditor is necessary in order for the
payment to be valid.
Interest in fulfillment of obligation
•
Right to Reimbursement
As to whether or not a third person has the
right to compel the creditor to accept his
When the third person has intention to be
reimbursed
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•
•
•
If the debtor’s obligation is paid by another
person, the third person is generally entitled
to recover from the debtor what he has paid.
If the payment is made with the knowledge
and consent of the debtor, the third person is
entitled not only to recover what he has paid
but also to be subrogated to the rights of the
creditor.
If the payment is made without the
knowledge or against the will of the debtor,
the third person can only recover insofar as
the payment has been beneficial to the
debtor.
Landbank of the Philippines vs Ong
•
Par. 2, Art. 1236 is applicable only if the third
person made the payment on behalf of the
debtor or in order to fulfill the obligation of the
debtor. It does not apply when the third
person made the payment for his own
interest.
Philippine Commercial Industrial Bank vs Court
of Appeals
•
Accion in rem verso – remedy available to a
third person in case he made the payment
without the knowledge or against the will of
the debtor and his payment did not redound
to the debtor’s benefit, such as when the debt
has been previously remitted, paid,
compensated, or prescribed. In such
situation, the third person has no duty to pay
and the creditor has no right to receive it.
When the third person has no intention to be
reimbursed.
•
•
•
•
The law requires the debtor’s consent
because the payment is deemed to be a
donation.
If the debtor did not give his consent to the
intention of the third person to pay his debt
without being reimbursed, no donation is
perfected between them.
The payment made by the third person is
valid as to the creditor who has accepted it.
Since there is no donation if the debtor’s
consent is not obtained, the third person may
•
•
still change his mind and choose to recover
from the debtor.
If the debtor opposed both the donation and
the payment made by the third person, the
latter can recover from the former only
insofar as the payment has been beneficial
to the debtor.
But if the debtor opposed only the donation
but consented to the payment made by the
third person, the third person becomes
entitled to be subrogated to the rights of the
creditor.
Subrogation – the transfer of all the rights of the
creditor to a third person, who thereby acquires all
his rights against the debtor or against the third
persons.
Subrogation vs Reimbursement
Subrogation
Includes not only
the
right
of
reimbursement but,
also, the rights of
action against the
debtor and other
third
persons
whether they are
guarantors
or
mortgagees.
The person who
pays for another
acquires not only
the right to be
reimbursed for what
he has paid but also
the other rights
attached to the
obligation originally
contracted by the
debtor.
Reimbursement
It covers only the
refund
of
the
amount paid.
The person paying
for another has only
a personal action to
recover for what he
has paid without the
rights, powers and
guaranties attached
to
the
original
obligation.
When third person entitled to subrogation
•
If the third person pays the obligation without
the knowledge or against the will of the
debtor, he is not entitled to be subrogated to
the rights of the creditor.
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•
If the payment is made by a third person who
has no interest in the fulfillment of the
obligation, it is the consent of the debtor, not
that of the creditor, which is necessary in
order for the paying third person to acquire
the right to be subrogated to the rights of the
creditor.
of the creditor. Such benefit to the creditor need
not be proved in the following cases:
(1) If after the payment, the third person
acquires the creditor's rights;
(2) If the creditor ratifies the payment to
the third person;
Article 1302. It is presumed that there is legal
subrogation:
(3) If by the creditor's conduct, the debtor
has been led to believe that the third
person had authority to receive the
payment. (1163a)
(1) When a creditor pays another creditor
who is preferred, even without the debtor's
knowledge;
(2) When a third person, not interested in the
obligation, pays with the express or tacit
approval of the debtor;
(3) When, even without the knowledge of the
debtor, a person interested in the fulfillment
of the obligation pays, without prejudice to
the effects of confusion as to the latter's
share. (1210a)
Capacity to make payment
•
•
Where the person paying has no capacity to
make the payment, the creditor cannot be
compelled to accept it; consignation will not
be proper; in case he accepts it, the payment
will not be valid.
In order for the payment to be valid in
obligation to give, Article 1239 of the Civil
Code requires that it must be made by a
person having the free disposal of the thing
due and capacity to alienate it.
Article 1242. Payment made in good faith to any
person in possession of the credit shall release
the debtor. (1164)
Article 1243. Payment made to the creditor by
the debtor after the latter has been judicially
ordered to retain the debt shall not be valid.
(1165)
Rule No. 3 To whom must payment to be made
Proper Person to receive payment
1. The person in whose favor the obligation has
been constituted.
2. His successor in interest.
3. Any person authorized to receive it.
A person authorized to receive it
•
Article 1240. Payment shall be made to the
person in whose favor the obligation has been
constituted, or his successor in interest, or any
person authorized to receive it. (1162a)
Article 1241. Payment to a person who is
incapacitated to administer his property shall be
valid if he has kept the thing delivered, or insofar
as the payment has been beneficial to him.
Payment made to a third person shall also be
valid insofar as it has redounded to the benefit
Means not only a person authorized by the
same creditor, but also a person authorized
by law to do so, such as guardian, executor
or administrator of estate of a deceased, and
assignee or liquidator of a partnership or
corporation, as well as any other who may be
authorized to do so by law.
Effect of payment to wrong person, General rule.
•
•
It does not extinguish the obligation as to the
creditor, if there is no fault or negligence
which can be imputed tot the latter.
Such payment does not prejudice the
creditor nor deprive him of his right to
demand payment.
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•
If it becomes impossible to recover what was
duly paid, any loss resulting therefrom shall
be borne by the deceived debtor.
Exceptions to Rule: When payment to wrong
party considered valid
A. When payment redounds to creditor’s
benefit.
Burden of proving benefit to creditor:
•
•
He was the one who committed the mistake
of paying a wrong party.
He has the burden of proving that his
obligation had been extinguished.
The debtor no longer has the duty to prove the
benefit to the creditor because the law itself
presumes the existence of such benefit:
(1) If after the payment, the third person
acquires the creditor's rights;
(2) If the creditor ratifies the payment to the
third person;
(3) If by the creditor's conduct, the debtor has
been led to believe that the third person had
authority to receive the payment.
B. Payment to Possessor of Credit in Good
Faith.
Example:
A debtor pays possessor of credit i.e., someone who
is not the real creditor but appears, under the
circumstances, to be the real creditor. The law
considers the payment to the possessor of credit as
valid even as against the real creditor taking into
account the good faith of the debtor.
•
The payment must be made to a wrong
person and not someone entitled to the
payment, otherwise the provision will no
longer require good faith on the part of the
payor.
If the promissory note executed by the debtor is
payable to “X” and the latter assigned his credit to
“Y” is a valid payment under Article 1240 of the Civil
Code and not under Article 1242, because “Y” is a
successor-in-interest of the original creditor. If the
promissory note, on the other hand, is payable to the
order of “X” and “X” validly negotiated the instrument
to “Y” through endorsement and delivery, “Y” also
becomes a successor-in-interest entitled to the
payment.
•
If the promissory note executed by the debtor
in favor of his creditor is “payable to bearer,”
the possession of the instruments is
possession of the credit itself.
C. Payment in Good Faith to Assignor of
Credit
Assignment of Credit – An agreement by virtue of
which the owner of the credit by a legal cause – such
as sale, dation in payment or exchange or donation
– and without need of the debtor’s consent, transfers
that credit and its accessory rights to another who
acquires the power to enforce it, to the same extent
as the assignor could have enforced it against the
debtor.
Purpose: if creditor acts in bad faith in assigning
another person to receive payment, the debtor
(having no knowledge of such assignment) pays the
creditor, he shall be released from his obligation
•
•
The debtor’s consent is not essential for the
validity of the assignment.
What the law requires in an assignment of
credit is not the consent of the debtor but
merely notice to him.
Capacity of Payee
If the payment is made to a person incapacitated to
administer his property, the payment is invalid
except in the following situations:
1. If he has kept the thing delivered.
2. If the payment has been beneficial to him.
Example:
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Effect of Court to Retain Debt
•
Payment made to the creditor after the latter
has been judicially ordered to retain the debt
should not be valid.
“After the latter has been judicially ordered”
•
Refers to the date of receipt of the notice of
such judicial order and not on the date of its
issuance.
Article 1244. The debtor of a thing cannot
compel the creditor to receive a different one,
although the latter may be of the same value as,
or more valuable than that which is due.
In obligations to do or not to do, an act or
forbearance cannot be substituted by another
act or forbearance against the obligee's will.
(1166a)
Article 1245. Dation in payment, whereby
property is alienated to the creditor in
satisfaction of a debt in money, shall be
governed by the law of sales. (n)
Article 1246. When the obligation consists in the
delivery of an indeterminate or generic thing,
whose quality and circumstances have not been
stated, the creditor cannot demand a thing of
superior quality. Neither can the debtor deliver a
thing of inferior quality. The purpose of the
obligation and other circumstances shall be
taken into consideration. (1167a)
Article 1247. Unless it is otherwise stipulated,
the extrajudicial expenses required by the
payment shall be for the account of the debtor.
With regard to judicial costs, the Rules of Court
shall govern. (1168a)
Article 1248. Unless there is an express
stipulation to that effect, the creditor cannot be
compelled partially to receive the prestations in
which the obligation consists. Neither may the
debtor be required to make partial payments.
However, when the debt is in part liquidated and
in part unliquidated, the creditor may demand
and the debtor may effect the payment of the
former without waiting for the liquidation of the
latter. (1169a)
Article 1249. The payment of debts in money
shall be made in the currency stipulated, and if it
is not possible to deliver such currency, then in
the currency which is legal tender in the
Philippines.
The delivery of promissory notes payable to
order, or bills of exchange or other mercantile
documents shall produce the effect of payment
only when they have been cashed, or when
through the fault of the creditor they have been
impaired.
In the meantime, the action derived from the
original obligation shall be held in the abeyance.
(1170)
Article 1250. In case an extraordinary inflation or
deflation of the currency stipulated should
supervene, the value of the currency at the time
of the establishment of the obligation shall be
the basis of payment, unless there is an
agreement to the contrary. (n)
Rule No. 4: Identity of Prestation
•
The very due must be delivered or released.
What must be paid
A. In Determinate Obligation
• The debtor cannot compel the creditor to
receive a different one, although the latter
may be of the same value as, or more
valuable than that which is due.
B. In Indeterminate Obligation
• The obligation can be complied with by the
delivery of a thing belonging the said genus
but the following rules must be observed:
1. The delivery must be in accordance with
the quality and circumstances agreed
upon.
2. In the absence of such agreement, the
creditor cannot demand a thing of
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superior quality and neither can the
debtor deliver a thing of inferior quality.
C. In Personal Obligation
• In obligation to do or not to do, an act or
forbearance cannot be substituted by
another act or forbearance against the
creditor’s will.
2. P 100 for denominations of 1-sentimo, 5sentimo, 10-sentimo, and 25-sentimo.
Checks are not legal tender
•
Payment of Debts in Money
Rules if the obligation is to pay a sum of money:
1. The payment shall be made in the currency
stipulated.
2. If it is not possible to deliver the currency
stipulated or in the absence of such
stipulation, the payment must be in the
currency which is legal tender in the
Philippines.
•
•
A check whether a manager’s check or
ordinary check, is not legal tender, and an
offer of a check in payment of a debt is not a
valid tender of payment and may be refused
by the obligee or creditor.
Applicable only to payment of an obligation.
Inapplicable to the exercise of a right.
Fortunado vs Court of Appeals
•
•
Stipulation for Payment in Foreign Currency
Check may be used for the exercise of the
right of redemption, the same being a right
and not an obligation.
The tender of a check is sufficient to compel
redemption but is not in itself a payment that
relieves the redemptioner from his liability to
pay the redemption price.
Before: Any agreement to pay an obligation in a
currency other than the Philippine currency is void;
the most that could be demanded is to pay said
obligation in Philippine Currency to be measured in
the prevailing rate of exchange at the time the
obligation was incurred.
Article 1249 is applicable if:
Now: In case of foreign borrowings and foreign
currency loans, however, prior Bangko Sentral
approval was required. The same statute also
explicitly provided that parties may agree that the
obligation or transaction shall be settled in a
currency other than the Philippine currency at the
time of payment.
Article 1249 is not applicable if:
Currency which is legal tender in the Philippines
If creditor accepts Check as Payment
Legal Tender
Coins issued by the Bangko Sentral ng Pilipinas
have limited legal tender power.
The maximum amount of coins to be considered as
legal tender shall be as follows:
1. P 1,000 for denominations of 1-Piso, 5-Piso,
and 10-Piso coins.
•
•
•
The payment of the price can be demanded
as a legal obligation, the tender of check is
precisely for the purpose of extinguishing an
obligation.
There is no legal obligation to pay the price
because the payor may choose not to pay if
he decides not to exercise his right, i.e., right
of redemption.
He is estopped from later on denouncing the
efficacy of such tender of payment.
A check and similar instruments operate as payment
only when:
1. They have been encashed.
2. They have been impaired through the fault of
the creditor.
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BPI vs Spouses Royeca
•
The obligation to prove that the checks were
not dishonored, but were in fact encashed,
fell upon the debtors who would beneft from
such fact.
Papa vs A.U. Valencia and Co., Inc.
•
•
Even if the creditor had never encashed the
check, his failure to do so for more than 10
years undoubtedly resulted in the impairment
of the check through his unreasonable and
unexplained delay.
It will be held to operate as actual payment
of the debt or obligation for which it was
given.
Extraordinary Inflation and Deflation
Effect of Extraordinary Inflation or Deflation.
•
The value of the currency at the time of the
establishment of the obligation shall be the
basis of the payment.
Requisites for Application of Article 1250
1. That there was an official declaration of
extraordinary inflation and deflation from the
Bangko Sentral ng Pilipinas.
2. That the obligation was contractual in nature.
3. That the parties expressly agreed to consider
the effects of the extraordinary inflation or
deflation.
•
•
Dation in Payment (Dacion en Pago)
•
•
Exception:
•
It is inly when there is an agreement to the
contrary that the extraordinary inflation will
make the value of the currency at the time of
payment, not at the time of the establishment
of the obligation, the basis for payment.
What Constitutes Extraordinary Inflation or
Deflation
Where the obligation to pay arises from law
and not from contractual obligation, such as
in the taking of private property by
Government in the exercise of its power of
eminent domain, Article 1250 of the Civil
Code does not apply.
The provision is also inapplicable to the
obligations arising from tort.
The alienation of property to the creditor in
satisfaction of a debt in money.
The debtor delivers and transmits to the
creditor the former’s ownership over a thing
as an accepted equivalent of the payment or
performance of an outstanding debt.
Dation in Payment vs Objective Novation
•
What actually takes place in decion en pago
is an alternative novation of the obligation
where the thing offered as an accepted
equivalent of the performance of an
obligation is considered as the object of the
contract of the sale, while the debt is
considered as the purchase price.
Inflation – The sharp increase of money or credit, or
both, without a corresponding increase in business
transaction.
•
When there is an increase in the volume of
money and credit relative to available goods,
resulting in a substantial and continuing rise
in the general price level.
Mode of
extinguishment
Dation in
Payment
The original
obligation
of
the
debtor must
be to pay a
sum
in
money.
Objective
Novation
The debt is
not in money
and
the
creditor
accepts the
delivery of
the property
of
the
performance
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The
equivalent
of
the
payment of
an
outstanding
debt must
be
the
alienation
of
a
property.
of
the
obligation.
The
equivalent of
the
performance
of
the
obligation is
not
the
alienation of
property but
some other
prestation.
Requisites for valid decion en pago
Extent of Extinguishment of Debt
•
CESSION
•
Rockville Excel International Exim Corp vs Culla
1. Existence of a money obligation
2. The alienation to the creditor of a property by
the debtor with the consent of the former
3. Satisfaction of the money obligation of the
debtor.
In other cases:
1. There must be the performance of the
prestation in lieu of payment which may
consist in the delivery of a corporeal thing or
a real right or a credit against the third
person.
2. There must be some difference between the
prestation due and that which is given in
substitution.
3. There must be an agreement between the
creditor and debtor that the obligation is
immediately extinguishing by reason of the
performance of a prestation different from
that due.
Property
•
Need not be corporeal thing but may also
include a real right or a credit against a third
person.
Note: if the alienation of property is by ay of security,
and not by way of satisfying the debt, there is no
decion en pago.
Dation in payment extinguishes the
obligation to the extent of the thing delivered,
either as agreed upon by the parties or as
may be proved, unless the parties by
agreement – express or implied, or by their
silence – consider the thing as equivalent to
the obligation, in which case the obligation is
totally extinguished.
•
Payment by cession contemplates of a
situation where the debtor is indebted to
several creditors but he is under the state of
insolvency, or that the debtor is generally
unable to pay his liabilities as they fall due in
the ordinary course of business or has
liabilities that are greater than his assets.
The debtor abandons all his properties or
assets to his creditors so that the latter may
sell the same and apply the proceeds to the
satisfaction of their credits.
Cession vs Dacion En Pago
Cession
Dacion En Pago
Requires plurality of Number of creditors
creditors
is immaterial in
dacion.
Involves
the Involves
specific
universality or the property
or
whole
of
the properties of the
property of the debtor
debtor
The debtor is under The debtor is under
the
state
of the state of financial
insolvency
difficulties because
if the debtor is
insolvent, he is
generally prohibited
from resorting to
dacion en pago as it
would give undue
preferenc
to
a
creditor.
The creditors do not Involves
the
acquire ownership delivery
and
over the properties transmission
of
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of
the
debtor
because
the
transfer
of
possession to them
is only for the
purpose of the sale
of properties.
Payment by cession
releases the debtor
from responsibility
only up to the extent
of the net proceeds
of the sale.
ownership of thing
as an accepted
equivalent of the
performance of the
obligation.
Extinguishes
the
obligation to the
extent of the value
of
the
things
delivered, either as
agreed upon by the
parties or as may be
proved, unless the
parties
by
agreement, express
or implied, or by
their
silence,
consider the thing
as equivalent to the
obligation, in which
case, the obligation
is
totally
extinguished.
Expenses Required by Payment
A. Extrajudicial Expenses
To who shall bear extrajudicial expenses?
1. The parties may freely stipulate as to who
shall bear said expenses.
2. In the absence of the stipulations, said
expenses shall be for the account of the
debtor.
B. Judicial Expenses
•
•
If the expenses required by the
payment are no longer connected
with, or arising from, the normal
fulfillment of the obligation, but as a
consequence
of
the
judicial
proceeding, they are referred to as
judicial expenses.
As to judicial expenses or costs, the
same shall be governed by the Rules
of Court.
Article 1251. Payment shall be made in the place
designated in the obligation.
There being no express stipulation and if the
undertaking is to deliver a determinate thing, the
payment shall be made wherever the thing might
be at the moment the obligation was constituted.
In any other case the place of payment shall be
the domicile of the debtor.
If the debtor changes his domicile in bad faith or
after he has incurred in delay, the additional
expenses shall be borne by him.
These provisions are without prejudice to venue
under the Rules of Court. (1171a)
Rule No. 5: Proper Place of Payment
•
The creditor cannot be compelled to accept
the payment if the same is made in a place
other than the proper place of payment.
Rules in determining proper place of payment:
1. If the place of payment is designated in the
obligation, the payment shall be made in the
said place.
2. In the absence of stipulation and the
obligation is to deliver a determinate thing,
the payment shall be made in the place
where the thing might be at the time of the
constitution of the obligation.
3. In any other cases, the place shall be the
domicile of the debtor.
•
•
Whether the change in the domicile is done
in good faith or in bad faith, the place of
payment shall still be the debtor’s new
domicile.
If he debtor changes his domicile in bad faith
or after he was incurred in delay, the
additional expenses that the creditor may
incur in going to the debtor’s new domicile
shall be borne by the debtor.
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SUBSECTION 1. Application of Payments
Article 1252. He who has various debts of the
same kind in favor of one and the same creditor,
may declare at the time of making the payment,
to which of them the same must be applied.
Unless the parties so stipulate, or when the
application of payment is made by the party for
whose benefit the term has been constituted,
application shall not be made as to debts which
are not yet due.
If the debtor accepts from the creditor a receipt
in which an application of the payment is made,
the former cannot complain of the same, unless
there is a cause for invalidating the contract.
(1172a)
Application of Payments
Application of payment is applicable only to debts
which are already due.
Exceptions:
1. When there is a stipulation allowing such
application.
2. When the application is made by the party for
whose benefit the term has been constituted.
Who has right to make application of payment?
A. Right Initially to Debtor
Special forms of payment under the Civil Code:
1.
2.
3.
4.
both contingent and singular; his liability is
confined to such obligation, and he is entitled
to have all payments made applied
exclusively to said application and to no
other.
Dation in Payment (Art. 1245)
Payment by cession (Art. 1255)
Application of payments (Arts. 1252-1254)
Tender of payment and consignation (Arts.
1256-1261)
Basis: First sentence of Article 1252 of the Civil
Code.
B. Debtor Rights is not Mandatory
•
The debtor’s right to apply payment has been
considered merely directory, and not
mandatory.
Article 1252 gives right to the debtor to
choose to which several obligations to apply
a particular payment that he tenders to the
creditor.
Granted in the same provision is the right of
the creditor to apply such payment in case
the debtor fails to direct its application.
and
•
Application of Payment – the designation of the
debt to which should be applied the payment made
by a debtor who owes several debts to the same
creditor.
•
Requisites:
C. Creditor may propose application
Concept of
Requisites:
Application
of
Payments
1. There be several debts.
2. Those debts are owed by one debtor to one
creditor.
3. All debts must be of the same kind.
4. All debts must be due.
5. The payment made is not sufficient to cover
all debts.
•
This concept applies only to a “person owing
several debts of the same kind of a single
creditor,” it cannot be made applicable to a
person whose obligation as a mere surety is
•
•
•
The debtor is required to make the
application at the time of the payment.
Should the debtor fail to exercise such right
at the time of the payment, the same is
extinguished.
Thereafter, the creditor acquires the right to
propose an application of payment by issuing
receipt in which an application of payment is
made, which proposal does not bind the
debtor unless he accepts the same.
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Where the debtor has not expressly elected any
particular obligation to which the payment should
be applied, the application by the creditor, in
order to be valid and lawful, depends:
1. Upon his expressing such application in the
corresponding receipt.
2. Upon the debtor’s assent, shown by his
acceptance of the receipt without protest.
D. Limitations upon right to apply payment
1. The debtor cannot make an application of
payment that will violate the agreement.
2. The debtor cannot make an application of
payment that will violate the rule in Article
1248 of the Civil Code.
3. The debtor cannot make an application of
payment in violation of the rule in Article 1253
of the Civil Code.
Relevant
on
questions
pertaining to the
effects and nature
of the obligations in
general.
The
presumption
does not resolve the
question of whether
the
amount
received by the
creditor
is
a
payment for the
principal or interest.
The
amount
received by the
creditor
is
the
payment for the
principal.
Article 1253. If the debt produces interest,
payment of the principal shall not be deemed to
have been made until the interests have been
covered. (1173)
Presumption on Payment of Interest
A. When debt produces interest
The rule in this article that payments shall first be
applied to the interest and not to the principal shall
govern if two facts exists:
1. The debt produces interest
2. The principal remains unpaid
B. Kinds of Interest
1. Stipulated monetary interest
2. Interest for default (compensatory)
C. Article 1176, in relation to Article 1253,
Civil Code
Article 1176
Article 1253
Chapter 1 (Nature Subsection
1
and
Effect
of (Application
of
Obligation)
Payments) Chapter
Resolves the doubt
by presuming that
the creditor waives
the payment of
interest because he
accepts
payment
for the principal
without
any
reservation.
IV (Extinguishment
of Obligations)
Pertinent
on
questions involving
application
of
payments
and
extinguishment of
obligations.
The
presumption
resolves
doubts
involving payment
of interest-bearing
debts.
The doubt pertains
to the application of
payment;
the
uncertainty is on
whether the amount
received by the
creditor is payment
for the principal or
the interest.
Resolves the doubt
by
providing
a
hierarchy: payment
first be applied to
the
interest;
payment shall the
be applied to the
principal only after
the interest has
been fully-paid.
Note: When the doubt pertains to the application of
the payments, Article 1253 shall apply. Only when
there is a waiver of interest shall Article 1176
become relevant.
Swagman Hotels and Travel Inc. vs Court of
Appeals
The creditors were deemed to have waived the
payment of interest because they issued receipts
expressly referring to the payment of the principal
without any reservation with respect to the interest.
As a result, the interests due were deemed waived.
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Article 1254. When the payment cannot be
applied in accordance with the preceding rules,
or if application cannot be inferred from other
circumstances, the debt which is most onerous
to the debtor, among those due, shall be deemed
to have been satisfied.
If the debts due are of the same nature and
burden, the payment shall be applied to all of
them proportionately. (1174a)
Application of Payment by Operation of Law
A. When no application was made by parties
In the absence of express application by the debtor,
or of any receipt issued by the creditor specifying a
particular imputation of the payment:
1. The debt which is more onerous to the
debtor, among those due, shall be deemed
to have been satisfied.
2. If the debts due are of the same nature and
burden, the payment should be applied to all
of them proportionately.
B. Debt more onerous to debtor
1. Debts covered by guaranty are deemed
more onerous to the debtor than the simple
obligations.
2. When a person has two debts, one as sole
debtor and another as solidary co-debtor his
more onerous obligation to which first
payments are to be applied is the debt as
sole debt.
3. Where there are various debts, the oldest
ones are more burdensome, and payments
should be applied to them before the more
recent ones.
4. Where one debt bears interest and the other
does not, even if the latter should be the
older generation, the former is considered as
more onerous. Where both debts bear
interest, the one with the higher rate is more
burdensome.
5. Debts with a penal clause are more onerous
than those without one.
6. Where the debtor had entered into various
contracts with the creditor, including a lease
contract over a wet-market property where
he invested P35 Million and sale of 8 heavy
equipment, the lease over the wet market is
more onerous among all obligations because
the wet market is a going concern and the
debtor would stand to lose more if the lease
would be rescinded, than if the contract of
sale of heavy equipment would not proceed.
SUBSECTION 2. Payment by Cession
Article 1255. The debtor may cede or assign his
property to his creditors in payment of his debts.
This cession, unless there is stipulation to the
contrary, shall only release the debtor from
responsibility for the net proceeds of the thing
assigned. The agreements which, on the effect
of the cession, are made between the debtor and
his creditors shall be governed by special laws.
(1175a)
(See notes on Cession)
SUBSECTION
Consignation
3.
Tender
of
Payment
and
Article 1256. If the creditor to whom tender of
payment has been made refuses without just
cause to accept it, the debtor shall be released
from responsibility by the consignation of the
thing or sum due.
Consignation alone shall produce the same
effect in the following cases:
(1) When the creditor is absent or
unknown, or does not appear at the place
of payment;
(2) When he is incapacitated to receive
the payment at the time it is due;
(3) When, without just cause, he refuses
to give a receipt;
(4) When two or more persons claim the
same right to collect;
(5) When the title of the obligation has
been lost. (1176a)
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Tender of Payment and Consignation
Effect of Non-Acceptance of Payment
•
•
•
•
The creditor’s unjust refusal to accept
payment does not produce the effect of
payment that will extinguish the debtor’s
obligation.
A refusal without just cause is not equivalent
to payment.
To have the effect of payment and the
consequent extinguishment of the obligation
to pay, the law requires the companion acts
of tender of payment and consignation.
Tender of payment produces no effect;
rather, tender of payment must be followed
by a valid consignation in order to produce
the effect of payment and extinguish an
obligation.
State Investment House Inc. vs Court of Appeals
•
•
•
The debtor is exempt from paying
compensatory interest only but he remains
liable to pay the monetary interest.
If the tender of payment is valid and the
creditor refuses to accept the payment, the
debtor is not guilty of delay.
With respect to monetary interest, the same
accrues until actual payment of the principal
amount is effected.
Llamas vs Abaya
•
A written tender of payment alone, without
consignation in court of the sum due, does
not suspend the accruing of regular or
monetary interest.
Bonrostro vs Luna
Where the creditor unjustly refuses to accept
payment, the debtor desirous of being released from
his obligation must comply with two conditions:
1. Tender of payment
2. Consignation of the sum due.
•
The debtors are liable for interest on the
installments due from the date of default until
fully paid.
•
With respect to the accrual of the regular or
monetary interest until actual payment of the
principal amount is effected notwithstanding
the existence of a valid tender of payment,
applies only when the tender of payment is
not followed by a valid consignation.
•
When the tender of payment is coupled with
consignation, such that the thing is deposited
in court or placed at the disposal of the
judicial authority, justice and equity demands
that the debtor be freed from obligations to
pay interest on the outstanding amount from
the time the unjust refusal took place since
he would not have been liable for any interest
from the time tender of payment was made if
the payment had only been accepted.
What is the effect of a valid tender of payment which
the creditors refuse to accept?
PNB vs Relativo
•
The effect of a valid tender of payment is
merely to exempt the debtor from payment of
interest and/or damages.
Two kinds of interest:
1. Monetary Interest – the compensation set
by the parties for the use or forbearance of
money.
2. Compensatory Interest – the penalty or
indemnity for damages imposed by law or by
the courts.
Is the debtor exempt from paying both kinds of
interest by reason of his valid tender of payment?
Biesterbos vs Court of Appeals
•
Equity and justice would demand that such
an act, placing at the disposal of respondent
(creditor) the deposited sum, should have the
effect of suspending the running of the
interest on said outstanding amount.
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Reference: Rabuya 2019
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Suyat, Tang, Valenzuela – 1C – 2020-2021
Tender of Payment
•
•
•
•
The definitive act of offering the creditor what
is due him or her, together with the demand
that the creditor accepts the same.
For valid tender of payment, it is necessary
that there be a fusion of intent, ability and
capability to make good such offer, which
must be absolute and must cover the amount
due.
Mere sending of letter by the vendee
expressing the intention to pay without the
accompanying payment was not considered
a valid tender of payment.
Tender of payment presupposes not only
that the obligor is able, ready, and willing, but
more so, in the act of performing his
obligation.
Ab posse ad actu non vale illatio
•
A proof that an act could have been done is
no proof that it was actually done.
Consignation
•
•
The remedy for an unjust refusal to accept
was actually done.
The act of depositing the thing due with the
court or judicial authorities whenever the
creditor cannot accept or refuses to accept
payment and it generally requires a prior
tender of payment.
Rationale: to avoid the performance of an obligation
becoming more onerous to the debtor by reason of
causes not imputable to him.
Tender of Payment vs Consignation
•
•
•
Tender is the antecedent of consignation
An act preparatory to the consignation, which
is the principal, and from which are derived
the immediate consequences which the
debtor desires or seeks to obtain.
Tender of payment may be extrajudicial,
while consignation is necessarily judicial.
•
The priority of tender or payment is to
attempt to make a private settlement before
proceeding
to
the
solemnities
of
consignation.
Note: Tender and consignation, where validly made,
produces the effect of payment and extinguishes the
obligation.
Article 1257. In order that the consignation of the
thing due may release the obligor, it must first be
announced to the persons interested in the
fulfillment of the obligation.
The consignation shall be ineffectual if it is not
made strictly in consonance with the provisions
which regulate payment. (1177)
Article 1258. Consignation shall be made by
depositing the things due at the disposal of
judicial authority, before whom the tender of
payment shall be proved, in a proper case, and
the announcement of the consignation in other
cases.
The consignation having been made, the
interested parties shall also be notified thereof.
(1178)
Requisites for valid consignation:
1. There was a debt due
2. The consignation of the obligation has been
made because the creditor to whom the
tender of payment was made refused to
accept it, or because he was absent, or
because several persons claimed to be
entitled to receive the amount due or
because the title of the obligation has been
lost.
3. Previous notice of the consignation has been
given to the person interested in the
performance of the obligation.
4. After the consignation has been made, the
person interested was notified thereof.
Note: Failure in any of these requirements is enough
to render a consignation ineffective.
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Compliance with the requisites mandatory
Soco vs Militante:
•
•
•
Failure to comply strictly with any of the
requirements will render the consignation
void.
The essential requisites of a valid
consignation must be complied with fully and
strictly in accordance with the law.
Substantial compliance is not enough.
Requisite No. 1: There must be a debt due
•
•
Where no debt is due and owing,
consignation is not proper.
Consignation is not required to preserve the
right of repurchase as a mere tender of
payment is enough is made on time as a
basis for an action to compel the vendee a
retro to resell the property.
Consignation in Article 1256
•
•
•
•
Refers to consignation as one of the
means for the payment or discharge of a
“debt”.
It does not apply when the lessee merely
exercised the option to buy the leased
premises because here the lessee was
not indebted to the lessor for the price of
the leased premises.
Consignation is likewise not required in
order to preserve the right to redeem
because the right to redeem is a right, not
an obligation.
In cases which involve the performance
of an obligation and not merely the
exercise of a privilege or right, payment
maybe effected not by mere tender alone
but by both tender and consignation.
Requisite No. 2: Unjust Refusal to Accept
Generally, requires prior valid tender of payment
•
In the absence of a valid prior tender of
payment, the consignation is invalid.
1. When the creditor is absent or unknown, or
does not appear at the place of payment;
2. When he is incapacitated to receive the
payment at the time it is due;
3. When, without just cause, he refuses to give
a receipt;
4. When two or more persons claim the same
right to collect;
5. When the title of the obligation has been lost.
(Article 1256)
Example:
Pasricha vs Don Luis Dison Realty, Inc.
•
•
The lessees failed to pay the rentals because
they did not know to whom payment should
be made
The Court held that such failure to pay was
not justified because the lessees could have
availed of the remedy of consignation.
Refusal to accept payment is without just cause
•
•
•
For a consignation to be necessary, the
creditor must have refused, without just
cause, to accept the debtor’s payment.
If the payment was accepted by the creditor,
there is no need for consignation.
If a creditor refuses with reason to accept a
tender of payment made by the debtor and
the former makes a consignation of the thing
due, the debtor will not be relived from his
liability by the consignation and the loss or
deterioration in value of the thing due or
deposited shall be borne by the debtor.
Example:
A creditor may refuse to accept the tender of
payment if the tender is made before the obligation
of the debtor becomes due, or the thing rendered is
different in specie or amount from what is due, or the
obligation is not payable at the time the tender of
payment was made.
When is the creditor justified in refusing to accept the
tender of payment?
Instances where prior tender of payment is excused:
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•
If the tender of payment made by the debtor
is not valid, the creditor has just cause for
refusing to accept the same.
Requisite Nos. 3 and 5: Two Notices Required
1. To be given prior to the deposit of the
payment in court (or prior to consignation)
2. To be issued after the deposit has been
made (or after the consignation)
Requirement of Prior Notice
Purpose: In order to give the creditor an opportunity
to reconsider his unjustified refusal and to accept
payment thereby avoiding consignation and the
subsequent litigation.
•
The prior notice requirement is held to be
satisfied when the debtor informed the
creditor in a letter that should the latter fail to
accept payment, the former would consign
the amount.
Article 1259. The expenses of consignation,
when properly made, shall be charged against
the creditor. (1179)
Article 1260. Once the consignation has been
duly made, the debtor may ask the judge to order
the cancellation of the obligation.
Before the creditor has accepted the
consignation, or before a judicial declaration
that the consignation has been properly made,
the debtor may withdraw the thing or the sum
deposited, allowing the obligation to remain in
force. (1180)
Article 1261. If, the consignation having been
made, the creditor should authorize the debtor to
withdraw the same, he shall lose every
preference which he may have over the thing.
The co-debtors, guarantors and sureties shall be
released. (1181a)
Effects of Consignation
Past Notice Requirement
Right of Debtor to Withdraw Deposit
Purpose: To enable the creditor to withdraw the
goods or money deposited. It would be unjust to
make him suffer the risk of any deterioration,
depreciation or loss of such goods or money by
reason of ack of knowledge of the consignation.
The debtor may withdraw the thing or amount
deposited on consignation in the following instances:
All interested Persons Must Be Notified
•
Failure to notify the persons interested in the
performance of the obligation will render the
consignation void.
1. Before the creditor has accepted the
consignation
2. Before a judicial declaration that the
consignation has been properly made.
•
Requisite No. 4: Deposit of Payment in Court
•
•
•
Consignation shall be made by depositing
the thing or things due at the disposal of
judicial authority.
It clearly precludes consignation in venues
other than the courts.
Elsewhere, what may be made is a valid
tender of payment, but not consignation.
•
•
After the creditor has accepted the
consignation or after the court has declared
the consignation to be properly made, the
debtor can no longer withdraw the thing or
amount deposited without the authorization
of the creditor.
After the creditor has accepted the
consignation or after the court has declared
the consignation to be properly declared, the
debtor may not be allowed to withdraw the
thing or amount deposited if he authorized by
the creditor.
Such authorization does not result in the
extinguishment of the debtor’s obligation
because the obligation has not yet been paid
but the co-debtors, guarantors and sureties
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are considered released from the obligation.
The creditor will likewise lose his right over
the thing deposited.
•
Right of Creditor to Withdraw Deposit
•
Upon being notified that the consignation has
been made, the creditor may choose to
accept the same unconditionally and without
reservations, in which case the obligation is
considered
extinguished
and
such
acceptance will prevent the debtor from
withdrawing the thing or amount deposited.
May the creditor be allowed to withdraw the amount
deposited with reservation as to the validity of the
consignation?
•
•
•
The Court ruled that the same is legally
permissible and does not result in the waiver
of the claims which the creditor reserved
against his debtor.
Sensu Contrario – when the creditor’s
acceptance of the money consigned is
conditional and with reservations, he is not
deemed to have waived the claims he
reserved against his debtor.
As respondent-creditor’s acceptance of the
amount consigned was with reservations, it
did not completely extinguish the entire
indebtedness of the petitioner-debtor.
Retroactive Effect of Consignation
•
The consignation has a retroactive effect,
and the payment is deemed to have been
made at the time of the deposit of the thing in
court or when it was placed at the disposal of
the judicial authority.
Rationale: to avoid making the performance of an
obligation more onerous to the debtor by reason of
causes not imputable to him.
Expenses of Consignation
•
The same shall be charged against the
creditor when the consignation is properly
made, such as when the creditor accepts the
same without objections, or, if he objects, the
court declares that it has been validly made
in accordance with law.
If the consignation is declared invalid, such
expenses shall be for the account of the
debtor.
SECTION 2
Loss of the Thing Due
Article 1262. An obligation which consists in the
delivery of a determinate thing shall be
extinguished if it should be lost or destroyed
without the fault of the debtor, and before he has
incurred in delay.
When by law or stipulation, the obligor is liable
even for fortuitous events, the loss of the thing
does not extinguish the obligation, and he shall
be responsible for damages. The same rule
applies when the nature of the obligation
requires the assumption of risk. (1182a)
Article 1263. In an obligation to deliver a generic
thing, the loss or destruction of anything of the
same kind does not extinguish the obligation. (n)
Article 1264. The courts shall determine
whether, under the circumstances, the partial
loss of the object of the obligation is so
important as to extinguish the obligation. (n)
Article 1265. Whenever the thing is lost in the
possession of the debtor, it shall be presumed
that the loss was due to his fault, unless there is
proof to the contrary, and without prejudice to
the provisions of article 1165. This presumption
does not apply in case of earthquake, flood,
storm, or other natural calamity. (1183a)
Concept of Loss as Mode of Extinguishment of
Obligation
•
•
This mode of extinguishment is not limited to
obligations to give.
It also covers obligations to do or not to do.
Concept of Loss in Obligations to Give
•
This mode of extinguishment is applicable
only to obligations to deliver a determinate
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thing and does not apply to obligations to
deliver a generic thing.
Rule in Determinate Obligation
Definition of Loss
Basis: the genus of a thing can never be perished
(Genus nunquan perit)
•
Determinate thing vs Generic thing
Determinate Thing
When
it
is
particularly
designated
or
physically
segregated from all
others of the same
class.
Generic Thing
When
it
is
designated merely
by its class or genus
without
any
particular
designation
or
physical
segregation from all
others of the same
class.
A
concrete, Its determination is
particularized
confined to that of
object, indicated by its nature, to the
its own individuality. genus (genero) to
which it pertains,
such as a horse, a
chair.
The thing is lost when it perishes, or goes out
of commerce, or disappears in such a way
that its existence is unknown or it cannot be
recovered, Article 1189 (2).
“perishes” – when it dies, in the case of animate
objects; when it rots in the case of perishable
objects.
“goes out of commerce” – when its possession
has become unlawful, as when it has been used as
an instrument in the commission of the crime, or it
can no longer be the object of contracts, as where
the land which is the subject matter of the obligation
to give has been expropriated for public use.
“disappears in such a way that its existence is
unknown” – as when, for example, in the case of a
wild animal, it has escaped and regained its freedom
and cannot be found.
“cannot be recovered” – when for instance in the
case of a ship, it sunk in the middle of the sea.
Rule in Generic Obligations
•
•
•
•
In an obligation to deliver a generic thing, the
loss or destruction of anything of the same
kind does not extinguished the obligation.
The loss or destruction of anything of the
same kind even without the debtor’s fault and
before he incurred in delay will not have the
effect of extinguishing the obligation.
Basis: Genus nunquan perit
Example:
Where the obligation consists in the payment of
money, the failure of the debtor to make the payment
even by reason of a fortuitous event shall not relieve
him of his liability.
Reason:
This is because an obligation to pay money is
generic; therefore, it is not excused by fortuitous loss
of any specific property of the debtor.
In Article 1262, the loss of the determinate
thing subject matter of the obligation to give
necessarily occurs after the constitution of
the obligation because the law speaks of
extinguishment of the obligation as a
consequence.
Effects of Loss of Determinate Thing Due
Requisites in order that the loss will extinguish the
obligation and exempt the obligor from any further
liability:
1. The lost occurs without the fault of the
debtor.
2. The loss occurs prior to the debtor incurring
the delay.
3. There is no law or stipulation holding the
debtor liable even in the case of fortuitous
event, or that the nature of the obligation
does not require the assumption of risk.
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If the foregoing requisites are not present, the
debtor’s obligation to deliver a determinate thing is
not considered extinguished. Instead, the obligation
is converted into payment of damages.
•
•
In order for the obligation to extinguished by
reason of the loss of the determinate thing,
what is essential is that the loss be without
the fault of the debtor.
To be exempt from liability by reason of
fortuitous event, it is also essential that the
debtor must be free from any participation in,
or aggravation of the injury to the creditor.
The debtor shall remain liable even if the loss is by
reason of fortuitous event in the following instances:
1. When the law expressly provides for liability
even for fortuitous event.
2. When the stipulation of the parties expressly
provides for liability for fortuitous event.
3. When the nature of the obligation requires
the assumption of risk.
Example:
One of said instances is when the debtor delays or
has promised to deliver the same thing to two or
more persons who do not have the same interest.
Applicability
Obligations
of
the
Rule
to
Reciprocal
Where both parties are obligated (reciprocally or not)
and the obligation of one is extinguished by
fortuitous event, does the other party remain bound
or is he released?
