OBLIGATIONS AND CONTRACTS

Atty. Harriet Reyes Linsangan

TITLE I - OBLIGATIONS
(Articles 1156-1304, New Civil Code)

CHAPTER 1 – GENERAL PROVISIONS

(Arts. 1156-1162)

1. “Obligation” defined. (Art. 1156)

(a) Explain why an obligation is a “juridical necessity.”
(b) Distinguish an “obligation” from a “contract”

2. Requisites or elements of an obligation:

(a) Active subject (obligee or creditor)
(b) Passive subject (obligor or debtor)
(c) Object or prestation (subject matter of the obligation)
(d) Juridical or legal tie (vinculum or efficient cause)

3. Distinction between “obligation”, “right” and “wrong or injury.”

4. Elements of a legal wrong or injury, or the requisites in order that a person may acquire a right of
action in court against another to enforce the performance of the latter’s obligation.

5. Kinds of obligations from the viewpoint of subject matter :

(a) Real obligation - obligation to give
(b) Personal obligation
(b.1.) Positive – obligation to do (Art. 1167)
(b.2.) Negative – obligation not to do (Art. 1168)

6. Kinds of obligations from the viewpoint of sanction :

(a) Civil obligations – the sanction is positive law
(b) Natural obligations – the sanction is equity
(c) Moral obligations – the sanction is conscience

7. Sources of obligations : (Art. 1157)

(a) Law (Art. 1158)
(b) Contracts (Art. 1159) – NOTE: Correlate with Art. 1306
(c) Quasi-contracts (Art. 1160)

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 (d) Crimes or delicts (Art. 1161) (See Art. 2142)
(e) Quasi-delicts/torts/culpa-aquiliana (Art. 1162)
- quasi-delict defined (Art. 2176)
- test of negligence (Art. 1173)
NOTE: Be able to give examples of obligations arising from each of the sources.

8. 2 principal kinds of quasi-contracts :

(a) Negotiorum Gestio (Art. 2144)
(b) Solutio Indebiti (Art. 2154)
NOTE: Know the requisites.

9. Requisites for quasi-delict.

(a) Act or omission (d) Causal connection between fault and
(b) Fault or negligence damage
(c) Damage (e) No pre-existing contractual relations

10. Scope of civil liability arising from crimes :

(a) restitution (b) reparation (c) indemnification

APPLICATION/PROBLEMS :

1. Under a building contract, Engr. So agreed to construct the house of Mr. Rey for 6 months. On the
other hand, Mr. Rey agreed to pay Engr. So P3M after the construction is finished. Point out the elements of
the obligation in this legal scenario.
2. Christian and Carina entered into an agreement. For a consideration of P200,000 to be given by
Carina to him, Christian agreed to attend mass for four consecutive Sundays. Is this obligation legally
enforceable?
3. On November 15, 2013, Derek entered into an agreement with Caitlyn. Among other things, the
parties agreed that: (a) Caitlyn will lend P100,000 to Derek who promises to pay the loan on January 15,
2014; and, (b) In case of non-payment, Derek will render free service as a servant to Caitlyn until such time
that Derek is able to raise the money with which to pay his loan to Caitlyn. Is this agreement legally
enforceable?
4. Don, a merchant-farmer, was the owner of a ten-hectare land planted to lanzones. On April 1,
2014, Don left for a pleasure trip to the U.S. While Don was on vacation in the U.S., typhoon “Babing”
devastated the entire Philippines including the land owned by Don. Before the typhoon, however, reached
the Philippine area of responsibility, Conan, a conscientious neighbour and friend of Don, employed six (6)
farmers to harvest the lanzones planted on the land of Don. As a result, Conan incurred expenses
amounting to P36,000. The employment of the farmers and the harvest of the lanzones from the land of Don
was undertaken by Conan without the approval of Don as the latter was still in the U.S. Upon the arrival of
Don in the Philippines from his trip, may he be compelled by Conan to refund the P36,000 expenses
incurred?

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 5. You went to the bank and let the teller change your P1,000.00 bill. Because of the negligence of
the teller, she erroneously gave you 11 pieces of P100 bills. Can you be compelled to return the excess
considering the negligence of the bank’s teller?
6. While playing baseball with his friends, Jay broke the glass window of Kay, his neighbour. The
breakage was not made on purpose. It was only an accident. Is Jay liable to Kay?
7. Juan ordered ten-year old Pedro to climb a high and slippery santol tree, and promised to give the
boy 2 kilos of the santol he will be able to pick. While climbing the tree, however, Pedro’s foot slipped. As a
result, Pedro fell from the tree to the ground and died instantaneously. Will Juan be liable in damages for the
death of Pedro?

 FOR THIS SESSION, PLEASE MEMORIZE : Articles 1156, 1157, 1159 & 1306.

 READ THE FOLLOWING CASES IN THEIR ORIGINAL TEXT, AND BE ABLE TO GIVE A CASE
DIGEST (orally or in writing) :

 On Quasi-Delict

(1) Umali vs. Bacani, G.R. No. L-40570, January 1976.

(2) Go vs. Intermediate Appellate Court, G.R. No. L-68138, May 31, 1991.
(3) Franco vs. Intermediate Appellate Court, G.R. No. 71137, October 5, 1989.
(4) Ylarde vs. Aquino, G.R. No. 33722, July 28, 1988.
(5) Jimenez vs. City of Manila, G.R. No. 71049, May 29, 1987.

 Solutio Indebiti

(6) Philippine National Bank vs. Court of Appeals, G.R. No. 108052, July 24, 1996.

 MIND CALISTHENICS: Enumerated below are the list of articles that you are expected to commit to
memory.

ARTICLES 1156, 1157, 1159, 1164, 1165, par. 3, 1169, par. 1, 1170, 1173, 1174, 1305, 1306, 1318, 1358,
1381, 1390, 1403 and 1409.
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
(Arts. 1163-1178)

STUDY GUIDE :

 Distinguish: Specific/Determinate vs. Generic/Indeterminate Thing

 A. DUTIES IN A SPECIFIC REAL OBLIGATION 

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1. Preserve the thing. (Arts. 1163 & 1173, par. 2)
 Reason for the duty.
 Standard of care required :
(a) Law (b) Contract
(c) Diligence of a good father of a family
(c.1.) Factors to be considered : (Art. 1173, par. 1)
i. nature of obligation iii. circumstances of time
ii. circumstances of person iv. circumstances of place

2. Deliver the fruits of the thing. (Art. 1164)

 Kinds of fruits (natural, industrial & civil)
 Creditor’s right to the fruits :
(a) personal right (jus in personam) → when the obligation to deliver arises
(b) real right (jus in rem) → when there is delivery [= ownership]

3. Deliver the accessions and accessories. (Art.1166)

4. Deliver the thing itself. (Art. 1165, pars. 1&3)

 The delivery must be personal (made by the debtor himself), exclusive (made to the creditor
only) and timely (without delay).

5. Answer for damages in case of breach. (Art. 1170)

 Remedies of the creditor in case of the debtor’s failure to perform his obligation :
(a) specific performance (if compliance is still possible) + damages; OR
(b) rescission + damages; OR
(c) damages only (where it is the ONLY possible remedy).

 B. DUTIES IN A GENERIC REAL OBLIGATION 

1. Deliver a thing of the quality intended by the parties. (Art. 1246)

2. Answer for damages in case of breach. (Art. 1170)

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  Remedies of the creditor in case of the debtor’s failure to perform his obligation :
(a) specific performance or compliance; OR
(b) substitute performance (i.e., the obligation is performed by another person at the
debtor’s expense) [Art. 1165, par. 2] + damages; OR
(c) damages only (where it is the ONLY possible remedy).

 C. POSITIVE PERSONAL OBLIGATION 

1. Specific performance is NOT available as a remedy to the creditor as this may amount
to violation of the constitutional prohibition on involuntary servitude.
2. Remedies of the creditor in case of : (Arts. 1167 & 1170)
(a) Failure TO DO → substitute performance + damages
Exception : If the personal qualifications of the debtor was the determining motive
for the obligation contracted, the ONLY remedy of the creditor is to recover damages.

(b) Breach and/or poor execution → proper execution of the obligation at the debtor’s
expense + damages

3. REMEMBER : If substitute performance is still available (i.e., the obligation can still be
performed at the expense of the debtor notwithstanding his failure or refusal to do so), the
court is NOT authorized to merely grant damages to the creditor.

 D. NEGATIVE PERSONAL OBLIGATION 

1. The forbidden act shall be undone at the debtor’s expense. (Art. 1168)
2. REMEMBER : Non-fulfillment may take place BUT specific performance is NOT a remedy.
This is because the debtor fulfils by not doing what has been forbidden him. Hence, there can
be NO delay in a negative personal obligation.

 E. DELAY 

1. Distinguish:
(a) Ordinary Delay
(b) Legal Delay → requires extrajudicial/judicial demand (Art. 1169, par. 1)

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2. When DEMAND is NOT necessary to establish debtor’s delay:
(Art. 1169, par. 2)
(a) When provided by contract; [Art. 1169, par. 2(1)]
(b) When provided by law; [Art. 1169, par. 2(1)]
(c) When time is of the essence in the contract; [Art. 1169, par. 2(2)]
(d) When demand would be useless; [Art. 1169, Par. 2(3)]
(e) When there is performance by one of the parties in reciprocal obligations. (Art. 1169,
par. 3)

3. Kinds of Default :
(a) Mora Solvendi (Art. 1169, par. 1) → delay on the part of the debtor
(b) Mora Accipiendi → delay on the part of the creditor
(c) Compensatio Morae (Art. 1169, par. 3) → delay of obligors in reciprocal obligations

4. Requisites of Mora Solvendi :

(a) Failure of the debtor to perform his positive obligation on the date agreed upon;
(b) Judicial and extrajudicial demand made by the creditor; and
(c) Failure of the debtor to comply with such demand.

5. Effects of Mora Solvendi :

(a) The debtor is guilty of breach of the obligation.
(b) He is liable to the creditor for interest (in obligations to pay money – Art. 2209), or
damages (in other obligations).
(c) In a specific real obligation, he is liable even for a fortuitous event (Art. 1165,
par. 3).

6. “Acceleration Clause” → In a purchase by installments, the contract may provide for an

“acceleration clause” (a clause which would make all installments due, upon default in one
installment). Default in the payment of one installment does not mean default in the whole
amount. If there is an acceleration clause, and there is default in the payment of one
instalment, what will happen merely is that the whole amount under the obligation becomes
due. However, demand is still necessary to put the debtor in default with respect to the whole
amount.

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7. Effects of Compensatio Morae : (Art. 1169, par. 3)
(a) The delay of the obligor cancels the delay of the obligee, and vice versa.
(b) The net result is that there is no default on the part of both parties.

 F. GROUNDS FOR DAMAGES – ARTICLE 1170 

See Art. 2201 – Measure of liability for damages :

i. if there is good faith ii. if there is bad faith

1. FRAUD (deceit or dolo)

(a) refers to dolo incidente as differentiated from dolo causante
(b) waiver of action for future fraud - VOID (Art. 1171)
(c) waiver of action for past fraud - valid

2. NEGLIGENCE (culpa)
(a) Defined (Art. 1173, par. 1)
(b) Distinguish: fraud vs. negligence
(c) Validity of waiver of action for future negligence :
(c.1.) simple negligence – valid
(c.2.) gross negligence (amounting to fraud) - VOID

(d) Kinds of negligence

(d.1.) contractual (culpa contractual)
(d.2.) civil (tort/culpa aquiliana)
(d.3.) criminal (culpa criminal)

(e) Effect of negligence on the part of the injured party (Art. 2179):
(e.1.) if immediate and proximate cause of injury → NO recovery
(e.2.) if contributory to injury → recovery is reduced

3. DELAY (already discussed above)

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4. BREACH – contravention of the tenor of the contract

 G. FORTUITOUS EVENTS – ARTICLE 1174 

1. Defined.
2. Refers to both : (a) acts of man & (b) acts of God

3. Requisites : (a) independent of the debtor’s will

(b) unforeseeable or unavoidable
(c) renders debtor’s normal compliance with obligation
impossible
(d) no concurrent negligence on debtor’s part

4. Debtor’s liability in case of fortuitous event :

(a) General rule: A person is NOT responsible for loss or damage caused to another
resulting from fortuitous events. In such a case, his obligation is extinguished. (Art.
1174)

(b) Exceptions (i.e., positive liability even with a fortuitous event) :

(Art. 1174)

(b.1.) When expressly specified by law, as when there is :

(b.1.1.) Fraud, negligence, delay or breach (Art. 1170)
(b.1.2.) Dual promise to deliver the same specific thing
(Art. 1165, par. 3)
(b.1.3.) Obligation to deliver specific things arising from crimes
(Art. 1268)

(b.2.) When declared by stipulation.

(b.3.) When the nature of the obligation requires the assumption of risk.
(b.4.) When the thing to be delivered is generic
(“genus never perishes” - Art. 1263)

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  H. ARTICLE 1175 

1. Usury is now legally non-existent. The parties are now free to stipulate any amount of
interest.

2. Article 1956, however, of the Civil Code states: “No interest shall be due unless it has
been expressly stipulated in writing.”

 I. ARTICLE 1176 

1. Disputable presumptions on payments of interest and prior installments.

2. When the presumptions do not apply.

 J. GENERAL REMEDIES OF THE CREDITOR TO PROTECT

OR ENFORCE HIS RIGHTS AGAINST THE DEBTOR - ARTICLE
1177 

1. specific performance + damages

2. exhaustion of debtor’s properties
3. exercise all rights and bring all actions of the debtor
(accion subrogatoria)
4. rescind or impugn fraudulent acts or contracts of the debtor
(accion pauliana)
NOTE: No. 3 & No. 4 are subsidiary remedies to No. 2

 K. TRANSMISSIBILITY OF RIGHTS -
ARTICLE 1178 

1. General rule: Rights are transmissible.

2. Exceptions :
(2.1.) when prohibited by law

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 (2.2.) when prohibited by stipulation
(2.3.) in purely personal obligations

 L. OTHER CITED CIVIL CODE PROVISIONS 

ART. 2179. When the plaintiff’s own negligence was the immediate and proximate cause
of his injury, he cannot recover damages. But if his negligence was only contributory, the
immediate and proximate cause of the injury being the defendant’s lack of due care, the plaintiff
may recover damages, but the courts shall mitigate the damages to be awarded.

ART. 2201. In contracts and quasi-contracts, the damages for which the obligor who
acted in good faith is liable shall be those that are the natural and probable consequences of the
breach of the obligation, and which the parties have foreseen or could have reasonably foreseen at
the time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for
all damages which may be reasonably attributed to the non-performance of the obligation.

ART. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is
six per cent per annum.

APPLICATION/PROBLEMS :

1. Liza is the owner of a 200 square-meter lot sited in Makati. On January 15, 2016, Lito
and Liza entered into a lease contract covering the said lot. The term of the lease was 2
years, or until January 14, 2018, and the monthly rental agreed upon by the parties was
P100,000.00. On June 15, 2016, Liza sold her Makati lot to Rene and promised to deliver the
lot to Rene on November 15, 2016. On November 15, 2016, however, Liza failed to deliver the
lot and instead made delivery only on December 15, 2016. As the new owner, Rene now
claims from Liza Lito’s rental payments starting June 15, 2016. Is Rene’s demand well-
founded?
 Clue question: When does the obligation to deliver arise? (Art. 1164)

2. For a consideration of P2M, Mike promised to deliver to Joe, on or before July 15,
2016, his BMW with plate No. HRL-512 as well as a 2016 24-inch Sony Wega television set.
Unfortunately, on July 10, 2016, an unusual bolt of lightning stroke onto the roof of Mike’s
house and started fire. The fire completely gutted down Mike’s property. As a result, the BMW

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and the TV set were both reduced to ashes. Has the obligation of Mike to Joe been
completely extinguished?
 Clue question: If the thing to be delivered is generic, and the same is lost or destroyed,
is the obligation to deliver extinguished? (Art. 1263)

3. On March 15, 2016, Engr. Fabi entered into a building contract with Mr. Oni. It was
agreed that in six months, Engr. Fabi will finish the construction of a one-kilometer dam in
Bacolor, Pampanga to protect the property of Mr. Oni from damage caused by the lahar mud
flow consequent of the Mount Pinatubo eruption. It was also stipulated that the height of the
dam from the basement shall be four meters, and crushed stone measuring two inches in
diameter shall be used. Later, Mr. Oni found out that Engr. Fabi used 1/2-inch diameter of
crushed stone for the dam. Under the factual circumstances obtaining in this case, what are
the remedies of Mr. Oni?
 Clue: Creditor’s right in a positive personal obligation (Art. 1167)

4. Budoy and Inday are the owners of two adjoining pieces of land in Allen, Samar. On
April 10, 2016, Budoy and Inday entered into an agreement. In the agreement, Inday obliged
herself not to construct any structure, whether temporary or permanent, on her land for five
years because Budoy will use it as his garage for five years. As consideration for the promise,
Budoy paid Intoy the amount of P200,000.00. On March 20, 2017, however, Inday constructed
a semi- structure to accommodate five live-in employees from her carinderia. What is the
liability of Inday under the facts?
 Clue: Creditor’s right in a negative personal obligation (Art. 1168)

5. On July 2, 2016, Hiss agreed to sell his original set of Harry Potter DVD’s to Moo, and
promised to deliver the same to Moo’s house on July 4, 2016. On July 8, 2016, Moo
demanded from Hiss delivery of the DVD’s. Hiss, however, informed Moo that on the night of
July 6, 2016 a burglar entered their house and robbed them of personal effects amounting to
P300,000.00 which were never recovered. Hiss’ original set of Harry Potter DVD’s were
among the things stolen.
(a) What is the liability of Hiss?
(b) If, on July 4, 2016, Moo had asked his brother-lawyer to write a demand letter addressed
to Hiss insisting on the delivery of the DVD set, would your answer to the preceding question
be the same?
 Clue: Correlate Art. 1165, par. 3 with Art. 1169, par. 1.