Ans: The extinguishment of the obligation due to
loss of the thing or impossibility of performance
effects both the debtor and creditor; the entire
juridical relation is extinguished, so that if the creditor
has himself an obligation, this is likewise
extinguished.
Chrysler Philippine Corporation vs Court of
Appeals
•
The Court held that before delivery, the risk
of loss is borne by the seller who is still the
owner, under the principle of res perit
domino.
Effects of Partial Loss
•
The loss is due to the debtor’s fault when the
determinate thing due is lost in his
possession.
Reason: Since he who has the custody and care of
the thing can easily explain the circumstances of the
loss.
The presumption does not apply in the following
instances:
1. When there is proof to the contrary.
2. When the loss occurs during an earthquake,
flood, storm or other natural calamity.
Example:
When the owner left his vehicle in a repair shop and
the same was allegedly carnapped while in the
possession of the repair shop, the owner of the
repair shop was held liable for such loss because he
failed to rebut the presumption and since the case
does not fall under the exceptions. (Co vs Ca)
Article 1266. The debtor in obligations to do shall
also be released when the prestation becomes
legally or physically impossible without the fault
of the obligor. (1184a)
Article 1267. When the service has become so
difficult as to be manifestly beyond the
contemplation of the parties, the obligor may
also be released therefrom, in whole or in part.
(n)
Basis: principle of res perit domino – the risk
pertains to the debtor, which means that if an
obligation is extinguished by the loss of the thing or
impossibility of performance through fortuitous
events, the counter-prestation is also extinguished.
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Concept of Loss in Obligations to Do
•
Impossibility of Performance
•
The article is applicable to obligations “to do”,
and not to obligations “to give.”
•
Obligation to do – includes all kinds of work
or service.
Obligation to give – a prestation which
consists in the delivery of a movable or an
immovable thing in order to create a real
right, or for the use of the recipient, or for its
simple possession, or in order to return it to
its owner.
•
•
The impossibility referred to is either a
physical or legal impossibility.
Physical Impossibility
•
•
When the act by reason of its nature cannot
be accomplished.
May also proceed principally from the death
of the obligor, in obligations of a most
personal character to him, and in those which
have a similar character in respect to the
creditor, for having to be done for his
exclusive benefit, when it is he who dies,
since in the former and in the latter case the
obligation and the right, respectively,
because they are impossible of transmission,
are extinguished.
Example: to install a motor in a ship that is lost after
the perfection of the contract but before such
installation.
Legal Impossibility
•
Doctrine of Unforeseen Events
•
Impossibility of performance – one which
supervenes after the constitution of the obligation or
during its performance.
When the act by reason of a subsequent law
is prohibited.
Example: when the contract involves child labor and
a law is subsequently passed prohibiting the same.
The impossibility of performance releases
the debtor from his obligation provided that
there is not fault on the part of the debtor.
When the service has become so difficult as
to be manifestly beyond the contemplation of
the parties, the oblig9or may also be
released therefrom, in whole or in part.
Rationale: the intention of the parties should govern
and if it appears that the service turns out to be so
difficult as to have been beyond their contemplation,
it would be doing violence to that intention to hold the
obligor still responsible.
Basis: Rebus sic stantibus – the parties stipulate
in the light of certain prevailing conditions, and once
these conditions cease to exist the contract also
ceases to exist.
Philippine National Construction Corp. vs Court
of Appeals and So vs Food Fest Land, Inc.
•
•
The Court explained that Article 1267 is not
absolute application of the principle of rebus
sic stantibus, which would endanger the
security of contractual relations.
The parties to the contract must be
presumed to have assumed the risks of
unfavorable developments.
“Service” – should be understood as referring to the
“performance” of the obligation.
Tagaytay Realty, Inc vs Gacutan
In order for Article 1267 to apply, the following
conditions should concur:
1. The event or change n circumstances could
not have been foreseen at the time of the
execution of the contract.
2. It makes the performance of the contract
extremely difficult but not impossible.
3. The contract is for a future prestation.
Note: The doctrine of unforeseen events should
apply only to risks that are manifestly beyond the
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contemplation of the parties, or to those absolutely
exceptional changes of circumstances, where equity
demands assistance for the debtor. It does not apply
to risks that are already known or should have been
known, to the parties when they entered into their
contractual relations.
Article 1269. The obligation having been
extinguished by the loss of the thing, the creditor
shall have all the rights of action which the
debtor may have against third persons by reason
of the loss. (1186)
Right of Creditor to exercise all rights of debtor.
Article 1268. When the debt of a thing certain and
determinate proceeds from a criminal offense,
the debtor shall not be exempted from the
payment of its price, whatever may be the cause
for the loss, unless the thing having been offered
by him to the person who should receive it, the
latter refused without justification to accept it.
(1185)
•
•
Obligation to deliver determinate thing arising
from crime
•
•
When the obligation to deliver a determinate
thing arises from a crime, the loss of the thing
due for any cause, does not extinguish the
obligation.
The obligation of the debtor is converted into
payment of the value of the thing lost, even
when the loss thereof is caused by a
fortuitous event.
Exception: if the nature of the determinate thing
was unjustly refused by the person who should
receive it and the thing is thereafter lost through
fortuitous event without the fault of the debtor, and
before he has incurred in delay, the obligation is
deemed extinguished.
Two alternative remedies of the debtor:
1. To consign the thing and thereby relieve
himself from any further responsibility for
such thing.
2. To just keep the thing in his possession, with
the obligation to exercise due diligence,
subject to the general rules of obligations, but
no longer to the special liability imposed by
the above article.
•
•
When the thing is lost by reason of an act of
the third person and without the fault of the
debtor, and before he has incurred in delay,
the obligation is extinguished.
However, it is only the creditor who is granted
the right of action to claim indemnity from the
third person, or otherwise the debtor would
unjustly be enriched by such loss of his
obligation is extinguished and, at the same
time, he can still recover indemnity from
another.
This includes the indemnity which the debtor
might have already received by reason of the
loss.
It is also applicable to money obtained from
the insurance of the thing lost or destroyed.
SECTION 3
Condonation or Remission of the Debt
Article 1270. Condonation or remission is
essentially gratuitous, and requires the
acceptance by the obligor. It may be made
expressly or impliedly.
One and the other kind shall be subject to the
rules which govern inofficious donations.
Express condonation shall, furthermore, comply
with the forms of donation. (1187)
Article 1271. The delivery of a private document
evidencing a credit, made voluntarily by the
creditor to the debtor, implies the renunciation
of the action which the former had against the
latter.
If in order to nullify this waiver it should be
claimed to be inofficious, the debtor and his
heirs may uphold it by proving that the delivery
of the document was made in virtue of payment
of the debt. (1188)
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Article 1272. Whenever the private document in
which the debt appears is found in the
possession of the debtor, it shall be presumed
that the creditor delivered it voluntarily, unless
the contrary is proved. (1189)
Article 1273. The renunciation of the principal
debt shall extinguish the accessory obligations;
but the waiver of the latter shall leave the former
in force. (1190)
2.
3.
Article 1274. It is presumed that the accessory
obligation of pledge has been remitted when the
thing pledged, after its delivery to the creditor, is
found in the possession of the debtor, or of a
third person who owns the thing. (1191a)
Condonation and Remission of Debt
Remission – is an act of liberality by which the
creditor, who receives no price or equivalent thereof,
releases the debtor from the obligation, either in
whole or in part, upon the latter’s consent.
•
•
•
If an equivalent is given, it ceases to be a
remission and becomes either dation in
payment, if the creditor receives a thing
different from that stipulated.
Novation, if the object or principal condition
is changed.
Compromised, when there is an exchange of
concessions to avoid a litigation or to put an
end to one already commenced.
Act inter vivos – if the remission is intended to be
effective during the creditor’s lifetime. The same is
essentially a donation.
Mortis causa – if the intention is for the remission to
be effective only after the creditor’s death and by
reason of his death. The same is essentially a legacy
of credit.
Reason: one cannot simply impose his own
generosity upon another person.
Requisites:
1. The parties must have the requisite
capacity.
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4.
5.
a. Inter vivos – the parties must have
the capacity to make and accept the
donations.
b. Mortis causa – the parties must have
the capacity to make a will and to
inherit.
It must be gratuitous.
• Otherwise, it will become either
dation in payment, novation, or
compromise.
It must be accepted by the debtor.
• Whether done through and act inter
vivos or mortis causa.
It must not amount to an inofficious
donation or legacy.
If it is made expressly, it must comply
with the forms of donation, if done
through an act inter vivos; or with the
formalities of a will, if done through an act
mortis causa.
Kinds of remission
A. As to form:
1. Express – where consent is given
explicitly and it is required to be made in
a certain form.
2. Implied – where consent can be inferred
form the acts of the parties.
B. As to effectivity:
1. Inter Vivos – when it takes effect during
the lifetime of the creditor.
2. Mortis causa – when it takes effect after
the death of the creditor.
C. As to extent:
1. Total – if the remission involves the
entire obligation.
2. Partial – which may either be a remission
of the part of the amount, a part of the
obligation (such as the accessory
obligation of pledge), or an aspect of the
obligation (such as solidarity).
Requirement of Acceptance and Formalities
A. Debtor’s consent is essential
Reason: a person could not be allowed to impose
his own generosity upon another.
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•
•
If the consent of the debtor is not
obtained, or when the express
remission does not comply with the
required formalities, the creditor may
not simply consider the obligation as
already extinguished by virtue of his
unilateral renunciation of the credit.
If the creditor unilaterally renounces
his credit and fails to demand the
performance of the obligation within
the allowable prescriptive period, the
obligation is extinguished by reason
of extinctive prescription or statute of
limitations and not by reason of the
creditor’s unilateral action.
Note: if the private document evidencing the credit
is found in the possession of the debtor, it gives rise
to a presumption of remission of the debt.
•
•
Burden of proof: Debtor
•
Formalities Required
•
If the remission is intended to be effective
during the lifetime of the creditor, or through
an act inter vivos, the same is essentially a
donation and governed by the law on
ordinary donation.
Example:
1. If the obligation to be remitted involves a
delivery of a personal property, the value of
which exceeds 5, 000 pesos, both the
remission and its acceptance must be in
writing, otherwise the remission is not valid.
2. If the obligation to be remitted involves the
delivery of a real property, both the remission
and its acceptance must be embodied in a
public instrument, otherwise the remission is
invalid.
Presumption of Remission
•
•
Under Article 1272 – if the private document
evidencing the credit is found in the
possession of the debtor, it will give a rise to
a presumption that the creditor voluntarily
delivered such document to the debtor.
Under Article 1271 – the voluntary delivery of
such document by the creditor to the debtor,
in turn, gives rise to a presumption of
remission of the debt.
Applicable only to a private document
evidencing the credit.
The creditor’s possession of the evidence of
debt is proof that the debt has not been
discharged by payment and that promissory
note in the hands of the creditor is a proof of
indebtedness rather than proof of payment.
If the private document evidencing the credit
is already in the possession of the debtor, the
obligation is presumed extinguished by virtue
of remission.
Burden of proof: creditor
Effect of remission of principal or accessory
obligation
•
The remission of the principal debt also
results in the extinguishment of the
accessory obligations; but the remission of
the latter does not affect the former.
Reason: the principal obligation may exist without
any accessory obligation; but the latter cannot
possibly exist without a principal obligation to which
it supports.
Example:
In a contract of loan, if the loan is secured by a
pledge of a thing belonging to the debtor, the
remission of the loan (the principal obligation) will
result in the extinguishment of the pledge (accessory
obligation) but the remission of the latter shall leave
the former in force.
Accessory Obligation of Pledge
Article 1274 provides for a presumption of the
remission of the pledge when the thing pledged,
after its delivery to the creditor, is found in the
possession of the debtor, or of a third person who
owns the thing.
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Reason: A contract of pledge, the thing pledged is
delivered by the pledgor to the creditor or to a third
person by common agreement.
Effect of Merger Upon Guarantors
•
Pledge – is classified as a real contract under the
Civil Code, which requires the delivery of the thing
pledged in order for the contract to be perfected.
•
The law declares the extinguishment of the
pledge “if the thing pledged is returned by the
pledgee to the pledgor or owner,” and “any
stipulation to the contrary shall be void.”
SECTION 4
Confusion or Merger of Rights
Article 1275. The obligation is extinguished from
the time the characters of creditor and debtor are
merged in the same person. (1192a)
Article 1276. Merger which takes place in the
person of the principal debtor or creditor
benefits the guarantors. Confusion which takes
place in the person of any of the latter does not
extinguish the obligation. (1193)
Article 1277. Confusion does not extinguish a
joint obligation except as regards the share
corresponding to the creditor or debtor in whom
the two characters concur. (1194)
•
The obligation of the guarantor is merely an
accessory obligation, the extinguishment of
the principal obligation by virtue of the
merger involving the principal creditor and
the debtor will necessarily result in the
extinguishment of the accessory obligation.
Any merger involving the persons of the
guarantor and the principal creditor will only
result in the extinguishment of the accessory
obligation but the principal obligation shall
remain.
Effect of Merger in Joint Obligation
•
•
•
•
Various credits or debts in a joint obligation
are considered distinct from one another.
The extinction of the debt of one of the
various joint debtors does not necessarily
affect the debt of the others.
If merger takes place in a joint obligation, the
same does not extinguish the obligation
“except as regard the share corresponding to
the creditor or debtor in whom the two
characters concur.”
With respect to solidary obligation, Article
1215 of the Civil Code provides that the
confusion has the effect of extinguishing the
obligation if the confusion affects the entire
obligation.
Confusion or Merger of Rights
Confusion or Merger – is the meeting of one
person of the qualities of creditor and debtor with
respect to the same obligation.
•
It takes place when the debtor find himself to
be the creditor of the same obligation.
Example:
“A” executes a promissory note payable to the order
of “B.” “B” uses the same promissory note to pay “C”
and he endorses and delivers the note to the latter.
“C,” in turn, negotiated the instrument back to “A.”
“A” will then find himself to be the creditor of his own
debt. Hence, the obligation is extinguished by
reason of confusion or merger.
SECTION 5
Compensation
Article 1278. Compensation shall take place
when two persons, in their own right, are
creditors and debtors of each other. (1195)
Compensation – a mode of extinguishing to the
concurrent amount the obligations of persons who in
their own right and as principals are reciprocally
debtors and creditors of each other.
•
Compensation in effect presupposes a
process of balancing simultaneously two
obligations in order to extinguish them to the
amount in which one is covered by the other.
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Compensation is a specie of abbreviated payment,
which gives to each of the parties a double
advantage:
and also of the same quality if the latter
has been stated;
(3) That the two debts be due;
1. Facility of payment
2. Guaranty for the effectiveness of credit
(4) That they
demandable;
be
liquidated
and
Kinds of Compensation:
(5) That over neither of them there be any
retention or controversy, commenced by
third persons and communicated in due
time to the debtor. (1196)
As to its effect:
1. Total – the two obligations are of the same
amount and compensation operates fully
extinguishing both obligations.
2. Partial – two obligations are of different
amounts and a balance remains.
Article 1280. Notwithstanding the provisions of
the preceding article, the guarantor may set up
compensation as regards what the creditor may
owe the principal debtor. (1197)
As to their cause or origin
1. Legal Compensation – takes place by
operation of law when all the requisites are
present.
2. Voluntary or conventional compensation
– takes place when the parties agree to
compensate their mutual obligations even in
the absence of some requisites.
3. Judicial Compensation – takes place by
virtue of an order of the court where the
counterclaim of the defendant is allowed to
be set-off against the claim of the plaintiff.
4. Facultative – when it can be claimed by the
party who can oppose it and who is only party
prejudiced by the compensation, as happens
when one of the obligations has a period for
the benefit of one party alone and the latter
renounces the period with the effect of
making the obligation due and therefore
compensable.
Article 1279. In order that compensation may be
proper, it is necessary:
(1) That each one of the obligors be
bound principally, and that he be at the
same time a principal creditor of the
other;
(2) That both debts consist in a sum of
money, or if the things due are
consumable, they be of the same kind,
Requisites:
1. That the parties are mutually creditors and
debtors of each other, in their own right and
as principals.
2. That both debts consist in a sum of money,
or if the things due are consumable, they be
of the same kind, and also of the same
quality if the latter has been stated;
3. That the two debts be due;
4. That they be liquidated and demandable;
5. That over neither of them there be any
retention or controversy, commenced by
third persons and communicated in due time
to the debtor.
Requisite No. 1: As to Parties
For compensation to take place the parties must be:
1. Mutual debtors and creditors of each other
2. In their own right
3. As principals
Mutual Debtors and Creditors
•
Requires confluence in the parties of the
characters of mutual debtors and creditors,
although their right as such debtors need not
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spring from one and the same contract or
transactions.
As Principals
•
Tax vs Debt
•
•
Debt are due to the Government in its
corporate capacity.
Taxes are due to the Government in its
sovereign capacity.
Example:
The lessor was ordered to pay his lessee attorney’s
fees in the amount of 500 pesos in a case filed by
the former against the latter. After the judgement
became final, the lessee obtained a writ of execution
of the judgement for attorney’s fees. The lessor
interposed the defense of legal compensation
because the lessee owed him 4, 320 for unpaid
debts.
It is also necessary that the parties must be
bound principally in order for legal
compensation to take place. Hence, there
can be no legal compensation if one is a
mere guarantor in one of the obligations.
Example: A is the guarantor when X borrowed a sum
of money from Y. But Y is also indebted to A. Here,
there can be no legal compensation between A and
Y because the former is not the principal debtor in
the first obligation.
•
The provision simply follows the principle that
since the guaranty is merely an accessory
obligation, the extinguishment of the
principal obligation will also result in the
extinction of the former.
Requisite No. 2: As to Objects
The Court ruled that the attorney’s fees may properly
be the subject of legal compensation because the
award is made in favor of the litigant, not of his
counsel. In other words, it is the litigant, not his
counsel, who is the judgement creditor and who may
enforce the judgement by execution.
In their own right
•
Legal compensation cannot take place if the
parties are not, in their own right, reciprocally
creditors and debtors of each other. Hence,
if a party has a debt or credit in his personal
capacity, it cannot be compensated by a
claim or debt in his representative capacity.
Example:
X is indebted to Y in a promissory note for 100, 000
pesos. Thereafter, X sold the property of A to Y, in
his capacity as the guardian of the ward A. Here,
there can be no legal compensation because Y is not
actually indebted to X. The latter is a creditor of Y in
a representative capacity only and not in his own
right.
In order for the compensation to take place, both
debts must consist:
1. In payment of a sum of money.
2. In the delivery of fungibles.
Note: If both debts consist of delivery of fungibles, it
is necessary that the fungibles be of the same kind,
and also the same quality if the latter has been
stated.
Fungibles vs Consumable
Fungibles
Is that which can be
substituted
by
another thing of the
same kind and
quality.
Consumable
refers to movable
property
which
cannot be used in a
manner appropriate
to its nature without
it being consumed.
The classification is The classification is
based
on
the based on the very
intention or will of nature of the object
the parties.
itself.
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Requisite No. 3: As to Maturity
•
Legal compensation cannot take place
unless both debts are already due.
Requisite No. 5: Absence of Retention or
Controversy.
•
Example:
If the obligation is payable on demand, in the
absence of a demand, the obligation is not yet due.
Therefore, this obligation may not be subject to
compensation for lack of a requisite under the law.
Requisites No. 4: As to remendability and
liquidation
•
•
•
•
If one of the obligations is a natural
obligation, void, or unenforceable, it cannot
be compensated because it is not a
demandable debt.
When one or both debts are rescissible or
voidable, they may be compensated against
each other before they are judicially
rescinded or avoided because prior to the
rescission or annulment declared by the
court they are considered valid and
enforceable obligations.
But once these obligations are rescinded or
annulled by a final judgement of the court,
the compensation is deemed not to have
taken place because the rescission or
annulment has retroactive effects.
A debt is liquidated when its existence and
amount are determined, or when the amount
is determinable by inspection of the terms
and conditions of relevant documents.
The controversy must be communicated in
due time to prevent compensation from
taking place. By “in due time” should mean
the period before legal compensation is
supposed to take place, considering that
legal compensation operates so long as the
requisites concur, even without any
conscious intent on the part of the parties.
Debts payable at a different place
•
If the foregoing requisites are present,
compensation shall take place by operation
of law even though the debts may be payable
at different places.
Basis: an indemnity for expenses of exchange or
transportation to the place of payment. Such
indemnity is required to be paid by the party claiming
the compensation.
Example:
If one debt is payable in Manila and other debt is
payable in Singapore, the fact that the debts are
payable in different places is not an obstacle to legal
compensation but the indemnity for expenses for
exchange or transportation is required to be paid by
the party claiming the compensation.
Article 1281. Compensation may be total or
partial. When the two debts are of the same
amount, there is a total compensation. (n)
Debt vs Claim
Debt
An amount actually
ascertained.
A claim which has
been
formally
passed upon by the
courts or quasijudicial bodies to
which it can in law
be submitted and
has been declared
to be a debt.
Claim
Is a debt in embryo.
It is mere evidence
of a debt and must
pass
thru
the
process prescribed
by law before it
develops into what
is properly called a
debt.
Article 1282. The parties may agree upon the
compensation of debts which are not yet due. (n)
Article 1283. If one of the parties to a suit over an
obligation has a claim for damages against the
other, the former may set it off by proving his
right to said damages and the amount thereof.
(n)
Article 1284. When one or both debts are
rescissible or voidable, they may be
compensated against each other before they are
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judicially
rescinded
or
avoided.
(n)
Conventional or Voluntary Compensation
•
•
•
takes place when the parties agree to
compensate their mutual obligations even in
the absence of some requisites.
The parties may agree upon the
compensation of debts which are not yet due.
Its minimum requirement is that the parties
must be mutually creditors and debtors of
each other.
Effect of Assignment of Credit
Assignment of Credit – an agreement by virtue of
which the owner of a credit by a legal cause – such
as sale, dation in payment or exchange or donation
– and without need of the debtor’s consent, transfers
that credit and its accessory rights to another, who
acquires the power to enforce it, to the same extent
as the assignor could have enforced it against the
debtor.
Effect of Assignment Upon Compensation
Assignment AFTER compensation
Requisites:
1. That each of the parties can dispose of the
credit he seeks to compensate.
2. That they agree to the mutual extinguishment
of the credits.
Judicial Compensation
•
There can be compensation of debts where
the amounts are not yet liquidated because
the existence of the debt and its amount may
be established and determined with certainty
in the very case where the set off is pleaded.
Article 1285. The debtor who has consented to
the assignment of rights made by a creditor in
favor of a third person, cannot set up against the
assignee the compensation which would pertain
to him against the assignor, unless the assignor
was notified by the debtor at the time he gave his
consent, that he reserved his right to the
compensation.
If the creditor communicated the cession to him
but the debtor did not consent thereto, the latter
may set up the compensation of debts previous
to the cession, but not of subsequent ones.
If the assignment is made without the knowledge
of the debtor, he may set up the compensation
of all credits prior to the same and also later ones
until he had knowledge of the assignment.
(1198a)
When the assignment of rights is made by the
creditor only after legal compensation has already
taken place, the same can no longer affect the
debtor because the latter’s obligation had already
been extinguished.
Remedy: the remedy of the assignee is to file an
action against the assignor for eviction or damages
in view of the fraud committed by the latter.
Exception: when the debtor consented to the
assignment and failed to reserve his right to the
compensation, in which case he is deemed to have
waived his right to the compensation. But if he
reserved his right to the compensation when he gave
his consent, he is not deemed to have abandoned
the compensation that had already taken place.
Assignment Before Compensation
The right of the debtor to set up against the assignee
any compensation which would pertain to him
against the assignor shall depend of the following:
1. Whether or not the assignment is made with
his knowledge.
2. If made with his knowledge, whether or not
he consented thereto
3. If he consented, whether or not he reserved
his right to the compensation.
When debtor consented to assignment
Rule: When debtor consented to the assignment
made by the creditor, he cannot set up against the
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assignee the compensation which would pertain to
him against the assignor.
Exception: if the debtor notified the assignor, at the
time he gave consent, that he was reserving his right
to the compensation, he can still set up against the
assignee any compensation that would pertain to
him against the assigned credit should all requisites
of legal compensation be present.
Debts which cannot be compensated
1.
2.
3.
4.
Debts arising from contracts of depositum
Debts arising from contracts of commodatum
Claims for support due by gratuitous title
Debts consisting in civil liability arising from a
penal offense
•
The creditor in any of the foregoing
obligations can demand for the performance
of the obligation even if he is also indebted to
the debtor and all requisites of legal
compensation are present.
However, it is only the debtor in any of the
foregoing obligations who is not allowed to
set up compensation.
The creditor on the other hand, may set up
compensation with respect to debts that he
owed to the debtor.
When debtor did not consent to assignment
•
If the debtor was notified of the assignment
but he did not consent thereto, he may set up
the compensation of debts previous to the
assignment, but not of subsequent ones.
•
•
Without knowledge of the debtor
•
•
If the assignment is made without the
knowledge of the debtor, he may set up the
compensation of all credits prior to the same
and also later ones until he had knowledge
of the assignment.
The debtor is allowed to set up against the
assignee all credits he have against the
assignor, provided that such credits have
become due and demandable prior to the
notice of the assignment
Article 1286. Compensation takes place by
operation of law, even though the debts may be
payable at different places, but there shall be an
indemnity for expenses of exchange or
transportation to the place of payment. (1199a)
Article 1287. Compensation shall not be proper
when one of the debts arises from a depositum
or from the obligations of a depositary or of a
bailee in commodatum.
Neither can compensation be set up against a
creditor who has a claim for support due by
gratuitous title, without prejudice to the
provisions of paragraph 2 of article 301. (1200a)
Article
1288. Neither
shall
there
be
compensation if one of the debts consists in civil
liability arising from a penal offense. (n)
Example: in obligations arising from a crim, it is only
the offender who is prohibited from invoking
compensation against any claim that he has with the
offended party; but the latter can interpose
compensation against any claim which the offender
has against him.
Article 1289. If a person should have against him
several debts which are susceptible of
compensation, the rules on the application of
payments shall apply to the order of the
compensation. (1201)
Article 1290. When all the requisites mentioned
in article 1279 are present, compensation takes
effect by operation of law, and extinguishes both
debts to the concurrent amount, even though the
creditors and debtors are not aware of the
compensation. (1202a)
Effects of Legal Compensation
•
When all the requisites mentioned in Article
1279 are present, compensation takes effect
by operation of law, and extinguishing both
debts to the concurrent amount, even though
the creditors and debtors are not aware of
the compensation.
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•
SECTION 6
Novation
Article 1291. Obligations may be modified by:
(1) Changing their object or principal
conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the
rights of the creditor. (1203)
Novation
•
•
•
•
The extinguishment of an obligation by the
substitution or change of the obligation by a
subsequent one which extinguishes or
modifies the first, either by changing the
object or principal conditions, or by
substituting the person of the debtor, or by
subrogating a third person to the rights of the
creditor.
A juridical act with a dual function – it
extinguishes an obligation and creates a new
one in lieu of the old.
It is not a complete obliteration of the obligorobligee relationship, but operates as a
relative extinction of the original obligation in
the sense that by novation, obligations are
not extinguished but rather substituted with
another.
The effect of novation is either to modify or
extinguish the original contract.
Kinds of Novation
As to extent
1. Extinctive (total novation) – when an old
obligation is terminated by the creation of a
new one that takes the place of the former.
• The
obligation
is
completely
extinguished.
2. Modificatory (partial novation) – the old
obligation subsists to the extent that it
remains compatible with the amendatory
agreement.
There is only a modification or change in
some principal conditions of the
obligation.
As to its essence
1. Objective novation (real novation) –
occurs when there is a change of the object,
cause, or principal conditions of an existing
obligation.
2. Subjective novation (personal novation) –
occurs when there is a change of either the
person of the debtor, or of the creditor in an
existing obligation.
3. Mixed novation – when the change of the
object, cause or principal conditions of an
obligation occurs at the same time with the
change of either in the person of the debtor
or creditor.
As to its form or constitution
1. Express – when the new obligation declares
in unequivocal terms that the old obligation is
extinguished.
2. Implied – when the new obligation is
incompatible with the old ne on every point.
Requisites of Novation
1. There must be a previous valid obligation
2. There must be an agreement of the parties
concerned to a new contract.
3. There must be the extinguishment of the old
contract
4. There must be the validity of the new
contract.
Previous Valid Obligation
•
•
It is necessary that the original obligation
exists and that the same is valid.
Article 1292 – it is only when the original
obligation is void that the novation also
becomes void.
There will be a valid novation even if the original
obligation is voidable in two instances:
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1. When there has been a ratification of the
obligation prior to the novation inasmuch as
ratification cleanses the obligation of its
defects from the very beginning.
2. If the defect can be claimed only by the
debtor because he consents to the novation,
he renounces his right to annul the old
obligation.
Extinguishment of Obligation
•
•
Note:
•
•
The latter exception is always true in
delegacion, where the initiative for the
substitution emanates from the original
debtor; hence, he necessarily consents
to the same.
Expromision, the same may be made
without the knowledge of even against
the will of the original debtor, in which
case there would be no implied
ratification of the old obligation and,
hence, should the new debtor demand
reimbursement from the original debtor,
the latter can still interpose the nullity of
the original obligation.
New Valid Obligation
•
•
Villaroel vs Estrada
•
•
The first requisite does not require that the
obligation be a civil one because even a
natural obligation can be novated.
It can also be said that the novation of a
prescribed debt is valid because prescription,
being a defense available only to the debtor,
can be waived by him and he does so by
voluntarily promising to pay the prescribed
debt in case of a novation.
New Contract
•
•
There is neither a valid new contract nor a
clear agreement between the parties to a
new contract, there is no novation.
Since novation is effected only when a new
contract has extinguished an earlier contract
between the same parties, it necessarily
follows that there could be no novation if the
parties in the new contract are not the same
parties in the old contract.
In order that an obligation may be
extinguished by another which substitute the
same, it is imperative that it be so declared in
unequivocal terms, or that the old and the
new obligations be on every point
incompatible with each other.
The four essential elements of novation and
the requirement that there be total
incompatibility between the old and the new
obligation, are applicable only to an
extinctive novation, because in modificatory
novation the obligation is simply modified not
extinguished.
•
•
If the new obligation is void, the
extinguishment of the original obligation is
not realized, because that which is null and
void cannot produce effect. Hence, there is
no novation.
However, even when there is no novation
because of the nullity of the new obligation,
Article 1297 provides that the original
obligation is deemed extinguished if “the
parties intended that the former relation
should be extinguished in any event.”
The rule applies only if the new obligation is
void ab initio.
If the obligation is merely voidable, novation
can still take place because voidable
obligation is considered valid until annulled
by a final judgement of a competent court.
Article 1292. In order that an obligation may be
extinguished by another which substitute the
same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new
obligations be on every point incompatible with
each other. (1204)
Novation is never presumed
•
•
Novatio non praesumitur – novation is never
presumed.
For novation to be a jural reality, its animus
must be ever present, debitum pro debito –
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•
•
•
•
•
•
basically extinguishing the old obligation for
the new one.
Novation is never presumed, and the animus
novandi, whether totally or partially, must
appear by express agreement of the parties,
or by their acts that are too clear and
unmistakable.
To effect an objective novation, it is
imperative that the new obligation expressly
declare that the old obligation is thereby
extinguished, or that the new obligation be on
every point incompatible with the new one.
The term “expressly” means that the
contracting parties incontrovertibly disclose
that their object in executing the new contract
is to extinguish the old one. Upon the other
hand, no specific form is required for an
incompatibility between the two contracts.
Implied novation necessitates that the
incompatibility between the old and new
obligation be total on every point such that
the old obligation is completely superseded
by the new one.
The test of incompatibility is whether the two
obligations can stand together, each one
having an independent existence; if they
cannot and are irreconcilable, the
subsequent obligation would also extinguish
the first.
When not expressed, incompatibility is
required so as to ensure that the parties have
indeed intended such novation despite their
failure to express it in categorical terms.
The incompatibility must take place in any of the
essential elements of the obligation in order for
extinctive novation to occur:
1. The juridical relation or tie, such as from a
mere commodatum to lease of things, or
from negotorium gestio to agency, or from a
mortgage to antichresis; or from sale to one
of loan.
2. The cause, object or principal conditions,
such as a change of the nature of the
prestation.
3. The subjects, such as the substitution of a
debtor or the subrogation of the creditor.
•
agreement is merely incidental to the main
obligation, such as a change in the interest
rate, an extension of the time to pay or a
change in the period to comply with the
obligation.
Article 1293. Novation which consists in
substituting a new debtor in the place of the
original one, may be made even without the
knowledge or against the will of the latter, but not
without the consent of the creditor. Payment by
the new debtor gives him the rights mentioned in
articles 1236 and 1237. (1205a)
Article 1294. If the substitution is without the
knowledge or against the will of the debtor, the
new debtor's insolvency or non-fulfillment of the
obligations shall not give rise to any liability on
the part of the original debtor. (n)
Article 1295. The insolvency of the new debtor,
who has been proposed by the original debtor
and accepted by the creditor, shall not revive the
action of the latter against the original obligor,
except when said insolvency was already
existing and of public knowledge, or known to
the debtor, when the delegated his debt. (1206a)
Expromision vs Delegacion
Expromision
Delegacion
The initiative for the The debtor offers,
change does not and the creditor
come from – and accepts, a third
may even be made person
who
without
the consents to the
knowledge of – the substitution
and
debtor, since it assumes
the
consists of third obligation.
person’s
assumption of the
obligation.
It logically requires The consent of
the consent of the these three persons
third person and the are necessary.
creditor.
The original debtor must be released from
the obligation; otherwise, there can be no
valid novation.
The novation is merely modificatory where
the change brought about by any subsequent
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Release of Original Debtor
•
•
In order to change the person of the debtor,
the old one must be expressly released from
the obligation, and the third person or new
debtor must assume the former’s place in the
relation.
Without the express release of the debtor
from the obligation, any third party who may
thereafter assume the obligation shall be
considered merely as co-debtor or surety.
•
Effect of Non-fulfillment of insolvency of new
debtor
•
Magdalena Estates Inc. vs Rodriguez
•
•
If it is not clearly shown that the original
debtor has been released from the
obligation, the fact that the creditor accepts
payment from a third person who has
assumed the obligation will result merely to
the addition of debtors and not novation.
Hence, the creditor may therefore enforce
the obligation against both debtors.
The existence of the creditor’s consent may
also be inferred from the creditor’s act, but
such acts still need to be clear and
unmistakable expression of the creditor’s
consent.
•
Whether the substitution of the debtor is
expromision or delegacion, the effect is the
same, that is the release of the original
debtor from the obligation.
If the new debtor fails to fulfill his obligation
to the creditor for whatever reason, even by
reason of his insolvency, the same shall not
ordinarily give rise to any liability on the part
of the original debtor.
In delegacion, the rule admits of exceptions.
If the new debtor fails to perform the obligation by
reason of his insolvency, the action can be revived
against the original debtor in two instances:
Consent of Creditor
De Cortes vs Venturanza
Reason: substitution of one debtor for another may
delay or prevent the fulfillment of obligation by
reason of the financial inability or insolvency of the
new debtor; hence, the creditor should agree to
accept the substitution in order that it may be binding
on him.
Testate Estate of Lazaro Mota vs Serra
General Rule: since novation implies a waiver of the
right the creditor had before the novation such
waiver must be EXPRESS.
1. When the insolvency of the new debtor was
already existing and of public knowledge at
the time the old debtor delegated his debt.
2. When such insolvency was already existing
and known to the old debtor at the time, he
delegated his debt.
Article 1296. When the principal obligation is
extinguished in consequence of a novation,
accessory obligations may subsist only insofar
as they may benefit third persons who did not
give their consent. (1207)
Affect of Novation on Accessory Obligations
Accessory vs Principal
Reason: since novation extinguishes the personality
of the first debtor who is to be substituted by a new
one, it implies on the part of the creditor a waiver of
the right that he had before the novation, which
waiver must be express under the principle that
renuntiatio non praesumitor, be perform unless the
will to waive is indisputably shown by him who holds
the right.
Asia Banking Corporation vs Elser
Accessory
Principal
Dependent for its May exist without
existence on a an
accessory
principal obligation. obligation.
Example:
The contract of mortgage is an accessory obligation
to guarantee the performance of the main obligation
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of indebtedness in a contract of loan. The loan can
exist without the mortgage but the mortgage cannot
exist without the loan, which is the principal
obligation.
•
When principal obligation is extinguished in
consequence of novation, accessory
obligations are also extinguished.
Exception:
1. When the accessory obligation is for the
benefit of a third person and the latter did not
give his consent to the novation, because in
reality it is distinct obligation.
2. When the guarantors and sureties agree to
be bound in the new obligation.
The effects of novation referred to in Article 1296 are
applicable only to the following forms:
1. By changing the cause, object or principal
conditions.
2. By substituting the person of the debtor.
Article 1297. If the new obligation is void, the
original one shall subsist, unless the parties
intended that the former relation should be
extinguished in any event. (n)
Article 1298. The novation is void if the original
obligation was void, except when annulment
may be claimed only by the debtor or when
ratification validates acts which are voidable.
(1208a)
(See Requisites of Novation)
Article 1299. If the original obligation was
subject to a suspensive or resolutory condition,
the new obligation shall be under the same
condition, unless it is otherwise stipulated. (n)
Example:
1. If the condition to which the old obligation is
subjected to is a suspensive one, the
obligation does not arise except from the
fulfillment of the condition. Hence, one of the
requisites extinctive novation is lacking, that
is, the existence of a previous valid
obligation.
2. If the condition is resolutory, the happening
of the condition would result in the
extinguishment of the old obligation. Hence,
there would also be no novation because of
the absence of a previous valid obligation.
In both instances, the novation must be held
conditional also, and its efficacy depends upon
whether condition which affects the original
obligation is complied with or not.
Exception: when there is a stipulation to the
contrary, that is, when the intention of the parties is
to do away with the condition and substitute the
conditional obligation with a pure one. In such case,
the old obligation disappears and the new one is
substituted in its place.
When both Obligations are conditional
•
•
•
•
When Original Obligation is Conditional
•
If the original obligation is subject to a
suspensive or resolutory condition, the new
obligation must necessarily be subject to the
same condition.
•
If both the old and new obligations are
subject to different conditions, the effect is
determined by the compatibility or
incompatibility of the condition.
If the conditions in both obligations can stand
together, all conditions in both obligations
must be fulfilled in order for the novation to
be effective.
If only the conditions in the old obligation are
complied with while those in the new
obligation are not, there would be no
novation because of the absence of a new
valid obligation.
If only the conditions in the new obligation
are complied with while those in the old
obligation are not, there would also be no
novation because of the absence of a
previous valid obligation.
If the conditions in both obligations are
incompatible with each other, there will exist
a case of an implied novation resulting in the
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extinguishment of the old obligation and its
substitution by the new one, subject to its
conditions.
Article 1300. Subrogation of a third person in the
rights of the creditor is either legal or
conventional. The former is not presumed,
except in cases expressly mentioned in this
Code; the latter must be clearly established in
order that it may take effect. (1209a)
Article 1301. Conventional subrogation of a third
person requires the consent of the original
parties and of the third person. (n)
Article 1302. It is presumed that there is legal
subrogation:
(1) When a creditor pays another creditor
who is preferred, even without the
debtor's knowledge;
(2) When a third person, not interested in
the obligation, pays with the express or
tacit approval of the debtor;
(3) When, even without the knowledge of
the debtor, a person interested in the
fulfillment of the obligation pays, without
prejudice to the effects of confusion as to
the latter's share. (1210a)
Subrogation
•
•
Takes place when there is a change in the
person of the creditor.
The transfer of all the rights of the creditor to
a third person, who substitute him in all his
rights.
Legal Subrogation – takes place without
agreement but by operation of law because of
certain acts.
Conventional Subrogation – takes place by
agreement of parties.
CONVENTIONAL SUBROGATION
•
•
Art. 1300 – conventional subrogation of a
third person requires the consent of the
original parties and of the third person.
It must be clearly established in order that it
may take effect and the burden of proof
rests upon him who claim its existence.
Conventional Subrogation vs Assignment of
Credit
Assignment of Credit – an agreement by virtue of
which the owner of the credit, by legal cause – such
as sale, dation in payment, or exchange or donation
– and without need of debtor’s consent, transfers
that credit and its accessory rights to another, who
acquires the power to enforce it, to the same extent
as the assignor could have enforced it against the
debtor.
Conventional
Subrogation
Debtor’s consent is
necessary
Extinguishes
the
obligation and gives
rise to a new one.
Nullity of an old
obligation may be
cured such that a
new obligation will
be perfectly valid.
•
Assignment of
Credit
Debtor’s consent is
not necessary
Refers to the same
right which passes
from one person to
another.
Nullity
of
an
obligation is not
remedied by the
assignment of the
creditors to another.
What the law requires in an assignment of
credit is not the consent of the debtor, but
merely notice to him as the assignment takes
effect only from the time, he has knowledge
thereof.
In ascertaining the character of the transaction as to
whether it is an assignment of credit or conventional
subrogation, the determinative factor is the
intention of the parties.
Example:
If the intention of the parties is that the agreement
would not become valid and effective in the absence
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of the debtor’s consent, the transaction is one of
conventional subrogation and of an assignment of
credit.
•
If the parties intended their transaction to be
that of conventional subrogation but the
debtor’s consent was not obtained, the
conventional
subrogation
was
never
perfected, the transaction may not be treated
as a case of an assignment of credit.
remainder, and he shall be preferred to the
person who has been subrogated in his place in
virtue of the partial payment of the same credit.
(1213)
Effects of Subrogation
1. In case of Total Subrogation
•
LEGAL SUBROGATION
•
Legal subrogation is not presumed except ONLY in
the following cases:
1. When a creditor pays another creditor who is
preferred, even without the debtor’s
knowledge.
Example: A is indebted to B for 1, 000, 000 pesos
secured by a mortgage. A is also indebted to C for
500, 000 pesos, without any collateral. B is preferred
creditor compared to C. If C will pay B the amount of
1, 000, 000 pesos, he will be subrogated to all the
rights of B even if he made the payment without the
knowledge of A. In this situation, A can still set up
against C the defenses which he could have used
against B, such as compensation, payments already
made, or even any vice or defect of the former
obligation.
2. When a third person, not interested in the
obligation, pays with the express or tacit
approval of the debtor.
3. When, even without the knowledge of the
debtor, a person interested in the fulfillment
of the obligation pays, without prejudice to
the effects of confusion as to the latter’s
share.
It does not obliterate the obligation of the
debtor, but merely puts the assignee in the
place of his assignor.
The rule stated in Article 1303 absolutely
applies to legal subrogation but not so in
conventional subrogation.
Reason: Since conventional subrogation is a new
contractual relation based on the mutual agreement
among all the necessary parties, the parties are free
to stipulate as to the effect of their agreement on the
accessory obligations accompanying the original
obligation.
2. In Case of Partial Subrogation
•
•
The creditor may still exercise his right with
respect to the remainder of the with respect
to the remainder of the debt while the third
person may exercise his right up to the extent
of what he had paid to the creditor.