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 6. John and Bea were engaged to be married on July 6, 2016. For the wedding cake,
they contracted Goldi-Cooks to bake a five-layered chocolate cake with walnut, which was
Bea’s favourite. On the day of the wedding, and up to the time when the newly weds were
about to share their first slice of cake as husband and wife, no cake arrived. So, they had to
make do with the leche flan the caterer had prepared for the wedding. When John and Bea
arrived from their honeymoon, they filed an action for damages against Goldi-Cooks who now
denies liability on the ground that the spouses never made any demand on Goldi-Cooks for the
delivery of the wedding cake. Is Goldi-Cooks liable for damages under the facts of this case?
 Clue: Art. 1169, par. 2.

7. On December 31, 2014, Brad advanced P100,000.00 from Angie and promised to pay
the amount on December 31, 2015 at 10% per annum interest. In case of default, Brad also
obliged himself to pay to Angie additional interest on the principal amount (as penalty for the
delay) computed at 5% per month. On December 31, 2015, Brad failed to pay Angie his loan.
For the next six months, Angie did not hear anything from Brad. On June 30, 2016, Angie filed
a case in court to recover the amount of P140,000.00, computed as follows:

Principal amount  P100,000.00

10% agreed annual interest  P 10,000.00
5% agreed penalty interest for delay  P 30,000.00
Total liability as of 30 June 2015  P140,000.00

Under the factual circumstances obtaining, does the computation of Angie on Brad’s liability for
interest on account of default have legal basis?
 Clue: Art. 1169, par. 1.

8. Dean is a businessman engaged in the buy and sell of second hand cars. He owns a
500 square-meter lot in Manila valued at P5M and a Mercedez Benz car worth P1.5M. On
January 1, 2014, Dean’s best friend Techie bought a 2008 Nissan Patrol car from Dean for
P1M. Dean agreed to extend payment of the car to December 15, 2014. In the early part of
2015, due to financial reverses, Dean was able to borrow money from a wealthy friend, James,
who loaned him the amount of P10M without interest and payable on May 31, 2016. As of July
10, 2016, however, Dean, despite repeated demands from James since the obligation became
due, has not been able to settle his obligation. Worst, James came to know from another
business associate that, on June 18, 2016, Dean sold his 800 square-meter lot Manila for P5M
to Gaby, who was embarking on a renovation project on the subject property. What, under the
factual circumstances of this case, are the successive rights of James against Dean? 
Clue: Art. 1177.

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 9. On July 31, 2015, Procopio sold to Cordapio his Nikon D700 camera for P100,000.00.
Upon delivery of the camera on the same day, Cordapio paid P20,000.00 as down payment.
Procopio agreed to accept payment on the balance in instalments, as follows :

September 30, 2015  P10,000.00

November 30, 2015  P15,000.00
January 31, 2016  P15,000.00
March 31, 2016  P20,000.00
May 30, 2016  P20,000.00
Balance Payable  P80,000.00

It was also agreed by the parties that if any instalment was not paid by Cordapio on
time, the remainder of the unpaid instalments would automatically become due and
demandable, and will be charged a 5% monthly interest until completely paid. On January 31,
2016, Cordapio did not remit the instalment thus due to Procopio. Until the end of March,
2016, Procopio did not hear from Cordapio. On April 15, 2016, Procopio filed an action for
collection against Cordapio demanding payment of the entire balance due from January 31,
2016 in the amount of P55,000.00. From what time should the 5% interest for damages start
to be computed on the total amount due?
 Clue: Art. 1169, par. 1. (See Note No. 6 on DELAY)

10. At around 10:00 in the evening, you are driving along Roxas Boulevard within the
area of Buendia. Your family is in the car with you. The highway is normally free from
pedestrians who are required by local ordinances to cross the boulevard using the designated
overpass. Suddenly, from out of nowhere, a man in his mid-30’s crosses the road. The man
was wearing a black shirt which made him even more invisible to moving vehicles. Before you
realize it, he was already right in front of the car a few feet away, and it became impossible to
steer clear of the man after a rapid full step on the brakes. As a result, the man suffered
serious injuries. Will you be liable for damages to the injured man?
 Clue: Art. 2179. (See Note 2[e], Grounds for Damages)

LIST OF CASES FOR STUDY

1. Jimmy Co. vs. CA, G.R. No. 124922, 22 June 1998.

(Articles: 1165; 1174 in relation to 1262; 1265)

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2. Equatorial Realty Development, Inc. vs. Mayfair Theatre, Inc.,
G.R. No. 133879, 21 November 2001. (Article 1169)

3. DBP vs. Licuanan, G.R. No. 150097, 26 February 2007. (Article 1169)

4. Comsavings Bank vs. Sps. Capistrano,

G.R. No. 170942, 28 August 2013.
(Article 1170 in relation to Article 1173;
when gross negligence amounts to fraud)

5. Spouses Batal vs. Spouses San Pedro & Tominaga,

G.R. No. 164601, 27 September 2006.
(Article 1173; negligence –
culpa aquiliana and culpa contractual distinguished)

6. Wildvalley Shipping Co., Ltd. vs. CA, G.R. No. 119602, 6 October 2000.
(Article 1173; negligence; ordinary diligence)

7. Crisostomo vs. CA, G.R. No. 138334, 25 August 2003.

(Article 1173; ordinary vs. extraordinary diligence; allegation of negligence
must be positively proven as a fact)

CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS

SECTION 1 – PURE AND CONDITIONAL OBLIGATIONS

(Arts. 1179-1192)

1. Kinds of obligation according to demandability :

(a) Pure obligation – no term & no condition; demandable at once

(Art. 1179, par. 1)
(b) Conditional obligation – subject to the fulfillment of a condition

2. Condition – (a) future and uncertain; OR (b) past but unknown

3. Kinds of condition as to effect : (Art. 1181)

(a) Suspensive – its fulfillment gives rise to an obligation

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 (b) Resolutory – its fulfillment extinguishes an obligation

4. Kinds of condition as to cause or origin : (Art. 1182)

(a) Potestative – depends upon the will of one of the parties

NOTE : If the potestative condition (a) depends upon the sole will of the debtor AND (b) is
suspensive in nature, the conditional obligation shall be VOID. (Art. 1182, 1st sentence)

 READ THIS CASE IN ITS ORIGINAL TEXT:

Lao Lim vs. Court of Appeals,
G.R. No. L-87047, October 31, 1990.

(b) Casual – depends upon chance, OR upon the will of a third person

 READ THIS CASE IN ITS ORIGINAL TEXT:

Ducusin vs. Court of Appeals,
G.R. No. L-58286 May 16, 1983.

(c) Mixed – depends partly upon chance, and partly upon the will of a third person

5. Kinds of conditions as to form :

(a) Possible – capable of fulfilment

(b) Impossible - not capable of fulfillment (Art. 1183)

(b.1.) Physically – cannot exist or cannot be done

[par. 1]
(b.2.) Legally – contrary to “LaMoG-PuPu”
(b.1.) Positive – TO DO an impossible thing
 the conditional obligation is VOID
[par. 2]
(b.2.) Negative – NOT TO DO an impossible thing
 the conditional obligation is VALID

 READ THIS CASE IN ITS ORIGINAL TEXT:

Roman Catholic Archbishop of Manila vs. Court of Appeals,
G.R. No. 77425, June 19, 1991.

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6. 2 kinds of suspensive conditions as to mode :

(a) Positive – that an event WILL happen at a determinate time

(b) Negative – that an event WILL NOT happen at a determinate time

The designated time expires or The designated time has not expired
EFFECT ON
elapses WITHOUT the event taking but it becomes definite that the event
OBLIGATION
place. will not take place.

POSITIVE Extinguished (Art. 1184) Extinguished (Art. 1184)

NEGATIVE Effective (Art. 1185) Effective (Art. 1185)
7. Art. 1186 – When the debtor voluntarily performs any act to prevent the happening of a
suspensive condition, the same results in the constructive fulfillment of the suspensive
condition.

 READ THIS CASE IN ITS ORIGINAL TEXT:

PAL vs. CA, G.R. No. 119706, March 14, 1996.

8. Art. 1187 – Retroactive effect of fulfillment of the suspensive condition

(a) In real obligations (par. 1)

(a.1.) re the thing – once the condition is fulfilled, its effects retroact to the day when the
obligation was constituted.
(a.2.) re fruits and interests :
(a.2.1.) in reciprocal obligations – no retroactive effect; fruits and interests
received are deemed mutually compensated
(a.2.2.) in unilateral obligations – no retroactivity as they are gratuitous

(b) In personal obligations (par. 2) – subject to court’s determination

9. Art. 1188 – Rights pending fulfillment of the suspensive condition

(a) Creditor – to bring appropriate actions to preserve his rights (par. 1)

Reason : to prevent the debtor from deliberately destroying, hiding or
alienating the object of the obligation pending fulfillment of the condition.
REMEMBER : By the same token, this right may be exercised by the debtor in
obligations subject to a resolutory condition.

16
 EXAMPLES :

(a.1.) sue in court

(a.2.) initiate the recording of his expected right
(a.3.) ask for security if the debtor is about to be insolvent
(a.4.) ask the court to prevent alienation or concealment pendente
conditionae

(b) Debtor – Can the debtor recover from the creditor what he has paid by mistake? (par.
2)
Payment by mistake
Debtor’s right to recover what has been paid Deliberate
When creditor is in :
(including fruits/interest) payment
good faith bad faith
BEFORE fulfillment of suspensive condition YES YES + F/I NO
UPON fulfillment of suspensive condition NO NO + F/I NO
NON-fulfillment of suspensive condition YES YES + F/I YES

10. Art. 1189 – Loss, deterioration and improvement of the object of an obligation pending
fulfillment of a suspensive condition in a specific real obligation.

(a) Loss – physical, legal & civil loss (Art. 1189, No. 2)
(b) Deteriorate – value is reduced or impaired

Effect of : DEBTOR’S INTENT

(Art. 1189) Without Fault With Fault
LOSS Obligation is extinguished (No. 1) Damages incurred (No. 2)
Creditor’s remedies : (No. 4)
DETERIORATION Creditor bears impairment (No. 3) (a) rescission + damages OR
(b) fulfillment + damages

(a) By nature or by time – Creditor benefits from improvement (No. 5)

(b) At debtor’s expense – Debtor will have the rights of a usufructuary (No. 6); no
IMPROVEMENT right to indemnity but he may remove improvements without damage to the
property and/or set-off improvements against damage to the property. (Arts. 579 &
580, NCC)

11. Art. 1190 – Effects of fulfillment of the resolutory condition

(a) In real obligations (par. 1)

17
 (a.1.) The obligation is extinguished.
(a.2.) There should be restitution, not only of the thing received, but also of the fruits or
interests thereon.

(b) In personal obligations (par. 3) – subject to court’s determination

(c) In case of loss, deterioration or improvement of the thing after fulfillment of the resolutory
condition, but before restitution is effected (par. 2) – the party who is bound to return in a
resolutory conditional obligation shall have the same rights and duties as that of the
debtor under Art. 1189.

12. Art. 1191 – The right to rescind in reciprocal obligations in case of breach or non-fulfillment

(a) Kinds of obligations according to the person obliged :

(a.1.) Unilateral – when only one party is obliged to comply with a prestation
(a.2.) Bilateral – when both parties are debtors and creditors of each other
(a.2.1.) Reciprocal – the parties’ obligations arise from the same cause; the
obligation or promise of each party is the cause or consideration for the
obligation or promise of the other.
(a.2.2.) Non-reciprocal – the performance of one party is not dependent upon the
simultaneous performance by the other.

(b) Remedies of the aggrieved party in a reciprocal obligation in case the other party does
not comply with his undertaking : (par. 2)

(b.1.) specific performance + damages; OR

(b.2.) rescission/cancellation of contract + damages

REMEMBER : The remedies provided in Art. 1191, par. 2 are alternative, and not
cumulative.
HOWEVER : An action for rescission may still be availed of even after an action for specific
performance has been preferred, IF fulfillment should have become impossible.
BUT : Once an action for rescission is chosen, specific performance can no longer be
demanded.

(c) Limitations on the right to rescind :

(c.1.) Only substantial (not trivial or slight) breaches can cause rescission.

18
 (c.2.) If there is just cause for fixing the period within which the debtor can comply, the
court will not decree the rescission claimed. (par. 3)
(c.3.) If the property, subject of the contract, is in the hands of an innocent third party
who has lawful possession of the same, rescission will not be successful. (par. 4)

 READ THIS CASE IN ITS ORIGINAL TEXT:

Romero vs. Court of Appeals,
G.R. No. 107207, November 23, 1995.

13. Art. 1192 – Rule if both parties have committed a breach:

(a) If the first infractor is known – the liability of the first infractor shall be proportionately
reduced. (1st sentence)
(b) If the first infractor is not known – the contract shall not be enforced. Each party shall
bear his own loss/damages. (2nd sentence)

APPLICATION/PROBLEMS :

1. On May 5, 2016, Jim entered into an agreement with Jet. Under the agreement, Jim obliged
himself to deliver to Jet an antigue ruby ring worth P50,000.00 anytime that Jet wants it and demands
delivery. On July 5, 2016, Jet makes up her mind and insists on the delivery of the ruby ring from Jim.
Jim, however, denies liability and claims that the condition, that is – “anytime Jet wants it,” was
potestative in nature. Hence, the same condition upon which Jim’s obligation was made to depend
upon, as well as the obligation itself, is void. Does Jim’s argument have legal basis? Is he under
obligation to deliver to Jet the rubi ring as promised?  Clue: Art. 1182.

2. On March 15, 2016, Donna and Celia entered into an agreement. In their agreement, Donna
obliged herself to purchase from Celia a house and lot located in Makati for P3.5M. Donna’s husband
had been detailed by their office from Baguio City to Makati effective May 1, 2016. Hence, the family
was relocating permanently to Makati. For this reason, it was agreed by the parties that by April 15,
2016, Celia should have vacated and readied the house for occupancy to allow Donna and her family to
move in. On April 13, 2016, when Donna contacted Celia, she was informed that Celia had not even
taken initial steps to vacate the subject property. Hence, Donna was left with no other recourse but to
accept the proposal of an agent for the acquisition of a two-bedroom condominium unit at the Avida
Towers in Makati which was available for occupancy as of April 15, 2015. Celia, however, demanded
that Donna make good her commitment to purchase Celia’s Makati house and lot as per their March 15,
2016 agreement. Under the factual circumstances obtaining, is Donna bound to comply with her
obligation?  Clue: Art. 1184.

3. Angelo hired Engr. Luis to construct a 50-kilometer road within his private subdivision. It was
agreed that Engr. Luis was to finish the construction in 3 months. The contract price agreed upon was

19
P2M. After six weeks, however, and without justification, Angelo ordered the construction stopped with
the work barely half-finished. Engr. Luis was left with no choice but to follow the owner’s instruction for
work stoppage. Engr. Luis, however, charged Angelo for the complete contract price of P2M. Angelo
refused to pay the entire amount on the ground that the project was only then half-finished. Can Engr.
Luis demand from Angelo payment of the entire contract price of P2M?  Clue: Art. 1186.
4. On February 11, 2014, Francis and Josh entered into a transaction with regard to a 1-hectare
farm lot in Laguna owned by Francis. The parties agreed that should Josh pass the Nursing Board
Examination on September 30, 2015, Francis will sell the said farm lot to Josh for P1.5M. On March 15,
2014, Josh promised to sell the farm lot to Reuben for P2M. On October 23, 2014, Francis promised to
sell the farm lot to Peter. On September 30, 2015, Josh passed the Nursing Board Examination. As
between Reuben and Peter, who has a better right over the farm lot?  Clue: Correlate Arts. 1187 &
1188.

5. On April 4, 2015, I gave you Shaun, my favourite sheep, on the condition that you will never
go to the casino. On September 20, 2015, Shaun gave birth to 5 healthy lambs. On January 2, 2016,
however, I saw you going to the casino again. So, on January 3, 2016, I demanded for the return of
Shaun and her 5 lambs. You gave me Shaun but you refused to give me her babies, and in fact sold
the 5 lambs last Christmas. Do you think your refusal is legally justified under the factual
circumstances?  Clue: Correlate Arts. 1189 & 1190.

6. On December 20, 2011, Rudy and Dan entered into a lease contract. It was agreed that Dan
would lease an office space from Rudy for 5 years starting January 1, 2012 to December 31, 2016. In
consideration therefor, Rudy was to collect a monthly rental of P30,000.00 from Dan. Starting January
1, 2014, however, or after 2 years of the contract, Dan failed to pay his monthly rental payments despite
repeated demands from Rudy. Hence, on March 1, 2014, Rudy asked Dan to vacate the premises if he
could not afford to pay. On March 15, 2014, Dan turned over the office space to Rudy. Now, Rudy
demands from Dan payment of rents for the remaining three years of the contract, i.e., from January 1,
2014 to December 31, 2016. Is Rudy well within his rights to claim said rental payments for the
remaining term of their lease contract?  Clue: Art. 1191, par. 2

SECTION 2 –OBLIGATIONS WITH A PERIOD

(Arts. 1193-1198)

1. Art. 1193. –

(a) Obligation with a period – one whose consequences are subjected in one way or another
to the expiration of said period or term.
(b) Period or term – a future and certain event; must also be physically and legally possible.
(c) A day certain (par. 3) – a day that will unavoidably happen although it may not be known
when.

20
 (d) Kinds of period or term according to effect :
(d.1.) Suspensive period (ex die) – the obligation begins only from a day certain upon the
arrival of the period. (par. 1)
(d.2.) Resolutory period (in diem) – the obligation is valid up to a day certain and
terminates upon arrival of the period. (par. 2)

2. Art. 1194. – The rules in Article 1189 will also apply in case of the loss, deterioration or
improvement of the thing before the arrival of the period or term.

3. Art. 1195. – The debtor may recover what has been prematurely paid (plus fruits and
interests):
(a) If he was unaware of the period; or
(b) If he believed that the obligation has become due and demandable.

4. Kinds of period or term according to source :

(a) Legal period – when provided for by law.

(b) Conventional or voluntary period – when agreed to by the parties. (Art. 1196)
(c) Judicial period – when fixed by the court. (Art. 1197)
5. Art. 1196. – Disputable presumption as to benefit of conventional or voluntary period:

(a) General rule: the period is presumed to have been established for the benefit of both
the creditor and the debtor. (Effect: The debtor cannot pay prematurely and the creditor
cannot demand prematurely.)
(b) Exceptions: (if there be such intent, e.g. when provided by agreement)
(b.1.) If the term is for the benefit of the debtor alone. (Effect: The debtor may opt to
pay prematurely but he cannot be compelled by the creditor to pay prematurely.)
(b.2.) If the term is for the benefit of the creditor alone. (Effect: The creditor may
demand prematurely but he cannot be compelled by the debtor to accept
prematurely.)

 READ THIS CASE IN ITS ORIGINAL TEXT: Villaseñor vs. Javellana,

G.R. No. L-18500, October 2, 1922.

6. Art. 1197. – Judicial period

21
 (a) General rule: If the obligation does not state a period, and no period is intended by the
parties, the court is NOT authorized to fix a period.
(b) Exceptions : The court may, however, fix a period when :
(b.1.) No period is fixed but a period was intended. (par. 1)
(b.2.) The duration of the period depends upon the will of the debtor.
(Art. 1197, par. 2; See also Art. 1180)

 READ THIS CASE IN ITS ORIGINAL TEXT: Chavez vs. Gonzales, G.R.
No. 27454, April 30, 1970.

7. Art. 1198. – When the debtor loses the benefit of the period

(a) General rule: In obligations with a period, an obligation is not demandable before the
lapse of the period.
(b) Exceptions: In any of the following instances, however, the period is disregarded, and
the obligation becomes demandable at once :
(b.1.) When the debtor becomes insolvent, unless a guaranty or security is given.
(b.2.) When the debtor does not furnish the guaranties or securities as promised.
(b.3.) When the guaranties or securities given have been impaired by the debtor, or
have disappeared on account of a fortuitous event.
(b.4.) When the debtor violates an undertaking related to the creditor’s consenting to the
period.
(b.5.) When the debtor attempts to abscond.

APPLICATION/PROBLEMS :
1. On January 1, 2014, D borrowed P200,000.00 from C payable on January 1, 2016, with 20%
interest annually. On January 1, 2015, thinking that the obligation was already due, D paid C
P200,000.00 plus P80,000.00 interest. On January 3, 2015, D realized that his debt was not yet due
until a year after. Hence, D went to C to recover his payment. May D recover from C under the
circumstances? If so, how much?  Clue: Art. 1195.
2. On January 1, 2015, D borrowed P150,000.00 from C. As security for the payment of his
debt, D pledged with C a Rolex Date Just watch worth P225,000.00 which D bought from Hong Kong. It
was agreed by the parties that D was to pay back the money loaned, with 10% interest per annum, on
December 31, 2015. On September 5, 201, D went to C offering payment of the loan, plus interest

22
corresponding to 8 months, and at the same time redemption of the Rolex watch pledged. C, however,
refused to accept D’s payment as well as the return to D of his Rolex watch. Was C legally justified in
refusing the payment of D?  Clue: Art. 1196.
3. On January 1, 2015, D borrowed P1M from C. D promised to pay back the amount to C on
December 31, 2016 at 10% interest per annum. On December 31, 2015, D offered to pay the amount
of P1.1M to C, which covered the principal amount of the loan plus 10% interest on the loan for one
year. C willingly accepted the payment. On February 1, 2016, however, D asked his lawyer to send a
demand letter to D claiming payment of the balance of P100,000.00 pertaining to the interest on D’s
principal loan and corresponding to the period from January 1, 2015 to December 31, 2016. C
maintains that since the period for the payment of the loan was established for the benefit of both the
debtor and the creditor, the debtor had no right to make premature payments. C also maintains that if D
insists on paying prematurely, he can only be allowed to do so after paying the interest computed up to
the period agreed upon by the parties, i.e. P200,000.00. Is C’s argument legally tenable?  Clue:
Art. 1196.
4. D obliged himself to pay C P85,000.00 “as soon as possible”. Three months thereafter, C
demanded payment from D but the latter refused to pay. What is the remedy of C? Can C outrightly file
an action in court for specific performance to compel D to pay his obligation?  Clue: Art. 1197, par.
2.
5. On June 30, 2015, Malusog Medical Equipments, Inc. sold to Dr. Katakutan a portable x-ray
machine for P1.2M. MMEI agreed to accept payment for the machine in four equal quarterly
installments until June 30, 2016 but asked for a collateral. Dr. Katakutan then mortgaged to MMEI a
2013 MB 100 which was being used by his infirmary as ambulance. On September 15, 2015, the MB
100, while parked outside the NAIA Terminal 3 awaiting the arrival of a patient, was carnapped and was
no longer recovered. After notice of the incident, MMEI, on September 20, 2015, demanded for
payment of the entire P1.2M from Dr. Katakutan. Dr. Katakutan, however, refused to pay the total price
for the machine. Dr. Katakutan contends that he cannot be made liable for the whole obligation
because under the parties’ agreement, he was given until June 30, 2016 within which to pay for the
contract price in four equal quarterly installments. Besides, Dr. Katakutan states, the collateral he
furnished to MMEI was lost not through his own fault but by virtue of a fortuitous event. Will Dr.
Katakutan’s arguments prosper?  Clue: Art. 1198, par. 3.

SECTION 3 – ALTERNATIVE OBLIGATIONS

(Arts. 1199-1206)

1. Kinds of obligation according to object.

(A) Simple – one prestation only

(B) Compound – two or more prestations
(b.1.) Conjunctive – all prestations are due

23
 (b.2.) Distributive – only one, or some of the several prestations, are due
(b.2.1.) Alternative (b.2.2.) Facultative

2. Distinguish between an alternative and a facultative obligation. –

(A) Alternative – one where, out of two or more prestations which may be given or
performed, only one is due, and the complete performance of one of them extinguishes
the obligation. (Art. 1199)
(B) Facultative – one where only one prestation has been agreed upon but the DEBTOR
may render another in substitution. (Art. 1206)

3. The right of choice in alternative obligations. –

(A) The general rule is that the right to choose the alternative belongs to the DEBTOR.
(B) There are, however, limitations to this preferential right of the debtor :
(b.1.) When the right of choice is expressly given to the creditor by express stipulation in
the parties’ contract. (Art. 1200, par. 1)
(b.2.) The debtor cannot choose part of one prestation and part of another prestation.
(Art. 1199, par. 2)
(b.3.) The debtor has no right to choose those prestations which are impossible,
unlawful, or which could not have been the object of the obligation. (Art. 1200,
par. 2)
(b.4.) The choice cannot produce any legal effect until it has been communicated to the
other party. (Art. 1201)
(b.5.) The debtor loses the right of choice when only one alternative prestation is
practicable of performance. (Art. 1202)

 READ THIS CASE IN ITS ORIGINAL TEXT: Ong Guan Can vs. The
Century Insurance Co., Ltd., G.R. No. L-22738, December 2,
1924.

4. Art. 1203. – The debtor is given the right to rescind the contract with damages if, by reasons
attributable to the creditor’s acts, the debtor cannot exercise his right of choice among the
prestations, according to the terms of the contract.

24
5. In alternative obligations, what are the effects of the loss or impossibility of the alternative
prestations before the right of choice has been exercised?

(A) When the choice belongs to the debtor.

(a) If the loss is due to a fortuitous event :
(a.1.) If all are lost, the obligation is extinguished. (Art. 1174)
(a.2.) If two or more of the alternatives remain, the debtor can deliver any of the two
remaining. (Art. 1202)
(a.3.) If only one remains, there is no more alternative obligation but a simple
obligation. What he should deliver is the remaining object. (Art. 1202)

(b) If the loss is due to the debtor’s fault :

(b.1.) If all are lost, the obligation is converted into monetary consideration as
indemnity for damages, taking into consideration the value of the last
thing/service lost plus damages. (Art. 1204, pars. 1 & 2)

(b.2.) If two or more of the alternatives remain, the debtor can choose which one to
deliver (between the two) but NO damages. (Art. 1200, par. 1)

NOTE: The debtor is NOT liable for damages since he has the right of choice,
and the obligation can still be performed. This is an exception to the general
rule established in Article 1170 regarding liability for damages arising from
negligence.

(b.3.) If only one remains, there is no more alternative obligation but a simple
obligation. What he should deliver is the remaining object but NO damages.
(Art. 1202)

(B) When the choice belongs to the creditor.

(a) If the loss is due to a fortuitous event – The effects are the same as when the right
of choice belongs to the debtor.

(b) If the loss is due to the debtor’s fault :

(b.1.) If all are lost, the obligation is converted into monetary consideration as
indemnity for damages, taking into consideration the value of any of the
objects chosen by the creditor (because he is given the right of choice) plus
damages. (Art. 1205, par. 2[3])

25
 (b.2.) If two or more of the alternatives remain, the obligation is still alternative. The
creditor has the option to either: (Art. 1205, par. 2[2])

(b.2.1.) choose between the two remaining alternatives; OR

(b.2.2.) choose the lost object. In such case, the debtor will then be liable for
the value of the lost object chosen, plus damages.

NOTE No. 1 : When the choice belongs to the creditor, and the loss is due to the debtor’s fault,
there is damages to be awarded because the creditor was deprived of his right to choose.

NOTE No. 2 : In all cases, there is NO communication of the choice made. If there was already a
communication, there is no more alternative obligation. The obligation becomes pure after
communication of the choice, and the abovementioned rules are no longer applicable.

6. In facultative obligations, the right of choice belongs ONLY to the debtor (Art. 1206, par. 1).
Once the substitution is made, the obligation is converted into a simple one to deliver or
perform the substituted thing or prestation. The substitution, likewise, becomes effective from
the time it has been communicated (Art. 1201).

7. In facultative obligations, what are the effects of the loss or deterioration of the thing?

(a) If lost before substitution. –

Principal Thing Substitute

(a) If due to a fortuitous
event, the obligation
is extinguished.
(b) If due to the debtor’s
fault, he is liable for
damages.
(a) With or without the debtor’s fault, the
obligation to deliver the substitute is
extinguished.
Rationale: What is to be delivered is the
principal object and not the substitute.
The loss of the substitute is immaterial.

(b) If lost after substitution. –

Principal Thing Substitute

(a) The debtor is not liable (a) If due to a fortuitous event, the
whatever may be the obligation is extinguished.
cause of the loss, (b) If due to the debtor’s fault, he is liable
because it is no longer for damages.

26
 due.

8. llustrative distinction between an alternative and a facultative obligation. –

(a) Alternative – D will give prestation No. 1 or prestation no. 2. If prestation No. 1 is lost by
virtue of a fortuitous event, D will still have to give prestation No. 2.
(b) Facultative – D will give prestation No. 1, but if D wants, he may give prestation No. 2. If
prestation No. 1 is lost by a fortuitous event, the obligation is extinguished (because the
principal object has been lost), and D does not have to give object No. 2.

APPLICATION/PROBLEMS :
1. On December 4, 2015, D obtained a loan from C in the amount of P300,000.00. It was
agreed by the parties that on June 15, 2016, D could comply with his obligation by payment to C of the
P300,000.00, or by delivering to C 150 sacks of Dinorado rice, or by giving C 15 German Shepherd
puppies. On June 15, 2016, D was short of cash so he paid C the amount of P150,000.00. At the
same time, D also delivered to C 75 sacks of Dinorado rice which was valued at P150,000.00. C,
however, refused to accept D’s payment and delivery. Is C legally justified in rejecting D’s payment?
 Clue: Art. 1199.
2. On February 11, 2016, D obliged himself to give C his emerald ring or his portable Panasonic
DVD player. It was agreed that D will deliver the emerald ring or the portable DVD player to C’s house
on or before July 15, 2016. On July 15, 2016, D arrived at the house of C and delivered to C his
emerald ring. C, however, refused to accept the emerald ring and insisted that D deliver the portable
DVD player instead. D, however, was stubborn and insisted that C accept the emerald ring. Decide
on the rights of the parties.  Clue: Art. 1200.
3. On January 31, 2016, D obliged himself to give C, at D’s option, on April 15, 2016, the
following objects: (a) his goat from Israel worth P45,000.00; (b) his Swiss cow worth P55,000.00; or, (c)
his Australian kangaroo worth P60,000.00. On March 24, 2016, before D had a chance to communicate
his choice of the prestation to be complied with to C, both the goat and the cow died because D’s
caretaker had neglected to feed them for 2 weeks. What will be the obligation of D to C on maturity
date? What will be his liability?  Clue: Art. 1204.

TITLE I, CHAPTER III

SECTION 4 – JOINT AND SOLIDARY OBLIGATIONS
(Arts. 1207-1222)

1. What are the kinds of obligations according to the number of parties?

(a) Individual –there is only one debtor or one creditor in an obligation.

27
(b) Collective – there are two or more debtors and/or two or more creditors in one and the same
obligation. It may be joint or solidary.

2. How do you distinguish between a joint and solidary obligation? (Art. 1208)
(a) Joint – one where there is a concurrence of several creditors or several debtors, or of
several creditors and debtors, by virtue of which each of the creditors has a right to demand
while each of the debtors is bound to render compliance only with his proportionate part of
the prestation which constitutes the object of the obligation.
“To each his own.” In other words, each of the creditors is entitled to demand the payment
of only a proportionate part of the credit, while each of the debtors is liable for the payment of only
a proportionate part of the debt.

(b) Solidary – one where there is a concurrence of several creditors or several debtors, or of
several creditors and debtors, by virtue of which each of the creditors has a right to demand,
while each of the debtors is bound to render entire compliance with the prestation, which
constitutes the object of the obligation.
“One for all, all for one.” In other words, each of the creditors is entitled to demand the
payment of the entire credit, while each of the debtors is liable for the payment of the entire debt.

3. Presented below are the illustrative effects of joint and solidary obligations in tabulated
form. –

(a) D1 and D2 are joint debtors of C for P20,000.

Joint Debtors Debtors’ duty Creditor’s claim Individual Creditor

D1 P10,000
P20,000 C
D2 P10,000
Total liability P20,000 P20,000 Total claim

D1 and D2 may be compelled to pay only P10,000 each which is their proportionate part of the
total obligation.

(b) D1 is a debtor of C1 and C2, joint creditors, for P20,000.

Individual
Debtor’s duty Creditors’ claim Joint Creditors
Debtor
P10,000 C1
D P20,000
P10,000 C2

28
 Total liability P20,000 P20,000 Total claim

C1 and C2 can demand only their proportionate part of the total credit which is P10,000 each.

(c) D1 and D2 are joint debtors of C1 and C2, also joint creditors, for P20,000.

Joint Debtors’ Creditors’ Joint

Debtors duty claim Creditors
P5,000 C1
D1 P10,000 P5,000 C2
P5,000 C1
D2 P10,000 P5,000 C2
Total
P20,000 P20,000 Total claim
liability

Art. 1208 states that when an obligation is joint, the total credit or debt shall be divided into as
many equal shares as there are creditors or debtors, the credits or debts being considered distinct
from one another. (2 debtors X 2 creditors = 4 debts/credits) Hence, either D1 or D2 can be
compelled to pay only their proportionate part of the debt in the amount of P10,000 each (P5,000 to
C1 and P5,000 to C2). On the other hand, either C1 or C2 can demand only their proportionate
part of the credit in the amount of P10,000 each (P5,000 from D1 and P5,000 from D2).