In the event, however that the assets of the
debtor will no longer be sufficient to pay both
creditors, Article 1304 provides that the
original creditor shall be preferred to the
person who has subrogated in his place in
virtue of the partial payment of the same
credit.
Article 1303. Subrogation transfers to the
persons subrogated the credit with all the rights
thereto appertaining, either against the debtor or
against third person, be they guarantors or
possessors of mortgages, subject to stipulation
in a conventional subrogation. (1212a)
Article 1304. A creditor, to whom partial payment
has been made, may exercise his right for the
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TITLE II
CONTRACTS
•
CHAPTER 1
General Provisions
A contract may be entered into involving a
single person so long as he is representing
two different parties, for he may act in his
own right and as representative of another.
Example:
Article 1305. A contract is a meeting of minds
between two persons whereby one binds
himself, with respect to the other, to give
something or to render some service. (1254a)
Contract
•
•
a meeting of minds between two persons
whereby one binds himself, with respect to
the other, to give something or to render
some service.
A 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.
“Meeting of minds”
•
•
This meeting of the minds speaks of the
intent of the parties in entering into the
contract respecting the subject matter and
the consideration thereof.
There can be no contract in the true sense in
the absence of the element of agreement, or
of mutual assent of the parties, for consent is
the essence of a contract.
Note:
•
•
There can be no quasi-contract of
negotiorum gestio if in the fact the manager
has been tacitly authorized by the owner.
What will exist between the parties is an
implied contract of agency and not the quasicontract of negotiorum gestio.
Auto-Contract
•
While the definition of Article 1305 mentions
of the meeting of minds between two
persons, what is actually meant by the
provision is two parties and not two persons.
Article 1890 of the Civil Code allows the agent
himself to be the lender if he has been empowered
by his principal to borrow money, provided that he
lends at the current rate interest.
•
•
•
In such a case, the law authorizes the agent
to contract with himself because he is
representing two parties: (1) as the lender in
his personal capacity; and (2) as the agent of
the barrower.
Here, a possible conflict of interest is avoided
because he is allowed to lend only at the
current rate of interest.
On the other hand, if the agent has been
authorized to lend money at interest, the
same article prohibits him from borrowing the
money without the consent of the principal,
for the purpose of avoiding any conflict of
interest.
Characteristics of Contracts
1. Obligatory force of contracts – obligations
arising from contracts have the force of law
between the parties and should be complied
with in good faith.
2. Autonomy of contracts – the contracting
parties may establish such stipulations,
clauses, terms and conditions as they may
deem convenient, provided they are not
contrary to law, morals, good customs, public
order, or public policy.
3. Mutuality of Contracts – the contract must
bind both contracting parties and the validity
or compliance cannot be left to the will of one
of them.
4. Relativity of Contracts – contracts take
effect only between the parties, their assigns
and heirs, except in case where the rights
and obligations arising from the contract are
not transmissible by their nature, or by
stipulation or by provision of law.
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Classification of Contracts
b. Real
•
According to the degree of dependence
a. Preparatory
• That which is not an end by itself but
only a means for the execution of
another contract.
Example:
1. Agency is a preparatory contract, as agency
does not stop with the agency because the
purpose is to enter into other contracts.
2. An option is another preparatory contract in
which one party grants to the other, for a
fixed period and under specified conditions,
the power to decide, whether or not to enter
into a principal contract.
b. Principal
• That which can exist independently of
other contracts because it has its own
purpose which does not depend upon
any other contract.
Example: loans, sales, or leases
c. Accessory
• That which cannot exist as an
independent
contract since it
consideration is the same as that of
the principal.
Example: pledges, mortgages, and suretyship.
According to perfection
That which is perfected only upon the
delivery of the object of the contract.
Example: deposit, pledge, commodatum, contract
of simple loan, or mutuum.
According to nature of obligation produced
a. Unilateral
• That which creates obligations only
on one side or on the part of only one
of the contracting parties.
Example: Commodatum which is essentially
gratuitous and creates obligations only on the side
of the bailee.
b. Bilateral
• That which creates obligations on
both sides or on both parties.
• The contracting parties are mutually
creditors and debtors.
Example:
contract of sale
•
•
it creates obligations on both parties.
The seller obligates himself to transfer the
ownership of and to deliver the thing sold
while the buyer obligates himself to pay the
purchase price.
According to name
Example:
a. Nominate (contrato nominado)
• That which has an individuality of its own and
is distinguished by a particular or special
name in the Civil Code, such as sale, lease,
deposit, barter, pledge, etc.
• It is governed by the special rules of law
applicable to it.
Sale is a consensual contract and is perfected by
mere consent, which is manifested by a meeting of
the minds as to the offer and acceptance thereof on
the subject matter, price and terms of payments of
the price.
b. Innominate (contrato innominado)
• That which is without any individuality
of its own and not specifically named
or classified in the Civil Code
although recognized by it.
a. Consensual
• Perfected by mere consent or upon
mere meeting of the minds.
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According to Cause
a. Onerous
• That where the cause is understood
to be, for each contracting party, the
prestation or promise of a thing or
service by the other.
Example: the contract of sale, option contract.
b. Remuneratory
• That where the cause is the service
or benefit for which the remuneration
is given.
Example: a donation given in consideration of a past
service which does not amount to a demandable
debt.
c. Gratuitous
• That where the cause is the mere
liberality of the benefactor.
Example: the contract of commodatum is essentially
gratuitous.
According to risk involved
a. Commutative
• That in which each of the contracting
parties gives and receives an
equivalent or there is a mutual
exchange of relative values.
Example: the contract of sale where the seller
deli9vers the thing sold in exchange for the purchase
price and the buyer pays the price in exchange for
the thing sold.
Example: the contract of insurance
According to requirement of form or solemnity
a. Common
• That which does not require any form.
• As a rule, contracts are obligatory in
whatever form they may have been
entered into, provided all the
essential elements of a contract are
present.
b. Special or solemn
• That
which
requires
certain
formalities either for its validity or
enforceability.
Example: The donation of real property and its
acceptance are required to be embodied in a public
instrument; otherwise, the donation is void. The sale
over a real property or any interest therein, if still
purely executory, is required to be in writing;
otherwise it is unenforceable.
According to purpose
a.
b.
c.
d.
To transfer ownership (sale or barter)
To convey the use (commodatum or lease)
To give security (pledge or mortgage)
To render some service (agency)
According to their subject matter
a. Things (sale, pledge, mortgage)
b. Services (lease of service, or agency)
c. Rights (provided that the same are not
personal or intransmissible)
According to their defects
b. Aleatory
• That in which each of the parties or
both reciprocally bind themselves to
give or to do something in
consideration of what the other shall
give or do upon the happening of an
event which is uncertain, or which is
to occur at an intermediate time.
• The element of risk dependent on
chance is predominant.
a.
b.
c.
d.
e.
Perfectly valid (not suffering from defect)
Rescissible
Voidable
Unenforceable
Void or Inexistent
Article 1306. The contracting parties may
establish such stipulations, clauses, terms and
conditions as they may deem convenient,
provided they are not contrary to law, morals,
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good customs, public order, or public policy.
(1255a)
•
Autonomy of Contract
Autonomy of Contracts/Principle of Party Autonomy
in Contracts/Freedom of Contract
•
The contracting parties are accorded the
liberty and freedom to establish such
stipulations, clauses, terms and conditions
as they may deem convenient, provided the
same are not contrary to law, morals, good
customs, public order or public policy.
Constitutionally Protected Right
•
•
•
The right to enter into lawful contracts is not
based on Article 1306 of the Civil Code. The
function of the said article, aside from
recognizing the existence of such right, is
simply to provide for limitations in the
exercise of the freedom of contract.
Neither did such right derive its origin from
the Constitution. The function of the
Constitution, apart from recognizing the
existence of such right, is to guarantee and
protect the freedom of contract against
unwarranted and arbitrary interference by
the State.
•
Non-impairment Clause
Purpose: to safeguard the integrity of contracts
against unwarranted interference by the State.
•
•
•
A law which changes the terms of a legal
contract between parties, either in the time or
mode of performance, or imposes new
conditions, or dispenses with the expressed,
or authorizes for its satisfaction something
different from that provided in its terms, is law
which impairs the obligation of a contract and
is therefore null and void.
•
The prohibition against impairment of the
obligation of contracts is aligned with the
general principle that laws newly enacted
have only prospective operation, and cannot
affect acts or contracts already perfected;
however, as to laws already in existence,
their provisions are read into contracts and
deemed a part thereof.
•
While non-impairment of contracts is
constitutionally guaranteed, the rule is not
Basis:
Due Process Clause
•
The Constitution guarantees the free
exercise of the right of property, and the
freedom to contract is such right, of which the
Contracts should not be tampered with by
subsequent laws that would change or
modify the rights and obligations of the
parties.
However, the constitutional prohibition on the
impairment of the obligation of contract does
not prohibit every change in existing laws,
and to fall within the prohibition, the change
must not only impair the obligation of the
existing contract, but the impairment must be
substantial.
Clemons vs Nolting
To enter into a contract freely and without
restraint is one of the liberties guaranteed to
the citizens of the country and should not be
lightly interfered with.
1. Article III, Section 1. No law shall be deprived
of life, liberty or property without due process
of law.
2. Article III, Section 10. No law shall be passed
impairing obligation of contracts.
possessor cannot be deprived without due
process of law.
The Constitution allows deprivation of liberty,
including liberty of contract, as long as due
process is observed.
The liberty to contract maybe subjected, in
the interest of the general welfare under the
police power, to restrictions varied in the
character and wide ranging in scope as long
as due process is observed.
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•
absolute, since it has to be reconciled with
the legitimate exercise of police power.
As long as the contract affects the public
welfare one way or another so as to require
the interference of the State, then must be
the police power be asserted, and prevail,
over the impairment clause.
Ortigas & Co., Limited Partnership vs Feati Bank
and Trust Co.
•
Contractual restrictions on the use of
property could not prevail over the
reasonable exercise of police power through
zoning regulations
•
Freedom of contract is also subject to the
limitation that the agreement must not be
against public policy and any agreement or
contracts made in violation of this rule is not
binding and will not be enforced.
Public Policy
•
•
Principle under which freedom of contract or
private dealing is restricted for the good of
the community.
Courts of justice will not recognize or uphold
a transaction when its object, operation, or
tendency is calculated to be prejudicial to
the public welfare, to sound morality or to
civic honesty.
Sangalang vs Intermediate Appellate Court
Ongsiako vs Gamboa
•
The power of the Metro Manila Commission
and the Makati Municipal Council to enact
zoning ordinances for the general welfare
prevails over the deed restrictions on the lot
owners in Bel-Air Village which restricted the
use of the lots for residential purposes only.
•
Limitations on Freedom of Contract
•
•
Although a contract is the law between the
parties, the provisions of positive law which
regulate contracts are deemed written
therein shall limit and govern the relations
between the parties.
A contract that violates the Constitution and
the law is null and void and vests no rights
and creates no obligations. It introduces no
legal effect at all.
Laws, which by terms of a contract must not
contravene are those:
1. Which expressly declare their obligatory
character;
2. Which are prohibitive;
3. Which express fundamental principles of
justice which cannot be overlooked by the
contracting parties;
4. Which impose essential requisites without
An agreement is against public policy if it is
injurious to the interest of the public,
contravenes some established interest of
society, violates some public statute, is
against good morals, tends to interfere with
the public welfare or safety, or, as it is
sometimes put, if it is at war with the interests
of society and is in conflict with the morals of
the time.
Ollendorff vs Abrahamson
•
The term “public order” does not mean the
actual keeping of the public peace, but
signifies the public weal – that which is
permanent, and essential in institutions. It is
the equivalent of the term “public policy.”
Article 1307. Innominate contracts shall be
regulated by the stipulations of the parties, by
the provisions of Titles I and II of this Book, by
the rules governing the most analogous
nominate contracts, and by the customs of the
place. (n)
Innominate Contracts
Purpose: no one should permit to enrich himself to
the damage of another.
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Pacific Merchandising Corp. vs Consolacion
Insurance & Surety Co., Inc.
•
Where one has rendered services to another,
and these services are accepted by the
latter, in the absence of proof that the service
was rendered gratuitously, it is but just that
he should pay a reasonable remuneration
therefor.
Four kinds of innominate contracts:
1.
2.
3.
4.
Do ut des (I give that you give)
Do ut facias (I give that you do)
Facio ut des (I do that you give)
Facio ut facias (I do that you do)
Article 1308. The contract must bind both
contracting parties; its validity or compliance
cannot be left to the will of one of them. (1256a)
Article
1309. The
determination
of
the
performance may be left to a third person, whose
decision shall not be binding until it has been
made known to both contracting parties. (n)
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. (n)
An escalation clause which grants the creditor an
unbridled right to adjust the interest independently
and upwardly, completely depriving the debtor of the
right to assent to an important modification in the
agreement is void.
Philippine National Bank vs Court of Appeals
•
•
•
Contract changes must be made with the
consent of the contracting parties.
The minds of all parties must meet as to the
proposed modification, especially when it
affects an important aspect of the
agreement, like the rate of interest in loan
contracts, for it can make or break a capital
venture.
Any change must be mutually agreed upon,
otherwise, it is bereft of any binding effect.
Philippine Savings Bank vs Castillo
•
•
Respondents’ assent to the modifications on
the interest rates cannot be implied from their
lack of response to the memos sent by
petitioner,
informing
them
of
the
amendments, nor from the letters requesting
for reduction of the rates.
An escalation clause is void where the
creditor unilaterally determines and imposes
an increase in the stipulation rate of interest
without the express conformity of the debtor.
Mutuality of Contracts
GF Equity, Inc. vs Valenzona
Principle of Mutuality of Contracts
•
•
Based on the principle that the obligations
arising from contracts have the force of law
between the contracting parties, and there
must be mutuality between them based
essentially on their equality under which it is
repugnant to have one party bound by the
contract while leaving the other free
therefrom.
Purpose: to render void a contract containing a
condition which makes its fulfillment dependent
solely upon the uncontrolled will of one of the
contracting parties.
Example:
It leaves the determination of whether
Valenzona failed to exhibit sufficient skill or
competitive ability to coach Alaska team
solely to the opinion of GF Equity. Whether
Valenzona indeed failed to exhibit the
required skill or competitive ability depended
exclusively on the judgement of GF Equity. In
other words, GF Equity was given an
unbridled prerogative to pre-terminate the
contract irrespective of the soundness,
fairness or reasonableness, or even lack of
basis of its opinion.
Instant cases where the Court upheld the legality of
contracts
which
left
their
fulfillment
or
implementation to the will of either of the parties:
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Jespajo Realty vs Court of Appeals
•
The express provision in the lease
agreement of the parties that violation of any
of the terms and conditions of the contract
shall be sufficient ground for termination
thereof “by the lessor,” removes the contract
from the application of Article 1308.
Taylor vs Uy Tieng Piao
•
•
Art. 1308 creates no impediment to the
insertion in a contract of personal service of
a resolutory condition permitting the
cancellation of the contract “by one of the
parties”.
For where the contracting parties have
agreed that such option shall exist, the
exercise of the option is as much in the
fulfillment of the contract as any other act
which may have been the subject of
agreement.
Allied Banking Corporation vs Court of Appeals
•
•
The fact that such option is binding only on
the lessor and can be exercised only by the
lessee does not render it void for lack of
mutuality. After all, the lessor is free to give
or not to give the option to the lessee.
And while the lessee has a right to elect
whether to continue with the lease or not,
once he exercises his option to continue and
the lessor accepts, both parties are
thereafter bound by the new lease
agreement.
Contract of Adhesion
•
•
One of the parties imposes a ready-made
form of contract, which the other party may
accept or reject, but which the latter cannot
modify.
One party prepares the stipulation in the
contract, while the other party merely affixes
his signature or his adhesion thereto, giving
no room for negotiation and depriving the
latter of the opportunity to bargain, because
the only participation of the party is the
•
•
•
affixing of his signature or his adhesion
thereto.
These contracts have been declared as
binding as ordinary contracts, the reason
being that the party who adheres to the
contract is free to reject it entirely.
If the terms are accepted without objection,
then the contract serves as the law between
them.
The validity must be determined in light of the
circumstances under which the stipulation is
intended to apply.
Determination of Performance by Third Person
•
•
Such determination of the performance by a
third person shall be binding upon the
contracting parties from the moment it is
made known to them, provided that the
same is not evidently inequitable.
The court shall decide what is equitable
under the circumstances.
Article 1311. Contracts take effect only between
the parties, their assigns and heirs, except in
case where the rights and obligations arising
from the contract are not transmissible by their
nature, or by stipulation or by provision of law.
The heir is not liable beyond the value of the
property he received from the decedent.
If a contract should contain some stipulation in
favor of a third person, he may demand its
fulfillment provided he communicated his
acceptance to the obligor before its revocation.
A mere incidental benefit or interest of a person
is not sufficient. The contracting parties must
have clearly and deliberately conferred a favor
upon a third person. (1257a)
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. (n)
Article 1313. Creditors are protected in cases of
contracts intended to defraud them. (n)
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Article 1314. Any third person who induces
another to violate his contract shall be liable for
damages to the other contracting party. (n)
Note: The same principle applies to the option to
renew the lease. As a general rule, covenants to
renew a lease are not personal but will run with the
land.
Relativity of Contracts
DKC Holdings Corporation vs Court of Appeals
•
The basic principle or relativity of contracts is
that contracts can only bind the parties who
entered into it, and cannot favor or prejudice
a third person, even if he is aware of such
contract and has acted with knowledge
thereof.
Axiom res inter alios acta aliis neque nocet
predest
•
A contract can only obligate the parties who
had entered into it, or their successors who
assumed their personalities or juridical
positions, and that, concomitantly, a contract
can neither favor nor prejudice third person.
Basis: Article 1311 of the Civil Code
•
Only the contracting parties are bound by the
stipulations in the contract; they are those
ones who would benefit from and could
violate it. Thus, one who is not a party to a
contract, and for whose benefit it was not
expressly made, cannot maintain an action
on it.
Heirs Are Also Bound by Contracts
•
•
A person who enters into a contract is
deemed to have contract6ed for himself and
his heirs and assigns.
The heirs of the contracting parties are
precluded from denying the binding effect of
the valid agreement entered into by their
predecessors-in-interest
Example:
A contract of lease is generally transmissible to the
heirs of the lessor or lessee because a lease
contract is not essentially personal in character. It
involves a property right and, as such, the death of
a party does not excuse non-performance of the
contract.
•
The Contract of Lease with Option to Buy
entered into by the predecessor-in-interest is
binding upon the heir.
Tanay Recreation Center and Development Corp.
vs Fausto
•
The lease contract which contains a right of
first refusal into by the predecessor-ininterest is also binding upon the heir.
Naranja vs Court of Appeals
•
When the predecessor-in-interest had
already sold the parcels of land prior to his
death, the Court held that the heirs are bound
by the contract of sale executed by the
deceased and, therefore, said parcels of land
no longer formed part of the estate which the
heirs could have inherited.
Exceptions
1. Transmissibility by nature of the right and
obligation, refers to a situation where the
peculiar individual qualities are contemplated
as a principal inducement of the contract.
Example: contract intuit personae, or in
consideration of the performance by a specific
person and by no other.
2. Intransmissibility by stipulation of the parties,
being exceptional and contrary to the general
rule, should not be easily implied, but must
be expressly established, or at the very least,
clearly inferable from the provisions of the
contract itself.
3. Not transmissible by operation of law. The
provision makes reference to those cases
where the law expresses that the rights or
obligations are extinguished by death, as is
the case in legal support, parental authority,
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usufruct, contracts for a piece of work,
partnership, and agency.
Note: the articles of the Civil Code regulate guaranty
or suretyship contain no provision that the guaranty
is extinguished upon the death of the guarantor or
the surety.
5. Accion directa is allowed by law in certain
cases.
Stipulation Pour Autrui
•
Rule on Monetary Debts
•
•
The heir is not liable beyond the value of the
property he received from the decedent.
When the deceased had left debts, the heirs
are not personally liable for such debts of the
deceased; such debts must be collected only
from the property left upon his death, and if it
should not be sufficient to cover all of them,
the heirs cannot be made to pay the
uncollectible balance.
Note: the binding effect of contracts upon the heirs
of the deceased party is not altered by the provision
in our Rules of Court that money debts of a
deceased must be liquidated and paid from his
estate before the residue is distributed among said
heirs.
Reason: whatever payment is made from the estate
is ultimately a payment by the heirs and distributes,
since the amount of the paid claim in fact diminishes
or reduces the share that the heirs would have been
entitled to receive.
Exceptions to Relativity of Contracts
1. Contracts may confer benefits to a third
person or what are otherwise also known as
stipulation pour autrui.
2. In Contracts creating real right, third persons
who come into possession of the object of
the contract may be bound thereby under the
provisions of mortgage laws and land
registration laws.
3. Creditors are protected in cases of contracts
intended to defraud them, such that they can
ask for their rescission.
4. Any third person who induces another to
violate his contract can be made liable for
damages of the other contracting party.
•
It is fundamental that contracts take effect
only between the parties thereto, except in
some specific instances provided by law
where the contract contains some stipulation
in favor of a third person.
A third person is allowed to avail himself of a
benefit granted to him by the terms of the
contract, provided that the contracting
parties have clearly and deliberately
conferred a favor upon such person.
Florentino vs Encarnacion
•
A stipulation in favor of a third person
conferring a clear and deliberate favor upon
him, and which stipulation is merely a part of
a contract entered into by the parties, neither
of whom acted as agent of the third person,
and such third person may demand its
fulfillment provided that he communicates his
acceptance to the obligor before it is
revoked.
Parties
3 parties to a stipulation pour autrui:
1. The promisor – the party obliged to perform
the prestation in favor of the third person.
2. The promise – the party who obtains and
accepts the promise.
3. The third person or beneficiary – the party
who acquires the right to demand the
prestation from the promisor who may be a
determinate
(particular
person)
or
indeterminate (the prospective beneficiary in
life insurance.
Limitless Potentials, Inc. vs Quilala
The third person may either be:
1. A done beneficiary
• If the stipulation is in the nature of gift and for
the sole benefit of the third person.
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•
2. A creditor beneficiary
• Where an obligation is due from the promise
to the third person which the former seeks to
discharge by means of stipulation, such as
when a transfer if property is coupled with the
purchaser’s promise to pay a debt owing
from the seller to a third person.
3. An incidental beneficiary
• Absent the intent to benefit a third person
• One who benefits from the contract of anther
but whose benefit was not the intent of the
contracting parties.
• Should the benefit received by the third
person be merely incidental, then it is not
considered a stipulation pour autrui.
A stipulation pour autrui may be divided into two
classes:
1. Those where the stipulation is intended for
the sole benefit of such person. (The third
party is a done)
2. Those where an obligation is due from the
promise to the third person which the former
seeks to discharge by means of such
stipulation (he is a creditor beneficiary)
•
•
Example: the conferment of a favor upon the credit
holder in the contract between the credit card
company and the merchant (store).
Requirement of Acceptance
•
•
In order to constitute a valid stipulation pour
autrui it must be the purpose and intent of the
stipulating parties to benefit the third person,
and it is not sufficient that the third person
may be incidentally benefited by the
stipulation.
There is no time limit; such third person has
all the time until the stipulation is revoked.
Florentino vs Encarnacion
•
Requisites of Stipulation Pour Autrui
1. There is a stipulation in favor of a third
person.
2. The stipulation is a part, not the whole, of the
contract.
3. The contracting parties clearly and
deliberately conferred a favor to the third
person – the favor is not an incidental benefit.
4. The
favor
is
unconditional
and
uncompensated.
5. The third person communicated his or her
acceptance of the favor before its revocation.
6. The contracting parties do not represent, or
are not authorized by, the third party.
A third person is allowed to avail himself of a
benefit granted to him by the terms of the
contract, provided that the contracting
parties have clearly and deliberately
conferred a favor upon such person.
A third person not a party to the contract has
no action against the parties thereto, and
cannot generally demand the enforcement of
the same.
To determine the interest of a third person in
a contract is a stipulation pour autrui or
merely an incidental interest, is to rely upon
the intention of the parties as disclosed by
their contract.
The acceptance does not have to be in any
particular form, even when the stipulation is
for the third person an act of liberality or
generosity on the part of the promissor or
promise, and it need not be made expressly
and formally.
Revocation of Stipulation Pour Autrui
•
•
•
Stipulation Pour Autrui can be revoked prior
to its acceptance by the third person
beneficiary.
After acceptance, however, the stipulation
may no longer be revoked because the third
party in now entitled to demand for its
fulfillment.
The word revoked as used in Article 1311
must be understood to imply revocation by
the mutual consent of the contracting parties,
or at least by direction of the party to whom
the promise was made.
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Rights of the Parties
•
Third party beneficiary may demand for the
fulfillment of the stipulation in his favor
provided that he communicated his
acceptance to the obligor before its
revocation.
Exception: Under Article 1314, any third person
who induces another to violate his contract shall be
liable for damages to the other contracting party.
Interference with Contractual relations
•
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.
Example: registered real estate mortgage contract.
•
•
•
Mortgage is a real right, which follows the
party, even after subsequent transfers by the
mortgagor.
The sale or transfer of the mortgaged
property cannot affect or release the
mortgage; thus, the purchaser or transferee
is necessarily bound to acknowledge and
respect the encumbrance.
Under Article 2129, the mortgage on the
property may still be foreclosed despite the
transfer.
Contracts in Fraud of Creditor
Creditors, in order to satisfy their claims, may:
1. Pursue properties in the possession of the
debtor.
2. Exercise all the rights and bring all the
actions of the debtor, except those purely
personal to such debtor.
3. Impugn the acts which the debtor may have
done to defraud them.
One becomes liable in an action for damages for a
nontrespassory invasion of another’s interest in the
private use and enjoyment of asset if:
a. The other has property rights and privileges
with respect to the use or enjoyment
interfered with.
b. The invasion is substantial
c. The defendant’s conduct us a legal cause of
the invasion.
d. The invasion is either intentional and
unreasonable
or
unintentional
and
actionable under general negligence rules.
In order that an action against a third person for
contractual interference can be maintained, the
following elements must be present:
1. Existence of a valid contract.
2. Knowledge on the part of the third person of
the existence of the contract.
3. Interference of the third person without legal
justification or excuse.
•
•
Principle of Tort Interference
General Rule: the obligation of contracts is limited
to the parties making them and, ordinarily, only those
who are parties to contracts are liable for their
breach.
Penalized because it violates the property
right of a party in a contract to rea the
benefits that should result therefrom.
A third person may be held liable only when
there is no legal justification or excuse for his
action or when his conduct is stirred by a
wrongful motive.
To sustain a case for tortuous interference,
the interferer must have acted with malice or
must have been driven by purely impious
reasons to injure the plaintiff.
Gilchrist vs Cuddy
•
•
A person is not a malicious interferer if his
conduct is impelled by a proper business
interest.
A financial or profit motivation will not
necessarily make a person an officious
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•
interferer liable for damages as long as there
is no malice or bad faith involved.
A third person can be held liable for tortuous
interference with contractual relations even if
he does not know the identity of one of the
contracting parties.
Note:
•
An offer that is not accepted, either expressly
or impliedly, precludes the existence of
consent, which is one of the essential
elements of a contract.
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 in keeping with good faith, usage and
law. (1258)
Consent
Article 1316. Real contracts, such as deposit,
pledge and commodatum, are not perfected until
the delivery of the object of the obligation. (n)
•
•
•
Perfection of Contracts
Is manifested by the meeting of the offer and
acceptance upon the thing which are to
constitute a contract.
Once there is concurrence of the offer and
acceptance of the object and cause, the
stage of negotiation is finished.
Until the contract is perfected, it cannot, as
an independent source of obligation, serve
as a binding juridical relation. Hence, the
negotiation stage does not, as a general rule,
grant one of the parties the cause of action
to recover damages from the other.
Stages of Contracts
A contract undergoes three distinct stages:
1. Negotiation or preparation.
2. Perfection
3. Consummation
Negotiation or preparation
•
Begins when the prospective contracting
parties manifest their interest in the contract
and ends at the moment of their agreement.
Exception: when the parties entered into a contract
of option, which is defined as a preparatory contract
in which one party grants to the other, for a fixed
period and under specified conditions, the power to
decide, whether or not to enter into a principal
contract.
•
•
Perfection or birth of the contract
•
Occurs when they agree upon the essential
elements thereof.
Consummation
•
Occurs when the parties fulfill or perform the
terms agreed upon in the contract,
culminating in the extinguishment thereof.
When the contract of option is deemed
perfected, it would be a breach of that
contract to withdraw the offer during the
agreed period.
If the optioner-offeror withdraws the offer
before its acceptance (exercise of the option)
by the optionee-offeree, the latter may not
sue for specific performance on the proposed
contract (“object” of the option) since it has
failed to reach its own stage of performance.
Perfection of Contracts
•
•
The perfection of the contract takes place
upon the concurrence of the essential
elements thereof.
A contract which is consensual as to
perfection is so established upon a mere
meeting of minds, i.e., the concurrence of the
offer and acceptance, on the object and on
the cause thereof.
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•
A contract which requires the delivery of the
object of the agreement, as in a pledge or
commodatum, is commonly referred to as a
real contract.
4 contracts which are classified as real which
can only be perfected by the delivery of the
object of the contract:
1.
2.
3.
4.
Deposit
Pledge
Commodatum
Mutuum
•
Other than these four contracts, all other
contracts are consensual and perfected by
mere consent.
•
matter, read into it any other intention that
would contradict its plain import.
Courts have no power to relieve parties from
obligations voluntarily assumed, simply
because their contracts turned out to be
disastrous deals or unwise investments.
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. (1259a)
Example:
Unauthorized Contracts
Sale is a consensual contract and is perfected by
mere consent, which is manifested by a meeting of
the minds as to the offer and acceptance thereof on
the subject matter, price and terms of payment of the
price.
•
•
Obligatory Force of Contracts
•
•
•
•
•
•
Obligations arising from contracts have the
force of law between the parties and should
be complied with un good faith.
In characterizing the contract as having the
force of law between the parties, the law
stresses the obligatory nature of a binding
and valid agreement.
A contract becomes obligatory upon its
perfection.
Once a contract is entered into, no party can
renounce it unilaterally or without the consent
of the other.
It is a general principle of law that no one may
be permitted to change his mind or disavow
and go back upon his own acts, or to proceed
contrary thereto, to the prejudice of the other
party.
When couched in clear and plain language,
contracts should be applied according to
their literal tenor and that courts cannot
supply material stipulations, read into the
contract words it does not contain or, for that
A contract in the name of another without
being authorized by the latter, or unless he
has by law a right to represent him.
However, a contract entered into in the name
of another by one who has no authority or
legal representation is not void but merely
unenforceable.
Bumanlag vs Alzate
•
•
No consent is given by the alleged principal
in unauthorized contracts entered into by an
alleged agent, the same is declared merely
unenforceable (not void) by Article 1317 and
1403, par. 1 of the Civil Code.
In declaring the contract to be merely
unenforceable, the law allows the defect of
the contract to be cured by ratification.
Basis: 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.
CHAPTER 2
Essential Requisites of Contracts
General Provisions
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Article 1318. There is no contract unless the
following requisites concur:
(1) Consent of the contracting parties;
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter
of the contract;
(2) Object certain which is the subject
matter of the contract;
(3) Cause of the obligation which is
established.
(3) Cause of the obligation which is
established. (1261)
•
The foregoing requisites are applicable only
to consensual contracts, or those that are
perfected by mere consent.
Essential Requisites of Contracts
Real Contracts
Kinds of Elements
1. Essential Elements
• Are those necessary for the very
existence of the contract itself.
• The absence of any one of these
essential elements will prevent the
creation or existence of a contract.
•
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter
of the contract;
2. Natural Elements
• Are not essential to the existence of a
contract but they are presumed to
exist in certain contracts unless there
is an express stipulation to the
contrary.
Example: warranty in case of eviction in a contract
of sale.
3. Accidental Elements
• Can only exist when the parties
expressly provide for them.
• These are the clauses, terms, and
conditions that the parties may deem
convenient, provided they are not
contrary to law, morals, good
customs, public order or public policy.
In addition to the foregoing, the delivery of
the object of the contract is required as a
further requisite.
(3) Cause of the obligation which is
established.
(4) delivery of the object of the contract.
Purpose of Essential Requisites
•
•
Requisites are necessary only for giving birth
to a contract.
The requisites enumerated in Article 1318 re
necessary only for the perfection of the
contract not for its validity.
Basis: there is no contract unless the following
requisites concur xxx.
Note:
Essential Requisites
•
•
•
The essential requisites or elements are
those necessary for the very existence of the
contract itself.
There is no contract in the absence of these
requisites.
•
Contracts are obligatory upon its perfection,
regardless of the form they may have been
entered into, the rule is not absolute.
The fact that a contract is perfected does not
automatically mean that such contract is
valid.
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Inexistent Contract (Art. 1409)
•
Is a contract where one or some or all of the
essential requisites are both present, i.e., a
contract which is absolute simulated, or a
contract whose cause or object did not exist
at the time of the transaction.
Void Contract
•
Contains all the essential requisites but its
cause, object or purpose is contrary to law,
morals, good customs, public order or public
policy, or it is expressly prohibited by law.
The following perfected contracts, for example, are
void ab initio:
1. A contract that is contrary to law, morals,
good customs, public order, or public policy.
2. A contract that violates the principle of
mutuality of contracts.
3. Solemn contracts that fail to follow the formal
requirements of the law for their validity.
SECTION 1
Consent
Article 1319. Consent is manifested by the
meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the
contract. The offer must be certain and the
acceptance absolute. A qualified acceptance
constitutes a counter-offer.
perfected; therefore, there is no contract to
speak of.
Obligations
derived from
quasi-contracts
Referred
to
as
contracts implied in
law in the common
law system, there is
no true contract
because of the
absence of mutual
assent on the part
of the parties.
Is a juridical relation
which arises out of
a unilateral act and
which relation is
imposed by law,
though one of the
parties thereto does
not
intend
to
assume
an
obligation, for the
purpose of avoiding
unjust enrichment
by that party at the
expense of another.
•
•
Element of Consent
•
•
Consent is the essence of the contract.
There can be no contract in the true sense in
the absence of the element of agreement, or
of mutual assent of the parties.
Where there is no consent given by one party
in a purported contract, such contract is not
Always a product of
bilateral acts.
Manifestation of Consent
Acceptance made by letter or telegram does not
bind the offerer except from the time it came to
his knowledge. The contract, in such a case, is
presumed to have been entered into in the place
where the offer was made. (1262a)
•
•
Obligations
derived from
contracts
The source of the
obligation is the
intention of the
parties,
whether
such intention is
manifested
expressly
or
impliedly.
Consent is manifested by the meeting of the
offer and the acceptance upon the thing and
the cause which are to constitute the
contract.
The essence of consent is the conformity of
the parties to the terms of the contract, the
acceptance by one of the offers made by the
other; it is the concurrence of the minds of
the parties on the object and the cause which
shall constitute the contract.
Once there is a concurrence between the
offer and the acceptance upon the subject
matter (object) and the consideration, a
contract is already produced.
Mutual consent being a state of mind, its existence
may only be inferred from the confluence of two acts
of the parties:
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1. An offer certain as to the object of the
contract and its consideration, and
2. An acceptance of the offer which is absolute
in that it refers to the exact object and
consideration embodied in said offer.
Objective theory of Contracts
•
•
The intention of the parties to enter into a
contract is to be judged by their outward or
objective manifestations of intent.
Under American jurisprudence, mutual
assent is judged by an objective standard,
looking to the express words of the parties
used in the contract. Under this contract,
understandings and beliefs are effective only
if shared.
Note: in determining whether a contract is already
formed between the parties, the objective
manifestations of the intent of parties are to be
considered, that is, what a reasonably prudent
person would be led to believe from the actions and
words of the parties.
Computer Network, LTD vs Purcell Tire &
Rubber Co.
•
•
•
The objective theory lays stress on the
outward manifestation of assent made to the
other party in contrast to the older idea that a
contract was a true meeting of the minds.
The intent with which we are concerned is
the objective manifestation of intent by the
parties, that is, what a reasonably prudent
person would be led to believe from the
actions and words of the parties.
The essentials to formation of a contract may
not be found or determined on the
undisclosed assumption or secret surmise of
either party but must be gathered from the
intention of the parties as expressed or
manifested by their words or acts.
Article 1320. An acceptance may be express or
implied. (n)
Article 1321. The person making the offer may fix
the time, place, and manner of acceptance, all of
which must be complied with. (n)
Article 1322. An offer made through an agent is
accepted from the time acceptance is
communicated to him. (n)
Article 1323. An offer becomes ineffective upon
the death, civil interdiction, insanity, or
insolvency of either party before acceptance is
conveyed. (n)
Article 1324. When the offerer has allowed the
offeree a certain period to accept, the offer may
be withdrawn at any time before acceptance by
communicating such withdrawal, except when
the option is founded upon a consideration, as
something paid or promised. (n)
Article 1325. Unless it appears otherwise,
business advertisements of things for sale are
not definite offers, but mere invitations to make
an offer. (n)
Article 1326. Advertisements for bidders are
simply invitations to make proposals, and the
advertiser is not bound to accept the highest or
lowest bidder, unless the contrary appears. (n)
Offer
Meeting of Offer and Acceptance
The existence of mutual consent, being a state of
mind, may only be inferred from the confluence of
two acts of the parties:
1. An offer certain as to the object of the
contract and its consideration.
2. An acceptance of the offer which is absolute
in that it refers to the exact object and
consideration embodied in said offer.
•
The meeting of the minds referred to in
Article 1305 is actually the meeting of the
offer and the acceptance.
Concepts of Offer
Negotiation – the initial stage in the life of a contract,
is formally initiated by an offer.
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Offer
•
•
An expression of willingness to contract on
certain terms, made with the intention that it
shall become binding as soon as it is
accepted by the person to whom it is
addressed.
Refers to a unilateral proposition which one
party makes to the other for the celebration
of the contract.
•
Note: the party who makes the offer is called the
offeror while the party to whom an offer is made is
called the offeree.
by the mere acceptance of the offer without
any further act on the part of the offeror.
In the event that the terms of the offer is not
sufficiently detailed or in the expression of
intent is too vague in such a way that the
terms thereof cannot be ascertained with
reasonably certainty, a contract is not formed
notwithstanding the acceptance of the offer
and the court is powerless to supply the
missing terms, except when the missing
terms are minor or insignificant and the
parties have clearly manifested an intent to
form a contract.
Communication of Offer
Requisites of Offer
1. The offeror must have a serious intention to
become bound by his offer.
2. The terms must be reasonably certain,
definite and complete, so that the [arties and
the court can ascertain the terms of the offer.
3. The offer must be communicated by the offer
to the offeree, resulting in the offeree’s
knowledge of the offer.
•
•
•
Seriousness of the Offer
•
For an effective offer to exist, it is a
requirement that there must be a serious
intent on the part of the offeror in making the
offer.
Leonard vs Pepsico, Inc.
Following the objective theory, the seriousness of
such intention is to be determined by what a
reasonable person in the offeree’s position would
conclude the offeror’s words and actions meant and
not by the subjective intentions or beliefs of the
offeror.
Certainty of Offer
•
•
An offer to be effective must be certain and
definite with respect to the cause or
consideration and object of the proposed
contract.
There is an offer in the context of Article 1319
only if the contract can come into existence
The offeror cannot accept an offer which has
not been communicated to him; and,
therefore, as a general rule, an
uncommunicated offer, whether by words or
acts, cannot result in a contract.
An offer that has not been communicated by
the offeree, either in words or in actions, is
considered as not have been made.
There is in fact no need on the part of the
offeror to revoke such uncommunicated offer
as revocation is necessary only if the offer
has been previously communicated to the
offeree.
Example: “A” wrote a letter addressed to “B” to
convey his intention of selling his car to the latter
who, by the way, is his officemate. After writing the
letter, “A” kept and did the same inside his drawer in
the office. After writing the letter, “A” kept and hid the
same inside his drawer in the office. By incident, “B”
was able to see the letter when he opened A’s
drawer. Upon seeing the letter, he wrote his
acceptance in the same instrument. In this situation,
no contract of purchase and sale is formed between
the two since there is no offer which can be
subjected to acceptance.
Mere Invitations to Make an Offer
•
A mere statement of willingness to enter into
a negotiation or a mere inquiry as to whether
a person could make specified articles is not
an offer.
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•
An offer to be effective it must be one which
is intended of itself to create legal relations
on acceptance, and must be capable of
creating a definite obligation.
Rosenstock vs Burke
•
•
The word “entertain” applied to an act does
not mean the resolution to perform said act,
but simply a position to deliberate for
deciding to perform or not to perform said
act.
It was but a mere invitation to a proposal
being made to him, which might be accepted
by him or not.
•
Are treated as not offers to contract but as
invitations to negotiate.
Article 1325. Unless it appears otherwise, business
advertisements of things for sale are not definite
offers, but mere invitations to make an offer.
Example: Luis came across an advertisement in the
Philippine Daily Inquirer about the rush sale of three
slightly used Toyota cars for only 200,000 pesos
each. Finding the price to be very cheap and in order
to be sure that he gets one unit ahead of the others,
Luis immediately phoned the advertiser “Summit,
Inc.” and placed an order for one car. In this
situation, Luis may not sue the company for any
breach as no contract is formed between them.
Preliminary Negotiation
•
•
•
Are not viewed as an offer but rather are
invitations to negotiate or to make an offer.
It only expresses a willingness to discuss of
possibility of entering into a contract.
In determining whether there is an offer to
contract or only preliminary negotiations for
contract, only direct language indicating
intent to defer formation of contract, and
definiteness or indefiniteness of words used
in opening negotiation, as well as business
usages
and
all
accompanying
circumstances, must be considered.
Invitation to treat (or invitation to bargain)
•
•
An invitation to treat may be seen as a
request for expressions of interest.
The following are examples of invitation to treats (or
simply invitations to make an offer):
A. Advertisement of Things for Sale
The clause “unless it appears otherwise”
takes into consideration the fact that
advertisement may, under certain situation,
be in the nature of an offer.
Carlill vs Carbolic Smoke Ball Company
•
•
Is an action by one party which may appear
to be a contractual offer but which is actually
inviting others to make an offer of their own.
Note: the distinction is important because if a
legitimate contractual offer is accepted by another, a
binding contract is immediately formed and the
terms of the original offer cannot be further
negotiated without both parties’ consent.
•
Purpose: the law seeks to avoid such fairness by
treating advertisements of things for sale merely as
invitations to make an offer.
•
The advertisement was an offer of unilateral
contract between the Carbolic Smoke Ball
Company and anyone who satisfies the
conditions set out in the advertisement.
Weight was placed on the £1000 bank
deposit that claimed to show their sincerity in
the matter in showing that the advertisement
was not just a puff.