(d) D1 and D2 are joint debtors of C1 and C2, solidary creditors, for P20,000.

Joint Debtors’ Creditors’ Solidary

Debtors duty claim Creditors
D1 P10,000 C1
P20,000
D2 P10,000 C2
Total
P20,000 P20,000 Total claim
liability

As solidary creditors, either only C1 or only C2 can collect the entire P20,000 credit. However,
the obligation of the debtors being joint, the entire P20,000 debt cannot be collected from only
either D1 or D2. Of the P20,000 credit which either C1 or C2 will collect, only P10,000 can be
demanded from D1 and the other P10,000 from D2.

29
(e) D1 and D2 are solidary debtors of C1 and C2, joint creditors, for P20,000.

Solidary Debtors’ Creditors’ Joint

Debtors duty claim Creditors
D1 P10,000 C1
P20,000
D2 P10,000 C2
Total
P20,000 P20,000 Total claim
liability

Since D1 and D2 are solidary debtors, anyone of them may be compelled to pay the entire
P20,000 debt. However, the creditors’ obligation being merely joint, neither C1 nor C2 can
demand payment beyond their proportionate part of the credit. In other words, while the entire debt
may be paid by only one of the debtors (either D1 or D2), the payment of the entire credit cannot
be demanded by only one of the creditors (either C1 or C2). Hence, C1 and C2 can demand only
their proportionate share of the obligation, which is P10,000 each, from either D1 only or D2 only.

(f) D1 and D2 are solidary debtors of C1 and C2, solidary creditors, for P20,000.

Solidary Debtors Debtors’ duty Creditors’ claim Solidary Creditors

D1 C1
P20,000 P20,000
D2 C2

Total liability P20,000 P20,000 Total claim

Since the obligations of both parties are solidary, any one of the creditors (either C1 or C2)
may demand payment for the entire credit. In the same manner, any one of the debtors (either D1
or D2) may be made liable for the entire debt.

4. Art. 1208. – When the obligation is collective (i.e., there are two or more debtors or
two or more creditors), the obligation is presumed to be joint.

Hence, solidarity in a collective obligation is never presumed. There are only three instances
when solidarity may be demanded :

30
 (a) Conventional – when the contracting parties expressly agree
Kinds of and stipulate that the obligation is solidary.
Solidarity (b) Legal – when the law demands solidarity.
According to
Source :  (c) Real – when the nature of the obligation requires the liability to
be solidary.

5. What are the kinds of solidarity according to the parties bound :

(a) active – solidarity on the part of the creditors. [3(d) above]

(b) passive – solidarity on the part of the debtors. [3(e) above]
(c) mixed – solidarity on the part of the debtors and creditors. [3(f) above]

6. How do you distinguish between a joint and indivisible obligation?

(a) When we say joint obligation, it has particular reference to the juridical tie which binds the
parties to the obligation. It speaks of the respective obligations of the parties. Hence, as
previously discussed, the parties in a joint obligation are liable only for their proportionate
shares.

(b) On the other hand, when we say indivisible obligation, this has particular reference to the
prestation of the obligation – that is, the possibility or impossibility of partial fulfillment of the
parties’ prestation. Hence, when the obligation is indivisible, it means that the prestation
required to be performed by the debtor is not susceptible of division.
Example: The prestation to deliver a car is indivisible because the debtor cannot deliver half
of the car today and deliver the other half tomorrow.
(c) An obligation, therefore, may be “joint and divisible”, “joint and indivisible”, “solidary and
divisible”, or “solidary and indivisible” (Art. 1210). We will understand the consequences of
this class of obligations better when we go to Section 5 on “Divisible and Indivisible
Obligations.”

7. Let us say that D1, D2 & D3 are jointly liable to give C a car valued at P24,000. This is
an example of a joint indivisible obligation. Article 1209 outlines, in part, the rights and obligations
of the parties in a joint indivisible obligation. Just take note of Art. 1209. The article will be better
understood if we study it in conjunction with Art. 1224 under the next Section.

8. What are the rights of creditors in solidary obligations?

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(a) The right to demand entire payment of the debt or the entire compliance with the prestation
from any one of the debtors. (Art. 1207) [See No. 3(e) & 3(f) above.]
(b) The right to file an action for compliance with the obligation against one, some or all of the
debtors simultaneously. (Art. 1216, 1st sentence)

(c) If the debt has not been fully collected from one debtor, the creditor has the right to demand
payment from the remaining debtors. (Art. 1216, 2nd sentence)

(d) The right to do whatever may be useful to the other creditors, but not anything that may be
prejudicial to the other creditors. (Art. 1212)

(e) The right to assign his rights under the solidary obligation, BUT ONLY with the consent of the
other solidary creditors. (Art. 1213)

(f) The right to make a novation, compensation, confusion or remission of the debt. (Art. 1215)

9. Let us apply the foregoing precepts to an illustrative case : D1, D2 & D3, solidary
debtors, owe C1, C2 & C3, solidary creditors, the sum of P600,000 payable on December 15,
2013.

(a) C1, C2 AND/OR C3 may demand from D1, D2 OR D3 payment of the entire P600,000.

(b) C1, C2 AND/OR C3 may demand from D1, D2 AND/OR D3 payment of the entire P600,000.

(c) If C1, C2 AND/OR C3 demands payment of the entire P600,000 only from D1, and D1 is not
able to pay or pays only P200,000, C1, C2 AND/OR C3 can still proceed against D2 AND/OR
D3 for P600,000 (if D1 did not pay any amount), or the entire remaining balance of P400,000
(if D1 paid only P200,000).

(d) This rule is based on the theory of mutual agency (i.e., the right of one to act for and in the
name of the others) among the solidary creditors.

(d.1.) Example of beneficial act : Let us suppose that if demand for the payment of the loan is
not made by the creditors within 10 years from the time the obligation became due, the
creditors’ right will have prescribed. In other words, after 10 years, the obligation of the
debtors will be deemed extinguished. Hence, even if only C1 makes a demand for the
payment of the entire P600,000 before December 15, 2023, this demand will benefit also C2 &
C3, i.e., it is as if C2 and C3 also made their respective demands within the prescriptive period
of 10 years.

(d.2.) Example of prejudicial act : Let us assume C1, without the consent of C2 & C3, informs
D1, D2, & D3 that he (C1) is condoning their P600,000 debt. The entire obligation, as far as

32
 D1, D2, & D3 are concerned, will be extinguished, because of the fact that the notice of
condonation came from one of the solidary creditors who is deemed to have condoned the
entire obligation for and in behalf of the other solidary creditors, C2 & C3. However, the act
being prejudicial to C2 & C3, C1 has to reimburse C2 & C3 the amount of P200,000 each, the
latter’s share in the entire credit. (Art. 1215)

(e) Should one of the solidary creditors decide to assign his right to another person, he can only
do so if he obtains the consent of all the other solidary creditors. (Art. 1213) The reason
behind this prohibition is that each creditor represents the others, and the assignee (the
person to whom the credit was assigned) may not have the confidence of the original solidary
creditors. It is reasonable for the other solidary creditors to anticipate the possibility that the
creditor-assignee after receiving payment may not give the shares of his co-solidary creditors.

(f) Novation, compensation, confusion or remission of the debt has one uniform effect on the
obligation – its extinguishment. So, if any of the solidary creditors executes an act with the
object of extinguishing the obligation, the obligation will be extinguished. This extinguishment
will bind both the solidary debtors and the solidary creditors. However, the solidary creditor
who executed the act resulting in the extinguishment of the obligation will be held liable to the
other solidary creditors (who did not give their consent to the act). This means that the
solidary creditor who so acted has to reimburse the other solidary creditors for their
proportionate share in the credit. (Art. 1215) (See the previous example in (d.2.).

10. What are the obligations of solidary debtors?

(a) To pay the entire debt or fulfill the entire prestation when so demanded by the creditors. (Art.
1214)

(a.1.) 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. (Art. 1217,
par. 1)

(a.2.) To whom must the debtor pay? ANSWER: The general rule is that the debtor may pay
any one of the solidary creditors. BUT when a demand, judicial or extrajudicial, has been
made by one of the solidary creditors, payment should be made to the demanding creditor
(Art. 1214). This is to avoid confusion as well as prejudice to the more diligent creditor. If not
made to the demanding creditor, the obligation will be extinguished, BUT only insofar as the
share of the creditor-payee (the creditor to whom payment was made) is concerned.

Example: D1, D2 and D3 are solidary debtors of C1 and C2 for P50,000. C1 makes a
demand on D1 for the payment of the entire obligation. If instead of paying C1, D1 pays C2
the entire P50,000, the obligation will be extinguished only to the extent of C2’s proportionate

33
 share in the credit, which is P25,000. Therefore, C1 can still demand from D1 payment of the
remaining P25,000. However, if it is D2 who pays the entire obligation to C2, the obligation
will be completely extinguished. This is because, although payment was not made to the
demanding creditor C1, it was made by the solidary debtor (D2) upon whom NO DEMAND
was made by C1.

(b) To pay his corresponding share in the debt in case one of the solidary debtors made full
payment of the obligation, 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. (Art.
1217, par. 2)

(b.1.) Let us go back to the illustrative case in No. 9. If on December 15, 2013, D1 pays the
entire P600,000 (which he is obliged as solidary debtor), D1 can thereafter demand
reimbursement from D2 and D3 for their proportionate shares in the credit. In other words,
while the obligation has now been extinguished from the solidary creditors’ viewpoint, it does
not mean that D2 and D3 are already free from liability. As among themselves, solidary
debtors, after D1 pays the entire P600,000, D2 and D3 have now the obligation to reimburse
D1 in the amount of P200,000 each. Thus, the payment made by D1 creates a joint obligation
of reimbursement on the part of D2 and D3. And pursuant to Art. 1217, par. 2, if D2 and D3
will reimburse D1 their proportionate share only on December 15, 2014, or a year after D1
made payment, D1 is entitled to one-year legal interest on the proportionate shares of D2 and
D3 – that is, 6% of P200,000 (see Art. 2209).

(c) To pay for the share of an insolvent co-debtor in proportion to the debt of each when one of
the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor
paying the obligation. (Art. 1217, par. 3)

(c.1.) Let us suppose that D1, D2 & D3 owe C1, C2 & C3 P600,000 but in the following
proportions: D1 – P150,000; D2 – P250,000; and D3 – P200,000. If D1 pays the solidary creditors
the entire P600,000 debt, we said that he is entitled to reimbursement from D2 and D3 for the
latter’s proportionate shares in the debt which is P250,000 and P200,000, respectively. What will
happen if only D2 reimburses D1, but D3 cannot refund the P200,000 to D1 because of his (D3)
insolvency? Under Art. 1217, par. 3, how much is D2 obliged to refund D1 in addition to D2’s
proportionate share of P250,000? Art. 1217, par. 3 says that the share of the insolvent solidary
debtor shall be borne by his co-debtors in proportion to the debt of each. How do we compute
this?

Proportionate Reimbursement Share in Insolvent Proportionate Share to be

Solvent
Share in the the Insolvent Debtor’s Debtor’s Borne by the Solvent Debtors
Debtors
Debt Share Share (Art. 1217, par. 3)

D1 150,000 150,000/400,000 = 3/8 3/8 of P200,000 = P 75,000

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 D2 250,000 250,000/400,000 = 5/8 P200,000 5/8 of P200,000 = P125,000

TOTAL 400,000 8/8 TOTAL P200,000

So, if D3 becomes insolvent, D2 has to reimburse D1 his proportionate share in the entire debt
(which is P250,000), plus D2’s reimbursement share in the proportionate debt of the insolvent
debtor in the amount of P125,000 – a total of P375,000.

(c.2.) If a solidary debtor, however, makes payment after the obligation has been extinguished
by any of the causes provided in this Code, he will lose his right to joint reimbursement from his co-
debtors. (Art. 1218)
Illustrative example. – D1 and D2 are solidarily liable to deliver to C1 and C2 12 tarsiers
from the forests of Bohol. Before delivery due date, however, the Philippine Congress enacted a
law declaring tarsiers endangered animals, and criminalized, among other acts, the hunting and
selling of tarsiers. Despite the passage of the law, D1 handed over to C2 the 12 tarsiers that he
had earlier obliged himself to deliver. In such a case, D1 cannot ask for any reimbursement from
D2 because the payment was made after the obligation had become illegal.

(c.3.) Also, a solidary debtor who obtained a remission of the debt from the creditor losses his
right to reimbursement from his co-debtors. (Art. 1220)

Illustrative example. – D1 and D2 are solidarily liable to C1 and C2 in the amount of

P100,000. Because D1 was the grandchild of C1 and C2, they remitted the whole obligation last
Christmas before it fell due. In this case, D1 cannot ask D2 for reimbursement of D2’s
proportionate share in the debt because D1 never made any payment. How about if, of the
P100,000 debt, only P80,000 was remitted by C1 and C2. In such a case, D2 has no obligation to
reimburse D1 for the P30,000 of D2’s proportionate share which was affected by the remission.
However, D2 is still liable to C1 and C2 for P20,000, the remaining portion of his proportionate
share in the entire P100,000 debt owing.

(d) To pay for his share in the debt in case the debt had been totally paid by anyone of the
debtors before the remission was effected (Art. 1219).

(d.1.) This may arise in a situation where the creditor makes a remission of the share which
affects one of the solidary debtors. In this case, the solidary debtor who is the beneficiary of
the remission by the creditor, after full payment by his co-debtor, is still obliged to reimburse
the debtor-payor for his (the debtor-beneficiary) proportionate share in the debt.

(d.2.) Illustrative example. – On January 1, 2014, D1 and D2, solidary debtors, borrowed
money from C in the amount of P500,000 due on or before June 30, 2014. On January 15,
2014, D2 paid the entire debt of P500,000 to C. On February 14, 2013, C remitted the

35
 obligation in favor of D1. Can D2, after having paid for the entire debt, ask for reimbursement
from D1 for the latter’s proportionate share in the obligation considering that C had remitted
the obligation in favor of D1?

(d.2.1.) Despite the remission granted by C in favor of D1, D1 will still be liable to D2 for
his P250,000 proportionate share of the entire debt. In this case, the remission which was
effected after D2 had already paid the entire debt is considered to be without effect since the
obligation had already been extinguished by payment. Since C had already received the
entire credit in the amount of P500,000 before he remitted the obligation in favor of D1, C
cannot be allowed to unjustly enrich himself at the expense of D2. Hence, if it was really C’s
intention to remit D1’s proportionate share, C, in behalf of D1, may reimburse D2 for D1’s
proportionate share in the obligation in the amount of P250,000.

(d.3.) Another illustrative example. – On January 1, 2014, D1, D2 & D3, solidary debtors,
borrowed money from C in the amount of P1M due on or before June 30, 2014. The
proportionate shares in the debt of the solidary debtors are as follows : D1 – P200,000; D2 –
P300,000; and, D3 – P500,000. On January 15, 2014, C remitted the share of D3. On
February 14, 2014, D1 paid the entire debt of P1M to C. On March 15, 2014, D2 became
insolvent.

(d.3.1.) Can D1, after having paid for the entire debt, ask for reimbursement from D3 for
the latter’s proportionate share in the obligation? NO. When D1 paid the entire obligation on
February 14, 2014 (inclusive of the P500,000 proportionate share of D3), C had already
remitted the share of D3. Hence, as of January 15, 2013, the proportionate share of D3, which
was remitted by C, had already been extinguished. However, D3 can demand the return of
the P500,000 from C under the principle of solutio indebiti.

(d.3.2.) Since D2 has now become insolvent and is unable to reimburse D3 for his (D2)
proportionate share in the amount of P300,000, is D3 (whose proportionate share was already
earlier remitted by C) obliged to contribute to the share of D2? YES. Pursuant to Art. 1217
(par. 3), the share of the insolvent co-debtor shall be borne by all his co-debtors in proportion
to the debt of each. The remission made by C can only refer to the share of D3 in the
obligation and cannot, therefore, affect D3’s responsibility to contribute to the share of D2, the
insolvent solidary debtor. While C, as a creditor, can extinguish the proportionate obligation of
D3, he cannot modify the rights and obligations of the solidary debtors as among themselves.
Hence, D3 is still obliged to contribute to the share of D2 in the amount of P214,285.71 (5/7 of
P300,000). [Refer to the manner of computation as outlined under No. 10 (c)(c.1.) above.]

11. Art. 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.

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 Illustrative Case : D1, D2 and D3 are solidary debtors of C for P300,000 under the following
terms and period :

D1 – P50,000, due on June 30, 2013

D2 – P150,000, due on December 31, 2013
D3 – P100,000, due on June 30, 2014

On June 30, 2013, C made a demand upon D1 to pay the entire obligation but the latter paid only
P50,000. Subsequently, because of D1’s refusal to pay the balance, C filed a case against D1 for
collection of the amount. Will C’s action prosper? Reasons.
Answer : For the moment, the action will not prosper. It is true that the obligation here is solidary
and that its solidary character is not destroyed by the fact that the debtors are bound by different
periods for payment as expressly provided for in Article 1211 of the Civil Code. However, in
solidary obligations of this type, the right of the creditor is limited to the recovery of the amount
owed by the debtor whose obligation has already matured, leaving in suspense his right to recover
the shares corresponding to the other debtors whose obligations have not yet matured. This
limitation on the creditor’s right does not destroy the solidary character of the obligation because,
ultimately, he can still compel one and the same debtor, if that is his wish, to pay the entire
obligation. Therefore, on December 31, 2013, when D2’s obligation shall have matured, C can
collect the amount of P150,000 from either D1, D2 or D3. And on June 30, 2014, C can again
collect the remaining balance of P100,000 from any of the solidary debtors. Assuming that C, as of
June 30, 2014, had not collected anything from the solidary debtors, this time C can collect his
entire P300,000 from any one of the solidary debtors D1, D2 or D3.

12. What are the rights and obligations of solidary debtors in case of loss or impossibility of
the prestation? How are such rights and obligations affected by the happening of a fortuitous
event, and the onset of delay? (Art. 1221)
(a) If without fault or due to a fortuitous event – no liability is attached; the obligation is
extinguished. (par. 1)
(b) If with fault – liability attaches; the debtors shall be liable for the value of the object plus
damages and interest, subject to the right to reimbursement from the guilty debtor. (par. 2)
(c) If due to a fortuitous event BUT AFTER default – the same liability in the preceding instance
attaches. (par. 3)

From a reading of Art. 1221, it is clear that although the loss or impossibility of the prestation
was due to the fault of only one of the solidary debtors, all the debtors shall answer to the creditor
for the price and the payment of damages and interest. But the innocent co-debtor(s) shall have a
right of recourse against the guilty or negligent co-debtor.

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 Illustrative Case : D1, D2 and D3 solidarily promised to deliver to C, on December 15, 2013, a
2008 Toyota Hi-Luxe, with Plate No. ABC-123, and which was worth P2.4M. On November
30, 2013, the pick-up figured in an accident while being driven by D1 under the influence of
alcohol. Later, C makes a demand upon D2. Should D2 be liable for the price of the pick-up
as well as damages or interest? Answer : YES. D2 may be held liable for the price of the
pick-up including damages or interest even if he was not at fault at all. Remember that a
solidary obligation implies mutual agency; hence, as far as the creditor is concerned, the fault
or delay of one solidary debtor shall be the fault or delay of all the solidary debtors. Art. 1221
makes D2 liable BUT he can later on recover from the guilty debtor, D1, the amount of
damages or interest that he paid C. This is because had D1 not been at fault, the obligation
would have been already extinguished.

13. What defenses may a solidary debtor avail against the creditor? (Art. 1222)

In actions filed by the creditor, the solidary debtor who is sued may avail himself of these
defenses :

(a) All defenses derived from the nature of the obligation. This is a complete defense.
(b) Defenses which are personal to him.
(c) Defenses pertaining to his share.
(d) With respect to the personal defenses available to his co-debtors, he may avail himself of
those defenses only as regards that part of the debt for which his co-debtors are responsible.

Illustrative Examples of the different defenses :

(a) D1, D2 and D3 are solidarily indebted to C under a sale of marijuana. If D1, D2 and/or D3 are
sued, none can be held liable because the prestation is illegal. The obligation being illegal, the
same is not demandable from any of the solidary debtors. This is then a complete defense
available to all the solidary debtors.
(b) D1, D2 and D3 are solidarily indebted to C for P300,000, but D1 was insane at the time the
obligation was contracted. If C sues D1, D1 has no liability. As to D1, the fact that he was
insane at the time the obligation was contracted is a complete defense. After all, he did not
consent to the obligation contracted and cannot, therefore, be held liable therefor. This
defense, however, is personal to D1 alone.
(c) In the illustrative example under Note No. 11 above, if C, on June 30, 2013, sues D2 for
P200,000, D2 can set up the partial defense that his proportionate share in the amount of
P150,000 is not yet due and demandable. D2, however, as solidary debtor may be held liable
for the P50,000 proportionate share of D1 that is already due and matured as of that period.

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(d) In the preceding illustrative example in letter (b), if C sues D2 instead of D1, D2 can be made
liable for the whole P300,000 MINUS D1’s share (P100,000). This is because D2 can also put
up D1’s insanity, which is merely personal to D1, as a partial defense. In other words, D2 can
avail of D1’s defense but only for the purpose of disclaiming liability for D1’s share. Hence,
having only a partial defense, D2 can still be held liable for P200,000.

APPLICATION OR PROBLEMS:

 The groups are hereby directed to apply the provisions on this section to the
problems given below. Discuss the problems together, and make sure all the
members in the group are versed with the principles used.

1. Jojo and Jaja sold 1,000 sacks of rice to Kiko and Kaka for P1.5M. On Kiko’s request
and after paying the price therefor, Jojo and Jaja delivered to him the 1,000 sacks of rice. Later,
Kiko resold the rice for P2M and did not turn over any part of it or its price to Kaka. Kaka now
demands for the delivery of the rice. May Kaka compel Jojo and Jaja to deliver what he bought? If
so, how much will Jojo and Jaja be liable to Kaka under the factual circumstances of the case?

2. On February 15, 2013, Lyn and Rose, in a solidary obligation, bound themselves to pay
P1.5M to Jona, Larry, and Don subject to the following terms and conditions: Jona’s share will be
due on June 1, 2013; Larry will get his share only if he passes the 2013 Bar Examinations; and
Don, a fourth year LM student, will get his share only after he graduates from college in 2014.
(a) On March 25, 2014, shortly before deliberation on the status of graduates, Don went to
Rose and sought to recover the entire P1.5 M. Don alleged that since Lyn and Rose were solidarily
debtors, anyone of them may be made to answer for the entire P1.5M obligation. May Don recover
from Lyn? If so, how much?
(b) On April 15, 2014, the results of the Bar Exams came out, on the same day the LM
graduation rites took place. Both Larry and Don made it. Upon hearing the news, Jona, who was
Larry’s sister, immediately went to Lyn and sought to recover under the debtors’ obligation. How
much can Jona recover from Lyn?

3. Jerome, Sam and Nikki promised to give a Toyota Altis car worth P1.5M in favor of Sky,
Lei, Dane and Zier. Jerome became insolvent, so the other debtors could not purchase the car to
be given to the creditors. Later, Dane and Zier informed the debtors that they were giving up and
waiving their rights under the obligation. In other words, Dane and Zier were no longer interested
in the obligation. How much can the remaining creditors Sky and Lei each collect from each of the
debtors?

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 4. Benjie obliged to give solidary creditors Connie and Alejo P100,000 on June 30, 2014.
On May 15, 2014, Connie assigned his right to collect under the obligation to Baby. Connie
informed Benjie about the assignment. On June 30, 2014, as promised, Benjie paid the entire
P100,000 obligation to Baby. On July 1, 2014, alleging that he has as yet not received any
payment, Alejo demanded from Benjie his proportionate share in the credit in the amount of
P50,000. Does Benjie still have an obligation to Alejo?

5. Teotimo and Vicente, solidary debtors, promised to pay Lydio, Ison, and Sefa, solidary
creditors, the amount of P300,000 on December 31, 2013. On January 15, 2014, the lawyer of
Sefa sent a demand letter to Teotimo demanding for payment of the entire P300,000. However,
Vicente, who did not know of the demand, had paid Lydio the entire P300,000 on the very same
day the demand was made. Is the debtors’ obligation now extinguished? Assuming that Lydio
does not remit to Sefa her proportionate share in the entire credit in the amount of P100,000, can
Sefa still collect the said amount from Teotimo?

6. Maria and Clara are solidary debtors of Juan, Pedro and Jose, solidary creditors, for the
amount of P600,000. Juan subsequently fell in love with Maria. On the night he proposed
marriage, Juan told Maria to forget about the whole obligation because Juan was waiving the entire
P600,000 obligation. Maria accepted Juan’s proposal, and immediately went to Clara asking
reimbursement for her (Clara’s) proportionate share in the obligation. Is Clara obliged to reimburse
Maria, considering that the entire debt would not have been remitted by Juan had it not been for
Maria?

7. In the preceding question in No. 6, what will become of the proportionate shares of
Pedro and Jose assuming that the obligation is now totally extinguished? Can they still recover
their respective shares in the credit under the factual circumstances?

8. Paul, Ken, Jake and Mark are solidary debtors of Anne for P400,000. After Mark paid
the entire P400,000 to Anne, he went to Paul asking for reimbursement in the amount of P300,000.
Mark contends that since their obligation is solidary, after he paid the entire debt to Anne, the other
solidary debtors will now also be solidary obligors of Mark with respect to the remaining balance of
the debt in the amount of P300,000, after subtracting Mark’s proportionate share of P100,000. Do
you agree with Mark’s contention? In other words, can Mark ask for reimbursement from Paul in
the amount of P300,000?

9. On January 15, 2013, Donna, Diana and Dora signed a promissory note which read as
follows : “For value received, we promise solidarily to pay Caloy and Carmel the sum of P600,000
on or before June 30, 2014.” On December 25, 2013, Carmel fell in love with Diana, and remitted
her share in the obligation. On January 28, 2014, Donna became insolvent.

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(a) On July 1, 2014, Caloy went to the house of Diana and wanted to recover the entire P600,000
only from Diana. Can Caloy do so? How much can Caloy hold Diana liable under the factual
circumstances?

(b) After Donna had become insolvent, on February 5, 2014, Dora paid the entire P600,000
obligation to Caloy who acknowledged receipt of the entire amount. After paying the said
amount, Dora now seeks reimbursement from Diana. How much is Diana’s liability to Dora?

(c) Caloy and Carmel had an altercation on the occasion of one of their drinking sprees.
Thereafter, or on June 30, 2014, to make sure that Carmel would not be able to do anything to
cheat Caloy out of his share in the obligation, Caloy instructed his lawyer to send a demand
letter to Diana demanding from her payment of Caloy’s share in the credit in the amount of
P300,000. Does Caloy’s act have legal basis? Can Diana be compelled to pay Caloy the
amount of P300,000 despite the remission earlier granted by Carmel in her favor?

10. Cedric and Matt are solidarily obliged to give Kat a 2011 Ford Explorer pick-up worth
P1M on December 15, 2013. On November 30, 2013, Kat was able to close a deal with Jojo who
was willing to pay for P1.5M for the pick-up upon delivery. Cedric drove the pick-up and figured in
an accident after he beat the red light along the intersection of Roxas Boulevard and Pedro Gil
Street. Cedric miraculously survived the crash, but the car was completely wrecked beyond
recognition. While Cedric was recovering in the hospital, Kat went to Matt and demanded from him
the amount of P1.5M. Matt, however, refused to pay Kat the entire amount demanded. As a
solidary debtor, Matt did not deny liability on the amount of P1M. Matt, however, posited that the
additional amount of P500,000 which Kat seeks to recover as damages should properly be
demanded only from Cedric whose negligence was the proximate cause for the loss of the pick-up
to be delivered. Does Matt’s argument have legal basis?

11. On April 15, 2013, Gladys, Tere and Ella signed a promissory note in favor of Francis.
At the time of the signing, Ella was suffering from schizophrenia. In the promissory note, the
solidary debtors bound themselves to pay Francis, on April 15, 2014, the amount of P120,000.
When maturity date came, the debtors did not make good their promise under the note. Hence, on
April 30, 2014, Francis filed an action against Gladys demanding for the payment of the entire
P120,000 obligation. How much is Gladys liable to Francis under the promissory note, and
considering the factual circumstances?

SECTION 5
DIVISIBLE AND INDIVISIBLE OBLIGATIONS
(Arts. 1223-1225)

1. Distinguish between a divisible and an indivisible obligation.–

41
 (a) Divisible – an obligation the prestation of which is capable of partial performance.
(Example: to deliver 50 kilos of rice)

(b) Indivisible – an obligation the prestation of which is not capable of partial performance.
(Example: to deliver a refrigerator)

2. What are the kinds of division? Be able to distinguish and give an example for each
kind.

(a) Qualitative division – one based on quality.

(b) Quantitative division – one based on quantity.
(c) Ideal or intellectual division – one which exists only in the minds of the parties.

3. What are the kinds of indivisibility?

(a) Legal – when an object or prestation, which is divisible by nature, is declared indivisible
by specific provision of law. (Art. 1225, par. 3)
(Example: The obligation to pay income taxes on or before April 15 every year.)

(b) Conventional – when an object or prestation, which is divisible by nature, is declared

indivisible by mutual agreement of the parties. (Art. 1225, par. 3)
(Example: D promised to pay C his P100,000 debt on August 1, 2014.)

(c) Natural or Absolute – when an object or prestation, by its very nature, is not capable of
division. (Art. 1225, par. 1)
(Example: D promised to deliver his car to C on August 1, 2014.)
TEST TO DETERMINE INDIVISIBILITY:

From the above categorization, we can then infer that :

(a) When the prestation is indivisible by its very nature, i.e., not physically susceptible of partial
performance, the obligation is always and definitely indivisible. The parties cannot agree
contrariwise.
Example: D obliged himself to deliver a BMW car to C. Since the car is not physically
divisible, even if D and C agree to make the obligation divisible, the same would result in an absurd
situation. Imagine if D would deliver half of the car today, and the other half a week after. 

(b) Although the prestation is divisible by its nature, the parties may agree on the obligation’s
indivisibility.

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 Example: D obliged himself to deliver 100 copies of nursery rhymes books to C. In this case,
the obligation is divisible by its very nature because D may make a staggered delivery of the books
to C, e.g., 25 copies every week for four weeks. D and C, however, can stipulate and agree that
the obligation will become indivisible. Thus, D may be obliged to deliver the entire 100 copies at
one time only on a particular date agreed upon by the parties.

 READ THIS CASE IN ITS ORIGINAL TEXT: Soriano vs. Ubat, G.R. No. L-
11633, January 31, 1961.

4. Arts.1209 and 1224 on Joint Indivisible Obligations

(a) As previously discussed in Section 4, in a joint indivisible obligation, the object of the obligation
is indivisible, but the liabilities of the debtors are joint. Illustrative Example: D1 and D2 are
jointly liable to deliver to C (owner of a laundromat) a Whirlpool Dryer with serial no. 44714
valued at P25,000. The delivery date is set on December 5, 2014.

(b) Pursuant to Art. 1209, C has to make a simultaneous demand upon D1 and D2 for the
delivery of the dryer. This is because, while the liability of the debtors are merely joint,
compliance is possible only if all the joint debtors act together. Hence, C cannot make a
demand only on either D1 or D2 for the delivery of his proportionate share of the obligation –
that is, one-half of the dryer. 
(c) What is the effect of the debtors’ non-compliance with their joint indivisible obligation?
Pursuant to Art. 1224, the obligation is converted into a monetary obligation for damages to be
borne by the joint debtors as follows :

(c.1) The innocent debtor will be liable only for his proportionate share in the obligation.
(c.2.) In addition to his proportionate share in the obligation, the guilty debtor is the only one
liable for the damages sustained by the creditor.

(d) Let us apply the rules in letter (c) to our illustrative example in letter (a). Let us assume that
the dryer which D1 & D2 promised was sent to the Whirlpool service center because it needed
replacement of major parts to become functional again. The repair cost amounted to P10,000.
D2 was able to come up with his proportionate part in the repair cost amounting to P5,000.
D1, however, lost his P5,000 in a cockfight bet. As a result, the dryer could not be delivered to
C on December 5, 2014. Because of the non-delivery, C lost a lot of orders from his
laundromat customers costing P8,500. What are now the liabilities of D1 and D2 to C?

The obligation to deliver the Whirlpool dryer to C is converted into a monetary obligation
to give P25,000 to C.

43
 (d.1) D2 will be liable to C for the amount of P12,500, his proportionate share in the
obligation.
(d.2.) D1 will be liable to C for the amount of P12,500 (his proportionate share in the
obligation), plus the consequential damages suffered by C in the amount of P8,500, or a total
of P21,000.

(e) Pursuant to the second sentence of Art. 1209, should D1 become insolvent, D2 will not be
liable for D1’s share. Hence, in case of D1’s insolvency, D2 is still obliged to pay only
P12,500 to C.

(f) Let us assume that in the preceding problem, instead of D1 and D2’s obligation being joint and
indivisible, the same is solidary and indivisible. What would be the effect on the debtors’
respective liabilities?

Answer: Such being the case, C can demand the Whirlpool dryer, or its price of P25,000,
plus the P8,500 consequential damages from D2 alone. However, D2 can later on recover
reimbursement from D1 for D1’s proportionate share in the obligation amounting to P12,500
plus the P8,500 damages – a total of P21,000. We apply Art. 1221, par. 2.

5. Obligations that are deemed indivisible : (Art. 1225, par. 1)

(a) Obligations to give definite things (e.g., to give this car, or a house).

(b) Obligations which are not susceptible of partial performance (e.g., to render a “Tinikling” dance
presentation, or to host a birthday party).