Whether or not a business circular, a
corporate prospectus, a published price list,
or other advertisement of like nature is an
offer which will, on acceptance form a
contract, or is merely an invitation to make an
offer, depends on the language used; but
generally a newspaper advertisement or
circular couched in general language and
proper to be sent to all persons interested in
a particular trade or business, or a
prospectus of a general and descriptive
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nature, will be construed as an invitation to
make an offer.
hammer
has
fallen
The seller has the
obligation
of
notifying
those
attending
the
auction that sales
of goods made
during the auction
are not final until
confirmed by the
seller.
B. Invitations to Bid
•
Where a person or a corporation advertises
for or requests bidders for property to be sold
or for the erection or construction of
particular work, it is well-settled that this is
simply an invitation to make offer, to make
tenders, as it is often called, and is not an
offer obliging the one extending the invitation
to accept the highest or lowest of any of the
bids; and this rule applies although the call
for bids reserves no right to reject any and all
bids; unless it contains language subject to
the interpretation that the intention is to let
the contract to the highest or lowest bidder.
D. Display of Goods
•
Basis: Article 1326 of the Civil Code of the
Philippines.
•
Fisher vs Bell
The bid proposals or quotations submitted by
the prospective suppliers are the offers and
the reply of the prosper, the acceptance or
rejection of the offers.
•
•
•
C. Auctions
•
The display of goods with a price ticket
attached in a shop window or on a
supermarket shelf is not an offer to sell but
an invitation for customers to make an offer
to buy.
The bid proposal submitted by the bidder is
the offer, which the auctioneer can accept or
reject as he chooses.
The sale is considered perfected only when
the auctioneer announces its perfection by
the fall of the hammer, or in other customary
manner.
•
•
Where goods are displayed in a shop
together with the price label, such display is
treated as an invitation to treat (invitation to
make an offer) by the seller, and not an offer.
The offer is instead made when the customer
presents the item to the cashier together with
the payment.
Acceptance occurs at the point the cashier
takes payment.
This means that if a shop mistakenly displays
a good for sale at a very low price it is not
obliged to sell it for that amount.
Termination of Offer
Auction with
reserve
There
is
no
obligation to sell,
and the seller may
refuse the highest
bid.
The seller may
reserve the right
to conform or
reject the sale
even after the
Auction without
reserve
The goods may
not be withdrawn
by the seller and
they must be sold
to the highest
bidder.
•
•
•
An offer is terminated either through the
action of the parties or by operation of law.
The parties can terminate the offer in three
ways: by revocation, by rejection, or by
counter-offer.
Termination of offer by operation of law may
occur through the supervening illegality of
the proposed contract, lapse of time,
destruction of the subject matter of the offer,
or death, civil interdiction, insanity, or
insolvency of either the offeror or offeree.
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A. Revocation
•
•
•
•
•
•
•
•
•
•
•
•
At any time prior to the perfection of
the contract, either negotiating party
may stop the negotiation.
The offer, at this stage, may be
withdrawn or revoked by the offeror,
as a rule.
The power to revoke is implied in the
criterion that no contract exist until
the acceptance to the offer is known.
Upon the revocation or withdrawal of
the offer, the same is considered
terminated.
The acceptance of an offer must be
known to the offeror.
The contract is perfected only from
the time an acceptance of an offer is
made known to the offeror.
Unless the offeror knows of the
acceptance, there is no meeting of
the minds of the parties, no real
concurrence of the offer and
acceptance.
As a rule, the offeror may withdraw its
offer and revoke the same before
acceptance thereof by the offeree
However, where a period is given to
the offeree within which to accept the
offer and the same has a separate
consideration, a contract of option is
deemed perfected, and it would be a
breach of that contract to withdraw
the offer during the agreed period.
In contracts between absent persons,
the theory holding that an acceptance
by letter of an offer has no effect until
it comes to the knowledge of the
offerer.
It means, that before the acceptance
is known, the offer can be revoked, it
not being necessary, in order for the
revocation to have the effect of
impeding the perfection to the
contract, that it be known by the
acceptant.
The revocation or withdrawal of the
offer is effective immediately after its
manifestation, such as by its mailing
and not necessarily when the offeree
learns of the withdrawal.
B. Rejection and Counter-offer
• The offer may also be terminated
when the person to whom the offer is
made (the offeree) either rejects the
offer outright or makes a counteroffer of his own.
• By rejecting the offer, the offeree
thereby terminates the offer and his
subsequent attempt to accept the
previous offer will not result in its
reinstatement.
• If the offeree subsequently attempts
to accept the offer after its rejection,
the same will amount to a new offer
on his part and the original offeror
(who now becomes the offeree) must
accept the new offer in order for a
contract to be perfected.
Counter-offer
•
•
•
A rejection of the original offer and an
attempt to end the negotiation between the
parties on a different basis.
It has dual function: it rejects the original offer
and simultaneously makes a new offer.
The original offer is therefore terminated and
the original offeree now becomes the new
offeror.
Lapse of Time
•
•
•
•
Where time in an offer for its acceptance, the
offer is terminated at the expiration of the
time given for its acceptance.
If the offer does not state a specific time
period for acceptance, the passage of a
reasonable length of time after the offer has
been made will likewise result in the
termination of the offer.
As to what constitute a reasonable time, the
same shall depend upon the relevant
circumstances and must be decided by the
courts on a case-to-case basis.
An offer made inter praesentes (or made to
a person present) must be accepted
immediately when the offeror has not fixed a
period for acceptance, otherwise the offer is
immediately terminated.
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•
C. Effect of Death, Insanity, Insolvency, or
Civil Interdiction
•
•
If prior thereto, either party dies, suffer from
civil interdiction, becomes insane or
insolvent, the offer is rendered ineffective.
The disappearance of either party or his loss
of capacity before perfection prevents the
contractual tie from being formed.
Reason:
•
•
Villanueva vs Court of Appeals
•
•
The contract is not perfected except by the
concurrence of two wills which exist and
continue until the moment that they occur.
The contract is not yet perfected at any time
before acceptance is conveyed; hence, the
disappearance of either party or his loss of
capacity before perfection prevents the
contractual tie from being formed.
The insolvency of a bank and the consequent
appointment of a receiver restrict the bank’s
capacity to act, especially in relation to its
property.
D. Supervening Illegality and Destruction of
Subject Matter
•
•
•
The termination of the offer likewise occurs
when a legislative enactment or a court
decision makes the offer illegal after it has
been made.
The offer is likewise terminated if the specific
subject matter thereof is destroyed before
the offer is accepted.
If loss or destruction of the determinate thing
without the fault of the debtor results in the
extinguishment of the obligation to deliver a
determinate thing, with more reason that the
offer to deliver a specific thing should be
considered terminated upon the loss or
destruction of the subject matter of the offer
to acceptance.
Option
•
•
•
•
•
Is a preparatory contract in which one party
grants to the other, for a fix period and under
a specified condition, the power to decide,
whether or not to enter into a principal
contract.
It binds the party who has given the option,
not to enter into the principal contract with
any other person during the period
designated, and, within that period, to enter
into such contract with the one to whom the
option was granted, if the latter should decide
to use the option.
It is a separate agreement distinct from the
contract which the parties may enter into
upon the consummation of the option.
A continuing contract by which the owner
stipulates with another that the latter shall
have the right to buy the property at a fixed
price within a certain time, or under, or in
compliance with, certain terms and condition,
or which gives to the owner of the property
the right to sell or demand a sale.
It is sometimes called an unaccepted offer.
An option is not of itself a purchase, but
merely secures the privilege to buy.
It is not a sale of property but a sale of the
right to purchase.
It is simply a contract by which the owner of
the property agrees with another person that
he shall have the right to buy his property at
a fixed price within certain time.
Contract of Sale vs Option
Option
An
unaccepted
offer.
State the terms and
conditions on which
the owner is willing
to sell the property,
if
the
optionee
elects to accept
them within the time
limited.
If the optionee does
so elect, he must
give notice to the
other party, and the
accepted
offer
Contract of Sale
Fixes definitely the
relative rights and
obligations of both
parties at the time of
its execution.
The offer and the
acceptance
are
concurrent, since
the minds of the
contracting parties
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thereupon becomes meet in the terms of
valid and binding the agreement.
contract (of sale).
If an acceptance is
not made within the
time
fixed,
the
owner is no longer
bound by his offer,
and the option is at
an end.
When Supported by Separate Consideration
•
•
•
•
Where a period is given to the offeree within
which to accept the offer and the same is
founded upon or supported by a separate
consideration, a contract of “option” is
deemed perfected.
If the contemplated contract is one of sale,
an accepted unilateral promise which
specifies the thing to be sold and the price to
be paid, when coupled with a valuable
consideration distinct and separate from the
price, is what may properly be termed a
perfected contract of option.
For an option contract to be valid and
enforceable against the promisor, there must
be a separate and distinct consideration that
supports it.
When the option becomes a contract, the
offeror is bound by the agreement and may
not withdraw the offer during the period
agreed upon.
If the right to withdraw
whimsically/arbitrarily
•
•
Article 19 of the Civil Code will apply. It
provides that every person must, in the
exercise of his right and in the performance
of his duties, act with justice, give everyone
his due, and observe honesty and good faith.
Sanchez vs Rigos
•
Even if the option is not a contract in the
absence of a cause or consideration, in
which case the promisor is not bound by his
promise and may, accordingly, withdraw it,
nonetheless, pending notice of its
withdrawal, his accepted promise partakes,
however, of the nature of an offer which, if
accepted, results in a perfected contract.
Consideration in Option Contract
•
•
•
If the period is not itself founded upon or
supported by a consideration, the option
does not become a contract.
The offeror is still free and has the right to
withdraw the offer before its acceptance, or,
if an acceptance has been made, before the
offeror’s coming to know of such fact, by
communicating that withdrawal to the
offeree.
exercised
Reason: An offer implies an obligation on the part of
the offeror to maintain in such length of time as to
permit the offeree to decide whether to accept or not,
and therefore cannot arbitrarily revoke the offer
without being liable for damages which the offeree
may suffer.
When not Supported by Separate Consideration
•
was
•
•
The contract of option must be supported by
a consideration.
The consideration supporting the option,
must be distinct and separate from the
consideration of the projected principal or
main contract (subject matter of the option).
The same is an onerous contract for which
the consideration must be something of
value, although its kind may vary.
If the consideration is not monetary, these
must be things or undertakings of value, in
view of the onerous nature of the contract
option. ‘
When a consideration for an option contract
is not monetary, said consideration must be
clearly specified as such in the option
contract or sale.
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•
Note:
•
The provision in Article 1354 that the
existence of consideration is to be presumed
in a contract does not apply to the contract of
option or to “accepted unilateral promise to
buy or sell.”
Option Money Distinguished
Money
•
from
Earnest
Earnest money is something of value to show
that the buyer was really in earnest, and
given to the seller to bind the bargain, and
whenever earnest money is given in a
contract of sale, it is considered as part of the
purchase price and proof of the perfection of
the contract.
Option Money
A money given as a
distinct
consideration for an
option contract.
While option money
applies to a sale not
yet perfected.
When the would-be
buyer gives the
option money, he is
not required to buy.
•
Earnest Money
Is part of the
purchase price.
Given only where
there is already a
sale.
When it is given, the
buyer is bound to
pay the balance.
Effect of Qualified Acceptance
Qualified Acceptance – involves a new proposal
constitutes a counter-offer and rejection of the
original offer.
Counter-offer – a rejection of the original offer and
an attempt to end the negotiation between the
parties on a different basis.
•
•
Acceptance of Offer
Requirement of Acceptance
Acceptance
•
•
•
•
The offeree’s expression of assent to the
exact terms of the offer.
To produce a contract, there must be
acceptance, which may be express or
implied, but must not qualify the terms of the
offer.
An acceptance concludes the making of a
contract; nothing further is required.
The effect of an unqualified acceptance of
the offer is to perfect a contract.
Acceptance must be absolute
An acceptance is considered absolute and
unqualified when it is identical in all respects
with that of the offer so as to produce consent
or a meeting of the minds.
There is no acceptance sufficient to produce
consent, when a condition in the offer is
removed, or a pure offer is accepted with a
condition, or when term is established, or
changed, in the acceptance, or when a
simple obligation is converted by the
acceptance into an alternative one.
When something is desired which is not
exactly what is proposed in the offer, such
acceptance is not sufficient to generate
consent because any modification or
variation from the terms of the offer annuls
the offer.
A proposal to accept or an acceptance,
introducing new conditions or terms varying
from those offered amounts to a rejection of
the offer and the submission of a counterproposal and puts an end to the negotiations
without forming a contract unless the party
making the offer renews it or agrees to the
suggested modifications.
Mirror-Image Rule
•
•
•
•
Requires the offeree’s acceptance to exactly
match the offeror’s offer – to mirror the offer.
In effect, the acceptance must be the mirror
image of the offer.
It has been ruled in this jurisdiction that the
acceptance must be identical in all respects
with that of the offer so as to produce consent
or meeting of the minds.
When something is desired which is not
exactly what is proposed in the offer, such
acceptance is not sufficient to generate
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consent because any modification or
variation from the terms of the offer annuls
the offer.
the price and as proof of the perfection of the
contract.
Manner and Form of Acceptance
Limketkai Sons Millings, Inc. vs Court of Appeals
Manner of Acceptance
•
•
When any of the elements of the contract is
modified upon acceptance, such alteration
amounts to a counter-offer.
The request for change made by the offeree
concerns the amount and manner of
payment of the price, which is an essential
element in the formation of a binding and
enforceable contract of sale.
•
Villanueva vs Philippine National Bank
•
•
•
An acceptance of an offer which agrees on
the rate of the payment but varies the term is
ineffective.
An acceptance may contain a request for
certain changes in the terms of the offer and
yet be a binding acceptance so long as it is
clear that the meaning of the acceptance is
positively and unequivocally to accept the
offer, whether such request is granted or not.
The acceptance of the offer was qualified,
which amounts to a rejection of the original
offer.
Villonco Realty Company vs Bormaheco, Inc.
•
•
•
•
Where the alleged changes made in the
acceptance are not material but merely
clarificatory made in the acceptance of what
had previously been agreed upon, then there
is no rejection of the original offer.
Even if a letter accepting an offer
enumerates certain basic terms and
conditions are prescriptions on how the
obligation is to be performed and
implemented and not conditions for the
perfection of the contract, the same is not a
counter-offer.
The controlling fact is that there was
agreement between the parties on the
subject matter, the price and the mode of
payment and that part of the price was made.
Whenever earnest money is given in a
contract of sale, it shall be considered part of
•
•
•
•
The offeror has a right to prescribe in his offer
the time, place, and manner of acceptance or
other matters which it may please him to
insert in and make a part thereof, and the
acceptance, to conclude the agreement,
must in every respect meet and correspond
with the offer, neither falling short of, nor
going beyond, the terms propose, but exactly
meeting them at all points and closing with
them just as they stand, and, in the absence
of such an acceptance subsequent words or
acts of the parties cannot create a contract.
The acceptance must not vary terms of the
offer, when the offeror fixes the time, place
and manner of acceptance, the offeree must
comply with the same and no contract is
formed unless the latter uses that specified
mode or manner of acceptance.
An attempt on the part of the offeree to
accept the offer in a different manner does
not bind offeror as the absence of the
meeting of the minds on the altered type of
acceptance.
If the parties intended that there should be an
express acceptance, the contract will be
perfected only upon knowledge by the offeror
of the express acceptance by the offeree of
the offer.
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.
Forms of Acceptance
•
•
An acceptance may be express or implied,
unless the law specifically requires a
particular or manner of expressing such
consent.
The rule is that except where a formal
acceptance is so required, although the
acceptance must be affirmatively and clearly
made and must be evidenced by some acts
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•
or conduct communicated to the offeror, it
may be made either in a formal or informal
manner, and may be shown by acts, conduct,
or words of the accepting party that clearly
manifest a present intention or determination
to accept the offer.
If the parties intended that there should be an
express acceptance, the contract will be
perfected only upon knowledge by the offeror
of the express acceptance by the offeree of
the offer.
Note:
•
•
•
Acceptance Through Agent
•
If an offer has been made through an agent,
it is deemed accepted from the time
acceptance is communicated to said agent,
since by legal fiction, the agent is the
extension of the personality of the principal.
When acceptance binds offeror: Theory of
Cognition
•
The acceptance may be made through the
medium of letters, telegrams, or telephonic
communications, and result in a complete
contract as soon as an offer thus made is
unconditionally accepted, unless the offeror
fixes a different mode of acceptance
pursuant to Article 1321.
With regard to the contracts between absent person
or when the parties involved are not dealing face-toface, there are two principal theories as to when the
contract is perfected:
1. Theory of Cognition
• An acceptance by letter of an offer has no
effect until it comes to the knowledge of the
offeror.
• Being followed under the Spanish Civil Code.
2. Mailbox Rule
• An acceptance by letter of an offer is
effective form the time the latter is sent.
• Also called the deposited acceptance rule,
which majority of the courts of the United
States of America uphold.
•
Unless the offeror knows of the acceptance,
there is no meeting of the minds of the
parties, no real concurrence of offer and
acceptance.
The contract is perfected only from the time
an acceptance of an offer is made known to
the offeror.
Before the acceptance is known, the offer
can be revoked, it not being necessary, in
order for the revocation to have the effect of
impeding the perfection of the contract, that
it be known by the acceptant.
The offeree may still revoke his acceptance
before it comes to the knowledge of the
offeror (Dr. Tolentino)
Jardine Davies, Inc. vs Court of Appeals
•
For the contract to arise, the acceptance
must be made known to the offeror.
Accordingly, the acceptance can be
withdrawn or revoked before it is made
known to the offeror.
Article 1327. The following cannot give consent
to a contract:
(1) Unemancipated minors;
(2) Insane or demented persons, and
deaf-mutes who do not know how to
write. (1263a)
Article 1328. Contracts entered into during a
lucid interval are valid. Contracts agreed to in a
state of drunkenness or during a hypnotic spell
are voidable. (n)
Article 1329. The incapacity declared in article
1327 is subject to the modifications determined
by law, and is understood to be without
prejudice
to
special
disqualifications
established in the laws. (1264)
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Capacity to Give Consent
Importance of Capacity
•
•
•
The legal capacity of the parties is an
essential element for the existence of the
contract because it is an indispensable
condition for the existence of consent.
Legal consent presupposes capacity.
For consent to be valid it must be given only
by a person with legal capacity to give
consent.
The following are the persons who cannot give valid
consent to contract:
(1) Unemancipated minors;
(2) Insane or demented persons, and deafmutes who do not know how to write.
•
•
•
If said persons give consent to a contract, the
consent is not considered lacking or nonexistent, which will make the contract
inexistent.
Instead, the consent thus given is considered
merely as defective.
Thus, the contract is only classified as
unenforceable if both parties are incapable of
giving consent to a contract, or voidable of
only one of the parties is incapable of giving
consent to a contract.
Person Not Legally Capacitated to Contract
•
The burden of proof is on the individual
asserting a lack of capacity to contract, and
this burden has been characterized as
requiring for its satisfaction clear and
convincing evidence.
Persons who are incapable of giving consent to a
contract:
1. Unemancipated minor.
2. Insane or demented person.
3. Deaf-mute who do not know how to write.
Note: the Rules of Court also provide for the
guardianship of persons considered incompetent,
including persons suffering from the penalty of civil
interdiction or who are hospitalized lepers, prodigals,
deaf and dumb who are unable to read and write,
those who are of unsound mind, even though they
have lucid intervals, and persons not being of
unsound mind, but by reason of age, disease, weak
mind, and other similar causes, cannot, without aid,
take care of themselves and manage their property,
becoming thereby an easy prey for deceit and
exploitation.
Special Disqualification
Incapacities
•
Are limitations on capacity to act and are,
therefore, restrictions on the exercise of the
right, and are founded on subjective
circumstances within the person afflicted
thereof; whereas, disqualifications or
prohibitions are not limitations on capacity to
act but merely restrictions on the enjoyment
of the right and are based on reasons of
morality.
The following are examples of prohibitions or special
disqualifications:
1. The spouses and persons living together as
husband and wife without a valid marriage
are prohibited from making donations to each
other. Any such donation, whether direct or
indirect, is void.
2. The spouses cannot sell to each other,
except when the property regime is complete
separation. Any such sale is void.
3. The guardian cannot acquire by purchase,
even at a public or judicial action, the
property of the ward; otherwise, the sale is
void.
4. The agent cannot acquire by purchase, even
at a public or judicial action, the property
whose administration or sale has been
trusted to him, unless the consent of the
principal has been given; otherwise, the sale
is void.
5. The executor or administrator cannot acquire
by purchase, even at a public or judicial
action, the property of the estate under his
administration; otherwise the sale is void.
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6. Public officers and employees cannot
acquire by purchase even at public or judicial
action, the property of the State or of any
subdivision thereof or of any governmentowned or controlled corporation or institution,
the administration of which has been
entrusted to them; otherwise, the sale is void.
7. Justices, judges, prosecuting attorneys,
clerks of superior and inferior courts, and
other officers and employees connected with
the administration of justice, including
attorneys or lawyers, cannot acquire by
purchase, even at a public or judicial action,
the property and rights in litigation or levied
upon an execution before the court within
whose jurisdiction or territory they exercise
their respective jurisdiction; otherwise, the
sale is void.
Mercado vs Espiritu
•
Minor’s right to annul the contract he entered
into during minority if he was guilty of
mirepresenting his age.
When the minor’s physical development
could mislead the other party into believing
that he was of age, the minor is said to be
guilty of estoppel and may not annul the
contract on the ground of minority.
•
Bragaza vs Villa
•
•
Minors
Minority
•
•
•
•
•
•
The state of a person who is under the age
of legal majority and a minor is a person
below 18 years of age since majority
commences upon attaining the age of 18
years.
All
minors
now
are
necessarily
unemancipated because, under current
laws, emancipation can only take place by
the attainment of majority age.
A contract entered into by a minor is not void,
but merely voidable.
The law gives the minor the right to annul the
contract entered into by him upon his
attainment of the age of majority, but he must
bring the action for annulment within four
years from his attainment of the age of
majority, otherwise, the action will be barred
by the statute of limitations or prosecution.
He may, however, ratify the voidable contract
upon reaching the age of majority.
He may, however, be represented in a
contract by his guardian.
•
The Mercado ruling applies only if the minor
is guilty of active mirepresentation, such as
when the document signed by the minor
specifically stated he was of age.
If the minor is guilty only of passive or
constructive mirepresentation, such as
when he simply failed to disclose his
minority in the document that he signed, the
minor can still annul the contract on the
ground of minority.
The Mercado ruling was also held
inapplicable in a case where the minor did
not pretend to be of age at the time the
contract was made and his minority was
well known to the other party, hence, the
contract may still be annulled.
Insane or Demented
•
•
•
The law presumes that every person is of
sound mind, in the absence of proof to the
contrary.
Since contractual capacity is determined at
the time of the perfection of the contract, the
burden of proving that a party is mentally
incapacitated at the time of the execution of
the contract rest upon him who alleges it; if
no sufficient proof to this effect is presented,
such capacity must be presumed.
If a contracting party is under guardianship
by reason of insanity, there is naturally a
presumption of insanity.
Note: contract entered into during a lucid interval are
valid.
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Lucid Interval
•
•
Intervals occurring in the metal life of an
insane person during which he is completely
restored to the use of his reason, or so far
restored that he has sufficient intelligence,
judgement, and will to enter into contractual
relations, or perform other legal acts, without
disqualification by reason of his disease.
If a contracting party is under guardianship
by reason of insanity, the burden of proof that
the contract is entered into during a lucid
interval is upon him who upholds the validity
of the contract.
•
As to other illiterates, they are presumed to
have the capacity to give consent to a
contract but the law imposes an obligation
upon the other contracting party to fully
explain the contract to them.
Old Age or Other Physical Infirmities
General Rule:
In the same manner, a person is not incapacitated to
enter into a contract merely because of advanced
years or by reason of physical infirmities.
Exception:
Note: not every kind of insanity, will annul consent.
•
A person under guardianship for insanity
may still enter into a valid contract and even
convey property, if his menta defect did not
interfere with or affect his capacity to
appreciate the meaning and significance of
the transaction entered into by him.
When such age or infirmities impair his mental
faculties to the extent that he is unable to properly,
intelligently and fairly understand the provisions of
said contract, or to such extent as to prevent him
from properly, intelligently, and fairly protecting his
property rights, is he considered incapacitated.
Standard Oil Company of New York vs Arenas
•
Civil Interdiction
The Court did not annul a bond executed by
a person suffering from monomania of great
wealth because it was not shown that the
reason for its execution was an ostentation of
wealth and that such was purely an effect of
monomania of wealth.
•
•
Contracts agreed to in a state of drunkenness or
during a hypnotic spell are voidable.
•
In order for these persons to be considered
incapable of giving consent, it is necessary
that such state must have interfered with the
person’s mental faculties in such a way that
it prevented him form knowing the meaning
and significance of the transaction entered
by him.
Illiteracy, Old Age, and Civil Interdiction
Illiteracy
•
Is not an incapacity to give consent, except
when he is also a deaf-mute.
An accessory penalty imposed upon an
accused who is sentenced to a principal
penalty not lower than reclusion temporal.
It deprives the offender during the time of his
sentence of the following rights:
o Parental authority, or guardianship,
either as to the person or property of
any ward;
o Marital authority
o Management of his property
o Disposition of his property by any act
or any conveyance inter vivos.
Article 1330. A contract where consent is given
through mistake, violence, intimidation, undue
influence, or fraud is voidable. (1265a)
Vices of Consent
•
To create a valid contract, the meeting of the
minds must be free, voluntary, willful and with
a reasonable understanding of the various
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obligations the
themselves.
parties
assumed
for
Consent in contracts presupposes the following
requisites:
1. It should be intelligent or with an exact notion
of the matter to which it refers.
2. It should be free.
3. It should be spontaneous.
•
•
A contract where consent is given through
mistake, violence, intimidation, undue
influence or fraud is voidable.
These circumstances are defects of the will,
the existence of which impairs the freedom,
intelligence, spontaneity and voluntariness of
the party in giving consent to the agreement.
Article 1331. In order that mistake may invalidate
consent, it should refer to the substance of the
thing which is the object of the contract, or to
those conditions which have principally moved
one or both parties to enter into the contract.
Mistake as to the identity or qualifications of one
of the parties will vitiate consent only when such
identity or qualifications have been the principal
cause of the contract.
A simple mistake of account shall give rise to its
correction. (1266a)
Covers Both Mistake and Ignorance
Ignorance
Mistake
The absence of A wrong conception
knowledge
with about said thing, or
respect to a thing.
a belief in the
existence of some
circumstance, fact,
or event, which in
reality does not
exist.
Character of Mistake Which Annuls Consent
•
Not every mistake renders a contract
voidable.
In order that mistake may invalidate consent, it is
necessary that:
1. It should refer to the substance of the thing
which is the object of the contract, or to those
conditions which have principally moved one
or both parties to enter into the contract, or to
the identity or qualifications of one of the
parties when the same have been the
principal cause of the contract.
2. It must get excusable and not one that could
have been avoided by the party alleging it.
3. It must generally be a mistake of fact and not
mistake of law.
Mistake as to Object of Contract
Article 1332. When one of the parties is unable to
read, or if the contract is in a language not
understood by him, and mistake or fraud is
alleged, the person enforcing the contract must
show that the terms thereof have been fully
explained to the former. (n)
Mistake as to the object of the contract (error in re)
may either be:
1. Mistake over the identity of the thing
(error in corpore) which happens when
one thing is mistaken for another.
Article 1333. There is no mistake if the party
alleging it knew the doubt, contingency or risk
affecting the object of the contract. (n)
Example: substitution of a specific thing
contemplated by the parties with another.
Article 1334. Mutual error as to the legal effect of
an agreement when the real purpose of the
parties is frustrated, may vitiate consent. (n)
•
Mistake
2. Mistake over the essence or the
substantial qualities of a thing (error in
This kind of mistake destroys the will of the
parties and prevents the formation of a
juridical act, hence, there is no contract.
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•
•
substantia) which affects not the identity
of the thing but the materials which
compose it.
Mistake as to Identity or Qualification of Parties
Example: the purchase of an object which is
gold plated in the belief that it is really gold.
1. Mistake must be either with regard to the
identity or with regard to the qualification of
one of the contracting parties.
2. The identity or qualification must have been
the principal consideration for the celebration
of the contract.
The consent here is vitiated and the contract
is voidable.
This is the kind of mistake referred to in
Article 1331 concerning the substance of the
thing which is the object of the contract.
3. Mistake over determinate attributes or
characteristics of a thing foreign to its
matter, but which has been understood as
essential by the contracting parties (error
in sustantia)
Example: A painting by Goya is bought and
the painting is not of Goya.
•
This vitiates consent and the contract is
voidable.
4. Mistake is to amount (error in quantitate)
which refers to mistake as to the
extension or dimension of the object and
differs from the mistake of account which
is simply a mistake in the computation or
in a mathematical operation.
•
This mistake will vitiate consent and the
contract becomes voidable.
Mistake as to Conditions
Genera Rule: mistake as to condition will invalidate
consent only when they are essential, or have
principally moved one or both parties to enter into
the contract.
Exception: When the conditions are not essential
but merely accidental, they will not invalidate
consent.
Requisites:
Roman Catholic Church vs Pante
There was no mistake committed by the Church that
may invalidate consent because the actual
occupancy of a buyer over the land does not appear
to be a necessary qualification that the Church
requires before it could sell its land in view of the
following reasons:
1. The Church sold the same property to the
Spouses Rubi when the latter were not also
actual occupant of the lot.
2. Given the size of the lot, it could serve no
other purpose than as a mere passageway.
3. The Church was aware that Pante was using
the lot merely as a passageway.
Mistake as to Non-Essential Elements
The following kinds of mistake do not vitiate consent
because they refer merely to non-essential elements
of the contract:
1. Mistake as to the identity or qualification of
one of the contracting parties, unless such
identity or qualification have been the
principal consideration for the celebration of
the contract.
2. A simple mistake of account, or mistake in a
mathematical operation. The remedy is
simply correction.
3. Mistake as to motive because the latter is not
an essential element of a contract, unless the
motive predetermines the purpose of the
contract, in which case it also becomes the
cause of the contract.
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Mistake must be excusable
•
•
•
•
•
•
To invalidate consent, the error must be
excusable.
It must be real error, and not one that could
have been avoided by the party alleging it.
The error must arise from facts unknown to
him.
Article 1333 provides that there is no mistake
if the party alleging it knew the doubt,
contingency or risk affecting the object of the
contract.
Consequently, an error so patent and
obvious that no body could have made it, or
one which could have been avoided by
ordinary prudence, cannot be invoked by the
one who made it in order to annul his
consent.
A mistake that is caused by manifest
negligence cannot invalidate a juridical act.
Mistake must be of fact
•
•
•
•
The provision came into being because a
sizeable percentage of the country’s
populace was compromised of illiterates, and
the documents at the time had been written
either in Spanish or English.
It is also an accord with our state policy of
promoting social justice.
It also supplements Article 24 of the Civil
Code which calls on the court to be vigilant in
the protection of the rights or those who are
disadvantaged in life.
Note:
•
•
Before Article 1332 may be invoked, it must
be convincingly established that the
disadvantaged party is unable to read or that
the contract involved is written in a language
not understood by him.
Article 1332 contemplates a situation
wherein a contract has been entered into,
but the consent of one of the parties is
vitiated by mistake or fraud committed by the
other contracting party.
In order that mistake may be invalidated
consent, the same should refer to a mistake
of fact and not of law.
A mistake of law does not vitiate consent
because of the rule that ignorance of the law
excuses no one from compliance therewith.
Article 1335. There is violence when in order to
wrest consent, serious or irresistible force is
employed.
In order for a mistake of law tom invalidate consent
under Article 1334, the following requisites must be
present:
There is intimidation when one of the contracting
parties is compelled by a reasonable and wellgrounded fear of an imminent and grave evil
upon his person or property, or upon the person
or property of his spouse, descendants or
ascendants, to give his consent.
•
1. The mistake must be with respect to the legal
effect of an agreement.
2. It must be mutual.
3. The real purpose of the parties must have
been frustrated.
Effect if a party is illiterate
•
When one of the parties is unable to read, or
if the contract is in a language not
understood by him, and mistake or fraud is
alleged, the person enforcing the contract
must show that the terms thereof have been
fully explained to the former.
To determine the degree of intimidation, the age,
sex and condition of the person shall be borne in
mind.
A threat to enforce one's claim through
competent authority, if the claim is just or legal,
does not vitiate consent. (1267a)
Article 1336. Violence or intimidation shall annul
the obligation, although it may have been
employed by a third person who did not take part
in the contract. (1268)
Lim vs Court of Appeals
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Violence or Intimidation
Violence
Refers to physical
force
or
compulsion.
There is actual
infliction of harm.
Intimidation
Moral
force
or
compulsion.
There is merely a
threat
to
inflict
harm.
Is external and Internal and does
generally prevents not prevent the will
the will from acting from operating but
at all.
merely directs it to
operate in only one
particular manner.
In both, the party is deprived of free will
and choice.
Requisites of Violence
1. The force employed is either serious or
irresistible.
2. It must have been the determining cause of
consent.
•
•
It is not necessary that the force be always
irresistible.
Even if the force is not irresistible but it is
serious in such a degree that the victim has
no other recourse, under the circumstances,
but to submit, the consent is also considered
vitiated.
Requisites of Intimidation
De Leon vs Court of Appeals
1. That the intimidation must be the determining
cause of the contract, or must have caused
the consent to be given.
2. That the threatened act be unjust or unlawful.
3. That the threat be real and serious, there
being an evident disproportion between the
evil and the resistance which all men can
offer, leading to the choice of the contract as
the lesser evil.
4. That it produces a reasonable and wellgrounded fear from the fact that the person
from whom it comes has the necessary
means or ability to inflict the threatened
injury.
•
•
In determining the degree of intimidation, the
age, sex, and condition of the person shall be
borne in mind.
A threat to enforce one’s claim through
competent authority, if the claim is just or
legal, does not vitiate consent.
Article 1337. There is undue influence when a
person takes improper advantage of his power
over the will of another, depriving the latter of a
reasonable freedom of choice. The following
circumstances shall be considered: the
confidential, family, spiritual and other relations
between the parties, or the fact that the person
alleged to have been unduly influenced was
suffering from mental weakness, or was ignorant
or in financial distress. (n)
Undue Influence
•
•
•
There is undue influence when a person
takes improper advantage of his power over
the will of another, depriving the latter of a
reasonable freedom of choice.
Undue influence is any means employed
upon
a
party
which,
under
the
circumstances, he could not well resist and
which controlled his volition and induced him
to give his consent to the contract, which
otherwise he would not have entered into.
For undue influence to be present, it is
necessary that the influence exerted must
have so overpowered or subjugated the mind
of a contracting party as to destroy his free
agency, making him express the will of
another rather than his own.
Loyola vs Court of Appeals
Requisites in order for undue influence to vitiate
consent:
1. A person who can be influenced.
2. The fact that the improper influence was
exerted.
3. Submission to the overwhelming effect of
such unlawful conduct.
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In determining the existence of undue influence, the
following circumstances shall be considered:
•
•
•
•
The confidential
Family
Spiritual and other relations between the
parties
The fact that the person alleged to have been
unduly influenced was suffering from mental
weakness, or was ignorant or in financial
distress.
Article 1344. In order that fraud may make a
contract voidable, it should be serious and
should not have been employed by both
contracting parties.
Incidental fraud only obliges the
employing it to pay damages. (1270)
and
•
That influence obtained by persuasion,
argument, or by appeal to the affections is
not prohibited either in law or morals, and is
not obnoxious even in court of equity.
•
Solicitation, importunity, argument,
persuasion are not undue influence.
Martinez vs HongKong and Shanghai Bank
•
person
Fraud
Baez vs Court of Appeals
•
Article 1343. Misrepresentation made in good
faith is not fraudulent but may constitute error.
(n)
Article 1338. There is fraud when, through
insidious words or machinations of one of
the contracting parties, the other is induced
to enter into a contract which, without them,
he would not have agreed to. (1269)
Article 1339. Failure to disclose facts, when
there is a duty to reveal them, as when the
parties are bound by confidential relations,
constitutes fraud. (n)
•
Insidious Machination
•
Article 1342. Misrepresentation by a third person
does not vitiate consent, unless such
misrepresentation has created substantial
mistake and the same is mutual. (n)
Refers to deceitful scheme or plot with an evil
or devious purpose.
Deceit
•
Article 1340. The usual exaggerations in trade,
when the other party had an opportunity to know
the facts, are not in themselves fraudulent. (n)
Article 1341. A mere expression of an opinion
does not signify fraud, unless made by an expert
and the other party has relied on the former's
special knowledge. (n)
Refers to all kind of deception, whether
through insidious machination, manipulation,
concealment or misrepresentation, that
would lead an ordinarily prudent person into
error after taking the circumstances into
account.
Fraud is defined as the deliberate and
intentional evasion of the normal fulfillment of
obligation, and properly corresponds to
malice or bad faith.
Fraud may also be present or employed at
the time of birth or perfection of a contract.
•
Exists where the party, with intent to deceive,
conceals or omits to state material facts and,
by reason of such omission or concealment,
the other [arty was induced to give consent
that would not otherwise have been given.
It must be sufficient to impress or lead an
ordinarily prudent person into error, taking
into account the circumstances of each case.
Kinds of Fraud
Dolo Causante or
Dolo Incidente or
Dolo Fraud
Incidental Fraud
Referred
to
in Referred
to
in
Article 1338
Article 1344
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Are
those
deceptions
or
mirepresentations
of
a
serious
character employed
by one party and
without which the
other party would
not have entered
into the contract.
Determines or is the
essential cause of
the consent.
Are those which are
not
serious
in
character
and
without which the
other party would
still have entered
into the contract.
Refers only to some
particular
or
accident of the
obligation.
The effect is the Only obliges the
nullity
of
the person employing it
contract and the to pay damages.
indemnification of
damages.
Serious in character Not
serious
in
character
The cause which Are those which a
induces the other re not serious in
contracting party to character
and
enter into a contract without which the
with the one who other party would
employed it, or the still have entered
essential cause of into the contract.
the consent.
Requisites of Fraud that Vitiates Consent
1. It must have been employed by one
contracting party upon the other.
2. It must have induced the other party to enter
into the contract.
3. It must have been serious.
4. It must have resulted in damage and injury to
the party seeking annulment.
General Rule:
•
Mirepresentation by a third person does not
vitiate consent.
Rationale:
•
There is no reason for making one of the
parties suffer for the consequences of the act
of a third person in whom the other
contracting party may have reposed an
imprudent confidence.
Exception:
The fraud cause by a third person may produce
effects and, in some cases, bring about the
nullification of the contract. This will happen when
the third person causes the fraud in connivance with,
or at least with the knowledge, without protest, of the
favored contracting party, in which case the latter
cannot be considered exempt from the
responsibility.
Fraud must be dolo causante
•
•
In order that fraud may vitiate consent, it
must be the causal (Dolo Causante),
inducement to the making of the contract.
The fraud must be the determining cause of
the contract, or must have cause the consent
to be given.
Example of Dolo Causante
Tongson vs Emergency Pawnshop Bula, Inc.
Some of the instances where this Court found the
existence of causal fraud include:
Employed by one against another
•
•
The fraud which vitiates consent must have
employed by one of the contracting parties
only and should not have been employed by
both of them; otherwise, the contract is not
voidable.
The fraud must have been employed by a
contracting party upon another and not by a
third person.
1. When the seller, who had no intention to part
with her property, as tricked into believing
that what she signed were papers pertinent
to her application for the reconstitution of her
burned certificate of title, not deed of sale.
2. When the signature of the authorized
corporate officer was forged.
3. When the seller was seriously ill, and died a
week after signing the deed of sale raising
doubts on whether the seller could have
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read, or fully understood, the contents of the
documents
he
signed
or
of
the
consequences of his act.
the former had the exclusive franchise to soft
drink bottling operations.
Fraud Must Be Serious
Example of Dolo Incidente
•
Woodhouse vs Halili
•
Facts:
The plaintiff Charles Woodhouse entered
into a written agreement with the defendant
Fortunato Halili to organize a partnership for the
bottling and distribution of soft drinks. However, the
partnership did not come into fruition, and the
plaintiff filed a complaint in order to execute the
partnership. The defendant filed a Counterclaim,
alleging that the plaintiff had defrauded him because
the latter was not actually the owner of the franchise
of a soft drink bottling operation. Thus, defendant
sought the nullification of the contract to enter into
the partnership.
•
The fraud must be serious to annul or avoid
a contract and render it voidable.
The fraud is serious when it is sufficient to
impress, or to lead an ordinarily prudent
person into error; that which cannot deceive
a prudent person cannot be a ground for
nullity.
In order for the deceit to be considered
serious, it is necessary and essential to
obtain the consent of the party imputing
fraud. To determine whether a person may
be sufficiently deceived, the personal
conditions and other factual circumstances
need be considered.
Other Rules on Fraud
Rule on Silence and Concealment
Held:
•
Plaintiff did actually represent to defendant
that he was the holder of the exclusive franchise.
The defendant was made to believe, and he actually
believed, that plaintiff had the exclusive franchise.
While the representation that plaintiff had the
exclusive franchise did not vitiate defendant’s
consent to the contract, it was used by the plaintiff to
get from defendant a share of 30% of the net profits;
in other words, by pretending that he had the
exclusive franchise and promising to transfer it to
defendant, he obtained the consent of the latter to
give him (plaintiff) a big slice in the net profits. This
is the dolo incidente defined in Article 1270 of the
Spanish Civil Code, because it was used to get the
other party’s consent to a big share in the profits, an
incidental matter in the agreement.
•
•
The original agreement may not be declared
null and void.
The plaintiff had been entitled to damages
because of the refusal of the defendant to
enter into the partnership. However, the
plaintiff was also held liable for damages to
the defendant for the misrepresentation that
•
Concealment which the law denounces as
fraudulent implies a purpose or design to
hide facts which the other party ought to
know.
Fraudulent concealment presupposes a duty
to disclose the truth and that disclosure was
not made when opportunity to speak and
inform was presented, and that the party to
whom the duty of disclosure, as to a material
fact was due, was induced thereby to act to
his injury.
Guihawa vs People
•
When the seller has knowledge of a material
fact which, if communicated to the buyer,
would render the sale unacceptable, or at
least, substantially less desirable, the nondisclosure of such fact would amount to
fraud.
Rural Bank of Sta. Maria, Pangasinan vs Court of
Appeals
•
It was ruled that the non-disclosure to the
creditor bank of the purchase price in the
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•
sale of the mortgaged property (between the
debtor-mortgagor and the buyer) did not
render the Memorandum of Agreement
(between the creditor bank and the buyer)
voidable on the ground that the bank’s
consent was vitiated with fraud.
The debtor-mortgagor and the property’s
buyer had no duty, and therefore did not act
in bad faith, in failing to disclose to the bank
the real consideration of the sale between
them.