6. Obligations that are deemed divisible : (Art. 1225, par. 2)

(a) When the object of the obligation is the execution of a certain number of days of work.
Example: Miss D is hired by Mr. C to do some encoding job for 30 days.

(b) When the object of the obligation is the accomplishment of work by metrical units.
Example: D is hired by C to construct a pig pen 3 meters wide and 3 meters long.

(c) When the object of the obligation is the accomplishment of work susceptible of partial
performance.
Example: When the debtor has obliged himself to pay his P10,000 debt in ten (10) equal
monthly instalments.

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APPLICATION/PROBLEMS :

1. On January 1, 2003, Jun signed a promissory note for P5M in favor or Sylvia. In the said
note, Jun obliged himself to pay Sylvia his debt in two (2) equal installments: P2.5M to be paid on
May 1, 2004, and the balance of P2.5M to be paid on December 1, 2004. Sylvia is given by law a
prescriptive period of 10 years to collect on her credit. If Sylvia files an action for collection against
Jun under this obligation on July 20, 2014, how much can Sylvia collect from Jun?

2. On February 15, 2014, Jay, Joe, and Jess promised to deliver to Jing and Josie a BMW
car, with plate number ABC-123, worth P6M. Two weeks before the delivery date set in their
contract, Joe drove the BMW car and slammed it into a ten-wheeler truck while overspeeding along
a barangay road in Manila. Because of the non-delivery of the car, Jing and Josie suffered
business loses amounting to P300,000. On maturity date, if Jing goes to Jess demanding
performance under this obligation, how much can Jess be compelled to pay?

3. In the preceding problem, assume that the object which the debtors promised to deliver to
the creditors was a 2013 red Toyota Land Cruiser car worth P6M. Assume also that the same
factual circumstances prevailed. Will your answer to the preceding question still be the same?

SECTION 6
OBLIGATIONS WITH A PENAL CLAUSE
(Arts. 1226-1230)

1. Distinguish between a principal and an accessory obligation. –

(a) Principal Obligation – one which can stand by itself and does not depend for its
validity and existence upon another obligation.

(b) Accessory Obligation – one which is attached to a principal obligation and,

therefore, cannot stand alone.

2. Obligation with a penal clause – an obligation which contains an accessory

undertaking to pay a previously stipulated indemnity in case of breach.

3. Penal Clause - an accessory undertaking to assume greater liability in case of

breach. It is attached to the principal obligation in order to insure its performance.

45
 4. Kinds of penal clauses :

(a) As to its origin :

 Legal – when it is provided by law; and
 Conventional – when it is agreed upon by the parties.

(b) As to its purpose :

 Compensatory (Art. 1226) – when the penalty takes the place of damages.
 Punitive – when the penalty is imposed merely as punishment for breach.

(c) As to its demandability or effect :

 Subsidiary or alternative – when only the penalty can be enforced.
 Joint or cumulative – when both the principal obligation and the penal
clause can be enforced.

5. ART. 1226. –

(a) GENERAL RULE: As a general rule, in an obligation with a penal clause, the penalty takes
the place of the indemnity for damages and the payment of interests in case of non-
compliance. (Art. 1226, par. 1)

(b) EXCEPTIONS: Additional damages (aside from the penalty), however, may be recovered
under the following instances : (Art. 1226, par. 2)

(b.1.) When the parties expressly agree that damages or interest may still be recovered
despite the presence of the penalty clause.
(b.2.) When the debtor refuses to pay the penalty imposed in the obligation, in which case the
creditor may recover legal interest thereon pursuant to Art. 2209 of the Civil Code.
(b.3.) When the debtor is guilty of fraud in the fulfilment of the obligation.

6. ART. 1227. – The rationale for this provision is that the precise purpose of the
penalty is to secure the performance of the principal obligation.

(a) The GENERAL RULE is that the debtor is NOT ALLOWED to just pay the penalty instead of
fulfilling the obligation. He may, however, be EXPRESSLY granted by the creditor the right to

46
 refrain from the execution of the contract by a forfeiture of the penalty. (Art. 1227, 1st
sentence)
RATIONALE: If the debtor can choose to just pay the penalty instead of fulfilling his
obligation, this would in effect make the obligation an alternative one.

(b) The penal clause is presumed to be SUBSIDIARY or ALTERNATIVE and NOT JOINT or
CUMULATIVE (Art. 1227, 2nd sentence). – The GENERAL RULE is that the creditor does
NOT have the right to demand fulfilment of the obligation and the penalty at the same time.
The creditor, however, may jointly demand performance and payment of the penalty :

(b.1.) If the right has been clearly granted to him. (Art. 1227, 2nd sentence)
(b.2.) If, after having required fulfilment, the performance of the obligation should have
become impossible with the debtor’s fault, the creditor may enforce payment of the
penalty. (Art. 1227, 3rd sentence)

 READ THIS CASE IN ITS ORIGINAL TEXT: Dimatulac vs. Coronel,

G.R. No. L-14132, January 22, 1920.

7. ART. 1228 – Proof of actual damages suffered by the creditor is NOT

necessary in order that the penalty may be demanded.

(a) To be able to recover the penalty, all that the creditor has to prove is that the debtor committed
a breach of his obligation.
(b) As long as there has been a breach, the creditor may enforce the penalty whether he suffered
damages or not.
(c) The creditor, however, cannot recover more than the penalty agreed upon, even if he proves
that the amount of his damages exceeds the penalty.
(d) Then again, in any of the three exceptions when damages may be recovered by the creditor in
addition to the penalty (Art. 1226, 2nd sentence), the creditor is required to prove the amount
of damages he actually suffered resulting from the debtor’s breach of the principal obligation.

8. ART. 1229 – When can the court reduce the penalty provided for in
the penal clause?

(a) When there is partial performance of the principal obligation.

(b) When there is irregular performance of the principal obligation.

47
(c) When, although there has been no performance of the principal obligation, the penalty is
iniquitous or unconscionable.

9. ART. 1230 –
(a) If the principal obligation is null and void, the penal clause (which is an accessory obligation)
will have no more use for existence, and is therefore also considered null and void. “The
accessory follows the principal.” (2nd paragraph)
(b) On the other hand, nullity of the penal clause does not make the principal obligation void.
Reason: The principal obligation can stand alone, and the void penal clause (which is
subordinate to the principal obligation) will simply be disregarded. (1st paragraph)

 READ THIS CASE IN ITS ORIGINAL TEXT: SSS vs Moonwalk

Development & Housing Corporation, G.R. No. 73345, April 7,
1993.

APPLICATION/PROBLEMS :

1. On July 15, 2016, D obliged himself to repaint the car of C, for a consideration of
P80,000.00, and to finish it within 30 days. It was also agreed by the parties that if D is not able to
finish the repainting job in 30 days, D will pay C a penalty of P8,000.00. On the eighth day of
repainting, D informed C that his daughter was treating him to a 45-day European tour. So D just
offered to pay C the P8,000.00 penalty because he could no longer proceed with the repainting job
as he was expected to fly in four (4) days. C, however, refused to accept the P8,000.00, and
insisted that D finish the job as agreed upon. Is C legally justified in his demands?  Clue: Art.
1227.

2. On March 20, 2016, Engr. D obliged himself to construct a chapel for Fr. C for
P350,000.00. The building contract carried with it a penal clause to the effect that in case of
breach with his obligation, Engr. D will be liable to pay Fr. C a penalty of P35,000.00. When the
chapel was two weeks away from completion, Fr. C detected some discrepancies in the
construction. It was discovered that major portions of the chapel were not constructed according to
the specifications in the parties’ building contract. Hence, Fr. C refused to pay his unpaid balance
of P50,000.00 to Engr. D, and filed a case against Engr. D to recover the P35,000.00 penalty for
breach of contract. Are the actions of Fr. C legally justified under the factual circumstances of this
case?  Clue: Art. 1227.

48
 3. D promised to deliver to C 600 bottles of sparkling wine worth P800,000.00 for the 70th
birthday celebration of his mother. It was stipulated by the parties that if D fails to deliver on the
day agreed upon, D will be liable to C for a penalty of P50,000.00. On the day of the celebration, D
was able to deliver only 580 of the 600 bottles promised. Hence, C filed an action against D to
recover the penalty of P50,000.00 as stipulated in the parties’ contract. Is C’s action legally
justified?  Clue: Art. 1229.
4. D obliged himself to sell to C for P65,000.00 his Australian kangaroo which was then
pregnant. It was agreed upon by the parties that D would deliver the kangaroo to C after it gave
birth or, in default thereof, to pay a penalty of P5,000.00. However, the kangaroo died while giving
birth to its joey. Hence, D was not able to make good his obligation to C. In view of the non-
delivery of the kangaroo, C filed an action against D for the recovery of the penalty of P5,000.00 as
stipulated by the parties in their contract. Does C’s action have legal basis?  Clue: Art. 1230.

CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS

GENERAL PROVISIONS
ART. 1231. Obligations are extinguished :
1. By payment or performance;
2. By the loss of the thing due;
3. By the condonation or remission of the debt;
4. By the confusion or merger of the rights of creditor and debtor;
5. By compensation;
6. By novation.
Other causes of extinguishment of obligations, such as annulment, rescission, fulfilment of a
resolutory condition, and prescription, are governed elsewhere in this Code.

SECTION 1 – PAYMENT OR PERFORMANCE

(Arts. 1232-1261)

STUDY GUIDE :

1. ART. 1232. – Concept of payment as a mode of extinguishing an obligation. –

(a) Delivery of money; and/or

49
 (b) Performance of the prestation.
 In law, payment and performance are synonymous.
 It also embraces within its terms the payment of damages or penalty in lieu of the
fulfilment of an obligation. (See Arts. 1170 & 1226)

2. How must payment be made?

 Payment must be COMPLETE. (Art. 1233) As a general rule, partial or irregular

payment or performance WILL NOT produce the extinguishment of an obligation.

3. What are the exceptions to the directive in Art. 1233?

 The obligation will be deemed paid or fully complied with if :

(a) There is (a.1.) substantial compliance (a.2) in good faith. In such case, the debtor may
recover as though there had been strict and complete fulfillment, less damages suffered by the
creditor. (Art. 1234)
(b) The creditor accepts payment (b.1.) knowing its incompleteness or irregularity, and (b.2)
without expressing any protest or objection. (Art. 1235)

 READ THIS CASE IN ITS ORIGINAL TEXT: Tayag vs. Court of Appeals,
G.R. No. 96053, March 3, 1993.

4. Who are the persons from whom the creditor is bound to accept payment or performance?
(Art. 1236, par. 1)

(a) The debtor.

(b) Any person who has an interest in the obligation (like a guarantor).
(c) A third person who has no interest in the obligation, when there is a stipulation that he
can make payment.

5. Suppose a third person pays for the debtor, how much can he recover from the debtor by way
of reimbursement?
 It depends.
(a) If made without the consent or against the will of the debtor, the third person can recover
only insofar as the debtor has been benefited by the payment. In other words, the third person-
payor is entitled only to REIMBURSEMENT. (Art. 1236, par. 2)

50
 (b) If made with the consent of the debtor, the third person can recover whatever amount he
has paid. In addition, the third person will be SUBROGATED to the rights of the creditor (e.g.,
rights arising from a mortgage, guaranty or penalty). Here, the third person-payor is entitled to
REIMBURSEMENT + SUBROGATION. (Art. 1237)
(b.1.) SUBROGATION means the act of putting a person into the shoes of the creditor;
hence, permitting that same person to exercise all the rights and actions that could have been
exercised by the creditor.

6. Who are the persons to whom the debtor is bound to make payment? (Art. 1240)
(a) The creditor.
(b) The creditor’s successor-in-interest (like an heir or assignee).
(c) Any person authorized by the creditor or by law to receive it.

7. When is payment to a third person valid?

 In two cases:
(a) The payment will be valid only in so far as it has redounded to the benefit of the creditor
(e.g., the payment, or a part thereof, is delivered by the third person to the creditor). (Art. 1241)
(b) The payment is made in good faith to a person in possession of the credit. (Art. 1242)

8. What should be the object of payment?

 It depends on the nature of the obligation.
(a) In a specific real obligation and personal obligation. – The very thing or service due.
The creditor cannot be compelled to receive a prestation different from that which is due. (Art.
1244)
(b) In a generic real obligation. – The thing must be of the quantity and quality specified. If
no quality is specified, the creditor may not demand a thing of superior quality, and the debtor may
not deliver a thing of inferior quality. This is “the rule of the medium quality.” (Art. 1246)
9. When is partial payment allowed?

 As a general rule, the creditor cannot be compelled to accept, and the debtor cannot
be required to make, partial payment or performance. (Art. 1248, par. 1) The exceptions to
this rule are :

(a) When there is an express stipulation or provision of law to that effect.

(Art. 1248, par. 1)

51
 (b) When the debt is in part liquidated and in part unliquidated.
(Art. 1248, par. 2)
(c) When the different prestations in which the obligation consists are subject to different
periods or conditions which affect some of them. (e.g., Where D owes C P10,000.00, and
P6,000.00 of the debt is due today and P4,000.00 is due 30 days after; or in case the payment of
P4,000.00 is subject to the fulfilment of a suspensive condition.)

10. In what currency shall payment of debt in money be made?

(Art. 1249, par. 1)
(a) In the currency stipulated.
(b) If there is no stipulated currency, in Philippine currency.

11. Commercial documents are NOT legal tender. The creditor, therefore, cannot be
compelled to accept them as payment for a debt. Supposing, however, the creditor decides to
accept a commercial document (such as a check) in payment of a debt, will the debt be
extinguished? (Art. 1249, par. 2)

 Acceptance of the check will be equivalent to payment only (i.e., the debt will be
extinguished only) when :

(a) The check has been encashed.

Rationale: It is only when the check is dishonoured that the creditor can bring an action
for non-payment of the debt (Art. 1249, par. 3).

(b) The check has lost its value because of the fault of the creditor.
12. Give the RULES regarding the place where payment shall be made.

(a) If there is a stipulation, payment shall be made in the place designated. (Art. 1251,
par. 1)
(b) If there is no stipulation :

(b.1) Delivery of a specific or determinate thing – payment shall be made at the place
where the thing was at the time of the perfection of the contract. (Art. 1251, par. 2)

(b.2.) Delivery of an indeterminate thing – delivery or payment must be made at the

domicile of the debtor. (Art. 1251, par. 3)

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13. What are the four (4) special modes or forms of payment under the Civil Code?

(a) Dation in payment, or adjudicacion en pago, or datio in solutum

(Art. 1245)
(b) Application of payment or imputation of payment (Art. 1252)
(c) Payment by cession or assignment in favor of creditors (Art. 1255)
(d) Tender of payment AND consignation (Arts. 1256-1261)

14. What is dation in payment?

 It is that extraordinary mode of extinguishing an obligation whereby the debtor

transmits his ownership over a property in favour of the creditor for the satisfaction of a monetary
debt. In other words, an existing debt in money is satisfied, not by the payment of money (Art.
1244), but by the alienation of property. (Art. 1245)

Example : D owes C P200,000.00. On maturity date, if D does not have enough money
to pay off his obligation to C, he may ask C to accept his (D’s) mountain bike worth P220,000.00
as payment for the obligation. If C consents, D’s obligation is extinguished by dation in payment.

 READ THIS CASE IN ITS ORIGINAL TEXT: Filinvest Credit Corporation

vs. Philippine Acetylene Co., Inc., G.R. No. L-50449, January
30, 1982.

15. What is application of payment? (Art. 1252, par. 1)

 In this special mode of payment, the debtor indicates with particularity the specific
debt to which the debtor’s payment should be applied, there being several debts owing to the
creditor, and the debtor’s payment being insufficient to cover all the debts.

 Application of payment, as a mode of extinguishing an obligation, can, therefore, be

availed of only when the following requisites concur :

(a) There must be two or more debts;

(b) The debts must be of the same kind;
(c) The debts are owed by the same debtor in favour of the same creditor;
(d) All the debts must be due; and
(e) The payment must not be enough to extinguish all the debts.

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16. Assuming all the requisites above are present, what are the rules to be observed in
application of payment?

(a) Under the first paragraph of Art. 1252, it is the debtor who is given the preferential right to
choose which among the debts due he is paying.
(b) If the debtor does not choose, the creditor may make the designation by specifying in the
receipt which debt is being paid. (Art. 1252, par. 2)
(c) If neither the debtor nor the creditor has made the application, or if the application is not
valid, then application is made as follows :

(c.1.) Apply the payment to the most onerous debt among those due. (Art. 1254, par. 1)
(c.2.) If the debts are of the same nature and burden, apply the payment to all the debts
proportionately. (Art. 1254, par. 2)

17. Art. 1253 mandates that, when interest is due on the debt, application of payment should be
made first to the interest before the principal. Hence, the debtor cannot insist that his
payment be credited to the principal first, instead of the interest.

18. Illustrative example on application of payment.

D owes C the delivery of the following objects :

(a) P100,000.00 due on January 15, 2016;

(b) P100,000.00 due on March 15, 2016 to bear interest at 3% per month;
(c) A Mitsubishi mini motorbike worth P100,000.00 due on May 15, 2016; and
(d) P200,000.00 due on June 30, 2016.

On July 15, 2016, C went to the house of D to demand the fulfillment of D’s obligation.
While D was willing to make payment to C, all that D had was P100,000.00. Applying the rules on
application of payment :

(a) D will pay C the P100,000.00, and inform her that the said payment will specifically be
applied to the P100,000.00 debt due on March 15, 2016. D cannot insist that C accept the
payment for the P200,000.00 debt due on June 30, 2016 because it would amount only to a partial
payment. Under Art. 1248, C cannot be compelled to receive partial payments. Neither can D
apply the P100,000.00 payment to the motorbike, though of the same value, because it is not of
the same kind (Art. 1252).

54
 (b) If D does not indicate to which of the debts he will apply his payment of P100,000.00, C
(after receiving payment) may indicate in the receipt given to D that: “I hereby acknowledge receipt
from D of the amount of P100,000.00, which is hereby applied to the P100,000.00 debt of D which
became due on January 15, 2016.” If D receives the receipt without question, he cannot later on
complain that the P100,000.00 payment should have been applied first to the P100,000.00 debt
due on March 15, 2016, because the same bears an interest.

(c) If D or C does not make any designation, then the payment will be made to apply first to
the most onerous debt. Among the debts which are of the same kind, the most onerous is the
P150,000.00 due on March 15, 2016, because it is the one that bears interest at the rate of 3% per
annum. In this case, as of July 15, 2016, when payment was tendered, the P100,000.00 debt due
on March 15, 2016 will have already earned interest for four months equivalent to P12,000.00.
Hence, applying Art. 1253, the P100,000.00 payment will be applied first to the interest of
P12,000.00. The remaining P88,000.00 will be applied to the principal obligation leaving an
outstanding balance of P12,000.00 on the principal obligation due for payment to C.

(d) Let us assume that in the example given in No. 18, the only debts owing from the debtor
to the creditor are :

a. P100,000.00 due on January 15, 2016; and

b. P200,000.00 due on June 30, 2016;
P300,000.00 (total debt due)

which are both of the same kind, nature and burden. In this case, if neither the debtor nor the
creditor makes a designation, the rule in the 2nd paragraph of Art. 1254 will apply. The payment
of P100,000.00 will be applied proportionately to the two (2) debts. Hence, P33,333.33
(P100,000.00/P300,000.00 X P100,000.00) will be deducted from the P100,000.00 debt, and
P66,666.67 (P200,000.00/P300,000.00 X P100,000.00) will be deducted from the second. The
first debt will have a remaining balance of P66,666.67. On the other hand, the second debt will
have a remaining balance of P133,333.33. The ratio here of the first debt to the second debt is thus
preserved, namely, 1 is to 2.

19. What is payment by cession? (Art. 1255)

 In this special mode of payment, the debtor transfers all his properties, not subject to
execution, in favour of his creditors, so that the latter may sell them and apply the proceeds to their
respective credits.

20. What are the requisites of payment by cession?

(a) There must be more than one debt;

55
 (b) There must be more than one creditor;
(c) The debtor must be insolvent;
(d) The debtor must abandon all his properties not exempt from execution in favour of the
creditors; and
(e) The cession must be accepted by the creditors.

21. What are the effects of payment by cession? (Art. 1255)

(a) Unlike in dation in payment, the creditors do not become the owners of the properties
ceded by the debtor as payment for the debts. The creditors merely become assignees of the
debtor with authority to sell the properties.
(b) The debtor is released from his obligations but only to the extent of the net proceeds of
the sale, unless there is a stipulation to the contrary. The balance, therefore, remains collectible
from the debtor.

22. Illustrative example of payment by cession. –

D is indebted to C1, C2 and C3 in the total amount of P2M. Later, D became bankrupt
and was left with no other assets but the following :
(a) A farm lot worth P1.5M; and
(b) A Toyota Altis car worth P1.1M.

With the consent of C1, C2 and C3, D can assign the above properties in favour of the
said creditors, so that they may be sold. The proceeds from the sale of the properties will then be
used to satisfy the respective claims of the creditors. If the net proceeds from the sale of the
properties amount only to, let us say, P1.8M, then D is still liable for the balance of P200,000.00 to
the creditors.

23. What is tender of payment?

 It is the act, on the part of the debtor, of offering to the creditor the thing or amount
due. The debtor must, therefore, show that he has in his possession the thing or money to be
delivered at the time of the offer. Tender of payment is extrajudicial.

24. What is consignation?

 Consignation is the act of depositing the thing or amount due with the proper court
when the creditor does not desire or cannot receive it, after complying with the formalities required

56
by law (Art. 1256, par. 1). Consignation is essentially judicial and, therefore, presupposes the
existence of a case filed in court by the debtor against the creditor to compel the latter to accept
the payment. Without a court case, there can be NO consignation and the debtor will not be
released from his obligation.

25. What are the requisites of a valid consignation?

(a) Existence of a valid debt which is due. (Art. 1256, par. 1)

(b) Tender of payment by the debtor and refusal, without justifiable reason, by the creditor to
accept it. (Art. 1256, par. 1)
(c) Previous notice of consignation to persons interested in the fulfillment of the obligation
(such as guarantors, mortgagors, solidary debtors and/or solidary creditors). (Art. 1257, par. 1)
(d) Consignation (deposit in court) of the thing or sum due. (Art. 1258, par. 1)
(e) Subsequent notice of consignation made to the interested parties. (Art. 1258,
par. 2)

26. What is the effect of a tender of payment made without consignation?

 A tender of payment made, even if the creditor unjustifiably refuses to accept payment
or performance, if not followed by a subsequent consignation in court of the object of the obligation,
shall NOT extinguish the obligation.

27. If a tender of payment without consignation does not extinguish the obligation, the reverse
is also true. In other words, a consignation without a previous tender of payment will not likewise
extinguish the obligation and release the debtor. There are, however, cases when consignation
ALONE, without need of a prior tender of payment, will produce the effect of payment and,
consequently, extinguish the obligation. What are these exceptional cases? (Art. 1256, par. 2)

(a) When the creditor is absent or unknown, or does not appear at the place of payment;
(b) When the creditor is incapacitated to receive the payment at the time it is due;
(c) When without cause, the creditor refuses to give a receipt;
(d) When two or more persons claim the same right to collect the obligation; and
(e) When the title of the obligation has been lost.

28. What are the effects if the consignation is properly made?

(a) The debtor may ask the court to order the cancellation of the obligation.

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 (Art. 1260, par. 2)
(b) The expenses of consignation shall be charged against the creditor.
(Art. 1259)

29. After having desposited the thing or sum due with the court, may the debtor still withdraw the
same? (Art. 1260, par. 2)

 YES, but the withdrawal must be made :

(a) before the creditor accepts the consignation; or
(b) before the court declares that the consignation has been properly made by the debtor,
and orders the cancellation of the debtor’s obligation.

 In such a case, the obligation shall continue in force, and the expenses for the
consignation shall be borne by the debtor.

30. What will be the effect if the creditor himself authorizes the debtor to withdraw the deposit (a)
after the creditor has accepted the consignation, or (b) after the court has issued an order
cancelling the debtor’s obligation? (Art. 1261)

(a) The debtor’s obligation to the creditor shall continue to subsist.

(b) The creditor shall lose every preference which he may have over the thing.
(c) The co-debtors, guarantors and sureties shall be released.

31. Illustrative example on tender and consignation. –

On July 15, 2015, D borrowed P500,000.00 from C payable on July 15, 2016. It was
agreed upon by the parties that should D default in the payment of the loan, D will pay a penalty
interest of 10% or P50,000.00. On July 15, 2016, D tendered payment to C in the amount of
P500,000.00. C, however, refused to accept the payment from D and never informed D of the
reason for his refusal. To make sure that he will not be charged for the penalty on account of delay
for failure to pay on due date, D filed an action for consignation with the court, and deposited the
amount of P500,000.00 with the court. If the court finds the consignation to have been properly
made pursuant to the requirements of the law, the court may order the cancellation of the
obligation. At this point, the obligation of the debtor will be considered extinguished. In other
words, while the creditor may not have actually received payment of the obligation on the maturity
date agreed upon by the parties, the debtor is deemed to have complied with his obligation by
properly making a tender of payment, and by consignation of the thing or sum due with the court.
The debtor is then released under the obligation.

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APPLICATION/PROBLEMS :
1. On July 15, 2015, Andrew borrowed money from Solo in the amount of P1M due for
payment on July 15, 2016 at 25% interest per annum. By end of April, 2016, Andrew suffered
financial reverses so he went to visit his college best friend John. Andrew asked John if he could
borrow from John without interest to pay his P1M debt with Solo, which was to be due on July 15,
2016. John promised to help Andrew. Three days after he saw John, Andrew luckily won in the
Bingo games at SM, and partially paid Solo the amount of P850,000.00. Unknown to Andrew,
however, on the very day that he saw John, John immediately went to Solo and paid Andrew’s debt
in the amount of P1M plus the 25% interest due in the amount of P250,000.00. Can John later on
recover from Andrew the entire P1,250,000.00 that he paid to Solo?
 Art. 1236

2. On March 15, 2014, Jun borrowed from Chris the amount of P350,000.00 payable on
March 15, 2016. As security for the loan, Jun mortgaged his 90-square meter lot in Dasmarinas,
Cavite, which was valued at P500,000.00, to Chris. On February 28, 2016, Jun’s cousin, Lucille,
paid Chris P350,000.00 without consulting Jun about it. When the obligation, however, fell due on
March 15, 2016, Jun was already insolvent. Arvin, the husband of Lucille, now seeks to foreclose
Jun’s 90-square meter mortgaged property, so he and his wife can recover the P350,000.00
payment advanced by Lucille to Chris. Can Arvin foreclose on the mortgaged property?  Art.
1237

3. Baldo obliged himself to deliver to Raoul a Jaguar car. Not having been able to obtain a
Jaguar, Baldo convinced Raoul to accept instead a Rolls Royce car which was a more expensive
car. Raoul, however, refused to accept a Rolls Royce, and insisted that Baldo deliver to him a
Jaguar. Is Raoul legally justified in refusing to accept the Rolls Royce car considering that the
same is even more expensive than the Jaguar car?

4. Ruben owes Ed P50,000.00. On maturity date, Ruben offered to pay Ed the amount of
P45,000.00, which was the only money he then had. Ed, however refused to accept the payment.
Thereafter, Ruben bumped into the 30-year old son of Ed, Joshua, to whom Ruben gave the
P45,000.00, with a request that Joshua turn over the money to his father. Instead of delivering the
money to his father, however, Joshua immediately went to the casino, and squandered the entire
amount in the slot machines.

(a) Was Ed justified in refusing to accept the payment offered by Ruben?

(b) May Ed still recover the full amount of P45,000.00 from Ruben, after the said amount was
squandered in its entirety by his son Joshua?  Arts. 1245 & 1240

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 5. Marissa owes Retchel P100,000.00 due on August 15, 2016. On maturity date, Marissa
presented to Retchel a dated MBTC check in the amount of P100,000.00 with a certification from
the bank manager that Marissa was a client in good credit standing who has been banking with
MBTC for almost 30 years. Despite the tender of payment and the certification issued by the bank
manager, Retchel, however, refused to accept the payment and insisted that Marissa pay her in
cash. Is Retchel justified in rejecting this tender of payment made by Marissa, it being certain that
the amount of the check will later on be cleared for sufficiency of funds in her (Retchel’s) favor? 
Art. 1249

6. Ricky is a tenant of an apartment owned by George. On June 30, 2016, George gave
Ricky fifteen days, or until July 15, 2016, within which to leave the leased apartment on the ground
that Ricky had not been paying his rental for two months already. In his defense, Ricky stated that
every month, George’s collector went to the house of Ricky and collected the rents, and issued a
receipt therefor. For the past two months, however, Ricky was ready and willing to pay the rents
and waited for the collector as usual. But the collector never showed up. Hence, Ricky’s rental
arrears amounted to two months. Does Ricky’s argument have legal basis?  Art. 1251 (3rd
par.)

7. Ben owes Jude P50,000.00 with 25% interest. On the due date, Ben tenders payment to
Jude but only for P50,000.00 when it should be P62,500.00. How will you apply the payment? 
Art. 1253

SECTION 2 – LOSS OF THE THING DUE

(Arts. 1262-1269)

STUDY GUIDE :

1. When is a thing considered lost? [Art. 1189(2)]

 A thing is considered lost when it :

(a) perishes; (c) disappears in such a way that its

existence is unknown; or
(b) goes out of commerce; (d) disappears in such a way that it can no
longer be recovered.

2. As a general rule, when the obligation is to deliver a specific or determinate thing, if the thing
is lost or destroyed without the fault of the debtor, or by reason of a fortuitous event, the
obligation is extinguished and the debtor will be released from any liability to the creditor. (Art.
1262, par. 1; Art. 1174)

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3. Enumerate the cases when the debtor is still liable despite the loss of the thing due :

(a) When the specific or determinate thing is lost or destroyed due to his fault, the debtor
shall be liable for damages. (Art. 1262, par. 1; Art. 1170)
(b) When the determinate thing is lost or destroyed after he has incurred in delay, the debtor
shall also be liable for damages. (Art. 1262, par. 1; Art. 1165, par. 3; Art. 1170)
(c) When, by law or stipulation, he is liable even for fortuitous events. (Art. 1262,
par. 2; Art. 1174)
(d) When the nature of the obligation requires the assumption of risk. (Art. 1262,
par. 2; Art. 1174)
(e) When the obligation to deliver the determinate thing arises from a crime (e.g., theft),
unless the loss occurs after the creditor refused to accept the thing without justification.
(Art. 1268)
(f) When the generic or indeterminate thing object of the obligation is lost or destroyed, the
obligation is not extinguished under the principle genus never perishes. (Art. 1263) The
debtor is still obliged to deliver a thing of the same kind. The creditor, however, cannot
demand a thing of superior quality, and neither can the debtor deliver a thing of inferior
quality. (Art. 1246)

4. What is partial loss?

(a) In a specific real obligation, there is partial loss when only a portion of the thing is lost or
destroyed, or when it suffers depreciation or deterioration. (Example: When portion of
the body of a car is smashed, and needs repair and repainting, there is depreciation of
the car or partial loss of the thing.)

(b) In a personal obligation, there is partial loss when :

(b.1.) the prestation has become legally and physically impossible. (Art. 1266)
(b.2.) the prestation has become morally impossible or impracticable, due to change of
certain conditions. (Art. 1267)

5. When is partial loss considered as total loss as to extinguish the debtor’s obligation?

 In a real obligation, the partial loss of the thing may be considered as a total loss if the
loss is so material that the remaining portion of the object is rendered insignificant or immaterial. In
such a case, the debtor will be released from liability, and his obligation extinguished. (Art. 1264)
This is, of course, subject to the general qualification that the loss was not due to the fault of the

61
debtor. (Arts. 1170 & 1174) (Example: The car was wrecked in an accident. The tires, car seats,
and stirring wheel are all that remain of the car. Here, while there is only partial loss because
many parts were still recovered, the same is deemed equivalent to total loss of the object of the
obligation.)

 In a personal obligation, the equivalent provisions are Arts. 1266 and 1267. It is,
however, imperative that in order that the obligation of the debtor may be extinguished, the
impossibility (Art. 1266) or impracticability (Art. 1267) of the performance of the prestation should :

(a) take place after the establishment of the obligation; and

(b) be without fault on the part of the debtor.

6. What is the presumption when the thing due is lost while in the possession of the debtor?
When will the presumption not apply?

 When the thing due is lost while in the custody of the debtor, the disputable
presumption arises that the loss was due to the debtor’s fault. This presumption, however, will not
apply if the loss occurred during a natural calamity. (Art. 1265)

APPLICATION/PROBLEMS:

1. On January 5, 2012, Arthur leased his 200 square-meter lot located in San Pablo City to
Irwin. It was agreed upon by the parties that Irwin was to use the lot for his poultry farm for a
period of two years or until January 4, 2014. The monthly rental agreed upon was P20,000. The
parties’ lease contract also provided for a penal clause which stipulated that should Irwin terminate
the contract before the term provided in the lease, Irwin will be liable for damages equivalent to all
unpaid rentals until January 4, 2014. On February 1, 2012, the City Council of San Pablo passed
an ordinance reclassifying the leased lot from commercial to purely residential. The ordinance was
to take effect on July 1, 2012. Hence, on March 15, Irwin informed Arthur that he was already
turning over the property on June 30, 2012. At the same time, Irwin updated his rental payments to
Arthur until end of July 4, 2012. Arthur is now claiming for damages corresponding to Irwin’s rental
payments from July 5, 2012 up to January 4, 2014 (P20,000 x 18 months), or a total of P360,000,
as penalty for pre-terminating the lease. Irwin, however, refuses to pay alleging that he could no
longer continue with his poultry business on the leased lot in view of the passage of the ordinance.
Decide on the parties’ arguments?

2. On February 14, 2014, Je carnapped the Honda-CRV of Garry. Three days after, he was
apprehended by the police authorities and a case for theft was filed against Je. On April 30, 2014,
the court convicted Je of the crime of theft and ordered him to return to Garry the Honda-CRV
within fifteen days from receipt of a copy of the court’s judgment in the case, or until May 15, 2014.