Usual Exaggeration in Trade
•
The usual exaggerations in trade, when the
other party had an opportunity to know the
facts, are not in themselves fraudulent.
Songco vs Sellner
•
•
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 value face. The refusal
of the seller to warrant his estimate should
have admonished the purchaser that that
estimate was put forth as a mere opinion;
and we will not now hold the seller to a
liability equal to that which would have been
created by a warranty, if one had been given.
A man who relies upon such an affirmation
made by a person whose interest might so
readily prompt him to exaggerate the value of
his property does so at his peril, and must
take the consequences of his own
imprudence.
Expression of Opinion
General Rule:
•
A mere expression of opinion does not
signify fraud.
Exception:
•
When the opinion is made by an expert and
the other party relied on the former’s special
knowledge.
Quantum of Evidence
•
The Civil Code does not mandate the
quantum of evidence required to prove
actionable fraud, either for purposes of
annulling a contract (dolo causante) or
rendering a party liable for damages (dolo
incidente).
Viloria vs Continental Airlines, Inc.
•
Mere preponderance of evidence will not
suffice in proving fraud.
Tankeh vs
Philippines
•
Developmental
Bank
of
the
The purpose of annulling a contract on the
basis of dolo causante, the standard of proof
required is clear and convincing evidence.
Clear and Convincing Evidence
•
•
•
•
•
•
Derived from American common law.
It is less than proof beyond reasonable doubt
(for criminal cases) but greater than
preponderance of evidence (for civil cases).
The degree of believability is higher than that
of an ordinary civil case.
When fraud is alleged in an ordinary civil
case involving contractual relations, an
entirely different standard of proof needs to
be satisfied.
Mere allegations will not suffice to sustain the
existence of fraud.
The burden of evidence rests on the part of
the plaintiff or the party alleging fraud.
Article 1345. Simulation of a contract may be
absolute or relative. The former takes place
when the parties do not intend to be bound at all;
the latter, when the parties conceal their true
agreement. (n)
Article 1346. An absolutely simulated or
fictitious contract is void. A relative simulation,
when it does not prejudice a third person and is
not intended for any purpose contrary to law,
morals, good customs, public order or public
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policy binds the parties to their real agreement.
(n)
Simulation of Contracts
Simulation
•
Is the declaration of a fictitious will,
deliberately made by agreement of the
parties, in order to produce, for the purpose
of deception, the appearances of a juridical
act which does not exist or is different with
that which was really executed.
Requisites:
1. An outward declaration of will different from
the will of the parties.
2. The false appearance must have been
intended by mutual agreement.
3. The purpose is to deceive third person.
Absolute
Simulation
There is a colorable
contract but it has
no substance as the
parties have no
intention
to
be
bound by it.
The
apparent
contract is not really
desired or intended
to produce legal
effect or in any way
alter the juridical
situation of the
parties.
An
absolutely
simulated
or
fictitious contract is
void, and the parties
may recover from
each other what
they may have
given under the
contract.
Relative
Simulation
The parties conceal
their
true
agreement.
The
essential
requisites
of
a
contract are present
and the simulation
refers
only
to
content or terms of
the contract.
Two Juridical Acts:
Ostensible Act is
the contract that the
parties pretend to
have executed.
Hidden Act is the
true
agreement
between
the
parties.
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There appears to be
a valid contract but
there is actually
none because the
element of consent
is lacking because
the parties do not
actually intend to be
bound by the terms
of the contract.
The
most
protuberant index of
absolute simulation
of contract is the
complete absence
of an attempt in any
manner of the part
of the ostensible
buyer to assert
rights of ownership
over the subject
properties.
To determine the
enforceability of the
actual agreement
between
the
parties, we must
discern whether the
concealed
or
hidden act is lawful
and the essential
requisites of a valid
contract
are
present.
SECTION 2
Object of Contracts
Article 1347. All things which are not outside the
commerce of men, including future things, may
be the object of a contract. All rights which are
not intransmissible may also be the object of
contracts.
No contract may be entered into upon future
inheritance except in cases expressly authorized
by law.
All services which are not contrary to law,
morals, good customs, public order or public
policy may likewise be the object of a contract.
(1271a)
Article 1348. Impossible things or services
cannot be the object of contracts. (1272)
Article 1349. The object of every contract must
be determinate as to its kind. The fact that the
quantity is not determinate shall not be an
obstacle to the existence of the contract,
provided it is possible to determine the same,
without the need of a new contract between the
parties. (1273)
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Objects of Contracts
Object of
Obligation
It is the prestation or
the
conduct
required
to
be
observed by the
debtor (to give, to
do, or not to do).
Object of Contract
It is the subject
matter
of
the
prestation,
which
can either be a
thing,
right
or
service.
Example:
In the sale of a car, the object of the obligation is the
delivery of the car (to give) while the object of the
contract is the subject matter of the obligation to
give, or the thing sold, which is the car.
Requisites of Object of Contract
1.
2.
3.
4.
It must be within the commerce of men.
It must be licit.
It must be real or possible
It must be determinate or susceptible to
determination.
The following cannot be the object of contracts:
1. Things which are outside the commerce of
men.
2. Rights which are untransmissible.
3. Future inheritance, except in cases expressly
authorized by law.
4. Services which are contrary to law, morals,
good customs, public order, or public policy.
5. Impossible things or services.
6. Things which are not susceptible to
determination as to its kinds.
7. Things which do not have the possibility or
potentiality of coming into existence.
Must be within Commerce of Men
• All things which are not outside the
commerce of men, including future things,
may be the object of a contract.
• Things which are outside the commerce of
men cannot become objects of contracts.
• Any contract whose object is outside the
commerce of men is void.
To be considered within the commerce of men, a
thing must be:
1. Susceptible of appropriation or of private
ownership.
2. Transmissible
The following things may not be the object of a
contract because they are not susceptible of
appropriation, therefore, outside the commerce of
men:
1. Properties of public dominion
Example:
a. Public streets cannot be converted into a flea
market and leased to private individuals.
b. The submerged lands in the Manila Bay
area, which are declared to part of the State’s
inalienable natural resources, cannot be
alienated to private entity.
c. Properties
officially
declared
military
reservations become inalienable and outside
the commerce of men and may not be the
subject of a contract or of a compromise
agreement.
2. Sacred things, common things like the air
and the sea, and res nullius, as long as
they have not been appropriated.
Rights which are intransmissible may not also be the
object of the contract because they are also
considered outside the commerce of men:
1. Purely personal rights (patria potestas or
marital authority, the status and capacity of
persons, and honorary titles and distinctions)
2. Public offices, inherent attributes of the
public authority, and political rights of
individuals (ex: right to suffrage)
Saura vs Sindico
Such rights may not, therefore, be bargained
away curtailed with impunity, for they are conferred
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not for individual or private benefit or advantage but
for the public good and interest.
Must be Licit
• To be an object of a contract, the thing or
service must not be contrary to law, morals,
good customs, public order or public policy.
Example:
Any contract which authorizes slavery in any form is
not valid because it is contrary to law and public
policy.
Must have Possibility or Potentiality of Existence
In order for a contract to be valid, it is necessary that
the object thereof must either be:
1. Existing at the time of the perfection of the
contract.
2. Even if not existing at that time, at least, it
has the possibility or potentiality of coming
into existence.
“Future Things”
• Anything which is not yet owned or
possessed by the obligor at the time of the
celebration of the contract, but it may be
manufactured, raised or acquired after the
perfection of the contract.
When the object of the contract is a “future
thing,” there are two possibilities:
Example:
If there is a purchaser who is willing to take his
chance in return for a bigger profit and is willing to
purchase, for example, “whatever should be caught
in the next haul of the fisherman’s net,” the contract
is immediately effective and valid.
Exceptions:
1. Future inheritance may not be the object of a
contract unless it is in the nature of a partition
inter vivos made by the decedent.
2. Future property may not be the object of a
donation, unless the donation is between the
future spouses, in consideration of their
marriage, and to take effect after death.
Future Inheritance
• A contract entered into upon future
inheritance is void.
• Any property or right not existence or
capable of determination at the time of the
contract, that a person may in the future
acquire by succession (Blas vs Santos)
A contract may be classified as a contract upon
future inheritance, prohibited under the second
paragraph of Article 1347, where the following
requisites concur:
1. That the succession has not yet been
opened.
2. That the object of the contract forms part of
the inheritance
3. That the promisor has, with respect to the
object, an expectancy of a right which is
purely hereditary in nature.
1. Conditional
•
•
The efficacy of the contract is dependent
upon the future existence of the thing.
Example:
If the sale involves the next year’s harvest from a
specific fam, the contract becomes effective only if
the harvest will materialize. If the crops failed, the
contract does not become effective.
•
•
•
2. Aleatory
•
•
One of the parties bears the risk of the thing
never coming into existence.
The prohibition on contracts respecting
future inheritance admits of an exception,
which is the partition inter vivos referred to in
Article 1080 of the Civil Code.
If the partition is made by an act inter vivos,
no formalities a re prescribed by the Article.
The partition will of course be effective only
after death.
It does not necessarily require the formalities
of a will for after all it is not the partition that
is the mode of acquiring ownership.
The partition here is merely the physical
determination of the part to be given to each
heir.
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Donation of Future Property
•
•
•
•
•
•
Donations cannot comprehend future
property.
As being itself a mode of acquiring
ownership, donation results in an effective
transfer of title over the property from the
donor to the donee once the donation is
perfected.
The law requires that the donor must be the
owner of the thing donated at the time of the
donation.
By “future property” is understood anything
which the donor cannot dispose of at the time
of the donation.
Future property includes all property that
belongs to others at the time the donation is
made, although it may or may not later
belong to the donor.
It cannot be donated, because it is not at
present his property, and he cannot dispose
of it at the moment of making the donation.
Note: at the time of donation = perfection of the
donation.
Exception:
The Family Code allows a donation of future
property between the future spouses in donation
propter nuptias.
• The donation of future property referred to is
a donation propter nuptias between the
future spouses.
It must be determinate or Susceptible to
determination
•
•
•
•
The object of a contract, in order to be
considered as certain, need not specify such
object with absolute certainty.
It is enough that the object is determinable in
order for it to be considered as certain.
In order for the object of the contract to be
considered “determinate,” it is not necessary
that the same be particularly or physically
segregated from all others of the same class.
It is sufficient that the object be determinate
as to its kind or species.
Impossible Things or Services
•
Impossible things or services cannot be the
object of contracts.
Basis: impossibilium nulla obligation est (there is no
obligation to do impossible things)
Impossible Things – one which is not susceptible
of coming into existence or outside the commerce of
men.
Impossible Service – beyond the ordinary power of
man or what which is against the law, morals, good
customs, public order, or public policy.
Absolute
Relative
Impossibility
Impossibility
When nobody can When it cannot be
perform it.
performed because
of
the
special
condition
or
qualifications of the
obligor.
Nullifies
the Effects
shall
contract.
depend on whether
the
same
is
temporary
or
permanent.
•
•
If temporary, it does not nullify the contract.
The impossibility contemplated by Article
1348, as to services, is that of absolute
impossibility.
SECTION 3
Cause of Contracts
Article 1350. In onerous contracts the cause is
understood to be, for each contracting party, the
prestation or promise of a thing or service by the
other; in remuneratory ones, the service or
benefit which is remunerated; and in contracts
of pure beneficence, the mere liberality of the
benefactor. (1274)
Article 1351. The particular motives of the
parties in entering into a contract are different
from the cause thereof. (n)
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Article 1352. Contracts without cause, or with
unlawful cause, produce no effect whatever. The
cause is unlawful if it is contrary to law, morals,
good customs, public order or public policy.
(1275a)
Article 1353. The statement of a false cause in
contracts shall render them void, if it should not
be proved that they were founded upon another
cause which is true and lawful. (1276)
Article 1354. Although the cause is not stated in
the contract, it is presumed that it exists and is
lawful, unless the debtor proves the contrary.
(1277)
Article 1355. Except in cases specified by law,
lesion or inadequacy of cause shall not
invalidate a contract, unless there has been
fraud, mistake or undue influence. (n)
Cause of Contracts
Gonzales vs Trinidad
•
•
•
Cause or consideration is the “why of the
contracts, the essential reason which moves
the contracting parties to enter into the
contract.
The cause is the immediate, direct and
proximate reason which justifies the creation
of an obligation through the will of the
contracting parties.
What is referred to as the cause of the
contract is actually the cause of the
obligation.
Example:
In synallagmatic (or bilateral) contract in which each
party is bound to provide something to the other
party, the cause of the obligation of one party is the
expectation of the performance of the obligation of
the other.
Kinds of Cause
Onerous
Contracts
Remuneratory
Contracts
The cause is
understood
to be, for
each
contracting
party,
the
prestation or
promise
of
thing
or
service
by
the other.
The cause of
the obligation
of one party
is
the
expectation
of
the
performance
of
the
obligation of
the other.
The cause is
the service or
benefit which is
remunerated.
Example:
In a contract of sale of a piece of land, the cause for
the vendor in entering into the contract is to obtain
the price. For the vendee, it is the acquisition of the
land.
Cause
It is the essential
reason
which
moves
the
contracting parties
to enter into it.
Object
It is the subject
matter, which can
either be a thing,
right, or service.
A
natural
obligation is
a sufficient
consideration
for
an
onerous
contract;
hence, a debt
that
has
already
prescribed is
thus
a
sufficient
The
consideration
is the service
or benefit from
which
the
remuneration
is given; causa
is not liberality
in these cases
because
the
contract
or
conveyance is
not made out of
pure
beneficence,
but
solvendi
animo.
It is essential
that the service
or benefit for
which
the
remuneration
is given must
not be in the
nature of a
demandable
debt (or legal
obligation),
otherwise,
it
will
be
an
Contracts of
pure
beneficence
The cause is
the
mere
liberality of
the
benefactor.
The liberality
of the donor
is
deemed
the causa.
The
contracts are
designed
solely
and
exclusively to
procure the
welfare of the
beneficiary,
without any
intent
of
producing
any
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cause
or
consideration
for
a
promise.
onerous not a
remuneratory
contract.
satisfaction
for the donor.
Example:
when a person
undertakes to
give a parcel of
land to another
in recognition
of the latter’s
act of saving
the life of the
former in an
accident, the
contract
is
remuneratory
because
the
benefit is given
for
a
past
service which
does
not
amount to a
demandable
obligation.
The idea of
self interest
is
totally
absent on the
part of the
transferor.
DISTINGUISHED FROM MOTIVE
Motive- particular reasons of a contracting party
which do not affect the other party, and which do not
preclude the existence of a different consideration.
Any
detriment,
prejudice, loss, or
disadvantage
suffered
or
undertaken by the
promise other than
to such as he is in
time of consent
bound to suffer
Essential reason for
the contract
immediate, direct
and
proximate
reason
which
justifies the creation
of an obligation
through the will of
the
contracting
parties
objective
aspect
which justifies the
creation
of
the
contract and is
known to other
party
•
Example:
purchase of a thing
•
constitutes
consideration
for
the
purchaser, not the motives which influenced
his mind such as:
o its usefulness
o
its perfection
o its relation to another.
Cause
some right, interest,
benefit
or
advantage
conferred
upon
a promissor,
to
which
he
is
otherwise
not
lawfully entitiled
Motive
condition of the
mind which incites
to
action,
but
includes also the
inference as to the
existence of such
condition, from an
external fact of
nature to produce
such condition
•
particular reason of
a contracting party
which does not
affect the other
party
remote reason for
entering
into
a
contract
subjective aspect
and may not be
known to the other
party
As a general rule, motive does not affect the
validity or existence of the contract.
However, motive may be regarded as
causa when it predetermines the purpose of
the contract.
Liguez vs CA
•
Expressly excepts from the rule are contracts
that are conditioned upon the attainment of
the motives of either party.
•
This happens when: the realization of such
motive or particular purpose has been made
a condition upon which the contract is made
to depend.
•
it may now affect the validity or existence of
the contract.
•
when motive is unlawful – the contract is
NULL and VOID.
•
if the motive is negated, the contract
becomes inexistent. (Liguez vs CA)
REQUISITES OF CAUSE
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The ff. are the requisites of cause:
1. It must exist
2. it must be true
3. it must be lawful
•
EXISTING AND LAWFUL CAUSE
•
Art 1352 – Contracts without cause, or with unlawful
cause produce no effect whatsoever.
•
Contract without a cause- inexistent same is
absolutely simulated or fictitious
•
Lack of consideration – prevents existence of a
valid contract
Failure to pay consideration – contract is still valid
because act of payment does not determine the
validity of the contract
Where cause is: unlawful, contrary to law, morals,
good customs, public order, or public policy, contract is VOID AB INITIO
PRESUMPTION
OF
EXISTENCE
LAWFULNESS OF CAUSE
•
Example: when the consideration in a certain
contract is commission of a crime
CONTRACTS
WITHOUT A
CAUSE
contract
is
inexistent
absence
of
essential element
(cause)
in pari delicto
not
applicable
BOTH
CONTRACTS
PRODUCE
NO
EFFECT
WHATSOEVER
void ab initio
in pari delicto
applicable
AND
Under Article 1354, it is presumed that
consideration exists and is lawful unless
debtor proves on the contrary.
Under Sec 3, Rule 131 of the ROC, the ff. are
disputable presumptions:
UNLAWFUL
CAUSE
cause exists
unlawful
If the parties state a false cause in the
contract to conceal their real agreement, the
contract is relatively simulated and the
parties are still bound by their real
agreement.
if the real price is not stated in the contract,
then the contract of sale is still valid but
subject to reformation.
If the price is simulated, the sale is void, but
the act may be shown to have been in reality
a donation, or some other act or contract.
When the Deed of Sale states that
the purchase price has been paid but in fact
has never been paid, sale is null and void ab
initio and produces no effect whatsoever.
but
1. private transactions have been fair and regular
2. the ordinary course of business has been
followed
3. there was sufficient consideration for a contract
•
Effect of legal presumption upon burden of
proof – create the necessity of presenting
evidence to meet the legal presumption or
the prima facie case created thereby.
•
Presumption stands in the place of evidence
unless rebutted.
•
Burden of overthrowing the presumption –
rests on the party to profit from a declaration
of nullity of a contract.
is
TRUE CAUSE
Article 1353
•
“the statement of a false cause in contracts
shall render them void, if it should not be
proved that they were founded upon another
cause which is true and lawful.”
Samanilla v Cajucom
•
The presumption of a valid consideration
cannot be discarded on a simple claim of
absence of consideration, especially when
contract states that consideration was given.
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CHAPTER 3
Form of Contracts
Effect if Lesion or Inadequacy of Cause
•
Inadequacy of the consideration does not
render a contract void, even if gross
inadequacy of the price.
Reason: Bad Transaction cannot serve as a basis
for voiding a contract.
Valles vs. Villa
•
•
There must be in addition, a violation of the
law, the commission of what the law knows
as an actionable wrong, before the courts are
authorized to lay hold of the situation and
remedy it.
Gross inadequacy of the price does not affect
the validity of the contract of sale, unless it
signifies defect in the consent or that parties
actually intended a donation or some other
contract.
ARTICLE 1355.
Except in cases specified by law, lesion or
inadequacy of cause shall not invalidate a contract,
unless there has been fraud, mistake or undue
influence
Ordinary Sale:
•
transaction may be invalidated on the ground
of inadequacy of price (inadequacy shocks
one’s conscience as to justify the courts to
interfere)
Law gives owner right to redeem:
•
inadequacy of price should not be material
because judgment debtor may re-acquire the
property or else sell his right to redeem, thus
recover any loss he claims to have suffered
by reason of price obtained at the execution
sale.
Article 1356. Contracts shall be obligatory, in
whatever form they may have been entered into,
provided all the essential requisites for their
validity are present. However, when the law
requires that a contract be in some form in order
that it may be valid or enforceable, or that a
contract be proved in a certain way, that
requirement is absolute and indispensable. In
such cases, the right of the parties stated in the
following article cannot be exercised. (1278a)
Form of Contracts
General Rule: No Form Required
• The Philippine Contract Law is adhering to the
“spiritual system” by upholding the spirit over the
form.
• No form is required in order to make the contract
binding and effective between the parties thereto
as stated in the first sentence of Art. 1356:
o Contracts shall be obligatory in whatever
form they may have been entered into
provided all the essential elements for their
validity are present.”
•
Essential elements referred in the above
provision are those elements which are required
for the perfection of the contract:
o Consent
o Object certain, which is the subject matter of
the contract;
o Cause of the obligation which is established
•
Real Contracts require a fourth element which
is:
o The delivery of the subject matter of the
contract
•
As long as all the foregoing elements are
present, the contract is considered obligatory in
whatever form it may have been entered into.
In effect, what the first sentence of Art. 1365 is
saying is that once a contract is perfected, it is,
as a rule, obligatory.
It may be made either orally or in writing and, if
entered into in writing, it may either be in a
private or public instrument.
•
•
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•
In general, a certain form may be prescribed by
law for any of the following purposes:
o
Validity
▪ When the form required is for validity, its
non-observance renders the contract
void and of no effect.
o
Enforceability
▪ When the form required is for
enforceability, non-compliance therewith
will not permit, upon the objection of a
party, the contract, although otherwise
valid, to be proved or enforced by action
o
Greater efficacy of the contract
▪ Formalities intended for greater efficacy
or convenience or to bind third persons,
if not done, would not adversely affect the
validity or enforceability of the contract
between
the
contracting
parties
themselves
Exceptions: When form is indispensable
• Second sentence of Art. 1356:
o However, when the law requires that a
contract be in some form in order that it may
be valid or enforceable, or that a contract be
proved in a certain way, that requirement is
absolute and indispensable.
•
•
There are two groups of contracts where the
requirement of form is absolute and
indispensable:
o Those contracts which require a certain form
for the purpose of their validity
o Those contracts which require a certain form
for the purpose of proving their existence to
be enforceable between the parties
o As previously discussed:
▪ When the form required is for validity, its
non-observance renders the contract
void and of no effect
▪ When the form required is for
enforceability, non-compliance therewith
will not permit, upon the objection of a
party, the contract, although otherwise
valid, to be proved or enforced by action
There is a third group of contracts which require
a certain form, not for the purpose of making the
contract valid and enforceable between the
parties, but simply for greater efficacy and
convenience or for the purpose of making the
contract effective as against third persons.
o In this group of contracts, the requirement of
form is not absolute and indispensable since
non-compliance with the formal requirement
shall not adversely affect the validity or
enforceability of the contract between the
contracting parties themselves
Form for Validity
• In General
o In this group of contracts, the law expressly
declares the contract to be void or invalid if
the formality required by law is not complied
with.
o While the contract may have been perfected
because all the essential requisite are
present but if the same is not executed in the
form provided by the law creating it, it is void
even as between the parties.
•
Contracts which require a certain form for the
purpose of their validity:
1. Donation of personal property exceeding
Php5,000 in value
2. Donation of real property
3. Donation propter nuptias
4. Contract of partnership when real property is
contributed to the capital
5. Sale of a parcel of land or any any interest
therein by an agent
6. Contract if antichresis
7. Sale of transfer of large cattle
8. Chattel mortgage contract
9. Stipulation limiting the common carrier’s
liability in carriage of goods
•
(1) Donation of Personal Property
o The formalities of donation involving
personal (or movable) property are governed
by Art. 748, NCC:
▪ Article 748. The donation of a movable
may be made orally or in writing.
An oral donation requires the simultaneous
delivery of the thing or of the document
representing the right donated.
If the value of the personal property donated
exceeds five thousand pesos, the donation
and the acceptance shall be made in writing.
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▪
Otherwise,
the
donation Depending
therefore on the value of the personal
property to be donated, the donation may be
made either orally or in writing.
o
o
o
WHAT IF THE DONATION IS MADE
ORALLY?
▪ If the value of the personal property does
not exceed 5K pesos, the donation may
be made orally subject, however, to the
requirement that there must be
simultaneous delivery of the thing or of
the document representing the right
donated.
▪ If there is no simultaneous delivery, the
donation is void.
WHAT IF THE DONATION IS IN WRITING?
▪ There is nothing in the law which
prevents the donation from being
reduced in writing.
▪ If the donation is in writing, note that there
is no requirement of simultaneous
delivery and the law does not require that
the acceptance must also be in writing.
▪ As such, if the value of the personal
property to be donated does not exceed
5K pesos and the donation is made in
writing, the acceptance may be made
either orally or in writing, expressly, or
tacitly, and without need of simultaneous
delivery.
▪ If the value of the personal property to be
donated exceeds 5k pesos, the law
mandates that both the donation and the
acceptance MUST BE IN WRITING,
otherwise, the donation is void.
▪ Donation and acceptance may be
embodied either in a private instrument
or public instrument.
▪ Furthermore, the law does not require
that both donation and acceptance be
embodied in a single instrument. Hence,
acceptance may be made in a separate
instrument and such fact is not required
to be noted in both the instruments of
donation and acceptance.
DONATION OF A SUM OF MONEY
▪ A donation of a sum of money is
governed by this law.
•
Example:
• Where the alleged subject of
donation was the purchase money in
a contract of sale in the amount of
3.2M pesos, the SC held that the
donation must comply with the
mandatory requirements of Art. 748.
• The donation of money equivalent to
3.2M pesos as well as its acceptance
should be made in writing, otherwise,
it is invalid for non-compliance with
the formal requisites prescribed by
law.
(2) Donation of Real Property
o Governed by Art. 749:
▪ Article 749. In order that the donation of
an immovable may be valid, it must be
made in a public document, specifying
therein the property donated and the
value
of
the
charges
which
the donee must satisfy.
The acceptance may be made in the same
deed of donation or in a separate public
document, but it shall not take effect unless
it is done during the lifetime of the donor.
If the acceptance is made in a separate
instrument, the donor shall be notified thereof
in an authentic form, and this step shall be
noted in both instruments. (633)
▪
[REQUISITES] If what is to be donated
is real property, the law mandates
that:
1.
Both the donation and the
acceptance must be embodied in a
public instrument, although not
necessarily embodied in a single
document
2.
The real property donated
and the value of the charges which
the donee is required to satisfy must
be specified in the deed of donation
3.
If the acceptance is embodied
in a separate public document, the
donor shall be notified thereof in an
authentic form and such step shall be
noted in both instruments of donation
and acceptance.
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•
▪
▪
All the foregoing requisites must be
complied
with,
otherwise
the
donation is void
[REQUISITE NO. 1] DONATION AND
ACCEPTANCE MUST BE IN A PUBLIC
INSTRUMENT
• Donation of an immovable property
must be in a public document for its
validity REGARDLESS OF THE
VALUE OF THE PROPERTY
• Donation of a real property from one
person to another will take no effect,
unless embodied in a public
document
• Since a donation is perfected only
from the moment the donor knows of
the acceptance by the donee,
acceptance of the donation by
the donee is,
therefore,
indispensable;
absence
of
acceptance of the donation will make
the donation null and void.
• When applied to a donation of an
immovable property, the law further
requires that the acceptance must be
made in the same deed of donation
or in a separate public document.
• If the acceptance is not embodied in
a public document, the donation shall
also be void.
[REQUISITE NO. 3] REQUIREMENT OF
NOTIFICATION AND NOTATION
• Title to immovable property does not
pass from the donor to the donee by
virtue of a deed of donation until and
unless it has been accepted in a
pubic instrument and the donor duly
notified theereof.
• The acceptance may be made in the
very same instrument of donation. If
the acceptance does not appear in
the same document, it must be made
in another
• Solemn words are not necessary; it is
sufficient if it shows the intention to
accept.
• But in this case, it is necessaary that
formal notice thereof be given to the
•
•
donor, and the fact that due notice
has been given must be noted in both
instruments (that containing the offer
to donate and that showing the
acceptance)
If the deed of donation fails to show
the
acceptance,
or
where
the the formal notice of acceptance,
made in a separate instrument, is
either not given to the donor or else
not noted in the deed of donation and
in the separate acceptance, the
donation is null and void.
According to the SC, a strict and
literal adherence to the requirement
of "notation" in Art. 749 should be
avoided if such will result not in
justice to the parties but conversely a
distortion of their intentions.
o Example:
▪ Pajarillo vs IAC, If the donor
was not unaware of the
acceptance for she in fact
confirmed
it
later
and
requested that the donated
land by not registered during
her lifetime, the SC held that it
cannot in conscience declare
that the donation is ineffective
simply because there was no
notation for that would be
placing too much stress on
mere form over substance
▪ Republic
vs Silim, Where
the acceptance was not noted
in the Deed of Donation, the
SC held that the actual
knowledge by the donor of the
construction and existence of
the school building pursuant
to the condition of the
donation already fulfills the
legal requirement that the
acceptance of the donation by
the donee be communicated
to the donor.
▪ In Pajarillo and Silim, the SC
explained that the purpose of
the formal requirement for
acceptance of a donation is
to senure that
such
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•
•
acceptance
is
duly
communicated to the donor
In Legasto vs Verzosa and Santos vs
Robledo, the SC strictly applied the
requirement of notation. In Legasto,
there was no evidence whatsoever
that the claimed donations had been
accepted, as stressed by Justice
Villa-Real. The same observation
was also made in Santos, where
the accepance of the donation did
not appear in the deed of donation or
in any other instrument.
(3) DONATION PROPTER NUPTIAS
o Donations by reason of marriage are those
which are made before its celebration,
in consideration of the same, and in favor of
one or both of the future spouses.
o REQUISITES:
▪ Donation must be made before the
celebration of the marriage
▪ It must be made in consideration of the
celebration of marriage
▪ It must be made in favor of one or both of
the future spouses
o It is essential that the donee or donees be
ither of the future spouses or both of them,
although the donor may either be one of the
future spouses or a third person.
o Now governed by Article 83 of the Family
Code:
▪ Art. 83. These donations are governed by
the rules on ordinary donations
established in Title III of Book III of the
Civil Code, insofar as they are not
modified by the following articles.
o Article 83 of the Family Code intentionally
deleted the clause "except as to their form
which shall be regulated by the Statute of
Frauds" found in Art. 127, NCC.
o With the deletion of such clause, donations
propter nuptias are no longer to be governed
by the Statute of Frauds with respect to their
formalities\
o In view of the applicability of the rules on
ordinary
donations
to
donation
propter nuptias, the latter must now follow
the formal requirements outlined in Art. 748
and 749 of the NCC.
•
(4) Contract of Partnership Where Realty is
Contributed To Capital
o A contract of partnership is defined by law as
one where two or more persons bind
themselves to contribute money, property or
industry to a common fund, with the intention
of dividing the profits among themselves.
o In order to constitute a partnership, it must be
established that:
▪ 2 or more persons bound themselves to
contribute money, property or industry to
a common fund
▪ They intend to divide the profit among
themselves.
o The agreement need not be formally reduced
into writing, the statue allows the oral
constitution of a partnership, save in two
instances:
▪ When immovable property or real rights
are contributed and
▪ When in the partnership has a capital of
3k pesos or more
o In both cases, a public instrument is
required.
o Take note however Art. 1768:
▪
o
o
Article 1768. The partnership has a
juridical personality separate and distinct
from that of each of the partners, even in
case of failure to comply with the
requirements of article 1772, first
paragraph.
Art. 1772, in turn:
▪ Article
1772. Every
contract
of
partnership having a capital of three
thousand pesos or more, in money or
property, shall appear in a public
instrument, which must be recorded in
the Office of the Securities and Exchange
Commission.
Failure to comply with the requirements of
the preceding paragraph shall not affect the
liability of the partnership and the members
thereof to third persons
Further, a contract of partnership may be
constituted in any form. This implies that
since a contract of partnership is consensual,
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o
an oral contract of partnership is as good as
a written one.
requires that the authority of the agent must
be in writing. Pursuant to Art. 1874:
WHEN IMMOVABLE PROPERTY IS
CONTRIBUTED TO THE PARTNERSHIP
AS CAPITAL
▪
▪
▪
It is required that there must be an
inventory of said property, signed by the
parties, and attached to the instrument.
If this formality is not followed, the
contract of partnership is void. This is
pursuant to Article 1773 in relation to Art.
1717:
o
o
o
•
Article 1771. A partnership may be
constituted in any form, except where
immovable property or real rights are
contributed thereto, in which case a
public
instrument
shall
be
necessary.
•
Article
1773. A
contract
of
partnership is void, whenever
immovable property is contributed
thereto, if an inventory of said
property is not made, signed by the
parties, and attached to the public
instrument.
•
(6) CONTRACTS OF ANTICHRESIS
o
WHEN
THIRD
PARTIES
ARE
INVOLVED IN THE CONTRACT OF
PARTNERSHIP
In contract of antichresis the creditor
acquires the right to receive the fruits of an
immovable of his debtor, with the obligation
to apply them to the payment of the interest,
if owing, and thereafter to the principal of his
credit.
In order for this contract to be valid, the law
requires that the amount of the principal and
of the interest shall be specified in writing,
pursuant to Art. 2134:
•
▪
o
▪
•
In Torres vs CA, the SC explained
that the requirement of form in Art.
1773
is
intended
primarily
to pritect third persons. Hence, if the
controversy does not involve third
parties who may be prejudiced, as
when the action is between the
partners themselves, they cannot
deny the existence of a partnership
because of violation of Art. 1773.
(5) AGENCY TO SELL LAND OR ANY
INTEREST THEREIN
o
Article 1874. When a sale of a piece of
land or any interest therein is through an
agent, the authority of the latter shall be
in writing; otherwise, the sale shall be
void.
If the authority of the agent is not in writing,
the law declares the sale of the land
belonging to the principal to be void and not
merely unenforceable.
The authority of the agent must be in writing,
not the sale made by the agent.
With respect to the sale of a parcel of land,
the law does not require any form for its
validity, although under the Statute of Frauds
the sale is required to be in writing for the
purpose of making the sale enforceable.
If the sale of a parcel of land or any interest
therein is made through an agent, the law
o
o
o
Article 2134. The amount of the principal
and of the interest shall be specified in
writing;
otherwise,
the
contract
of antichresis shall be void
Hence, if the amount of the principal and of
the interest is not specified in writing, the
contract of anitchresis is void but without
affecting the validity of the principal contract
of loan.
Note: the law does not require that such
specification be made in the contract
of antichresis itself.
Since the contract of antichresis is a mere
security to the contract of loan, the former
should be interpreted in relation to the latter
and, as such, if the amount of the principal
and of the interest is already specified in the
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o
•
o
o
(7) SALE OF TRANSFER OF LARGE CATTLE
o
o
o
o
o
o
•
principal contract of loan, the requirement
under Art. 2134 is already satisfied.
This is in consonance with the rule of
contract interpretation known as the
"complementary-contracts-construedtogether" doctrine where an accessory
contract, such as the contract of antichresis,
is required to be read in its entirety and
together with the principal agreement
The only instance where a certain form is
required for validity of the sale is when it
involves "large cattle"
Formalities of the sale or transfer or large
cattle are governed by Act. No. 1147 or the
"Cattle Registration Law"
Such law specifically provides that no sale or
transfer
of
large
cattle
shall
be considere valid unless the sale or transfer
is registered in the office of the municipal
treasurer and a certificate of transfer is
secured.
If the record of such sale or transfer is not
registered and the certificate obtained, the
sale or transfer is not valid and the ownership
of the cattle does not pass.
It is implicity required in this law that the sale
or transfer of the large cattle must be made
in a public instrument since only a public
instrument may be accepted for registration.
Large cattle includes carabaos, horses,
mules, assess and all memebers of the
bovine family.
(8) CHATTEL MORTGAGE
o Art. 2140 of the NCC:
▪
o
Article 2140. By a chattel mortgage,
personal property is recorded in the
Chattel Mortgage Register as a security
for the performance of an obligation. If
the movable, instead of being recorded,
is delivered to the creditor or a third
person, the contract is a pledge and not
a chattel mortgage
While under Sec. 4 of Act No. 1508,
the requiremetn of recording is only for the
purpose of making the contract bind and
effective against third persons
o
o
Art 2140 of the NCC now makes the
recording of the contract of chattel mortgage
before the chattel mortgage registry as an
indispensable requirement for the existence
of the contract itslef.
The delivery of a personal property to the
creditor as security shall constitute a contract
of pledge and not a chattel mortgage. In
other words, the requirement of recording of
the chattel mortgage contract now
constitutes as inidspensable requirement for
the existence and validity of the said
contract.
An unrecorded chattel mortgage is not valid
even as between the contracting parties
Filipinas Marble Corp vs IAC, the SC held
that an unregistered chattel mortgage is
nevertheless valid beyween the parties
thereto. They invoked Art. 2125 of the NCC:
• Article 2125. In addition to the requisites
stated in article 2085, it is indispensable,
in order that a mortgage may be validly
constituted, that the document in which it
appears be recorded in the Registry of
Property. If the instrument is not
recorded, the mortgage is nevertheless
binding between the parties.
The persons in whose favor the law
establishes a mortgage have no other right
than to demand the execution and the
recording of the document in which the
mortgage is formalized
▪ However, Art. 2125 of the NCC is
inapplicable to a chattel mortgage
contract since the said article is found
under Chapter 3, Title XVI of Book IV of
the NCC, which chapter refers to the
contract of a real estate mortgage
(REM).
▪ Pursuant to Art. 2141, the provisions of
the NCC on REM find no application in
chattel mortgage contract, even in a
suppletory manner.
▪ What applies instead to a chattel
mortgage contract are the provision of
the NCC on pledge, insofar as they are
not in conflict with the chattel mortgage
law.
▪ In addition, the very definition of the
contract of chattel mortgage in Art. 2140
requires that there by recording of the
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▪
•
personal property in the Chattel
Mortgage registry, otherwise, there is not
chattel mortgage contract.
Registration is essential to the validity of
the chattel mortgage contract
(9) Stipulation Limiting Common Carrier's
Liability in Carriage Goods
o
In order for a stupulation between the
common carrier and the shipper or owner
limiting the liability of the former for the loss,
destruction or deterioration of the goods to a
degree less than extraordinary diligence to
be valid, the same must be in writing and
signed by the shipper or the owner
FORM FOR ENFORCEABILITY: STATUTE OF
FRAUDS:
•
o
Origin of Statute of Frauds
o Originated from an English statutory law
entitled "An Act for Prevention of Frauds and
Perjuries" Statute 29 Charles II chapter 3,
enacted in England in 1677.
o HISTORY: At early common law, parties to a
contract were not allowed to testify and
this prohiibtion has led to the practice of
hiring third party witness. As early as s the
17th Century, the English recognized the
dangers presented by this practice.
o PURPOSE: The English Parliament enacted
the said statute, the purpose of which is to
prevent fraud and perjury in the enforcement
of obligations depending for their evidence
on the unassisted memory of witnesses by
requiring certain enumerated contracts and
transactions to be evidenced by a writing
signed by the party to be charged.
STATUTE OF FRAUDS IN THE PHILIPPINES
o
o
o
Originally taken from the Code of Civil
Procedure of the State of California.
The statute was introduced in the PH by
Section 335 of Act 190, the Code of Civil
Procedure, and was reproduced as Sec. 21
of Rule 123 of the RoC
Realizing that the Statute of Frauds is more
substantive than procedural in character, the
o
CC decided to incorporate the same in the
NCC of the Philippines.
It can be found under Art. 1402, par. 2:
▪ Article 1403. The following contracts are
unenforceable, unless they are ratified:
Xxx
(2) Those that do not comply with the Statute
of Frauds as set forth in this number. In the
following cases an agreement hereafter
made shall be unenforceable by action,
unless the same, or some note or
memorandum, thereof, be in writing, and
subscribed by the party charged, or by his
agent; evidence, therefore, of the agreement
cannot be received without the writing, or a
secondary evidence of its contents:
(a) An agreement that by its terms is not to
be performed within a year from the making
thereof;
(b) A special promise to answer for the debt,
default, or miscarriage of another;
(c) An agreement made in consideration of
marriage, other than a mutual promise to
marry;
(d) An agreement for the sale of goods,
chattels or things in action, at a price not less
than five hundred pesos, unless the buyer
accept and receive part of such goods and
chattels, or the evidences, or some of them,
of such things in action or pay at the time
some part of the purchase money; but when
a sale is made by auction and entry is made
by the auctioneer in his sales book, at the
time of the sale, of the amount and kind of
property sold, terms of sale, price, names of
the purchasers and person on whose
account the sale is made, it is a sufficient
memorandum;
(e) An agreement for the leasing for a longer
period than one year, or for the sale of real
property or of an interest therein;
(f) A representation as to the credit of a third
person.
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o
o
o
Thus, the statute of Frauds is descriptive of
statues which require certain classes of
contracts to be in writing to be enforceable.
The statute does not deprive the parties of
the right to contract with respect to the
matters therein involved, but merely regulate
the formalities of the contract necessary to
render it enforceable.
They are included in the provisions of the
NCC regarding unenforceable contracts,
more particularly, Art. 1403 par. 2.
PURPOSE OF STATUTE OF FRAUDS
• To prevent fraud and perjury in the enforcement
of obligations depending for their evidence on
the unassisted memory of witnesses by requiring
a number of contracts to be evidenced signed by
the party to be charged.
• NOT designed to further or perpetuate fraud
• A contract or bargain within the statute by
making and executing note or memorandum,
sufficient to state the requirements of the
statute.
HOW STATUTE OF FRAUDS OPERATES
• The statute states that "evidence of the
agreement
CANNOT
be
received
WITHOUT the writing, or a secondary
evidence of its contents."
• The method by which the contracts
enumerated therein may be proved
but NOT INVALID because
there
not
reduced to writing.
General Rule: By law, contracts are obligatory in
whatever form they may have been entered
into, provided all essential requisites for validity are
present.
Exception: However, when law requires it to be in
some form for it to be valid or enforceable, that
requirement is absolute and INDISPENSABLE.
Effect of Non-Compliance:
o No action can be enforced unless the
requirement is complied with.
o Used as a DEFENSE when a party to an
alleged contract falling within the operation of
the Statute attempts to enforce the
agreement.
•
o
o
Party against whom enforcement is
sought MAY OBJECT to presentation of
the oral evidence
• For evidentiary purposes only
If parties permit a contract to be
proved WITHOUT OBJECTION, then it is
just as binding as if the Statute has been
complied with.
Example: Sale of parcel of land requires to
be in writing to be enforceable under the
Statute of Frauds. In a sale where A made a
verbal offer to sell it to B, who agreed to buy
it for Php 1M and was ready to pay it the
following day, but then A changed his mind
and did not want to proceed with the sale,
then:
• Should B go to court, either for specific
performance or for recovery damages,
he MUST PROVE EXISTENCE OF
CONTRACT of sale.
• However, since A MAY OBJECT to the
presentation of the evidence to prove the
existence of the contract under the
Statute of Frauds, B is prevented from
establishing the existence of said
contract.
• This results to B not being able to enforce
the contract against A. Therefore,
contract is UNENFORCEABLE, not void,
since A may choose to honor the
contract's existence notwithstanding the
existence of written proof.
SUFFICIENCY OF WRITING
o Does not require that contract be in writing
o Par. 2, Article 1403: "…some note or
memorandum, thereof, be in writing, and
subscribed by the party charged, or by his
agent…" makes the verbal agreement
enforceable, and takes it OUT OF OPERATION
OF THE STATUTE.
o Requirement of Statute is satisfied when:
A) Written contract exists or
B) In the absence thereof, some written note or
memorandum is signed by the party charged
against.
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(a) What Constitutes "Note or Memorandum"
o No particular form or language or instrument
o Any document or writing, formal or informal,
which satisfies all the requirements of a statute
as to contents and signature
o Can also be not just a single document; two or
more writings properly connected may be
considered together
o Not necessary to establish authenticity of the
note or memorandum for the purpose of
showing prima facie; only when the trial is held.
(b) Note or Memorandum Must Be Complete
o Must be complete; cannot rest partly in writing
and partly in parol
o Must contain: (a) name of the parties, (b) terms
and conditions of the contract, (c) and a
description of the property sufficient to render it
capable of identification.
Torcuator vs Bernabe
• The special power of attorney and the
summary of agreement presented as written
evidence did not suffice as notes or
memoranda contemplated by Article 1403 of
the Civil Code because said documents do
not contain the essential elements of the
purported contract.
Litonjua vs Fernandez
• To be binding on the persons to be charged,
such note or memorandum must also be
signed by the said party or by his agent duly
authorized in wiritng.
BASIC PRINCIPLES GOVERNING STATUTE OF
FRAUDS
(a) Applicable Only to PURELY EXECUTORY
CONTRACT
(b) Applicable to Actions for Violation of Contract or
for Its Performance
(c) Defense Is EXCLUSIVE to Parties
(d) Defense Can Be Waived
(e) Defense is Limited to Specific Transactions
Applicable Only
CONTRACT
•
to
PURELY
EXECUTORY
The Statute of Frauds applies only to
executory contracts.
•
It does not apply to contracts which have
been completely or partially performed.
Reason:
•
•
The Statute has precisely been enacted to
prevent fraud.
If a contract has been totally or partially
performed, the exclusion of parol evidence
would promote fraud or bad faith, for it would
enable the defendant to keep the benefits
already delivered by him from the transaction
in litigation, and, at the same time, evade the
obligations, responsibilities or liabilities
assumed or contracted by him thereby.
Example:
When the seller in a verbal sale of a parcel of land
had already accepted a down payment from the
buyer, he may no longer invoke the Statute of
Frauds to prevent the buyer from establishing the
existence of the oral contract by way of parol
evidence.
Doctrine of Partial Performance
• The buyer may now be allowed to introduce
parol evidence to prove the existence of the
contract since this situation is already taken
out of the operation of the Statute of Frauds.
Reason: it is not enough for a party to allege partial
performance in order to hold that there has been
such performance and to render a decision declaring
that the Statute of Frauds as inapplicable.
•
The rejection of any and all testimonial
evidence on partial performance, would
nullify the rule that the Statute of Frauds is
inapplicable to contracts which have been
partly executed, and lead to the very evils
that the statute seeks to prevent.
Rule: Partial execution is even enough to bar the
application of the Statute of Frauds.
Reason:
• It would be fraud upon the plaintiff if the
defendant were permitted to escape
performance of his part of the oral agreement
after he has permitted the plaintiff to perform
in reliance upon the agreement.
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•
For the prevention of fraud, and arose from
necessity of preventing the statute from
becoming an agent of fraud for it could not
have been the intention of the statute to
enable any party to commit a fraud with
impunity.
Note:
•
•
When the party concerned has pleaded
partial performance, such party is entitled to
a reasonable chance to establish by parol
evidence the truth of this allegation, as well
as the contract itself.
An action by a withdrawing party to recover
his partial payment of the consideration of a
contract, which is otherwise unenforceable
under the Statute of Frauds, by reason of the
failure of the other contracting party to
comply with his obligation, is not covered by
the Statute of Frauds.
•
Ayson vs Court of Appeals
• The statute of frauds may be invoked only by
a party to the oral contract, not by a stranger
thereto.
Defense Can Be Waived
It can be waived either by:
1. Failing to object to the presentation of oral
evidence to prove the contract.
2. Accepting benefits therefrom.
•
Applicable to Actions for Violation of Contract or
for Its Performance
•
•
•
•
The Statute of Frauds does not apply to
actions which are neither for violation of a
contract nor for the performance thereof.
In order that the defendant may successfully
invoke the defense of the Statute of Frauds
by objecting to the presentation of parol
evidence to prove the existence of the
contract, the actin must be either for specific
performance of the oral contract or for the
recovery of damages arising from a violation
thereof.
The statute may not also be applied to strike
out the corroborative testimonies of
witnesses of the acquisition of the property in
question during marriage because the action
was neither for a violation of contract nor the
performance thereof.
Defense Is EXCLUSIVE to Parties
•
The defense of the Statute of Frauds can be
relied only by the parties to the contract or
their representatives or privies, or those
whose rights are directly controlled by the
statute.
Unenforceable contracts, including those
which infringe the statute of frauds, cannot
be assailed by third persons.
Oral evidence of the contract will be excluded
upon timely objection. But if the parties to the
action, during the trial, make no objection to
the admissibility of the oral evidence to
support the contract covered by the statute,
and thereby permit such contract to be
proved orally, it would be just as binding
upon the parties as if it had been reduced to
writing.
Acceptance of benefits under the contract
constitutes ratification of the contract
infringing the statute of frauds.
Defense is Limited to Specific Transactions
The following are not covered by the Statute of
Frauds:
1. An agreement creating an easement of rightof-way since it is not a sale of real property
or of an interest therein;
2. An agreement for the setting up of
boundaries, hence, an oral testimony to
prove such agreement is admissible.
3. An oral partition of real property is
enforceable since partition is not a
conveyance of property but simply a
segregation and designation of the part of the
property which belongs to the co-owners.
4. A right of first refusal is not among those
listed as unenforceable under the statute of
frauds. It is not by any means a perfected
contract of sale of real property.
5. When one of the parties is trying to enforce
the delivery to him of 3,000 square meters of
land which he claims the defendant orally
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promised to do in consideration of his
services as mediator or intermediary in
effecting a compromise of a certain civil case
since such contract is in no sense a “sale of
real property or of any interest therein;”
6. Not applicable to wills or to renunciation or
partition of inheritance. Also, not applicable
to innominate contract, as where an
interpreter rendered services for an
inconsiderable number of times; to
employment of an attorney; or to a condition
upon which a deed is delivered in escrow.
Specific Contracts Covered by Statute of Frauds
(a) An agreement that by its terms is not to be
performed within a year from the making thereof;
Contract Not To be Performed Within A Year
A. In General
• An agreement that by its terms is not to be
performed within a year from the making
thereof is required to be in writing to be
enforceable under the Statute of Frauds.
• The mischief to be guarded against by this
rule is the leaving of the proof of a contract
which is to run beyond a year dependent on
the memory and truthfulness of witness, or
as is sometimes said, to be vouched by parol
evidence.
• Simply put, because disputes over such
contracts have been made, resolution of
these disputes is difficult unless the contract
has been put in writing.
(f) A representation as to the credit of a third person.
B. Test in Determining Whether Contract Is
Within One-Year Rule
• Courts in US have been governed by "not to
be performed," have treated them as
negative words, and, accordingly, to bring a
particular contract within the statute there
must be a negation of the right to perform it
within a year, that is, it must appear from a
reasonable interpretation of the terms of the
contract that it is not to be, or is incapable of
being, performed within a year.
• In other words, the test to determine whether
an oral contract is enforceable under the
one-year rule of the Statute of Frauds is
whether, under its own terms, performance is
possible within a year from the making
thereof.
• If so, the contract is OUTSIDE of the Statute
of Frauds and need not be inwriting to be
enforceable.
• The fact that performance may take more
than one year is immaterial as long as
performance is possible in less than a year.
• One-year period begins to run from the day
contract is made.
Note: Art. 1443 also requires an express trust
concerning an immovable property or any interest
therein to be in writing for purpose of proof. Court
said requirement is also in the nature of a statute of
frauds.
C. Applies Only to Agreement Not To be
Performed on Either Side
• This applies only to agreements not to be
performed on either side within a year from
the making thereof.
(b) A special promise to answer for the debt, default,
or miscarriage of another;
(c) An agreement made in consideration of marriage,
other than a mutual promise to marry;
(d) An agreement for the sale of goods, chattels or
things in action, at a price not less than five hundred
pesos, unless the buyer accept and receive part of
such goods and chattels, or the evidences, or some
of them, of such things in action or pay at the time
some part of the purchase money; but when a sale
is made by auction and entry is made by the
auctioneer in his sales book, at the time of the sale,
of the amount and kind of property sold, terms of
sale, price, names of the purchasers and person on
whose account the sale is made, it is a sufficient
memorandum;
(e) An agreement for the leasing for a longer period
than one year, or for the sale of real property or of
an interest therein;
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•
•
Agreements to be fully performed on one
side within a year are taken out of the
operation of the statute.
This is to prevent frauds and it should not be
made the instrument further them.
D. Effect of Partial Performance
• Contracts which by their terms are not to be
performed within one year may be taken out
of the SoF through performance by one party
thereto.
• In other words, when, in an oral contract
which, by its terms, is not to be performed
within one year from the execution thereof,
one of the contracting parties has complied
within the year with the obligations imposed
on him by said contract, the other party
cannot avoid the fulfillment of those
incumbent on him under the same contract
by invoking the statute of frauds, because the
latter aims to prevent and not to protect
fraud.
• In order that a partial performance of the
contract may take the cause out of the
operation of the statute, it must appear clear
that the full performance has been made by
one party within one year, as otherwise the
statute would apply.
• In other words, there must be complete
performance within the year by one party,
however many years may have to elapse
before the agreement is performed by the
other party. But nothing less than full
performance by one party will suffice, and it
has been held that, if anything remains to be
done after the expiration of the year besides
the mere payment of the money, the statute
will apply.
Special Promise to Answer for Debt, Default or
Miscarriage of Another
A. In General
• Any "special promise" to answer for the debt,
default or miscarriage of another is required
to be in writing or to be evidenced by some
note or memorandum signed by the promisor
to be enforceable against the latter.
• Thus, guaranty propert and suretyship are
covered under the Statute of Frauds
B. Test in Determining Whether Promise Is
Within the Statute
• True test, as to whether a promise is within
the statute had been said to lie in the answer
to the question whether the promise is an
original or a collateral one.
• If original or independent, that is, if promisor
becomes thereby primarily liable for the
payment of the debt, the promise is not within
the statute.
• If promise is collateral to the agreement of
another and the promisor becomes thereby
merely a surety, the promise must be in
writing.
C. Covers
Contracts
of
Guaranty
and
Suretyship
• Art. 2055 CC, provides that guaranty is not
presumed, but must be express, and cannot
extend to more than what is stipulated
therein.
• This is the obvious rationale as to why
contract of guaranty must be in writing.
Otherwise, it is unenforceable unless ratified
by made in writing or evidenced by some
writing.
• What is required in order for the contract of
guaranty to be enforceable is the undertaking
or the special promise of the guarantor (or
the offer or proposition for a guaranty), which
must also be signed by him.
Agreement in Consideration of Marriage
•
oral agreements made in consideration of
marriage are unenforceable under the
Statute of Fraud.
Marriage Settlement
• Article 77 of the Family Code simply requires
them to be in writing without providing for the
effect if such formal requirement is not
followed.
• The failure of Article 77 of the Family Code
to provide for the effects of failure to comply
with the formality required therein is not fatal.
Note: Prior to the amendments introduced by the
Family Code, the formalities of a marriage
settlement were governed by Article 122 of the New
Civil Code.
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Will this mean that a marriage settlement and its
modification are no longer governed by the Statute
of Fraud?
Example:
Ans: Notwithstanding the absence of express
provisions in the present article, the marriage
settlements and its modifications shall continue to
governed by the Statute of Frauds under Article
1403 since marriage settlement is obviously an
agreement made in consideration of a marriage.
•
•
•
•
Contract which infringes the Statute of
Frauds is not a void contract but merely
unenforceable under the SoF.
It is a valid agreement but it cannot be
enforced through a court action by either of
the parties since its existence cannot be
proved without the written agreement.
Such oral marriage settlement shall not
likewise prejudice the interest of the third
persons.
Donation Propter Nuptias
• They are not governed by the statute of
frauds with respect to their formalities.
• They are governed by the formalities
required in ordinary donations pursuant to
the provisions of Article 748 and 749 of the
Civil Code in relation to Article 83 of the
Family Code.
• Prior to the amendments introduced by the
Family Code, the formalities required in
donation propter nuptias were governed by
Art. 127 of the New Civil Code.
• An oral donation propter nuptias of a parcel
of land is now considered void under the new
law, while it is merely unenforceable under
the old law.
Mutual Promise to Marry
• A promise to marry is not covered by the
Statute of Frauds.
• An oral promise of marriage can be proven
by parol evidence.
There are instances where such oral promise is
necessary in actions for recovery of damages.
Gashem Shookat Baksh vs CA
•
Where the man’s promise to marry is in fact
the proximate cause of the acceptance of his
love by the woman and his representation to
fulfill that promise thereafter becomes the
proximate cause of the giving of herself unto
him in a sexual congress, the man shall be
liable for damages to the woman in the
former had, in reality, no intention of marrying
the latter and that the promise was only a
subtle scheme or deceptive device to entice
or inveigle the woman to accept him an to
obtain her consent to the sexual act.
The award of damages is justified not solely
by the breach of promise to marry, but
because of the fraud and deceit behind it and
the willful injury to the woman’s honor and
reputation which followed thereafter.
Sale of Goods, Chattels, or things in Action
1. At a price not less than 500 pesos
•
•
A contract for the sale of goods, chattels, or
things in action for a price of 500 pesos or
more must be in writing.
The requirements can be satisfied either by
having the contract itself in writing, or by
having a subsequent written memorandum
of the oral agreement.
Illustration:
Parties have entered into an oral agreement for the
sale of goods for a price of 500 pesos or more and
one of the parties thereafter sent a signed
confirmation letter to the other party.
Can this confirmation letter be considered sufficient
to establish the existence of the contract?
Ans: The letter can be used by the recipient in the
lawsuit against the sender but the latter cannot use
the letter against the recipient in a lawsuit because
the party against whom the contract enforcement is
sought did not signed the written memorandum.
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2. Qualification of the Rule
• When the sale is made by auction and entry
is made by the auctioneer in his sales book,
at the time of the sale, of the amount and kind
of property sold, price, names of the
purchasers and persons on whose account
is made, it is considered as sufficient
memorandum, in which case, the sale is
enforceable between the purchaser and the
person on whose account the sale is made
notwithstanding the absence of their
signatures in the auctioneer’s sales book.
•
3. Exception to Rule
•
•
If the buyer accepts and receives part of the
goods and chattels or pay at the time of the
purchase money, the transaction is taken out
of the Statute of Frauds under the doctrine of
partial performance.
•
•
Representations as to credit of third persons
•
Leasing for more than a year and sale of real
property
a) Lease of Realty for longer period than one
year
•
•
The Statute of Frauds requires that the
contract of lease over real property be in
writing or be in some note or memorandum
signed by the party charged, if the agreement
of the leasing is for a longer period than one
year.
The requirement of the Statute of Frauds is
also necessary in case of agreement to
renew the lease.
Fernandez vs CA
• Such alleged verbal assurance of renewal of
a lease is inadmissible to qualify the terms of
the written lease agreement under the parole
evidence rule and unenforceable under the
Statute of Frauds.
•
Have no prescribed form for their validity;
they follow the general rule on contracts that
they may be entered into in whatever form,
provided that all the requisites are present.
The representation must have been made by
a stranger to the contract in which credit was
extended, or, as otherwise stated, the
representation must relate to a third person’s
credit.
Representation as to the credit of the person
making the representation are not within the
Statute.
Express Trust Over Immovable or Any Interest
Therein
Express Trust
•
•
•
b) Sales of Realty
•
The sale is valid even if it does not contain a
technical description of the subject property.
The failure of the parties to specify with
absolute clarity the object of a contract by
including its technical description is of no
moment. What us important is that there is
an object that is determinate or at least
determinable, as subject of the contract of
sale.
A sale of a real property or any interest
therein, to be enforceable, is required to be
in writing and signed by the party against
whom the contract is being enforced.
A formal document is not necessary for the
sale transaction to acquire binding effect.
•
Created by intention of the trustor or of the
parties.
Stated otherwise, created by the direct and
positive acts of the parties, by some writing
or deed, or will, or by words either expressly
or impliedly evincing an intention to create a
trust, although no particular words are
required for its creation, it being sufficient
that a trust is clearly intended.
An express trust concerning an immovable or
any interest therein cannot be proved by
parol evidence. It must be proven by some
writing or deed.
Merely for purposes of proof, not for the
validity of the trust agreement.
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Ringor vs Ringor
•
Allowed oral testimony to prove the
existence of a trust, which had been partially
performed.
Reason:
• The oral character of a trust may be
overcome or removed where there has been
partial performance of the terms of the trust
as to raise an equity in the promise.
• When a verbal contract has been
completed,
executed
or
partially
consummated, its enforceability will not be
barred by the Statute of Frauds, which
applies only to an executory agreement.
Other Contracts
Indispensable
Where
From
is
Requires that instruments, such as
promissory notes and bills of exchange,
must be in writing in order to be negotiable.
Purpose: for the purpose of making the instrument
negotiable and does not affect the validity of the
obligation created thereunder.
Agreement to Pay Monetary Interest
Allowed only if:
a. There was an express stipulation for the
payment of interest.
b. The agreement for the payment of interest as
reduced in writing.
•
•
Article 1358. The following must appear in a
public document:
(1) Acts and contracts which have for
their object the creation, transmission,
modification or extinguishment of real
rights over immovable property; sales of
real property or of an interest therein are
governed by articles 1403, No. 2, and
1405;
Also
Negotiable Instruments
•
enumerated in the following article, the
contracting parties may compel each other to
observe that form, once the contract has been
perfected. This right may be exercised
simultaneously with the action upon the
contract. (1279a)
Collection of interest without any stipulation
therefor in writing is prohibited by law.
While the creditor may not legally compel
the debtor to pay the monetary interest
pursuant to an oral agreement for its
payment, should the debtor decide to
voluntarily pay the same, the creditor is
nevertheless authorized to retain the
payment.
Article 1357. If the law requires a document or
other special form, as in the acts and contracts
(2)
The
cession,
repudiation
or
renunciation of hereditary rights or of
those of the conjugal partnership of
gains;
(3) The power to administer property, or
any other power which has for its object
an act appearing or which should appear
in a public document, or should prejudice
a third person;
(4) The cession of actions or rights
proceeding from an act appearing in a
public document.
All other contracts where the amount
involved exceeds five hundred pesos
must appear in writing, even a private
one. But sales of goods, chattels or
things in action are governed by articles,
1403, No. 2 and 1405. (1280a)
Agreement to Pay Monetary Interest:
Article 1956. No interest shall be due unless it has
been expressly stipulated in writing. (1755a)
Payment of Monetary Interest is allowed only
if: (requires concurrence of the 2)
1. there was an express stipulation for the
payment of interest.
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(Collection of interest without any stipulation is
prohibited by law)
things in action are governed by articles, 1403, No.
2 and 1405. (1280a)
2. The agreement for the payment of interest
was reduced in writing.
Form for Greater Efficacy or Convenience:
(Monetary Interest is not demandable if the
agreement if it is not reduced in writing,
and the obligation is treated law as Natural
Obligation).
Article 1960. If the borrower pays interest when
there has been no stipulation therefor, the provisions
of this Code concerning solutio indebiti, or natural
obligations, shall be applied, as the case may be.
(n)
The creditor cannot compel the debtor to pay
the monetary interest based on oral agreement only,
but if the debtor decides to pay the same, the creditor
is authorized to retain the payment.
Article 1357. If the law requires a document or other
special form, as in the acts and contracts
enumerated in the following article, the contracting
parties may compel each other to observe that form,
once the contract has been perfected. This right may
be exercised simultaneously with the action upon the
contract. (1279a)
Article 1358. The following must appear in a public
document:
(1) Acts and contracts which have for their object the
creation,
transmission,
modification
or
extinguishment of real rights over immovable
property; sales of real property or of an interest
therein are governed by articles 1403, No. 2, and
1405;
(2) The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal
partnership of gains;
(3) The power to administer property, or any other
power which has for its object an act appearing or
which should appear in a public document, or should
prejudice a third person;
(4) The cession of actions or rights proceeding from
an act appearing in a public document.
All other contracts where the amount involved
exceeds five hundred pesos must appear in writing,
even a private one. But sales of goods, chattels or
Certain contracts are required to be in a public
document not for the validity or enforceability of the
contract but only for its greater efficacy or
convenience or to bind third persons.
Non-compliance does not adversely affect the
validity of contract or the contractual rights and
obligations of the parties.
Dailon vs CA
The provision of Article 1358 on the necessity
of a public document is only for convenience, not for
the validity or enforceability. It is not a requirement
for the validity of a contract for sale of a parcel of
land that this be embodied in a public instrument.
Non-appearance of the parties before the
Notary public who notarized the deed does not
necessarily nullify or render the parties’ transaction
void ab initio.
If the sale of parcel of land is in a private
instrument, such sale is valid and enforceable
between the contracting parties.
Effect of Non- recording of the instrument:
Even if the Contract of Sale is valid and
enforceable between the parties, if the same is not
registered, it is not binding upon third persons.
The act of registration shall be the operative act
to convey or affect the land insofar as third persons
are concerned. (Sec 51, P.D. 1529)
Thus, the purpose of Art. 1358 in requiring a
public document for the contracts named therein is
to make said contracts effective upon registration
of the instrument in the appropriate registry of
property.
Contracts Required to Be in Public Document for
Convenience:
Under Art. 1358, the ff. contracts are required to
appear in a public document but only for the purpose
of greater efficacy or convenience or to bind third
persons:
1. Acts and omissions which have for their object
the creation, transmission, modification or
extinguishment of real rights over immovable
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property; sales of real property or of an interest
therein are governed by articles 1403, No. 2 and 5
2. The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal
partnership of gains.
3. The power to administer property, or any other
power which has for its object an act appearing or
which should appear in a public document, or should
prejudice a third person.
4. The cession of actions or rights proceeding
from an act appearing in a public document.
Contract of Real Estate Mortgage
governed by Art. 2085-2092 and 2124-2131 of
the Civil Code.
do not require any formality to make the
contract valid and enforceable between the parties.
However, for the purpose of making the
contract effective upon third persons, the law
requires that the Mortgage be recorded in the
Registry of Property.
Article 2125. In addition to the requisites
stated in article 2085, it is indispensable,
in
order that a mortgage may be validly
constituted, that the document in which it
appears be recorded in the Registry of Property. If
the instrument is not recorded, the mortgage is
nevertheless binding between the parties.
The persons in whose favor the law
establishes a mortgage have no other right than
to demand the execution and the recording of the
document in which the mortgage is formalized.
(1875a)
since only a public document may be recorded,
it is implicit in the requirement that contract of real
estate mortgage must be contained in a public
document for it to be registrable in the Registry of
Property.
Contract of Sale over a Parcel of Land:
The Statute of Frauds require this contract to
be in writing to be enforceable.
additional requirement that the contract must
appear in a public document but only for the
convenience of the parties thereto.
though not consigned in a public instrument or
formal writing is valid and binding among the parties
(does not affect the validity of such conveyance)
Contracts Required to be in Writing under Article
1358
all other contracts where the amount involved
exceeds five hundred pesos must appear in writing,
even a private one. But sales of goods, chattels, or
things in action are governed by Articles 1403, No. 2
and 1405.
merely for convenience and not for the purpose
of validity and enforceability. (Shaffer vs. Palma)
Remedy granted under Article 1357
For contracts which are required to be in a certain
form, such as those enumerated in Art 1358 which
are required to be in a public document, the
contracting parties may compel each other to
observe that form, and this right may be exercised
simultaneously with the action upon the contract.
In order for this remedy to be exercised, the following
requisites must concur:
1. the contracts must have already been
perfected
2. the contract must have been valid as to form
3. the contract must have been enforceable under
the Statute of Frauds
Thus, when a contract is enforceable under the
Statute of Frauds, and a public document is
necessary for its registration in the Registry of
Deeds, the parties may avail themselves of the right
under Art 1357.
Illustration:
Sale of Parcel of Land
o if evidenced by a private instrument signed by
both parties, they may compel each other to execute
the formal public document of sale as required in Art.
1358. Such sale is outside the purview of the Statute
of Frauds.
• Sale is valid and effective
Verbal Sale of a Parcel of Land
purely executory
neither of the parties can avail of the remedy
under Art 1357 since the contract is unenforceable
under the Statute of Frauds
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CHAPTER 4
Reformation of Instruments (n)
Article 1359. When, there having been a meeting
of the minds of the parties to a contract, their
true intention is not expressed in the instrument
purporting to embody the agreement, by reason
of mistake, fraud, inequitable conduct or
accident, one of the parties may ask for the
reformation of the instrument to the end that
such true intention may be expressed.
If mistake, fraud, inequitable conduct, or
accident has prevented a meeting of the minds
of the parties, the proper remedy is not
reformation of the instrument but annulment of
the contract.
Article 1360. The principles of the general law on
the reformation of instruments are hereby
adopted insofar as they are not in conflict with
the provisions of this Code.
Reformation
•
A remedy in equity, whereby a written
instrument is made or construed so as to
express or conform to the real intention of the
parties, where some error or mistake has
been committed.
Rationale: it would be unjust and inequitable to
allow the enforcement of a written instrument which
does not reflect or disclose the real meeting of the
minds of the parties.
•
•
In granting information, the remedy in equity
is not making a new contract for the parties,
but establishing and perpetuating the real
contract between the parties which, under
the technical rules of law, could not be
enforced but for such reformation.
Equity renders the reformation of an
instrument in order that the true intention of
the contracting parties may be expressed.
National Irrigation Administration vs Gamit
Reformation of Contracts vs Interpretation of
Contracts
Reformation of
Contracts
A remedy in equity,
whereby a written
instrument is made
or construed so as
to
express
or
conform to the real
intention of the
parties
In
granting
information,
the
remedy in equity is
not making a new
contract for the
parties,
but
establishing
and
perpetuating
the
real
contract
between the parties
which, under the
technical rules of
law, could not be
enforced but for
such reformation.
Rationale: it would
be
unjust
and
inequitable to allow
the enforcement of
a written instrument
which does not
reflect or disclose
the real meeting of
the minds of the
parties.
Interpretation of
Contracts
The act of making
intelligible what was
before
not
understood,
ambiguous, or not
obvious.
It is a method by
which the meaning
of
language
is
ascertained.
It
is
the
determination of the
meaning attached
to the words written
or spoken which
make the contract.
Requisites of Reformation
1. There must have been a meeting of the
minds of the parties to the contract;
2. The instrument does not express the true
intention of the parties; and
3. The failure of the instrument to express the
true intention of the parties is due to mistake,
fraud, inequitable conduct or accident.
•
The presumption is that an instrument sets
out the true agreement of the parties thereto
and that it was executed for valuable
consideration.
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•
In actions for reformation of contract, the
onus probandi is upon the party who insists
that the contract should be reformed.
Effect of Mutual Mistake of Parties
•
•
When mutual mistake of the parties causes
the failure of the instrument their real
agreement, said instrument may be
reformed.
When the mutual error of the parties relates
to the legal effect of their agreement which
frustrates the real purpose of the contract,
the consent is vitiated and the remedy is not
reformation of the instrument but the
annulment of the contract.
In order for reformation of the instrument by reason
of mutual mistake to be applicable, it is necessary
that –
1. The mistake should be of fact;
2. The same should be proved by clear and
convincing evidence; and
3. The mistake should be common to both
parties to the instrument.
Article 1361. When a mutual mistake of the
parties causes the failure of the instrument to
disclose their real agreement, said instrument
may be reformed.
Article 1362. If one party was mistaken and the
other acted fraudulently or inequitably in such a
way that the instrument does not show their true
intention, the former may ask for the reformation
of the instrument.
Article 1363. When one party was mistaken and
the other knew or believed that the instrument
did not state their real agreement, but concealed
that fact from the former, the instrument may be
reformed.
Article 1364. When through the ignorance, lack
of skill, negligence or bad faith on the part of the
person drafting the instrument or of the clerk or
typist, the instrument does not express the true
intention of the parties, the courts may order that
the instrument be reformed.
Article 1365. If two parties agree upon the
mortgage or pledge of real or personal property,
but the instrument states that the property is
sold absolutely or with a right of repurchase,
reformation of the instrument is proper.
Instances where instrument may be reformed
The following instances the reformation of the
instrument is authorized:
1. When a mutual mistake of the parties causes
the failure of the instrument to disclose their
real agreement.
2. If one party was mistaken and the other
acted fraudulently or inequitably in such a
way that the instrument does not show their
true intention.
3. When one party was mistaken and the other
knew or believed that the instrument did not
state their real agreement, but concealed
that fact from the former.
4. When through the ignorance, lack of skill,
negligence or bad faith on the part of the
person drafting the instrument or of the clerk
or typist, the instrument does not express the
true intention of the parties.
5. If two parties agree upon the mortgage or
pledge of real or personal property, but the
instrument states that the property is sold
absolutely or with a right of repurchase.
Article 1366. There shall be no reformation in the
following cases:
(1) Simple donations inter vivos wherein
no condition is imposed;
(2) Wills;
(3) When the real agreement is void.
Article 1367. When one of the parties has
brought an action to enforce the instrument, he
cannot subsequently ask for its reformation.
Instances
reformed
where
instrument
may
not
be
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1. If mistake, fraud, inequitable conduct, or
accident has prevented a meeting of the
minds of the parties. Here, the remedy is
annulment of the contract and not
reformation.
2. In simple donation inter vivos wherein no
condition is imposed
3. In wills
4. When the real agreement us void.
5. When one of the parties has brought an
action to enforce the instrument, he cannot
subsequently ask for its reformation.
6. When the contract is unenforceable because
of failure to comply with the Statute of
Frauds.
Article 1368. Reformation may be ordered at the
instance of either party or his successors in
interest, if the mistake was mutual; otherwise,
upon petition of the injured party, or his heirs
and assigns.
Article 1369. The procedure for the reformation
of instrument shall be governed by rules of court
to be promulgated by the Supreme Court.
Who may demand reformation?
1. If the mistake was mutual, either party or his
successor-in-interest may demand for
reformation.
2. If the mistake was not mutual, only the
injured party or his heirs and assigns may
demand for reformation.
Note:
•
The party who has brought an action to
enforce the instrument cannot subsequently
ask for its reformation.
CHAPTER 5
Interpretation of Contracts
Article 1370. If the terms of a contract are clear
and leave no doubt upon the intention of the
contracting parties, the literal meaning of its
stipulations shall control.
If the words appear to be contrary to the evident
intention of the parties, the latter shall prevail
over the former. (1281)
Article 1371. In order to judge the intention of the
contracting parties, their contemporaneous and
subsequent acts shall be principally considered.
(1282)
Article 1372. However general the terms of a
contract may be, they shall not be understood to
comprehend things that are distinct and cases
that are different from those upon which the
parties intended to agree. (1283)
Article 1373. If some stipulation of any contract
should admit of several meanings, it shall be
understood as bearing that import which is most
adequate to render it effectual. (1284)
Article 1374. The various stipulations of a
contract shall be interpreted together, attributing
to the doubtful ones that sense which may result
from all of them taken jointly. (1285)
Article 1375. Words which may have different
significations shall be understood in that which
is most in keeping with the nature and object of
the contract. (1286)
Article 1376. The usage or custom of the place
shall be borne in mind in the interpretation of the
ambiguities of a contract, and shall fill the
omission of stipulations which are ordinarily
established. (1287)
Article 1377. The interpretation of obscure words
or stipulations in a contract shall not favor the
party who caused the obscurity. (1288)
Article 1378. When it is absolutely impossible to
settle doubts by the rules established in the
preceding articles, and the doubts refer to
incidental circumstances of a gratuitous
contract, the least transmission of rights and
interests shall prevail. If the contract is onerous,
the doubt shall be settled in favor of the greatest
reciprocity of interests.
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If the doubts are cast upon the principal object
of the contract in such a way that it cannot be
known what may have been the intention or will
of the parties, the contract shall be null and void.
(1289)
Article 1379. The principles of interpretation
stated in Rule 123 of the Rules of Court shall
likewise be observed in the construction of
contracts. (n)
Rules in Interpretation of Contracts
1. Cardinal Rule: Intention prevails
a. Intention of the contracting parties should
always prevail because their will has the
force of law between them
i.
The intention of the parties is primordial
and once the intention is ascertained,
that element is deemed as an integral
part of the contract as though it has been
originally expressed in unequivocal
terms
b. How to ascertain: based on the meaning
attached to the words written or spoken
which make the contract
i.
If the written instrument does not reflect
the real intention of the parties, due
to mistake, fraud, inequitable conduct or
accident, remedy is reformation
c. Process of ascertaining intent: objective
manifestation
i.
Court makes a preliminary inquiry as to
whether the contract is ambiguous
1. If ambiguous, interpretation left to the
courts (resolve using intrinsic
evidence + the rules stated below in
number 3 "when there is ambiguity")
a. Ambiguous: susceptible of 2
reasonable
alternative
interpretations
2. If clear and unambiguous (i.e. can
only be read one way), court will
interpret the contract as a matter of
law (just apply it, nothing else to be
done)
2. Terms of Contract are clear
a. If the terms of a contract are clear and leave
no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations
is controlling (Art. 1370, NCC 1st par.)
b. Where the language of a contract is plain and
unambiguous, meaning should he determine
without reference to extrinsic facts or aids
i.
Intention of the parties must be gathered
from that language alone.
c. Courts thus have no authority to alter a
contract by construction or to make a new
contract for the parties
3. When there is ambiguity
a. Ambiguous: susceptible of 2 reasonable
alternative interpretations
b. Extrinsic evidence
i.
Parol evidence rule: prohibits any
addition or contradiction of the terms of a
written instrument by testimony or other
evidence purporting to show that, at or
before the execution of the parties'
written agreement, other or different
terms were agreed upon by the parties,
varying the purport of the written
contract
1. Exception
a. Failure of the written agreement
to express the true intent and
agreement
of
the
parties
thereto (very
ambiguous
or
obscure; intention of the parties
cannot be understood)
ii.
Art. 1371, NCC: "In order to judge the
intention of the contracting parties, their
contemporaneous and subsequent acts
shall be principally considered"
1. Analysis by
a. Words of the Contract
b. Reason
behind
and
circumstances under which the
contract was executed
iii.
But if clear and unambiguous, no need
for extrinsic evidence (only intrinsic)
c. Contra proferentem (Construe against
drafting parties)
i.
Art. 1377, NCC: The interpretation of
obscure words or stipulations in a
contract shall not favor the party who
caused the obscurity
1. Contracts of adhesion: ambiguities
are construed against the party who
prepared the contract
d. Principle of Effectiveness
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i.
2 interpretations of the same contract are
possible:
1. One
rendering
the
contract
meaningless, invalid and illegal
2. One giving effect to the contract as a
whole, valid and legal
ii.
Art. 1373, NCC: Choose the latter
hehehe
e. Contract interpreted as a whole
i.
Provisions should be read in relation to
each other and in their entirety so as to
render them effective
ii.
Art. 1374, NCC: various stipulations of a
contract shall be interpreted together
attributing to the doubtful ones that sense
which result from all of them taken jointly
iii.
Doctrine of complementary-contractsconstrued-together (Art. 1374, NCC)
1. An accessory contract must be read
in its entirety and together with the
principal agreement
2. Ex. Surety contract as an accessory
contract to be interpreted together
with the loan agreement as the
principal contract
f. In keeping with the nature and object of
the contract
i.
Art. 1375, NCC: words which may have
different
significations
shall
be
understood in that which is most in
keeping with the nature and object of the
contract
ii.
Duty of the courts to place a practical and
realistic construction upon it, giving due
consideration to the context in which it is
negotiated and the purpose which it is
intended to serve (i.e. reasonable
construction)
g. Eusdem Generis (Limit Generalities to
Things of Same Genre)
i.
Art. 1372, NCC: However general the
terms of a contract may be, they shall not
be understood to comprehend things that
are distinct and cases that are different
from those upon which the parties
intended to agree
ii.
Eusdem Generis rule: where general
words follow the enumeration of
particular classes of persons or things,
the general words will be construed as
applicable only to persons or things of the
same general nature or class as those
enumerated
h. Usage or customs
i.
Art. 1376, NCC: the usage or custom of
the place shall be borne in mind in the
interpretation of the ambiguities of a
contract, and shall fill the omission off
stipulations
which
are
ordinarily
established
i. In case of impossibility to settled doubts
by other rules/i.e. those listed above (Art.
1378, NCC)
i.
If
doubts
refer
to
incidental
circumstances of a gratuitous contract,
the least transmission of rights and
interests shall prevail
ii.
If the contract is onerous, the doubt shall
be settled in favor of the greatest
reciprocity of interests; and
iii.
If the doubts are cast upon the principal
object of the contract in such a way that
it cannot be known what may have been
the intention or will of the parties,
the contract shall be null and void
4. Rules of Interpretation of Documents under
ROC
Rules of Interpretation of Documents Under
Rules of Court
• Article 1379 of the Civil Code provides that "the
principles of interpretation stated in Rule 130 of
the Rules of Court shall likewise be observed in
the construction of contracts"
• Section 10 up to 19 of Rule 130 of the Rules of
Court provides for the rules of interpreting
documents:
o Section 10. Interpretation of a writing
according to its legal meaning. —
The language of a writing is to be interpreted
according to the legal meaning it bears in the
place of its execution, unless the parties
intended otherwise.
o Section 11. Instrument construed so as to
give effect to all provisions. — In the
construction of an instrument, where there
are several provisions or particulars, such a
construction is, if possible, to be adopted as
will give effect to all.
Section 12. Interpretation
according
to
intention; general and particular provisions. — In
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the construction of an instrument, the intention of
the parties is to be pursued; and when a general
and a particular provision are inconsistent, the
latter is paramount to the former. So a particular
intent will control a general one that is
inconsistent with it.
o Section 13. Interpretation according to
circumstances.
—
For
the
proper
construction of an instrument, the
circumstances under which it was made,
including the situation of the subject thereof
and of the parties to it, may be shown, so that
the judge may be placed in the position of
those who language he is to interpret.
o Section 14. Peculiar signification of terms.
— The terms of a writing are presumed to
have been used in their primary and general
acceptation, but evidence is admissible to
show that they have a local, technical, or
otherwise peculiar signification, and were so
used and understood in the particular
instance, in which case the agreement must
be construed accordingly.
o Section 15. Written words control printed. —
When an instrument consists partly of written
words and partly of a printed form, and the
two are inconsistent, the former controls the
latter.
o Section 16. Experts and interpreters to be
used in explaining certain writings. — When
the characters in which an instrument is
written are difficult to be deciphered, or the
language is not understood by the court, the
evidence of persons skilled in deciphering
the characters, or who understand the
language, is admissible to declare the
characters or the meaning of the language.
o Section 17. Of Two constructions, which
preferred. — When the terms of an
agreement have been intended in a different
sense by the different parties to it, that sense
is to prevail against either party in which he
supposed the other understood it, and when
different constructions of a provision are
otherwise equally proper, that is to be taken
which is the most favorable to the party in
whose favor the provision was made.
o Section 18. Construction in favor of natural
right. — When an instrument is equally
susceptible of two interpretations, one in
o
favor of natural right and the other against it,
the former is to be adopted.
Section 19. Interpretation according to
usage. — An instrument may be construed
according to usage, in order to determine its
true character.
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Introduction to Defective Contracts
Defective Contracts
•
Kinds of Contracts as to Defects
Contracts are classified either as:
•
•
Perfectly Valid – where the contract does not
suffer from any defect.
Defective – where the contract suffers from a
certain kind of defect.
Classification of defective contracts:
•
•
•
•
Rescissible
Voidable Contracts
Unenforceable Contracts
Void or Inexistent Contracts
Rescissble Contracts
•
•
Contains all the requisites of a valid contract
and are considered legally binding, but by
reason of injury or by damage (lesion) to
either of the contracting parties or to third
persons, such as creditors, it is susceptible
to rescission at the instance of the party who
may be prejudiced thereby.
A rescissible contract is valid, binding and
effective until it is rescinded.
Voidable Contract
•
•
One in which the essential requisites for
validity under Article 1318 are present, but
may be annulled because of want of capacity
or the vitiated consent of one of the parties.
Before such annulment, the contract is
existent, valid, and binding, hence,
considered effective and obligatory between
parties.
Unenforceable Contract
•
Is that which cannot be enforced by a proper
action in court, unless it is ratified, because
either it is entered into without or in excess of
authority or it does not comply with the
•
statute of frauds or where both of the
contracting parties do not possess the
required legal capacity.
Prior to ratification, the contract is valid but it
cannot be enforced by a proper action in
court.
Once ratified, either expressly or impliedly, it
is rendered perfectly valid and becomes
obligatory between the parties.
Void or Inexistent Contract
•
•
•
Is one which has no force and effect from the
very beginning.
It is as if it has never been entered into and
cannot be validated either by the passage of
time or by ratification.
Void contract is more infer that inexistent
contract.
Clarification of Terms
•
•
•
Rescissble and voidable contracts are both
obligatory until they are rescinded or
annulled, respectively.
Unenforceable contracts are not obligatory
unless they are ratified.
Void or inexistent can never become
obligatory since the defect is not subject to
ratification.
Perfection
•
•
Is synonymous with the birth of the contract
or its existence.
It takes place upon the concurrence of all the
essential elements thereof.
There are two ways by which a contract may
perfected:
1. Consensual – its perfection is perfected by
mere consent. This kind of contract comes
into existence upon the concurrence of three
essential requisites: consent, object, and
cause.
2. Real – its perfection is not perfected by mere
consent but by the delivery of the object of
the contract. This kind of contract comes into
existence upon the concurrence of four
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essential requisites: consent, object, cause
and delivery.
Inexistent Contract is used to refer to contracts
which are made to appear as existing but in reality,
they do not exist either because:
Note:
In the Civil Code, there are only four contract that are
classified as real contracts, namely, pledge, deposit
commodatum, and nutuum.
•
1. It is merely absolutely simulated or fictitious.
2. Its cause or object did not exist at the time of
the transactions.
3. The intention of the parties relative to the
principal object of the contract cannot be
ascertained.
A contract is obligatory once it is perfected,
regardless of the form it may have been
entered into.
Under Article 1315, from the moment the
contract is perfected, “the parties are bound
not only to the fulfillment of what has been
expressly stipulated but also to all the
consequences which, according to their
nature, may be in keeping with good faith,
usage and law.”
Under Article 1356, the general rule is that
“contracts shall be obligatory, in whatever
form they may have been entered into,
provided all the essential requisites for their
validity are present.”
Unenforceable are perfected and valid contracts
but they cannot be enforced by a proper action in
court unless they are ratified.
A void contract contains all essential elements
(consent, object, cause, or delivery of the object of
the contract) but it is invalid from the very beginning
because:
Example: A contract entered into in the name of
another person by one who has been given no
authority or legal representation, or who has acted
beyond his powers.
•
•
1. Its cause, object or purpose is contrary to
law, morals, good customs, public order or
public policy.
2. Its object is outside the commerce of men.
3. It contemplates an impossible service.
4. It is expressly prohibited or declared void by
law, such as contracts which violate the
principle of mutuality of contracts and
contracts which require a certain form for
their validity and the requirement is not
complied with.
Void Contracts
Inexistent
Contracts
Contains all the In reality, it does not
essential elements exist.
of a contract.
•
•
•
•
•
The principle of pari delicto is applicable only
to contracts with an illegal cause or subject
matter (object) and does not apply to
inexistent contracts, such as those
absolutely simulated or fictitious.
Pari delicto rule presupposes the existence
of a cause, it cannot refer to fictious or
simulated contracts which are in reality nonexistent.
Once the contract is cleansed of its defect by
ratification, the same becomes enforceable
and is, therefore, obligatory.
A contract is obligatory only between the
parties, as well as assigns and heirs
A contract that is obligatory is binding
between the parties, their assigns and heirs.
CHAPTER 6
Rescissible Contracts
Article 1380. Contracts validly agreed upon may
be rescinded in the cases established by law.
(1290)
Rescissible Contracts
Rescission is found in:
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1. Article 1191 – the general provision on
rescission of reciprocal obligations.
2. Article 1381 – rescission of rescissible
contracts.
3. Article 1592 – rescission of a contract of sale
of an immovable property.
4. Article 1659 – rescission as an alternative
remedy, insofar as the rights and obligations
of the lessor and the lessee in contracts of
lease are concerned.
The
breach
contemplated is the
obligor’s failure to
comply with an
existing obligation.
Thus, the power to
rescind is given only
to the injured party.
Rescission under Article 1191 vs Rescission
under Article 1381
The Civil Code uses rescission in two different
contexts:
1. Rescission on account of breach of contract
under Article 1191.
2. Rescission by reason of lesion or economic
prejudice under Article 1381.
•
The rescission under Article 1991 is called
“resolution.”
Article 1991
Not predicated on
injury to economic
interests of the
party plaintiff but on
the breach of faith
by the defendant,
that violates the
reciprocity between
the parties.
The
rescission
applies exclusively
to the reciprocal
obligations.
The rescission is a
principal
action
which seeks the
resolution
or
cancellation of the
contract.
Article 1381
The cause of action
is subordinated to
the existence of
lesion or economic
prejudice because it
is the rasion d ‘etre
as well as the
measure of the right
to rescind.
The
rescission
applies to all kinds
of
obligations
arising
from
contracts, whether
the
same
be
reciprocal
in
character or not.
The rescission is
only a subsidiary
remedy, meaning, it
cannot be instituted
except when the
party
suffering
damage has no
other legal means
The
court
has
discretionary power
not to grant the
rescission if there
be just cause for the
fixing of a period for
the performance of
the obligation.
to obtain reparation
for the same.
Even a third person
can become an
injured party as in
the
case
of
contracts I fraud of
creditor. The latter
acquires the right to
rescind the contract
which is entered
into for the purpose
of defrauding him,
even if he is not a
party
to
said
contract.
The court must
order the rescission
once the ground is
proven.
Note:
•
•
The four-year prescriptive period provided for
in Article 1389 applies only to rescission as a
subsidiary remedy and not to rescission as a
principal action under Article 1191.
As to rescission as a principal action in
Articles 1191, 1592, and 1659, the
prescriptive period applicable is found in
Article 1144, which provides that the action
upon a written contract should be brought
within ten years from the time the right of
action accrues.
Rescission Distinguished from Termination of
Contracts
Rescission of
Contracts
When a contract is
rescinded, it is
deemed inexistent,
and the parties are
returned to their
status quo ante.
Termination of
Contracts
When
the
agreement
is
terminated, it is
deemed valid at
inception. Prior to
its termination, the
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Hence, there is contract binds the
mutual restitution of parties, who are
benefits received.
thus obliged to
observe
its
provisions.
To rescind is to The termination or
declare a contract cancellation of a
void in its inception contract
would
and to put an end to necessarily entail
it as though it never enforcement of its
were. It is not terms prior to the
merely to terminate declaration of its
it
and
release cancellation in the
parties from further same way that
obligations to each before a lessee is
other
but
to ejected under a
abrogate it from the lease contract, he
beginning
and has to fulfill his
restore the parties obligations
to relative positions thereunder that had
which they would accrued prior to his
have occupied had ejectment.
no contract ever However,
been made.
termination of a
contract need not
undergo
judicial
intervention.
•
Article 1381. The
rescissible:
•
•
The parties in a case of termination are not
restored to their original situation; neither is
the contract treated as if it never existed.
Prior to its termination, the parties are
obliged to comply with their contractual
obligations.
Only after the contract has been cancelled
will they be released from their obligations.
Huibonhoa vs CA
•
•
following
contracts
are
(1) Those which are entered into by
guardians whenever the wards whom
they represent suffer lesion by more than
one-fourth of the value of the things
which are the object thereof;
(2) Those agreed upon in representation
of absentees, if the latter suffer the lesion
stated in the preceding number;
(3) Those undertaken in fraud of creditors
when the latter cannot in any other
manner collect the claims due them;
(4) Those which refer to things under
litigation if they have been entered into by
the defendant without the knowledge and
approval of the litigants or of competent
judicial authority;
Note:
•
The parties have, in legal effect, simply
entered into another contract for the
dissolution of the previous one, and its
effects, in relation to the contract so
dissolved, should be determined by the
agreement of the parties, or by the
application of other legal principals, but not
by Article 1385.
(5) All other contracts specially declared
by law to be subject to rescission. (1291a)
Article 1382. Payments made in a state of
insolvency for obligations to whose fulfillment
the debtor could not be compelled at the time
they were effected, are also rescissible. (1292)
Concept of Rescission Under Article 1381
Where the action for the rescission of a lease
contract prayed for the payment of rental
arrearages, the aggrieved party actually
sought the partial enforcement of a lease
contract.
The remedy was not actually rescission, but
termination or cancellation, of the contract.
Rescission Distinguished from Mutual Dissent
•
The rescission contemplated in Articles
1380 to 1389 is a remedy granted to the
contracting parties and even to third
persons, to secure the reparation of
damages caused to them by a contract,
even if this should be valid, by restoration of
things to their condition at the moment prior
to the celebration of the contract. It implies a
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•
contract, which even if initially valid,
produces a lesion or a pecuniary damage to
someone.
The action cannot be instituted except when
the party suffering damages has no other
legal means to obtain reparation for the
same.
Nature of Rescissible Contracts Under Article
1381
•
•
•
•
Contracts which are rescissible are valid
contracts having all the essential requisites
of a contract and therefore obligatory under
normal conditions, but by reason of injury or
damage caused to either of the parties
therein or third persons are considered
defective and, thus, may be rescinded.
The defect of a rescissible contract under
Article 1381 may not be cleansed by
ratification although the right of action for
rescission may be lost by way of extinctive
prescription.
The defect of a rescissible contract cannot be
attacked collaterally.
An action for rescission must be set up in an
independent civil action and only after full
blown trial.
Requites for Rescission to Prosper
1. The action for rescission must be originate
from any of the causes specified in Articles
1381 and 1382.
2. The party suffering damage and who is
asking for rescission has no other legal
means to obtain reparation for the damage
suffered by him.
3. The person demanding rescission must be
able to return what he may be obliged to
restore if rescission is granted by the court.
•
This requisite does not apply to a creditor
suing for rescission under Article 1381 (3)
because he received nothing from the
contract which he seeks to rescind.
4. The things are the object of the contract must
not be legally in the possession of third
persons who did not act in bad faith.
5. The action for rescission must be filed within
four years from accrual of the right of action.
Specific Contracts Declared Rescissible
Kinds of Rescissible Contracts
According to the reason for their susceptibility to
rescission:
1. Those which are rescissible because of
lesion or prejudice.
2. Those which are rescissible on account of
fraud or bad faith.
3. Those which, by special provisions of law,
are susceptible to rescission.
The following contracts are rescissible by reason of
lesion or prejudice:
1. Those which are entered into by guardians
whenever the wards whom they represent suffer
lesion by more than one-fourth of the value of the
things which are the object thereof
2. Those agreed upon in representation of
absentees, if the latter suffer the lesion stated in the
preceding number
3. Partition of inheritance where an heir suffers
lesion of at least ¼ of the share to which he is
entitled.
The following contracts are rescissible on account of
fraud or bad faith:
1. Those undertaken in fraud of creditors when the
latter cannot in any other manner collect the claims
due them
2. Those which refer to things under litigation if they
have been entered into by the defendant without the
knowledge and approval of the litigants or of
competent judicial authority
3. Payments made in a state of insolvency for
obligations to whose fulfillment the debtor could not
be compelled at the time they were effected
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•
Contracts which are specially declared by
law to be subject to rescission: Articles 1189,
1191, 1526, 1534, 1539, 1542, 1556, 1560,
1567, 1592, and 1659.
Rescissible By reason of Lesion or Prejudice
Lesion – injury which one of the parties suffers by
virtue of a contract which is disadvantageous to him.
unenforceable in accordance with Articles
1317 and 1403 (1).
•
Note:
•
Scope and Coverage
•
•
•
•
For contract to be rescissible, the lesion must
exceed 25% of the value of the thing owned
by the ward or absentee.
The rescissible contracts referred to in
paragraph 1 and 2 of Article 1381
presuppose the absence of court approval
because if prior court approval is obtained,
the contract would be valid, regardless of the
presence of lesion.
Administration includes all acts for the
preservation of the property and the receipt
of fruits according to the natural purpose of
the thing.
The right to administer does not include the
power to dispose or encumber said property
without court authorization.
•
•
•
Under the Rules of Court, any disposition or
encumberance by the guardian or
administrator of real property of the ward or
of the absentee requires prior court approval.
What then is the effect of the absence of such
approval?
•
The guardian is prohibited from acquiring by
way of purchase, either in person r through
the mediation of another, the property of his
ward whether such purchase is made at a
public or judicial auction.
Basis:
Article 1491. The following persons cannot acquire
by purchase, even at a public or judicial auction,
either in person or through the mediation of another:
(1) The guardian, the property of the person
or persons who may be under his
guardianship;
Answers:
1. The Court declared void a sale of the ward’s
realty by the guardian without authority from
the court.
2. The Court ruled that any disposition of the
property of the ward (minor) without the
proper judicial authority, unless ratified by
them upon reaching the age of majority, is
The contract of disposition or encumberance
of realty entered into by the guardian or
administrator is unenforceable and not
rescissible, irrespective of whether there is
lesion or not.
If prior court approval is obtained, the
contract would be valid, regardless of the
presence of lesion.
If such contract is entered into by the
guardian without court approval and the ward
suffers lesion to the extent provided for in the
said article, such contract may be rescinded.
If such contract is approved by the court,
there is no ground for rescission even if the
ward suffers lesion to the extent provided for
in Par. 1 of Art. 1381.
Guardian cannot Acquire Property of Ward
Sale or Encumberance of Real Property of Ward
or Absentee
•
The second answer is the better view.
x x x.
•
•
Any sale in violation of the prohibition is void
and not merely voidable.
The sale is prohibited only while the
guardianship exists.
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•
•
•
After the termination of the guardianship, the
prohibition no longer applies.
The transaction may be ratified by means of
and in the form of a new contract, in which
case its validity shall be determined only by
the circumstances at the time the execution
of such new contract.
The new contract would then be valid from its
execution; however, it does not retroact to
the date of the first contract.
•
•
•
Contracts in Fraud of Creditor
a. Accion Pauliana
•
Contracts undertaken in fraud of creditors
are rescissible under the provisions of the
third paragraph of Article 1381, when the
latter cannot in any manner collect the claims
due them.
Accion Pauliana
•
•
•
This remedy is available when the subject
matter is a conveyance, otherwise valid,
undertaken in fraud of creditor.
Contracts which are rescissible under the
third paragraph of Article 1381 are valid
contracts, albeit undertaken in fraud of
creditors.
If the contract is absolutely simulated, the
contract is not merely rescissible but
inexistent, albeit undertaken as well in fraud
of creditors.
Difference
between
contracts
that
are
rescissible for having been undertaken in fraud
of creditors and absolutely simulated contracts
which are also undertaken in fraud creditors.
•
•
•
An absolutely simulated contract, under Art.
1346 is void.
It takes place when the parties do not intend
to be bound at all.
The characteristic of simulation is the fact
that the apparent contract is not really
desired or intended to produce legal effects
or in any way alter the juridical situation of the
parties.
•
The remedy of accion pauliana is available
when the subject matter is a conveyance,
otherwise valid, undertaken in fraud of
creditors.
A void or inexistent contract is one which has
no force and effect from the very beginning,
as if it had never been entered into; it
produces no effect whatsoever either against
or in favor of anyone.
Rescissble contracts are not void ab initio,
and the principle, “quod nullum set nullum
producit effectum,” in void inexistent
contracts is inapplicable.
Until set aside in an appropriate action,
rescissible contracts are repsected as being
legally valid, binding and in force.
Absolute Simulation vs Fraudulent Simulation
Absolute
Simulation
Implies that there is
no existing contract,
no
real
act
executed.
Can be attacked by
any
creditor,
including
one
subsequent to the
contract.
The insolvency of
the debtor making
the
simulated
transfer is not a
prerequisite to the
nullity
of
the
contract.
The
action
to
declare a contract
absolutely
simulated does not
prescribe (articles
1409 and 1410)
Fraudulent
Simulation
There is a true and
existing transfer or
contract.
Can be assailed
only by the creditors
before
the
alienation.
The
action
to
rescind, or accion
pauliana, requires
that the creditor
cannot recover in
any other manner
what is due him.
The accion pauliana
to
rescind
a
fraudulent
alienation
prescribes in four
years (article 1389)
Requisites of Accion Pauliana and Prescriptive
Period
1. The plaintiff asking for rescission has a credit
prior to the alienation, although demandable
later.
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2. The debtor has made a subsequent contract
conveying a patrimonial benefit to a third
person.
3. The creditor has no other legal remedy to
satisfy his claim.
4. The act being impugned is fraudulent.
5. The third person who received the property
conveyed, if it is by onerous title, has been
an
accomplice
in
the
fraud.
•
•
•
Rescission requires the existence of
creditors at the time of the alleged fraudulent
alienation, and this must be proved as one of
the bases of the judicial pronouncement
setting aside the contract.
While it is necessary that the credit of the
plaintiff in the accion pauliana must exist
prior to the fraudulent alienation, the date of
the judgement enforcing it is immaterial.
Right of First Refusal
Jurisprudential Development
•
•
It is further required that the conveyance
must not be absolutely simulated.
General Rule:
•
Paranaque Kings Enterprises, Inc. vs Court of
Appeals.
•
Note:
•
Right of First Refusal
•
A contract entered into in violation of a right
of first refusal is rescissible.
•
The status of creditor can be validly accorded
to grantees of the right of first refusal for they
have substantial interests that will be
prejudiced by the conveyance of the property
subject matter of their right of first refusal.
Equatorial Realty Development, Inc. vs Mayfair
Theater, Inc.
•
The term creditors in Article 1381 (3) is broad
enough to include the oblige under an option
contract as well as under a right of first
refusal, sometimes known as a right of first
priority.
A contract of sale entered into in violation of
a right of first refusal of another person, while
valid, is rescissible.
Concept of Right of First Refusal
Guzman, Bicaling & Bonnevie
•
In order to have full compliance with the
contractual right granting petitioner the first
option to purchase, the sale of the properties
for the price for which they were finally sold
to a third person should have likewise been
first offered to the former.
There should be identity of terms and
conditions to be offered to the buyer holding
a right of first refusal if such right is not to be
rendered illusory.
The basis of the right of first refusal must be
the current offer to sell of the seller or offer to
purchase of any prospective buyer.
•
A contractual grant, not of the sale of a
property, but of the first priority to buy the
property in the event the owner sells the
same.
Such grant may be embodied in a separate
contract, in which case it must be supported
by its own consideration distinct and
separate from the consideration supporting
the contemplated contract, such as when it is
one of the provisions in a lease contract.
In entering into the contract, the lessee is in
effect stating that it consents to lease the
premises and to pay the price agreed upon
provided the lessor also consents that,
should it sell the leased property, then, the
lessee shall be given the right to match the
offered purchase price to buy the property at
that price.
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Note:
•
•
•
•
Such grant of right of first refusal may not be
unilaterally withdrawn if it stands upon
valuable consideration.
But like any other right, it may be waived.
When a lease contains a right of first refusal,
the lessor has the legal duty to the lessee not
to sell the leased property to anyone at any
price until after the lessor has made an offer
to sell the property to the lessee and the
lessee has failed to accept it.
Only after the lessee has failed to exercise
his right of first priority could the lessor sell
the property to other buyers under the same
terms and conditions offered to the lessee, or
under terms and conditions more favorable
to the lessor.
Not Covered by Statute of Frauds
Example:
1. If the lessor sold the leased premises to a
third person without offering first the property
to the lessee, the latter’s right of first refusal
is violated.
2. If the lessor offered the property to the lessee
for P1.5 Million and the latter decided not to
buy the property at that price, the former
cannot sell the same property to a third
person at a price lower than P1.5 Million,
otherwise, there will be a violation of the
lessee’s right of first refusal.
Distinguished from Option
Option
Would require a
clear certainty on
both the object and
the
cause
or
consideration of the
envisioned contract.
with another but
also
on
terms,
including the price,
that obviously are
yet to be later
firmed up.
The option granted What is involved is
to the offeree is for only a right of first
a fixed period and at refusal.
a detrmined price.
No definite period One of the parties
within which the was granted a fixed
leased premises will period to buy the
be offered for sale subject property at
to the lessee and a price certain.
the price is made
subject
to
negotiation
and
determined only at
the time the option
to buy is exercised.
Right of First
Refusal
While the object
might be made
determinate,
the
exercise of the right
would
be
dependent not only
on the grantor’s
eventual intention to
enter into a binding
juridical
relation
•
•
•
A right of first refusal is not among those
listed as unenforceable under the statute of
frauds.
The application of Article 1403, par. 2(e )
presupposes the existence of a perfected,
albeit written, contract of sale.
A right of first refusal need not be in written
to be enforceable and may be proven by oral
evidence.
Effect of Violation of Right of First Refusal
The following are the consequences of violation of
the grantee’s right of first refusal:
1. If the grantor has entered into a contract with
a third person:
• A contract of sale entered into in
violation of a right of first refusal of
another
person
is
rescissible
because it is in fraud of creditor.
• The status of creditors can be validly
accorded to grantees of the right of
first refusal for they have substantial
interests that will be prejudiced by the
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conveyance of the property subject
matter of their right of first refusal.
2. If the contract in violation of the right of first
refusal is rescinded:
• The grantor may now be directed to
comply with his obligation to sell the
property to the grantee under the
same terms and conditions that it had
been sold to a third person.
• There should be identity of terms and
conditions to be offered to the buyer
holding the right of first refusal.
•
Restriction:
•
Riviera Filipina, Inc. vs Court of Appeals
•
The parties to the case are therefore
expected, in defense to the court’s exercise
of jurisdiction over the case, to refrain from
doing acts which would dissipate or debase
the thing subject of the litigation or otherwise
render the impending decision therein
ineffectual.
•
A right of first refusal means identity of terms
and conditions to be offered to the lessee
and all other prospective buyers and a
contract of sale entered into in violation of
right of first refusal of another person, while
valid, is rescissible.
Article 1381 (4) requires that any contract
entered into by a defendant in case which
refers to things under litigation should be with
the knowledge and approval of the litigants
or of a competent judicial authority.
Any disposition of the thing subject of
litigation or any act which tends to render
inutile the court’s impending disposition in
such case, sans the knowledge and approval
of the litigants or of the court, is unmistakably
and irrefutably indicative of bad faith.
Note:
Contracts Relating to Things Under Litigation
•
•
Contracts which are rescissible due to fraud
or bad faith include those which involve
things under litigations, if they have been
entered into by the defendant without the
knowledge and approval of the litigants or of
competent judicial authority.
Basis: Article 1381 (4)
•
•
It requires the concurrence of the following:
1. The defendant during the pendency of the
case, enters into a contract which refers to
the thing subject of litigation.
2. The said contract was entered into without
knowledge and approval of the litigants or of
a competent judicial authority.
•
Payment made in State of Insolvency
•
Reason:
•
Article 1381(4) seeks to remedy the
presence of bad faith among the parties to a
case and/or any fraudulent act which they
may commit with respect to the thing subject
of litigation.
The defendant in such a case is not
absolutely proscribed from entering into a
contact which refer to things under litigation.
If a defendant enters into a contract which
conveys the thing under litigation during the
pendency of the case, the conveyance
would be valid, there being no definite yet
coming from the court with respect to the
thing subject of litigation.
The absence of such knowledge or approval
would not precipitate the invalidity of an
otherwise valid contract.
Though considered, valid, may be rescinded
at the instance of the other litigants.
•
A debtor who is under a state of insolvency
should not give undue preference to once
creditor by paying only the latter’s credit to
the prejudice of the others.
Any payment made by an insolvent debtor of
an obligation the fulfillment of which could not
be compelled at the time of the payment is
considered fraudulent and is, therefore,
rescissible under Article 1382.
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Other Contracts Specially Declared by Law to be
Rescissible
•
Contracts which are specially declared by law to be
subject to rescission:
•
Articles 1189, 1191, 1526, 1534, 1542, 1556,
1567, 1592, and 1659.
Article 1383. The action for rescission is
subsidiary; it cannot be instituted except when
the party suffering damage has no other legal
means to obtain reparation for the same. (1294)
Article 1384. Rescission shall be only to the
extent necessary to cover the damages caused.
(n)
Subsidiary Remedy
•
•
•
•
•
In rescission by reason of lesion or economic
prejudice, the cause of action is subordinated
to the existence of that prejudice, because it
is the raison d’ etre as well as the measure
of the right to rescind.
Rescission of this kind is allowed only to the
extent necessary to cover the damages
caused.
Only the creditor who brought the action for
rescission can benefit from the rescission;
those who are strangers to the cation cannot
benefit from its effect, although they are
creditors prior to the questioned alienation.
The revocation is only to the extent of the
plaintiff creditor’s unsatisfied credit; as to the
excess, the alienation is maintained.
Where the defendant makes good the
damages cause, the action cannot be
maintained or continued.
The subsidiary character of the action for rescission
applies only to contracts enumerated in Articles
1381 and 1382; it does not apply to rescission under
Articles 1191, 1592, and 1659.
Subsidiary Remedy – the exhaustion of all
remedies by the prejudiced creditor to collect claims
due him before rescission is resorted to.
It is essential that the party asking for
rescission prove that he has exhausted all
other legal means to obtain satisfaction of his
claim.
A creditor would have a cause of action to bring an
action for rescission, it is alleged that the following
successive measures have already been taken:
1. Exhaust the properties of the debtor through
levying by attachment and execution upon all
the property by the debtor, except such as
are exempt by law from execution.
2. Exercise all the rights and actions of the
debtor, save those personal to him (accion
subrogatoria).
3. Seek rescission of the contracts executed by
the debtor in fraud of their rights (accion
pauliana).
Accion Pauliana presupposes the following:
1. A judgement
2. The issuance by the trial court of a writ of
execution for the satisfaction of the
judgement
3. The failure of the sheriff to enforce and
satisfy the judgement of the court.
Article 1385. Rescission creates the obligation
to return the things which were the object of the
contract, together with their fruits, and the price
with its interest; consequently, it can be carried
out only when he who demands rescission can
return whatever he may be obliged to restore.
Neither shall rescission take place when the
things which are the object of the contract are
legally in the possession of third persons who
did not act in bad faith.
In this case, indemnity for damages may be
demanded from the person causing the loss.
(1295)
Effects of Rescission
•
When the contract is ordered rescinded by
the court, the contract is not invalidated or
declared void in its inception.
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•
•
•
•
•
It is in the annulment of a voidable contract
where the contract is invalidated from its
inception by the judgment of a competent
court.
Rescission creates the obligation to return
the things which were the object of the
contract, together with their fruits, and the
price with its interest.
The necessary consequence of rescission is
mutual restitution, that is, the parties to a
rescinded contract must be brought back to
their original situation prior to the inception of
the contract; hence, they must return what
they received pursuant to the contract.
Rescission has the effect of unmaking a
contract, or its undoing from the beginning,
and not merely its termination.
When the contract is rescinded, it is deemed
inexistent, and the parties are returned to
their status quo ante.
It can be carried out only when the one who
demands rescission can return whatever he may be
obliged to restore.
•
In order that an action for rescission may
prosper, one of the requisites is that the
person demanding rescission must be able
to return what he may be obliged to restore if
rescission is granted by the court.
Rescission cannot take place when the things which
are the object of the contract are legally in the
possession of third persons who did not act in bad
faith.
•
•
•
•
Indemnity for damages may be demanded
from the person causing the loss.
When it is no longer possible to return the
object of the contract, an indemnity for
damages operates as restitution.
•
As to who or which is in legal possession of
a property, the registration in the Registry of
Deeds of the subject property under the
name of a third person indicates the legal
possession of that person.
Article 1385 also applies to Rescission under
Article 1191
•
•
The requirement of mutual restitution
whether the rescission is based on the
grounds enumerated under Article 1381 or
upon the ground established in Article 1991.
Mutual restitution is also required in cases
involving rescission under Article 1191.
Article 1386. Rescission referred to in Nos. 1 and
2 of article 1381 shall not take place with respect
to contracts approved by the courts. (1296a)
Article 1387. All contracts by virtue of which the
debtor alienates property by gratuitous title are
presumed to have been entered into in fraud of
creditors, when the donor did not reserve
sufficient property to pay all debts contracted
before the donation.
Alienations by onerous title are also presumed
fraudulent when made by persons against whom
some judgment has been rendered in any
instance or some writ of attachment has been
issued. The decision or attachment need not
refer to the property alienated, and need not
have been obtained by the party seeking the
rescission.
In addition to these presumptions, the design to
defraud creditors may be proved in any other
manner recognized by the law of evidence.
(1297a)
Presumption and Badges of Fraud
In allowing rescission in case of an alienation
by onerous title, the third person who
received the property conveyed should
likewise be a party to the fraud.
So long as the person who is in legal
possession of the property did not act in bad
faith, rescission cannot take place.
Presumption of Fraud
In case of Gratuitous Alienation
•
In case of gratuitous alienation of property,
the first paragraph of Article 1387 of the Civil
Code provides that All contracts by virtue of
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•
which the debtor alienates property by
gratuitous title are presumed to have been
entered into in fraud of creditors, when the
donor did not reserve sufficient property to
pay all debts contracted before the donation.
Article 759, second paragraph, states that
the donation is always presumed to be in
fraud of creditors, when the time thereof the
donor did not reserve sufficient property to
pay his debts prior to the donation.
•
For the foregoing presumption of fraud to
apply, it must be established that the donor
did not leave adequate properties which
creditors might have recourse for the
collection of their credits existing before the
execution of the donation.
•
•
•
Note:
•
In Case of Alienation by Onerous Title
•
•
Alienations by onerous title are also
presumed fraudulent when made by persons
against whom some judgment has been
rendered in any instance or some writ of
attachment has been issued.
For the presumption to apply, the same
article state that the decision or attachment
need not refer to the property alienated, and
need not have been obtained by the party
seeking the rescission.
Alienation
•
•
Connotes the transfer of the property and
possession of lands, tenements, or other
things, from one person to another.
This term is particularly applied to absolute
conveyance of real property and must
involve a complete transfer from one person
to another.
On Mortgage
•
The execution of mortgage is not
contemplated within the meaning of
alienation by onerous title under said
provision.
•
It does not contemplate a transfer or an
absolute conveyance of a real property. It is
an interest in land created by a written
instrument providing security for the
performance of a duty or the payment of a
debt.
It is merely a lien that neither creates a title
nor an estate.
For a contract to be rescinded for being in
fraud of creditors, both contracting parties
must be shown to have acted maliciously so
as to prejudice the creditors who were
prevented from collecting their claims.
The presumption of fraud in case of
alienations by onerous title only applies to
the person who made such alienation, and
against whom some judgment has been
rendered in any instance or some writ of
attachment has been issued.
Whether the person, against whom a
judgment was made or some writ of
attachment was issued, acted with or without
fraud, so long as the third person who is in
legal possession of the property in question
did not act with fraud and in bad faith, an
action for rescission cannot appear.
Badges of Fraud
1. The fact that the consideration of the
conveyance is fictitious or is inadequate.
2. A transfer made by a debtor after suit has
begun and while it is pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete
insolvency.
5. The transfer of all or nearly all of his property
by a debtor, especially when he is insolvent
or greatly embarrassed financially.
6. The fact that the transfer is made between
father and son, when there are present other
of the above circumstances.
7. The failure of the vendee to take exclusive
possession of all the property.
Note: the above enumeration is not an exclusive list.
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Test in Determining Whether Conveyance is
Fraudulent
•
•
•
•
•
•
In determining whether or not a certain
conveyance is fraudulent the question in
every case is whether the conveyance was a
bona fide transaction or a trick and
contrivance to defeat creditors, or whether it
conserves to the debtor a special right.
It is not sufficient that it is founded on good
considerations or is made with bona fide
intent: it must have both elements.
If defective in either of these, although good
between the parties, it is voidable as to
creditors.
The test as to whether or not a conveyance
is fraudulent is, does it prejudice the rights of
creditors.
Contracts in fraud of creditors are those
executed with the intention to prejudice the
rights of creditors.
To creditors seeking contract rescission on
the ground of fraudulent conveyance rest the
onus of proving by competent evidence the
existence of such fraudulent intent on the
part of the debtor, albeit they may fall back
on the disputable presumptions, if proper,
established under Article 1387.
Article 1388. Whoever acquires in bad faith the
things alienated in fraud of creditors, shall
indemnify the latter for damages suffered by
them on account of the alienation, whenever,
due to any cause, it should be impossible for him
to return them.
If there are two or more alienations, the first
acquirer shall be liable first, and so on
successively. (1298a)
Liability of Third Persons Who Acquired in Bad
Faith
1. If the transferee acted in good faith, the
contract can no longer be rescinded even if
the subsequent transferee has acted in bad
faith.
•
Since it is no longer possible to return the
object of the contract, the remedy of the
injured party is indemnity for damages from
the person who caused the loss, or from the
person who conveyed the property to the first
transferee.
2. If the first transferee acted in bad faith, as to
whether rescission may prosper or not will
depend on the good faith or bad faith of the
subsequent transferee. If the subsequent
transferee who is now in legal possession of
the property acted in good faith, the contract
can no longer be rescinded.
•
The remedy of the injured party is to recover
damages from the first transferee pursuant to
the first paragraph of Article 1388.
3. If the first transferee acted in bad faith, as
well as the subsequent transferee, the action
of rescission can prosper and the object must
be returned.
•
If the subsequent transferee cannot return
the object for any reason, then all the
transferees will be liable for damages in the
order of their acquisitions, the first acquirer
shall be liable first, and so on successively.
Article 1389. The action to claim rescission must
be commenced within four years.
For persons under guardianship and for
absentees, the period of four years shall not
begin until the termination of the former's
incapacity, or until the domicile of the latter is
known. (1299)
Prescriptive Period
Applicability of Prescriptive Period in Article
1389
•
•
The action to claim rescission must be
commenced within 4 years.
The 4-year prescriptive period in Article 1389
is applicable only to rescission as a
subsidiary remedy and does not apply to
rescission as a principal action under Articles
1191, 1592, and 1659.
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•
As to rescission as principal action in Articles
1191, 1592, and 1659, the prescriptive
period applicable is found in Article 1144,
which provides that the action upon a written
contract should be brought within 10 years
from the time the right of action accrues.
•
•
•
Reckoning Period of Rescission Under Article
1381 (1) and (2)
•
Who may Bring Action and Against Whom?
The perspective period of the action for
rescission based on Nos. (1) and (2) of
Article 1381 does not commence to run until
the domicel of the absentee is known.
Reckoning Period for Accion Pauliana
•
The law is silent as to when the prescriptive
period would commence to run.
General Rule: from the moment the cause of action
accrues, applies.
The following successive measures must be taken
by a creditor before he may bring an action for
rescission of an allegedly fraudulent contract:
1. Exhaust the properties of the debtor through
levying by attachment and execution upon all
the property of the debtor, except such as are
exempt by law from execution.
2. Exercise all the rights and actions of the
debtor, save those personal to him (accion
subrogatoria).
3. Seek rescission of the contracts executed by
the debtor in fraud of their rights (accion
pauliana)
•
•
The date of the decision of the trial court
against the debtor is immaterial.
What is important is that the credit of the
plaintiff antedates that of the fraudulent
alienation by the debtor of his property.
The decision of the trial court against the
debtor will retroact to the time when the
debtor became indebted to the creditor.
An accion pauliana accrues only when the
creditor discovers that he has no longer legal
remedy for the satisfaction of his claim
against the debtor other than accion
pauliana.
As long as the creditor still has a remedy at
law for the enforcement of his claim against
the debtor, the creditor will not have any
cause of action against the creditor for
rescission of the contracts entered into by
and between the debtor and another person
or persons.
Reference: Rabuya 2019
Cruz, Mambuay, Makilan, Marasigan
Suyat, Tang, Valenzuela – 1C – 2020-2021
The action for rescission may be brought by:
1. The person who is injured by the rescissible
contract, that is, the ward or absentee, the
creditors damages or the plaintiff in case a
thing in litigation is alienation by defendant.
2. The heirs of the above persons.
3. The creditors of the aforesaid perons by
virtue of Article 1177.
The action may be brought against the following:
1. The author of the injury and his successors
in interest.
2. Third persons who have acquired in bad faith
the property alienated in fraud of creditors.
CHAPTER 7
Voidable Contracts
Article 1390. The following contracts are
voidable or annullable, even though there may
have been no damage to the contracting parties:
(1) Those where one of the parties is
incapable of giving consent to a contract;
(2) Those where the consent is vitiated by
mistake, violence, intimidation, undue
influence or fraud.
These contracts are binding, unless they
are annulled by a proper action in court.
They are susceptible of ratification. (n)
Voidable Contract
•
Has all the essential elements of a contract
but the consent given is defective because of
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•
•
•
•
want of capacity or vitiation thereof by reason
of mistake, violence, intimidation, undue
influence or fraud.
Are existent, valid, and binding, although
they can be annulled because of want of
capacity or the vitiated consent of one of the
parties.
Before such annulment, they are considered
effective and obligatory between parties.
It is valid until it is set aside and its validity
may be assailed only in an action for that
purpose.
They can be confirmed or ratified.
Characteristics of Voidable Contract
1. It is existent, valid, and binding and produces
all its civil effects, until it is set aside by a final
judgment of a competent court in an action
for annulment.
2. However, it suffers from a defect in the form
of vitiation of consent by lack of legal
capacity of one of the contracting parties, or
by mistake, violence, intimidation, undue
influence or fraud.
3. It may be rendered perfectly valid by
ratification, which can be expressed or
implied, such as by accepting and retaining
the benefits of a contract.
4. It is also susceptible of convalidation by
prescription since the action for the
annulment of contract prescribes in four
years.
5. It cannot be attacked collaterally. Its validity
can only be assailed directly either by an
action for that purpose or by way of a
counter-claim for that purpose.
Example:
An action to recover a parcel of land upon the theory
that the plaintiff was the owner because the
conveyance made by his father was null and void
due to fraud, the Court ruled that the alleged
fraudulent deed must first be set aside in a special
action for that purpose.
Reference: Rabuya 2019
Cruz, Mambuay, Makilan, Marasigan
Suyat, Tang, Valenzuela – 1C – 2020-2021
Voidable
Contracts
The court has first
to set aside and
render ineffective
by its judgment the
contract
which
therefore is valid
and producing legal
effect, before the
defendant can be
exempt
from
compliance
therewith; hence,
the attack against
its validity must be
directly made in an
action or in a
counterclaim
for
that purpose, with
the consequence
flowing from the
declaration
of
nullity.
The annulment is by
a proper action in
court.
Void Contracts
The court merely
declares
the
contract as void and
inexistent, which is
its condition from
the very beginning,
and therefore the
attack against its
validity
can
be
made collaterally or
indirectly.
The declaration of
nullity may be by
action or defense.
Distinguished from Rescissible Contract
Rescissible
Voidable Contract
Contract
Both contain all the essential elements of
a contract and both are existent, valid and
binding until they are set aside by a final
judgement of the court in an action for
rescission or for annulment.
The action for rescission or annulment is
subject to a four-year prescriptive period.
The defect consists The defect consists
of
lesion
or in vitiation thereof
economic prejudice. by
reason
of
mistake, violence,
intimidation, undue
influence or fraud.
The defects are not The defect may be
subject
to ratified.
ratification
The remedy of the The remedy is an
injured party is an action
for
annulment.
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action
for
rescission.
Even a third person
who is prejudiced
by the contract may
assail it.
When a contract is
rescinded by the
court, it is not
invalidated
or
declared void in its
inception but simply
deemed inexistent
or abrogated from
the beginning.
Third person assail
its validity.
When it is annulled,
the
contract
is
invalidated from the
very beginning.
Annulment distinguished from Rescission
Annulment
Declares
the
inefficiency which
the contract already
carries in itself.
The
defect
is
intrinsic because it
consists of a vice
which
vitiates
consent.
The annullability of
the
contract
is
based on the law.
Not only a remedy
but a sanction.
The direct influence
of the public interest
is noted.
The contract is
annullable even if
there is no damage
or prejudice.
The nullity is based
on a vice of the
contract
which
invalidates it.
The contract is
susceptible
of
ratification.
Rescission
Merely
produces
the inefficacy, which
did
not
exist
essentially in the
contract.
The
defect
is
external because it
consists of damage
or prejudice either
to one of the
contracting parties
or to a third person.
The rescissibility of
the
contract
is
based on equity.
Merely a remedy.
Private
interests
predominate.
The contract is not
rescissible if there is
no
damage
or
prejudice.
Is compatible with
the perfect validity
of the contract.
May be invoked May be invoked
only
by
a either
by
a
contracting party.
contracting party or
by a third person
who is prejudiced.
The action is a The action is a
principal remedy.
subsidiary remedy.
Annulment Distinguished
Under Article 1191
Annulment Under
Art. 1390
One of the essential
elements
to
a
formation
of
a
contract, which is
consent, is absent.
The
defect
is
already present at
the time of the
negotiation
and
perfection stages of
the contract.
from
Rescission
Rescission Under
Art. 1191
All the elements to
make the contract
valid are present.
The defect is in the
consummation
stage
of
the
contract when the
parties are in the
process
of
performing
their
respective
obligations.
Grounds for Annulment
1. Where one of the parties is incapable of
giving consent to a contract.
2. Where the consent is vitiated by mistake,
violence, intimidation, undue influence, or
fraud.
•
If the ground is want of capacity, it is
necessary that only of the parties must be
incapable of giving consent because if both
arties are incapable of giving consent to a
contract, the contract is not merely voidable
but unenforceable.
The contract is NOT
susceptible
of
ratification.
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Article 1391. The action for annulment shall be
brought within four years.
4. If the ground for annulment is want of
capacity other than minority, from the time
the guardianship ceases.
This period shall begin:
In cases of intimidation, violence or undue
influence, from the time the defect of the consent
ceases.
In case of mistake or fraud, from the time of the
discovery of the same.
And when the action refers to contracts entered
into by minors or other incapacitated persons,
from the time the guardianship ceases. (1301a)
Prescriptive Period
•
An action for the annulment of a voidable
contract prescribes in four years.
The period commences to run, as follows:
1. If the ground for annulment is vitiation of
consent by intimidation, violence, or undue
influence, the four-year period starts from the
time such defect ceases.
•
The running of this prescriptive period cannot
be interrupted by an extrajudicial demand
made by the party whose consent was
vitiated.
2. If the ground for annulment is vitiation of
consent by mistake of fraud, the four-year
period starts from the time of the discovery of
the same.
•
Article 1392. Ratification extinguishes the action
to annul a voidable contract. (1309a)
Article 1393. Ratification may be effected
expressly or tacitly. It is understood that there is
a tacit ratification if, with knowledge of the
reason which renders the contract voidable and
such reason having ceased, the person who has
a right to invoke it should execute an act which
necessarily implies an intention to waive his
right. (1311a)
Article 1394. Ratification may be effected by the
guardian of the incapacitated person. (n)
Article 1395. Ratification does not require the
conformity of the contracting party who has no
right to bring the action for annulment. (1312)
Article 1396. Ratification cleanses the contract
from all its defects from the moment it was
constituted. (1313)
Confirmation
•
Acknowledgement or Recognition
•
If the fraudulent conveyance is registered in
the Register of Deeds, the discovery of fraud
is reckoned from the time the document was
registered in the Register of Deeds in view of
the rule that registration is notice to the whole
world.
3. If the ground for annulment is want of
capacity by reason of minority, the four-year
period starts when the minor reaches the age
of majority, or when he attains the age of 18
years.
Refers to the act of purging a voidable
contract of its defect through the renunciation
of the action of nullity made by the person
who can invoke the vide or defect of the
contract.
Is the act of remedying the deficiency of proof
as when a contract falling under the Statute
of Frauds is made orally but later on put in
writing, or when a private document is
converted into a public instrument.
Ratification
•
Is the act of curing the defect of a contract
entered into in the name of another person
without authority or in excess of authority by
the approval thereof.
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•
•
•
Whether the contract is voidable or
unenforceable, the manner of curing the
defect is altogether referred to as ratification.
Refers to the act or means by which efficacy
is given to a contract which suffers from a
vice of curable nullity.
It may be effected expressly or tacitly.
Tacit Ratification
•
If, with knowledge of the reason which
renders the contract voidable and such
reason having ceased, the person who has a
right to invoke it should execute an act which
necessarily implies an intention to waive his
right.
Implied or Tacit Ratification
•
May take diverse forms, such as by silence
or acquiescence; by acts showing approval
or adoption of the contract; or by acceptance
and retention of benefits flowing therefrom.
Example:
1. Viloria vs Continental Airlines, Inc. – The
Court ruled that by pursuing the remedy of
rescission under Art. 1191, there is an
implied admission of the validity of the
subject of the contracts, thereby forfeiting the
right to demand annulment.
Rescission Under
Article 1191
The defect is the
consummation
stage
of
the
contract when the
parties are in the
process
of
performing
their
respective
obligations.
Annulment
The
defect
is
already present at
the time of the
negotiation
and
perfection stages of
the contract.
2. When the contract entered into by a person
during his minority but he failed to repudiate
it promptly upon reaching his majority and
instead disposed of the greater part of the
proceeds after he became of age and after
he had knowledge of the facts upon which he
sought to disaffirm the agreement. It was
ruled that the contract was tacitly ratified.
Requisites of Ratification
1. The contract has all the essential requisites,
but it is tainted with a vice which is
susceptible of being cured.
2. It should be effected by the person who is
entitled to do so under the law.
•
The conformity of the contracting party who
has no right to bring the action for annulment
is not required.
3. It should be effected with the knowledge of
the vice or defect.
4. The cause of the nullity or defect should have
already disappeared.
Article 1397. The action for the annulment of
contracts may be instituted by all who are
thereby obliged principally or subsidiarily.
However, persons who are capable cannot allege
the incapacity of those with whom they
contracted; nor can those who exerted
intimidation, violence, or undue influence, or
employed fraud, or caused mistake base their
action upon these flaws of the contract. (1302a)
Who may Bring Action for Annulment?
To have the personality to bring an action for the
annulment of a voidable contract:
1. He must have an interest in the contract.
• He must be bound by the contract either
principally or subsidiarily, but including his
heir to whom the right and obligation arising
from the contract are transmitted.
• If no such rights, actions or obligations have
been transmitted to the heir, the latter cannot
bring an action to annul the contract in
representation of the contracting party who
made it.
Exception: a person who is not obliged principally
or subsidiarily in a contract may exercise an action
for nullity of the contract “if he is prejudiced in his
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rights with respect to one of the contracting parties,
and can show the detriment which could positively
result to him from the contract in which he had no
intervention.”
2. He must be the victim and not the party
responsible for the defect.
•
•
Persons sui juris cannot avail themselves of
the incapacity of those with whom they
contracted in order to annul their contract.
The person who exerted intimidation,
violence, or undue influence, or employed
fraud, or caused mistake cannot base his
action for the annulment of contracts upon
these flaws of the contract, following the
principle that he who comes to court must do
so with clean hands.
Article 1398. An obligation having been
annulled, the contracting parties shall restore to
each other the things which have been the
subject matter of the contract, with their fruits,
and the price with its interest, except in cases
provided by law.
In obligations to render service, the value thereof
shall be the basis for damages. (1303a)
Article 1399. When the defect of the contract
consists in the incapacity of one of the parties,
the incapacitated person is not obliged to make
any restitution except insofar as he has been
benefited by the thing or price received by him.
(1304)
Article 1400. Whenever the person obliged by
the decree of annulment to return the thing can
not do so because it has been lost through his
fault, he shall return the fruits received and the
value of the thing at the time of the loss, with
interest from the same date. (1307a)
Article 1401. The action for annulment of
contracts shall be extinguished when the thing
which is the object thereof is lost through the
fraud or fault of the person who has a right to
institute the proceedings.
If the right of action is based upon the incapacity
of any one of the contracting parties, the loss of
the thing shall not be an obstacle to the success
of the action, unless said loss took place
through the fraud or fault of the plaintiff. (1314a)
Article 1402. As long as one of the contracting
parties does not restore what in virtue of the
decree of annulment he is bound to return, the
other cannot be compelled to comply with what
is incumbent upon him. (1308)
Effects of Annulment
•
•
•
If voidable contract is annulled by a final
judgment of a competent court, the contract
is invalidated from the very beginning.
The nullity of voidable contracts can only be
produced by a judgement of the court.
In the absence of such judgment, the
contract is regarded as valid and obligatory
between the parties.
Mutual Restitution
•
Upon annulment the parties should be
restored to their original position by mutual
restitution.
Exception to Mutual Restitution
•
•
•
•
The parties to a contract that has been
annulled are obliged to restore to each other
the things which have been the subject
matter of the contract will not apply “if the
defect of the contract consists in the
incapacity of one of the parties and the
incapacitated person has not been benefited
by the thing or the price received by him.
The obligation of the incapacitated person to
make restitution in only to the extent that he
has been benefited by the thing or price
received by him.
The burden to prove such benefit is
incumbent upon the party who is sui juris and
the mere delivery of the thing to the
incapacitated person is not of such benefit.
When the action for annulment is based upon
the incapacity of the plaintiff, the loss of the
thing during the plaintiff’s incapacity shall not
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•
be an obstacle to the success of the action,
nor does it render him liable to for the price
or value of the thing, inasmuch as he has not
been benefited by it.
If the loss took place through the fraud or
fault of the plaintiff, his action for annulment
cannot prosper.
Effect of Loss of Object of Contract
1. If the thing is lost by the party who has the
right to annul the contract (the plaintiff)
a. The action for annulment is extinguished
if the thing has been lost through his
fraud or fault, even if the ground for
annulment is the incapacity of the
plaintiff.
b. The action for annulment cans till
prospers of the thing has been lost not by
reason of the plaintiff’s fraud or fault.
• If the ground for annulment is the
incapacity of the plaintiff, the
incapacitated person has no
obligation to pay the value of the
thing because he has not been
benefited by it.
• If the ground for annulment is
other than the incapacity of the
plaintiff, the plaintiff must pay the
value of the thing at the time of
the loss but without the obligation
to pay interest thereon.
2. If the thing is lost by the party who has no
right to annul the contracts, the action for
annulment can still prosper even if the
loss was without his fault.
•
•
His obligation is to pay the value of the
thing at the time of the loss, but without
interest thereon.
If the thing has been lost through his fault,
he shall return the fruits received and the
value of the thing at the time of the loss,
with interest from the same date.
Reference: Rabuya 2019
Cruz, Mambuay, Makilan, Marasigan
Suyat, Tang, Valenzuela – 1C – 2020-2021
CHAPTER 8
Unenforceable Contracts (n)
Article 1403. The following contracts
unenforceable, unless they are ratified:
are
(1) Those entered into in the name of
another person by one who has been
given no authority or legal representation,
or who has acted beyond his powers;
(2) Those that do not comply with the
Statute of Frauds as set forth in this
number. In the following cases an
agreement hereafter made shall be
unenforceable by action, unless the
same, or some note or memorandum,
thereof, be in writing, and subscribed by
the party charged, or by his agent;
evidence, therefore, of the agreement
cannot be received without the writing, or
a secondary evidence of its contents:
(a) An agreement that by its terms
is not to be performed within a
year from the making thereof;
(b) A special promise to answer for
the debt, default, or miscarriage of
another;
(c) An agreement made in
consideration of marriage, other
than a mutual promise to marry;
(d) An agreement for the sale of
goods, chattels or things in action,
at a price not less than five
hundred pesos, unless the buyer
accept and receive part of such
goods and chattels, or the
evidences, or some of them, of
such things in action or pay at the
time some part of the purchase
money; but when a sale is made by
auction and entry is made by the
auctioneer in his sales book, at the
time of the sale, of the amount and
kind of property sold, terms of
sale, price, names of the
purchasers and person on whose
Page | 196
account the sale is made, it is a
sufficient memorandum;
(e) An agreement for the leasing
for a longer period than one year,
or for the sale of real property or of
an interest therein;
aside
by
a intermediate ground
competent court.
between
the
voidable and the
void contract.
Void Contracts
( f ) A representation as to the
credit of a third person.
(3) Those where both parties are
incapable of giving consent to a contract.
Unenforceable Contracts
•
Are those which cannot be enforced by a
proper action in court, unless they are
ratified, because either they are entered into
without or in excess of authority or they do
not comply with the statute of frauds or both
of the contracting parties do not possess the
required legal capacity.
Nature and Characteristics
•
•
An unenforceable contract has all the
essential requisites enumerated in Article
1318; hence, it is a perfected contract.
It is also a valid contract although it cannot
be sued upon or be enforced by a proper
action in court because of its defect.
The defect of the contract consists of either:
1. It is entered into without or in excess of
authority.
2. It does not comply with the Statute of Frauds.
3. Bot of the contracting parties are incapable
of giving consent to a contract.
•
Unenforceable contract is not binding or
obligatory between the parties, unless the
contract is ratified.
Rescissible and
Unenforceable
Voidable
Contracts
Contracts
Are both obligatory More defective and
unless they are set occupies
an
Unenforceable
Contracts
Not susceptible to Can be ratified.
ratification.
•
•
•
•
An unenforceable contract, the effect is
purely a matter of defense.
As long as it is not ratified, the defect of the
contract is of a permanent nature.
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
unenforceable contract by the person in
whose name the contract was executed.
Note: The defense that the contract is
unenforceable is available only to the contracting
parties.
Basis: unenforceable contracts cannot be assailed
by third persons (Art. 1408)
Three kinds of Unenforceable Contracts:
1. Contracts entered into in the name of another
without the authority or in excess of authority.
2. Contracts which do not comply with the
Statute of Frauds.
3. Contracts where both parties are incapable
of giving consent to a contract.
Article
1404. Unauthorized
contracts
are
governed by article 1317 and the principles of
agency in Title X of this Book.
Unauthorized Contracts
•
Unenforceable, not void.
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Basis:
•
•
authorization therefor unless he has by law a
right to represent the latter.
First paragraph of Article 1403
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.
•
Note:
•
•
Article 1910. xxx as for any obligation
wherein the agent has exceeded his power,
the principal is not bound except when he
ratifies it expressly or tacitly.
The pronouncement in Delos Reyes and
Heirs of Sevilla and Gochan, appear to be
erroneous, as they run counter to the explicit
provisions of Articles 1317 and 1403,
paragraph 1 which classifies unauthorized
contracts as “unenforceable” and not void ab
initio.
The absence of consent of the alleged
principal does not justify the characterization
of the contract as void ab initio because
Congress was fully aware if such absence in
cases of unauthorized contracts and yet
Congress chose to classify the contract
merely unenforceable and not void and gave
the alleged principal the opportunity to ratify
the defect by subsequently approving the
contract entered into in his name.
Note:
•
•
In case of unauthorized contract, it is obvious
that no consent has been given by the
alleged principal.
The absence of the principal’s consent does
not make the contract void or inexistent, even
as to the alleged principal who has not given
his authorization.
Rule: Under the provisions of Article 1317 and 1403,
paragraph 1, the contract is classified merely as
“unenforceable” and not “void ab initio”
Delos Reyes vs Court of Appeals, Heirs of Sevilla
vs Sevilla, and Felix Gochan and Sons Realty
Corp. vs Heirs of Baba
•
•
The court classified the contract as void ab
initio and not merely unenforceable when the
agreement is entered into by one in behalf of
another who has never given him
authorization.
Reason of the Court: there is said to be no
consent, and consequently, no contract
when the agreement is entered into by one in
behalf of another who has never given him
Why is it important to properly characterized the
status of Contracts entered into by one in behalf of
another who has never given him authorization as
merely unenforceable and not void ab initio?
Answer: An unenforceable contract can be ratified
while a void contract is not susceptible to ratification.
In unenforceable contract, once the contract is
ratified, the effect of ratification retroacts to the day
when the contract was entered into by the agent and
cleanses the contract from all its defects from the
moment it was constituted, thereby rendering the
contract obligatory.
•
•
Article 1390 (1) is inapplicable to
unauthorized contracts as said article
contemplates the incapacity of the party to
give consent to a contract and not to lack of
authority, which is governed by Articles 1403
(1), 1404, and 1317.
The failure of the agent to obtain authority
from his alleged principals did not result in his
incapacity to give consent so as to render the
contract voidable, but rather, in rendered the
contract valid but unenforceable against the
alleged principals for having been entered
into without their authority.
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Rule Different in Agency to Sell Land
•
•
If the unauthorized contracts deal with the
sale of a parcel of land or any interest
therein, the applicable provision is Article
1874 of the Civil Code:
o Article 1874. When a sale of a piece
of land or any interest therein is
through an agent, the authority of the
latter shall be in writing; otherwise,
the sale shall be void.
An unauthorized contract involving the sale
of a parcel of land is not merely
unenforceable but void ab initio.
2. By acceptance of benefits under the
contract.
•
•
•
In this case, the contract is no longer
executory and, therefore, the Statute does
not apply.
This rule is based upon the familiar principle
that one who has enjoyed the benefits of a
transaction should not be allowed to
repudiate its burden.
It is also an indication of a party’s consent to
the contract as when he accepts partial
payment or delivery of the thing sold thereby
precluding him from rejecting its binding
effect.
How Ratified
Right of a party where contract enforceable
•
In case of an unauthorized contract, the
defect of the contract is cured in whose name
the contract was executed subsequently
gives his or her approval.
Article 1405. Contracts infringing the Statute of
Frauds, referred to in No. 2 of article 1403, are
ratified by the failure to object to the
presentation of oral evidence to prove the same,
or by the acceptance of benefit under them.
Article 1406. When a contract is enforceable
under the Statute of Frauds, and a public
document is necessary for its registration in the
Registry of Deeds, the parties may avail
themselves of the right under Article 1357.
Modes of Ratification under the Statute
The ratification of contracts infringing the Statute of
Fraud may be effected in two ways:
1. By failure to object to the presentation of
oral evidence to prove the contract.
•
•
The failure to object timely amounts to a
waiver and makes the contract as binding as
if it had been reduced to writing.
Cross examination of a witness testifying
orally on the contract with respect to matters
inadmissible under the Statute amounts to
failure to object.
1. A party to an oral sale of real property cannot
compel the other to put the contract in a
public document for purposes of registration
because it is unenforceable unless, of
course, it has been ratified.
2. Similarly, the right of one party to have the
other execute a public document is not
available in a donation of realty when it is in
a private instrument because the donation is
void.
Note: See attached file
Article 1407. In a contract where both parties are
incapable of giving consent, express or implied
ratification by the parent, or guardian, as the
case may be, of one of the contracting parties
shall give the contract the same effect as if only
one of them were incapacitated.
If ratification is made by the parents or
guardians, as the case may be, of both
contracting parties, the contract shall be
validated from the inception.
Article 1408. Unenforceable contracts cannot be
assailed by third persons.
Contracts where Both parties are Incapacitated
•
Where only one of the parties is incapable of
giving consent to a contract, the contract is
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•
•
•
•
merely voidable; but if both parties are
incapable of giving consent to a contract, the
contract is not voidable but unenforceable.
In either case, the contract may be ratified.
In a contract which is unenforceable because
both parties are incapacitated, the ratification
on the part of one of the contracting parties
“shall give the same effect as if only one of
them were incapacitated, thereby making the
contract merely voidable.
If ratification is made on the part of both
parties, the contract shall be validated from
the inception.
If the contract is unenforceable, the defect of
the contract can be ratified in the same
manner that voidable contract is ratified.
Implied or tacit ratification may take diverse forms,
such as:
a. By silence or acquiescence
b. By acts showing approval or adoption of the
contract
c. By acceptance and retention of benefits
flowing therefrom.
Chapter 9
Void or Inexistent Contracts
Void or Inexistent Contracts
Is equivalent to
nothing; it produces
no
legal
effect
whatsoever
in
accordance with the
principle
“quod
nullum est nullum
producit effectum.”
Contains all the
essential requisites
but it is invalid from
the very beginning
either because:
Its causes, object or
purposes
is
contrary to law,
morals,
good
customs,
public
order, or public
policy;
Its object is outside
the commerce of
men;
It contemplates an
impossible service;
Or it is expressly
prohibited
or
declared void by
law.
Distinction Between Void and Inexistent
Contracts
•
•
One which lacks
one
or
more
essential requisites
of
a
contract
enumerated
in
Article 1318 of the
Civil Code.
o
•
The two terms are interchangeable.
Void or inexistent contract is often defined in
jurisprudence as one which has no force and
effect from the very beginning, as if it had
never been entered into, and which cannot
be validated either by time or ratification.
The in pari delicto doctrine applies only to
contracts with illegal consideration or subject
matter, whether the attendant facts
constitute an offense or misdemeanor or
whether the consideration involved is merely
rendered illegal.
Example:
Void Contract
Inexistent
Contract
Also referred to as The principle of in
inexistent from the pari delicto is not
beginning.
applicable. Hence,
the principle is not
applicable
to
fictitious
or
simulated contracts.
•
•
A contract without any cause or
consideration, or absolutely simulated or
fictitious, is in reality non-existent.
A contract with an illegal cause or subject
matter, for purposes of applying the principle
of in pari delicto, is not inexistent.
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Concept and Characteristics
Inexistent Contracts
of
Void
or
1. General Rule: they produce no legal effects
whatsoever in accordance with the principle
“quod nullum est nullum producit effectum.”
Exception: when the void contract has
already been performed and the principle of
in pari delicto is applied.
•
The guilty parties to an illegal contract cannot
recover from one another and are not entitled
to an affirmative relief.
2. They are not susceptible of ratification.
3. The right to set up the defense of inexistent
or absolute nullity cannot be waived or
renounced.
4. The action or defense for the declaration of
their inexistent or absolute nullity is
imprescriptible.
•
•
The defect of a void or inexistent contract is
permanent.
The right to have a contract declared void ab
initio may be barred by laches although not
barred by prescription.
waived
renounced.
or inexistence
or
absolute
nullity
cannot be waived or
renounced.
The action to annul The
action
or
is subject to a 4- defense for the
year
prescriptive declaration of the
period.
inexistence
or
absolute nullity of a
void or inexistent
contract
is
imprescriptible.
It is extended to The right to set up
third persons who the nullity is not
are directly affected limited
to
the
by the contract.
parties.
If the contract is The remedy is an
voidable,
the action
for
remedy
is declaration of nullity
annulment of the of contract.
contract.
Article 1409. The following contracts
inexistent and void from the beginning:
are
(1) Those whose cause, object or purpose
is contrary to law, morals, good customs,
public order or public policy;
5. The inexistence or absolute nullity of a
contract cannot be invoked by a person
whose interest are not directly affected.
(2) Those which are absolutely simulated
or fictitious;
Voidable Contract vs Void or Inexistent Contract
(3) Those whose cause or object did not
exist at the time of the transaction;
Voidable Contract
Considered
effective
and
obligatory between
parties, until it is set
aside by a final
judgement of a
competent court in
an
action
for
annulment.
Susceptible
of
ratification
The right to annul
the contract can be
Void or Inexistent
Contract
Produces no legal
effects whatsoever
in accordance with
the principle “quod
nullum est nullum
producit effectum.”
Not susceptible of
ratification
The right to set up
the defense for the
declaration of the
(4) Those whose object is outside the
commerce of men;
(5) Those which
impossible service;
contemplate
an
(6) Those where the intention of the
parties relative to the principal object of
the contract cannot be ascertained;
(7) Those expressly
declared void by law.
prohibited
or
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These contracts cannot be ratified. Neither can
the right to set up the defense of illegality be
waived.
CONTRACTS DECLARED VOID OR INEXISTENT
In General
- A contract is void from the very beginning when:
(1) Those whose cause, object or purpose is
contrary to law, morals, good customs, public order
or public policy;
(2) Those which are absolutely simulated or
fictitious;
(3) Those whose cause or object did not exist
at the time of the transaction;
(4) Those whose object is outside the
commerce of men;
(5) Those which contemplate an impossible
service;
(6) Those where the intention of the parties
relative to the principal object of the contract cannot
be ascertained;
(7) Those expressly prohibited or declared
void by law.
When Cause, Object, or Purpose Is Illegal:
a. Illegality of Cause
o Cause is ordinarily different from motive and, as a
rule, the motive or particular purpose of a party in
entering into a contract does not affect the validity
nor the existence of the contract.
o Cause is the essential reason which moves the
contracting parties to enter into it.
o Cause is the immediate, direct and proximate
reason which justifies the creation of an obligation
through the will of the contracting parties.
o Motive on the other hand is the particular reason
of a contracting party which does not affect the other
party.
EXCEPTION:
§ motive may be regarded as causa when it
predetermines the purpose of the contract
§ when the realization of such motive or particular
purpose has been made a condition upon which the
contract is made, a condition which the contract is
made to depend, then the motive becomes the
cause.
o When motive and cause blend to such a degree,
and the motive is unlawful, then the contract entered
into is null and void.
b. Object or Subject-Matter Is Unlawful
o As a rule, all forms of gambling are illegal.
o The only form of gambling allowed by law is that
stipulated under Presidential Degree No. 1869,
which gave PAGCOR its franchise to maintain and
operate gambling casinos.
o Thus, even the object of the contract is gambling
outside the purview of PD 1869, the same is illegal
and, therefore, void.
o Thus, in Yun Kwan Byung vs PAGCOR, it was
held that courts will not enforce debts arising from
gambling.
• Ruling: The SC ruled that the Junket Agreement
is void, gambling between the hunket player and
the junket operator under such ageement is
illegal and may not be enforced by the courts
• Citing Article 2014 of the NCC, the SC ruled that
no action can be maintained by the winner for the
collection of what he has won in an illegal
gambling
c. Illegal Purpose
o For example, a partnership must have a lawful
object or purpose, and must be established for the
common benefit or interest of the partnership.
o When the partnership has unlawful object or
purpose, the contract of partnership is void.
o When such unlawful partnership is dissolved by a
judicial decree, the profits shall be confiscated in
favor of the State, without prejudice to the provisions
of the Penal Code governing the confiscation of the
instrument and effects of a crime.
d. Contrary to Public Policy, Good Customs Or
Morals
o In order to declare a contract void as against
public policy, a court must find that the contract as to
consideration of the thing to be done, contravenes
some established interest of society, or is
inconsistent with sound policy and good moral or
tends clearly to undermine the security of individual
rights
o Must be shown that the object, cause or purpose
thereof contravenes the generally accepted
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principles of morality which have received some kind
of social and practical confirmation.
ABSOLUTELY SIMULATED OR FICTITIOUS
CONTRACTS
- Such contracts are void.
- An absolute simulation, there is a colorable
contract but has no substance as the parties have
no intention to be bound by it.
- An absolutely simulated or fictitious contract is
void, and the parties may recover from each other
what they may have given under the contract.
- In Absolute Simulation, there appears to be a
valid contract but there is actually none because the
element of consent is lacking.
- Examples:
o Where a person, in order to place his property
beyond the reach of his creditors, simulates a
transfer of it to another, he does not really intend to
divest himself of his title and control of the property;
hence, the deed of transfer is a sham.
o A contract of purchase and sale is void and
produces no effect whatsoever where it appears that
the same is without cause or consideration which
should have been the motive thereof, or the
purchase price which appears thereon as paid but
which in fact has never been paid by the purchaser
to the vendor.
CAUSE OR OBJECT DID NOT EXIST AT ATIME
OF TRANSACTION
- o Lack of an object certain at the time of the
transaction
o Contract of lease – void for having an inexistent
cause
Ballesteros vs Abion:
In a lease contract over real property, the
object of the contract is the leased premises. As
its cause, the payment of the rentals is the
cause on the part of the lessor, while the
delivery of the leased premises is the cause on
the part of the lessee. Therefore, the leased
premises is both the object of the contract and
the cause in so far as the lessee is concerned.
Hence, when the lessor does not have the right
to lease the premises, both the object of the
contract and the cause (as to the lessee) do not
exist at the time of the transaction, making the
contract void pursuant to the third paragraph of
Article 1409.
Double Donation
• Article 1409(3) will also be applicable
• As a mode of acquiring and transmitting
ownership, a donation results in an effective
transfer of title over the property from the
donor to the donee and once a donation is
accepted, the donee becomes the absolute
owner of the property donated.
• Hence, a second donation of the same
property
by
the
same donotr to
another donee is a void or inexistent
contract under Article 1403(3) for lack of
object vertain at the time of the transaction.
The same principle is also applicable to a
donation of a future property.
• Under Article 751, donations cannot
comprehend future property. The same
article defines future property as anything
which the donor cannot dispose of a the
donation.
• In other words, the law requires that the
donor be the owner of the property donated
at the time of the donation, otherwsie, such
donation is void under Article 1409(3) for
lack of an object certain at the time of the
transaction.
Contract of Sale
• The rule is different however, in a contract of
sale
• Ownership by the seller of the thing sold at
the time of the perfection of the contract of
sale is not an element for its perfection.
• What the law requires is that the seller has
the right to transfer ownership at the time the
thing sold is delivered
• Perfection per se does not transfer
ownership which occurs upon the actual or
constructive delivery of the thing sold.
• Thus, a perfected contract of sale cannot be
challenged on the ground of nonownershup on the part of the seller at the
time of its perfection;
• Hence the sale is still valid
• Unlike in an ordinary donation, where the law
requires the donor to have owernship of the
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•
•
thing or the real right he donates at the time
of its perfection since a donation constitutes
a mode, not just a title in an acquisition and
transmission of ownership; in a contract of
sale, the law does not require the seller to be
the owner of the thing sold at the time of the
sale because sale is not a mode, but merely
a title.
Sale by itself does not transfer or affect
ownership; the most that sale does is to
create the obligation to transfer ownership.
It is a tradition or delivery, as a consequence
of sale, that actually transfers ownership.
OBJECT OUTSIDE THE COMMERCE OF MEN
IMPOSSIBLE SERVICE
- Any contract which contemplates an impossible
service is void or inexistent
- Based
on
the
maxim impossibilum nilla obligatio est (there is no
obligation to do impossible things)
- May either be absolute when nobody can
perform it
- Absolute impossibility nullifies the contract
- Relative impossiblity – when it cannot be
performed because of the special conditions or
qualifications of the obligor.
- The effect of a relative impossibility depends on
whether the same is temporary or permanent.
- If temporary – it will not nullify the contract
- If permanent – nullifies the contract.
- In case of relative impossibility, the debtor
becomes liable for damages if he cannot perform the
undertaking.
- Nool vs CA
o Seller can no longer deliver the object of the sale
to the buyers, as when the buyers themselves have
acquired title and delivery thereof from the rightful
owner, the contract may be deemed to be
inoperative and by analogy fall under Article 1409(5)
- It must be pointed out that the defect of a void or
inexistent contract must be present from the very
beginning.
- For Article 1409(5) to apply, it is essential that
the impossibility of the service contemplated by the
contract must already be present at its inception in
order for it to be classified as void or inexitent.
- If
the
impossibility
of
service
will
only superervene during the consummation stage,
the contract is deemed valid and the debot will only
be released from his obligation pursuant to Article
1266 of the NCC
o Art. 1266 – The debtor in obligations shall also be
released when the prestation becomes legally or
physically impossible without the fault of the obligor.
- Additionally, the provision of Article 1409(5) is
applicable only to obligations to do, hence,
inapplicable to a contract of sale which creates an
obligation to give.
- The Nool case could have been decided without
the need to declare void the contract of sale between
the
Spouse
Conchita
Nool
and
Gaudencio Almonera and Anacleto Nool
- Since Anacleto Nool was able to purchase the
property form the DBP and not from the Spouses
Conchita Nool and Gaudencio Almonera, the latter
are note entitle d to exercise a right of repurchase
INTENTION AS TO PRINCIPLA OBJECT CANNOT
BE ASCERTAINED
- Article 1349. The object of every contract must
be determinate as to its kind. The fact that the
quantity is not determinate shall not be an obstacle
to the existence of the contract, provided it is
possible to determine the same, without the need of
a new contract between the parties.
- It is enough that the object is determinable in
order for it to be considered as certain.
- If the intetntion of the parties relative to the
principal object of the contract cannot, however, be
ascertained, the contract is void or inexistent
according to Article 1409(6) of the NCC.
- The same rule is echoed in Article 1378,
paragraph 2 of the same Code which states that “if
the doubts upon the principal object of the contract
in such a way that it cannot be known what may have
been the intention or will of the parties, the contract
shall be null and void.
EXPRESSLY PROHIBITED OR DECLARED VOID
BY LAW
- Contracts which are expressly prohibited or
declared void by law are also void or inexistent
(Article 1409(7))
- This is contemplated by Article 5 of
the sam Code which states that “acts executed
against the provisions of mandatory or prohibitory
laws shall be void, except when the law itself
authorizes their validity.”
Examples:
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1. Those contracts which failed to comply with the
formalities required by law for their validity
2. A contract that violates the principle of mutuality
of contracts
3. Donations between spouses during the marriage
and between those living together as husband and
wife
4. Any dispotition or encumbrance of absolute
community property or conjugal partnership property
without authority of the court or written consent of the
other spouse
5. Any dispotition or encumbrance of the absolute
community property or conjugal partnership property
of the terminated marriage without a pervious
liquidation of the propert regime within one year from
the death of the deceased spouse
6. Any agreement which contravenes the
mandatory awarding of sole parental custody to the
mother under the second paragraph of Article 213 of
the Family Code
7. Any sale in violation of Articles 1490 and 1491 of
the NCC
8. Any stipulation which contravenes the
prohibition against pactum commissorium
9. A stipulation forbidding the owner from alienating
the immovable mortgaged
Article 1410. The action or defense for the
declaration of the inexistence of a contract does
not prescribe.
Action or Defense For Declaration of Nullity
• Imprescriptible
o GR: the action or defense for the declaration
of inexistence or absolute nullity of a void or
inexistent contract is imprescriptible.
o However, the prevailing doctrine is that the
right to have a declared contract declared
void ab initio may be barred by laches
although not barred by prescription.
o Laches v Prescription (MWSS v CA)
• Prescription is concerned with the fact of
delay, Laches is concerned with the
effect of delay.
• Prescription is a matter of time, laches is
principally a question of inequity of
permitting a claim to be enforced, this
inequity being founded on some parties.
• Prescription is statutory; laches is not
• Laches applies in inequity, whereas
prescription applies at law.
•
o
Prescription is based on fixed-time;
laches is not
For laches to apply, requires the concurrence
of the following:
• Conduct on the part of the defendant, or
one under whom he claims, giving rise to
the situation that led to the complaint and
for which the complaint seeks a remedy;
• Delay in asserting the complainant's
right, having had knowledge or notice of
the defendant's conduct and having been
afforded an opportunity to institute a suit;
• Lack of knowledge or notice on that part
of the defendant that the complainant
would assert the right on which he bases
his suit; and
• Injury or prejudice to the defendant in the
event relief is accorded to the
complainant, or the suit is not held
barred.
Action to Declare Nullity of Contract, When
Necessary
o Art 1410 can be set up either by way of an
action or by way of defense.
o As a rule, no need of an action to set aside a
void or inexistent contract
o Thus, if the void contract is still fully
executory, no party need bring an action to
declare its nullity considering that no
affirmative relief is to be prayed from the
court.
o But, if any party should bring an action to
enforce the void contract, the other party can
simply set up the nullity as defense.
o On the other hand, if void contract has
already been performed, an action to declare
the non-existence of the contract can be
maintained for the purpose of recovering
what has been given by virtue of that
contract.
o Although a void contract has no legal effects
even if no action is taken to set it aside, when
any of its terms have been performed, an
action to declare its inexistence is necessary
to allow restitution of what has been given
under it.
o This action does not prescribe.
o Rationale: Nobody can take the law into his
own hands; hence, the intervention of the
competent court is necessary to declare the
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absolute nullity of the contract and to decree
the restitution of what has been given under
it.
Distinguished From Action For Annulment
o To annul means to reduce to nothing;
annihilate; obliterate; to make void or no
effect; to nullify; to abolish to do away with.
o Hence a voidable contract presupposes that
is subsists but later ceases to have legal
effect when it is terminated through a court
action.
o In annulment, it is the judgment of the court
that produces the invalidity of the contract.
o On the other hand, an action for declaration
of nullity presupposes a void contract or one
where all of the requisites prescribed by law
for contracts are present but the cause,
object or purpose is contrary to law, morals,
good customs, public order or public policy.
o Such contract, as a rule, produces no legal
binding effect even if it is not set aside by
direct legal action.
o Judgement is merely declaratory or
confirmatory of the existence of a state of
nullity that is already present from the
beginning.
Article 1411. When the nullity proceeds from the
illegality of the cause or object of the contract,
and the act constitutes a criminal offense, both
parties being in pari delicto, they shall have no
action against each other, and both shall be
prosecuted. Moreover, the provisions of the
Penal Code relative to the disposal of effects or
instruments of a crime shall be applicable to the
things or the price of the contract.
This rule shall be applicable when only one of the
parties is guilty; but the innocent one may claim
what he has given, and shall not be bound to
comply with his promise. (1305)
Article 1412. If the act in which the unlawful or
forbidden cause consists does not constitute a
criminal offense, the following rules shall be
observed:
(1) When the fault is on the part of both
contracting parties, neither may recover
what he has given by virtue of the
contract, or demand the performance of
the other's undertaking;
(2) When only one of the contracting
parties is at fault, he cannot recover what
he has given by reason of the contract, or
ask for the fulfillment of what has been
promised him. The other, who is not at
fault, may demand the return of what he
has given without any obligation to
comply his promise. (1306)
Principle of In Pari Delicto
Rules in Cases of Illegal Contracts
o Art 1411 and 1412 covers cases where the
cause or object thereof is unlawful.
o Art 1411, the act constitutes a criminal
offense
o Art 1412, the act does not constitute a
criminal offense
o The governing rules will depend on whether
a party or both parties are at fault
•
Where Both Parties Are at Fault (in Pari Delicto)
o Statement of Principle of In Pari Delicto
• Ex dolo malo non oritur actio (no right
of action can have its origin in fraud)
• In pari delicto potior est condicio
defendentis (when the parties are
equally at fault, the defendant’s position
is more compelling)
• The law will not aid either party to an
illegal agreement.
• In pari delicto
• Is a universal doctrine which holds
that no action arises, in equity or at
law, from an illegal contract; no suit
can be maintained for specific
performance, or to recover the
property agreed to be sold or
delivered, or the money agreed to be
paid, or damages for its violation; and
where the parties in pari delicto, no
affirmative relief of any kind will be
given to one against the other.
• Premise on two grounds
• First, the courts should not lend
their good offices to mediating
disputes among wrongdoers;
• Second, that denying judicial
relief to an admitted wrongdoer is
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•
an effective means of deterring
illegality.
Thus, to serve as both a sanction and
as a deterrent, the law will not aid
either party to an illegal agreement
and will leave them where it finds
them.
Applicability
• Applies only to contract with an illegal
cause, subject matter, or purpose,
whether the attendant facts constitute an
offense or misdemeanor or whether the
consideration
involved
is
merely
rendered illegal.
• It does not apply to inexistent contracts,
or to fictitious or simulated contracts.
Rules If Both Parties Are In Pari Delicto
• When 2 parties are equally at fault, the
law leaves them as they are and denies
recovery by either one of them.
• No specific performance, or to recover
the property agreed to be sold or
delivered, or money agreed to be paid, or
damages for its violate, an no affirmative
relief of any kind will be given to one
against the other.
• Each must bearthe consequence of his
own acts.
• They will be left where they have placed
themselves since they did not come into
court with clean hands.
• A good example of application of this
principle is when foreigner acquires
private lands in the Philippines, inviolates
of the prohibition of the Constitution.
• Aliens are disqualified from acquiring
lands of the public domain, which
includes private lands. Rationale:
national patrimony.
• Under Art 1412, foreigner cannot
have the subject properties deed to
him or allow him to recover the
money he had spent for the purchase
thereof.
• In re petition for separation of
property- elena buenaventure v.
Helmut Muller and Beumer v.
Amores
Reference: Rabuya 2019
Cruz, Mambuay, Makilan, Marasigan
Suyat, Tang, Valenzuela – 1C – 2020-2021
•
Court denied the claim for
reimbursement of the value of
purchased parcels of land
instituted by foreigner against his
Filipina spouse.
Rule If Only One Party Is At Fault
• Guilty party
• cannot recover what he has given by
reason of the contract if contract has
been executed,
• cannot ask for the fulfillment of what
has been promised to him if contract
is merely executory
• Innocent party
• may demand return of the thing if
contract was executed
• May not be compelled to comply with
his promise if contract is merely
executory
Article 1413. Interest paid in excess of the
interest allowed by the usury laws may be
recovered by the debtor, with interest thereon
from the date of the payment.
Article 1414. When money is paid or property
delivered for an illegal purpose, the contract may
be repudiated by one of the parties before the
purpose has been accomplished, or before any
damage has been caused to a third person. In
such case, the courts may, if the public interest
will thus be subserved, allow the party
repudiating the contract to recover the money or
property.
Article 1415. Where one of the parties to an
illegal contract is incapable of giving consent,
the courts may, if the interest of justice so
demands allow recovery of money or property
delivered by the incapacitated person.
Article 1416. When the agreement is not illegal
per se but is merely prohibited, and the
prohibition by the law is designed for the
protection of the plaintiff, he may, if public policy
is thereby enhanced, recover what he has paid
or delivered.
Article 1417. When the price of any article or
commodity is determined by statute, or by
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authority of law, any person paying any amount
in excess of the maximum price allowed may
recover such excess.
has a tendency to be injurious to the public
or against the public good.
Gonzalo vs Tarnate, Jr.
Article 1418. When the law fixes, or authorizes
the fixing of the maximum number of hours of
labor, and a contract is entered into whereby a
laborer undertakes to work longer than the
maximum thus fixed, he may demand additional
compensation for service rendered beyond the
time limit.
Article 1419. When the law sets, or authorizes
the setting of a minimum wage for laborers, and
a contract is agreed upon by which a laborer
accepts a lower wage, he shall be entitled to
recover the deficiency.
1. The innocent party (Arts. 1411- 1412)
2. The debtor who pays usurious
interests (Art. 1413)
3. The party repudiating the void
contract before the illegal purpose is
accomplished or before damage is
caused to a third person and if public
interest is subserved by allowing
recovery (Art. 1414)
4. The incapacitated party if the interest
of justice so demands. (Art. 1415)
5. The party protection the prohibition
by law is intended if the agreement is
not illegal per se but merely
prohibited and if public policy would
be enhanced by permitting recovery
(Art. 1416)
6. The party for whose benefit the law
has been intended such as in price
ceiling laws (Art. 1417) and labor
laws (Arts 1418-1419)
Violation
of
•
Frenzel vs Catio
•
That principle of the law which holds that no
subject or citizen can lawfully do that which
The recovery on the basis of unjust
enrichment cannot apply to a foreigner who
acquired private lands in the Philippines in
violation of the Constitutional prohibition.
The prohibition on unjust enrichment does
not apply if the action is proscribed by the
Constitution.
Pajuyo vs CA
•
The principle of pari delicto should not be
applied to a case of ejectment between
squatters.
Reason:
•
Well-
Public Policy
The principle of pari delicto cannot be applied
if it would contravene the public policy on
prevention of unjust enrichment.
Basis: Article 22 “Every person who through an act
of performance by another, or any other means,
acquires or comes into possession of something at
the expense of the latter without just or legal ground,
shall return the same to him.”
•
Exceptions to Principle of In Pari Delicto
Recovery in Case of
Established Public Policy
•
•
To shut out relief to squatters on the ground
of pari delicto would openly invite mayhem
and lawlessness. A squatter would oust
another squatter from possession of the lot
that the latter had illegally occupied,
embolded by the knowledge that the courts
would leave them where they are. Nothing
would hen stand in the way of the ousted
squatter from re-claiming his prior
possession at all cost.
It would give squatter free rein to dispossess
fellow squatters or violently retake
possession of properties usurped from them.
Courts could not leave squatters to their own
devices in cases involving recovery
possession.
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Reference: Rabuya 2019
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Suyat, Tang, Valenzuela – 1C – 2020-2021
Recovery by Innocent Party
•
•
•
If only one of the parties is at fault, the
innocent party may still demand for the
return of what he has given if the contract
has already been executed; but he may not
be compelled to comply with his promise if
the contract is merely executory.
The law allows innocent parties to recover
what they have given without any obligation
to comply with their prestation but they are
not entitled to an award of liquidated
damages.
No damages may be recovered on the basis
of a void contract; being non-existent, the
agreement produces no juridical tie between
the parties involved.
Recovery in Case of Usury
•
•
A contract of loan with usurious interest
consists of principal and accessory
stipulations; the principal one is to pay the
debt; the accessory stipulation is to pay the
interest thereto.
Ans said two stipulations are divisible in the
sense that the former can still stand without
the latter.
Whether the illegal terms as to payment of interest
likewise renders a nullity the legal terms as to
payments of the principal debt.
•
In case of divisible contract, if the illegal
terms can be separated from the legal ones,
the latter may be enforced.
Example:
In simple loan with stipulation of usurious interest,
the prestation of the debtor to pay the principal debt,
which is the cause of the contract (Article 1350), is
not illegal.
Article 1413 states: “interest paid in excess of the
interest allowed by the usury laws may be recovered
by the debtor, with interest thereon from the date of
the payment.”
•
It means the whole usurious interest.
Illustration:
In a loan of P1,000, with interest of 20% per annum
P200 for one year, if the borrower pays said P200,
the whole P200 is the usurious interest, not just that
part thereof in excess of the interest allowed by law.
•
•
•
The whole stipulation as to interest is void,
since payment of the said interest is the
cause or object and said interest is illegal.
The only change effected is not provide for
the recovery of the interest paid in excess of
that allowed by law, which the Usury Law
already provided for, but to add that the same
can be recovered “with interest thereon from
the date of payment.”
The whole interest paid may be recovered,
with interest thereon from the date of
payment.
Party Repudiating Void Contract
When money is paid or property delivered for an
illegal purpose, recovery of what has been paid or
delivered may be allowed if the following conditions
are satisfied:
1. The party who seeks to recover has
repudiated the contract.
2. The contract is repudiated before the
purpose has been accomplished, or before
any damage has been caused to a third
person.
3. Public interest will be subserved by allowing
recovery.
Incapacitated Party
•
The illegality lies only as to the prestation to
pay the stipulated interest; hence, being
separable, the latter only should be deemed
void, since it is the only one that is illegal.
A party to an illegal contract may be allowed to
recover what he had delivered if the following
conditions are satisfied:
Note:
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1. Such party is incapable of giving consent to
a contract.
2. If the interest of justice demands such
recovery.
Article 1421. The defense of illegality of contract
is not available to third persons whose interests
are not directly affected.
Article 1422. A contract which is the direct result
of a previous illegal contract, is also void and
inexistent.
•
Contract not Illegal Per Se and Recovery will
Enhance Public Policy
Recovery for what has been paid or delivered
pursuant to an inexistent contract is allowed only
when the following requisites are met:
•
A void contract cannot give rise to a valid
one.
To the same effect is Article 1422, which
declares that a contract which is the direct
result of a previous illegal contract, is also
void and inexistent.
1. The contract is not illegal per se but merely
prohibited.
2. The prohibition is for the protection of the
plaintiffs.
3. If public policy is enhanced thereby.
Price Ceiling and Labor Laws
•
If the one recovering is the party for whose
benefit the law has been intended, such as in
price ceiling laws and labor laws, the law
authorized recovery.
1. When the price of any article or commodity is
determined by statute, or by authority of law,
any person paying any amount in excess of
the maximum price allowed may recover
such excess.
2. When the law fixes, or authorizes the fixing
of the maximum number of hours of labor,
and a contract is entered into whereby a
laborer undertakes to work longer than the
maximum thus fixed, he may demand
additional
compensation
for
service
rendered beyond the time limit.
3. When the laws sets, or authorizes the setting
of a minimum wage for laborers, and a
contract is agreed upon by which a laborer
accepts a lower wage, he shall be entitled to
recover the deficiency.
Article 1420. In case of a divisible contract, if the
illegal terms can be separated from the legal
ones, the latter may be enforced.
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Reference: Rabuya 2019
Cruz, Mambuay, Makilan, Marasigan
Suyat, Tang, Valenzuela – 1C – 2020-2021