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On May 10, 2014, the warehouse where Je put the Honda-CRV in storage was gutted by fire. The
car was completely burned to ashes.
(a) Is Je’s obligation to deliver the car to Garry now extinguished?
(b) Assume that on May 15, 2014, Je tendered delivery of the car to Garry but Garry refused to
accept the car without justifiable reason. On May 16, 2014, the car was completely burned to
ashes. Will your answer in the immediately preceding question be the same?

SECTION 3
CONDONATION OR REMISSION OF DEBT
(Arts. 1270-1274)

STUDY GUIDE :

1. What is condonation or remission?

 Condonation or remission is the gratuitous abandonment by the creditor of his right. It

is, in effect, a donation. (Art. 1270)

Example : Edna owes Reme P120,000. When the debt matured, Edna told Reme that
she need not pay the debt, since Edna was condoning or remitting the same. Reme agreed and
expressed her appreciation to Edna. Here, the debt of Reme has already been extinguished by a
special mode of payment called condonation or remission.

2. Here are some practical presumptions related to condonation or remission :

(a) Presumption of voluntary delivery - When the private document in which the debt
appears is found in the possession of the debtor, it shall be presumed that the creditor voluntarily
delivered the document to the debtor. (Art. 1272)

(b) Presumption of remission of the principal obligation – When the private document in
which the debt appears is voluntarily delivered by the creditor to the debtor, it shall be presumed
that the creditor is condoning or remitting the debt in favor of the debtor. (Art. 1271, par. 1)

(c) Presumption of remission of the accessory obligation – 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, it shall be presumed that the creditor has remitted the debtor’s accessory obligation under
the accessory contract of pledge. (Art. 1274)

3. Effects of the foregoing presumptions :

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 (a) These are merely disputable presumptions. The creditor can always present evidence to
prove the contrary.

(b) In Art. 1274, only the accessory obligation of pledge, and not the principal obligation, is
remitted. Hence, the debtor is still indebted to the creditor but there is no more security.
This provision adheres to the rule that “accessory follows the principal”. This is further
reiterated in Art. 1273 which states that the remission of the accessory obligation does
not remit the principal obligation, but the remission of the principal obligation also remits
the accessory obligation.

APPLICATION/PROBLEMS :

1. On March 15, 2013, Ryan signed a promissory note with the following tenor: “I promise to
pay the amount of P50,000 to Judy on October 12, 2013.” Judy took hold of the promissory note
so that she has evidence of the unpaid debt of Ryan. On May 25, 2013, a burglar entered the
house of Judy, and stole some valuables. On that occasion, Judy lost the promissory note signed
by Ryan. On October 12, 2013, Judy then went to Ryan to collect his P50,000 debt. To Judy’s
surprise, Ryan was already in possession of the promissory note, and refused to pay his obligation.
Ryan told Judy that since he was already in possession of the promissory note, it is presumed that
he had already paid his debt of P50,000, and there was nothing Judy could do about it. Is Ryan’s
position tenable?

2. On April 15, 2013, Nick borrowed P100,000 from Paul payable on August 30, 2013. As
security for the loan, Nick pledged his antique coffee table worth P150,000 to Paul, and
immediately delivered the table to Paul. On July 15, 2013, Paul received, as a birthday gift, a
European coffee table with chairs from his son in Europe. As a consequence, Paul requested his
nephew to deliver back to Nick the pledged antique coffee table to give space to the new one. On
August 30, 2013, Paul went to the house of Nick, and demanded payment of the P100,000 debt as
agreed upon. Nick, however, refused to pay the P100,000 on the ground that when Paul returned
the antique coffee table which Nick had delivered to him as a pledge, Paul had in effect condoned
Nick’s indebtedness. Is Nick’s argument correct?

SECTION 4 - CONFUSION OR MERGER

(Arts. 1275-1277)

1. Define confusion or merger.

 It is the meeting in one person of the qualities of creditor and debtor with respect to
the same obligation. (Art. 1275)

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2. What are the requisites of confusion?

(a) It must take place between the principal debtor and creditor; and
(b) It must be complete.

Example: D owes C P1,000 evidenced by a negotiable promissory note in favour of C. C indorsed

the note to E who, in turn, indorsed it to F. Now F bought goods from the store of D. Instead of
paying cash, F just indorsed the note to D. The result is that D, who is the principal debtor under
the promissory note, also becomes the creditor under the said note; in other words, D owes
himself. Consequently, his obligation is extinguished.

3. What is the effect of merger in the person of the principal debtor or creditor?
(Art. 1276, par. 1)

 It extinguishes the principal obligation.

 It benefits the guarantors because the accessory obligation of guaranty is also
extinguished. “Accessory follows the principal.”

Example : D owes C P100,000 with G as guarantor. C assigns his credit to E. E assigns the
credit to F. F assigns the credit to D. D’s obligation is extinguished, and G is then released from
his obligation as guarantor.

4. What is the effect of merger in the person of the guarantor? (Art. 1276, par. 2)

 It extinguishes the guaranty but leaves the principal obligation in force.

Example : D owes C P100,000 with G as guarantor. C assigns his credit to E. E assigns the
credit to F. F assigns the credit to G. Here, G becomes the new creditor of D. In this case, the
contract of guaranty is extinguished. However, D’s obligation to pay the principal obligation
subsists. G now, as the new creditor, can demand payment of the P100,000 from D.

5. What is the effect of confusion in a joint obligation? (Art. 1277)

 Confusion will extinguish a joint obligation only with respect to the share of the creditor
or debtor in whom the merger takes place.

Example : D1 and D2 jointly owe C P100,000. If C assigns the entire credit to D1, D1’s share is
extinguished, but D2’s share remains. In other words, D2 will still owe C the sum of P50,000. In a
joint obligation, the debts are distinct and separate from each other.

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6. What is the effect of confusion in a solidary obligation?

 Merger in the person of one of the solidary debtors shall extinguish the entire
obligation, because it is also a merger in the other solidary debtors. (Art. 1215)

 However, the solidary debtor (in whose person the merger took place) may claim
reimbursement from his co-debtors for the shares which correspond to them. (Art.
1217, par. 2)

Example : Pursuant to a promissory note, D1 and D2 are solidarily liable to C for P100,000. C
endorsed the note to E. E endorsed the note to F. F endorsed the note back to D1. The
obligation here is totally extinguished. However, D1 has the right to proceed against D2, and
collect P50,000 by way of reimbursement because it is as if D1 paid the entire debt.

APPLICATION/PROBLEMS :

1. On January 30, 2012, Prancer borrowed P200,000 from Vixen. Rudolf guaranteed that if
Prancer is not able to pay his obligation on January 30, 2013, Rudolf will answer for the entire
obligation of P200,000 to Vixen. On June 12, 2012, Vixen assigned his credit to Donald. On
August 15, 2012, Donald assigned the credit to Gloria. On November 12, 2012, Gloria assigned
the credit to Rudolf. On January 30, 2013, Rudolf wants to collect the P200,000 from Prancer.
Prancer, however, refuses to pay. Prancer alleges that when the credit was endorsed to the
guarantor of the obligation, Rudolf, this completely extinguished the obligation of Prancer. Do you
agree with Prancer’s argument?  Art. 1276

2. Armando and Nicolas jointly owe Daniela P400,000 payable on March 15, 2013. On
January 3, 2013, Daniela bought some pieces of jewelry from the store of Armando. As payment,
and instead of paying cash, Daniela assigns her entire P400,000 credit to Armando. When the
debt fell due on March 15, 2013, Armando went to Nicolas collecting the amount of P200,000 as
Nicolas’ proportionate share in the indebtedness. Nicolas, however, refused to make payment,
and claimed that when Daniela assigned the credit to Armando, the principal obligation had already
been extinguished by confusion or merger. Hence, Nicolas is also released from liability. Does
Nicolas’ argument have legal basis?  Art. 1277

SECTION 5 - COMPENSATION
(Arts. 1278-1290)

1. What is compensation? (Art. 1278)

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  Compensation is the extinguishment to the concurrent amount of the debts of two
persons who, in their own right, are debtors and creditors of each other.

2. What are the kinds of compensation as to extent or as to their effects? (Art. 1281)

(a) TOTAL – when both obligations are of the same amount, and are entirely extinguished.
(b) PARTIAL – when the two obligations are of different amounts, and a balance remains.

3. What are the kinds of compensation as to origin?

(a) LEGAL – when it takes place by operation of law, even without the knowledge of the
parties. (Arts. 1279 & 1290)
(b) VOLUNTARY – when it takes place by agreement of the parties. (Art. 1282)
(c) JUDICIAL – when it takes place by order from a court in a litigation. (Art. 1283)

4. What are the requisites of legal compensation? (Art. 1279)

(a) The parties must be principal creditors and principal debtors of each other.
(b) Both debts must consist in a sum of money or, if the things due are consumable, they
must be of the same kind, and also of the same quality, if the latter has been stated.
(c) The two debts must be due and demandable.
(d) The two debts must be liquidated.
(e) There must not be any retention or controversy, over either of the debts, commenced by
third persons, and communicated in due time to the debtor.
(f) The compensation is not prohibited by law.
 NOTE: The requisites mentioned refer to compensation by operation of law. Even if
there is no agreement voluntarily and validly entered into, as long as all the above requisites are
complied with, compensation will set in. (Arts. 1279 & 1290)

5. Can the guarantor set up compensation as regards what the creditor may owe the principal
debtor?
 YES. Compensation benefits the guarantor (Art. 1280) because the extinguishment
of the principal obligation carries with it that of the accessory obligation of guaranty.

6. What are the cases provided under the Code when compensation is prohibited?

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 (a) If one of the debts arises from a depositum, or from the obligation of a depositary (Art.
1287, par. 1).
(b) If one of the debts arises from the obligation of a bailee in commodatum (Art.
1287, par. 1).
(c) If one of the debts arises from a claim for support due by gratuitous title (except support
in arrears which may be compensated with the debt of the person entitled to support)
(Art. 1287, par. 2).
(d) If one of the debts consists in civil liability of the offender arising from a penal offense
(Art. 1288).

 NOTE: Only the depositor, bailor (lender), or the offended party, as the case may be,
can claim the right of compensation.

APPLICATION/PROBLEMS :

1. D owes C P100,000 due on May 15, 2013. G is the guarantor of D. C also owes D
P85,000 likewise due on May 15, 2013. On due date, D is insolvent and cannot pay C. For how
much will G, as guarantor, be made liable?

2. D owes W P200,000 due on June 30, 2013. On March 15, 2013, D deposited with W
(who was a warehouseman) 100 cavans of wagwag rice valued at P200,000. On July 1, 2013,
when D was already withdrawing the deposited rice, W refused to deliver, claiming compensation.
Is W allowed to compensate in this case?

SECTION 6 - NOVATION
(Arts. 1291-1304)

1. What is novation?
 Novation is the extinction or extinguishment of an obligation through the creation of a
new one which substitutes the old one. (Art. 1291)

2. What are the requisites that must concur for novation to take place?
(a) There must be a previous valid obligation.
(b) There must be an agreement of the parties concerned to a new contract.
(c) There must be an extinguishment of the old contract.
(d) There must be the validity of the new contract.

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3. What is the dual purpose or function of novation?

(a) To extinguish or modify an existing obligation.

(b) To create or substitute a new obligation in place of the old obligation.

4. Novation is Never Presumed. Animus Novandi must be present. – In order to extinguish

or discharge an obligation by novation, the intent of the parties to do so (animus novandi) must
be either expressed or else clearly apparent from the incompatibility “on all points” of the old
and the new obligations. (Example: The act of giving a debtor more time to pay an obligation
is not a novation that will extinguish the original debt.)

5. Kinds of Novation. –

(a) As to effect:
Total  The entire obligation is extinguished.
Partial  Only a portion is extinguished.
(b) As to the form of constitution: (Art. 1292)
 Express  The parties expressly state that the old obligation is novated or
extinguished.
 Implied  When the two obligations are incompatible.

(c) As to its nature: (Art. 1291)

 Subjective or Personal  When the debtors or creditors are changed.
 Objective or Real  When there is a change in the cause, object or principal
conditions.
 Mixed  Both personal and real.

(d) As to extent:
 Extinctive  The old obligation is extinguished.
 Modificatory  The old obligation is only modified.

6. What are the ways of effecting REAL or OBJECTIVE novation? [Art. 1291(1)]

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 (a) By change of principal conditions or terms (Example: The parties change the contract by
agreeing that the debt will be payable in installments instead of at one time only as originally
agreed upon in their old contract.)
(b) By change of cause (Example: In a contract of sale where the price or consideration has
not been paid to the seller, if the parties subsequently enter into a new agreement whereby the
buyer’s obligation to pay the consideration is converted into a loan made payable at a specified
period, the result is real novation.)
(c) By change of subject matter or object (Example: The parties change the contract by
agreeing that, instead of the debtor delivering to the creditor a BMW car as originally agreed upon,
the debtor will deliver to the creditor on maturity date of the obligation a Mercedez Benz car.)

7. What are the kinds of PERSONAL or SUBJECTIVE novation? [Art. 1291(2) & (3)]
(a) SUBSTITUTION – when the person of the debtor is substituted. [(Art. 1291(2)] It may
either be :

 Expromision (Arts. 1293 & 1294) – when a third person without the knowledge or
against the will of the original debtor assumes the obligation with the consent of the creditor; or

 Delegacion (Art. 1295) – when the creditor accepts a third person to take the place of
the debtor at the instance of the debtor.

(b) SUBROGATION – when a third person is subrogated to the rights of the creditor. [Arts.
1291(3) & 1300] It may either be :

 Conventional (Art. 1301) – when it takes place by agreement of the original parties
(the debtor and the original creditor) and the third person (the new creditor); or

 Legal (Art. 1302) – when it takes place by operation of law.

8. What are the effects of expromision? (Art. 1294)

(a) The old debtor is released; and

(b) The new debtor’s insolvency or non-fulfillment of the obligation does not give rise to any
liability on the part of the original debtor.
REASON: The substitution is not made at the original debtor’s initiative.

Example: D owes C P100,000.00 due on December 31, 2016. S goes to C and assumes the
obligation of D to C. C consented.

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 Is D’s obligation to C extinguished? YES, because C consented to the novation.
 Supposing S becomes insolvent, can C proceed against D to collect the P100,000.00? NO,
because in novation the moment the creditor consents to the novation, the obligation is totally
extinguished.

9. What are the effects of delegacion? (Art. 1295)

(a) The new debtor’s non-fulfullment of the obligation or insolvency does not give rise to any
liability on the part of the original debtor.
(b) However, the old debtor may be held liable to the creditor if the new debtor’s insolvency
was already existing AND either :

 of public knowledge at the time of the delegacion; OR

 known to the debtor at the time of the delegacion.

Example: D owes C P100,000.00 due on December 31, 2016. Before the due date, D delegates
his obligation to S with the consent of C.

 Is D’s obligation to C extinguished? YES, because C consented to the novation.

 Supposing S becomes insolvent, can C proceed against D to collect the P100,000.00? NO,
except if, at the time of the delegation, D knew that S is already insolvent, or if it is of public
knowledge that S is insolvent, because D then will be considered to have acted in bad faith.

10. What are the effects of TOTAL or EXTINCTIVE novation?

(a) The old obligation is extinguished, and replaced by the new one; and
(b) Accessory obligations are also extinguished, but they shall subsist in so far as they
benefit third persons who did not give their consent. (Art. 1296)

11. What are the effects of novation in void and voidable obligations?

(a) If the new obligation is void, the original obligation shall subsist.
(Art. 1297)
(b) If the original obligation is void, the new obligation is also void.
(Art. 1298)

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 (c) If the original obligation is voidable only, a valid novation can take place because
voidable contracts are valid until annulled by proper action in court. (Art. 1298)

12. What are the cases when legal subrogation of the creditor is presumed?

(a) When a creditor pays another creditor who is preferred, even if payment is made without
the debtor’s knowledge.

Example: D owes C1 and C2: C1, a mortgage creditor for P100,000.00; and C2, an ordinary
creditor for P50,000.00. C2, without D’s knowledge paid D’s debt of P100,000.00 to C1. Here, C2
will be subrogated to the rights of C1. C2 will be a mortgage creditor for P100,000.00, and an
ordinary creditor for P50,000.00. If D cannot reimburse C2 for the P100,000.00 paid to C1, C2 can
have the mortgaged property foreclosed because there is here legal subrogation.

(b) When a third person, not interested in the obligation, pays with the express or tacit
approval of the debtor. (See also Arts. 1236, par. 2 & 1237)

Example: D owes C P100,000.00 due on December 31, 2016. S paid C P100,000.00 with the
consent of D. Here, S is subrogated to the rights of C. So that if the debt is secured by a
mortgaged property, S can foreclose the mortgage if D cannot reimburse S. However, if S paid
without the consent of D, he cannot foreclose the mortgaged property because there is no legal
subrogation.

(c) 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.

Example: D owes C P100,000.00 secured by a mortgage and guaranteed by G. If G paid C

even without the knowledge of D, G will be subrogated to all the rights of C because as a
guarantor, he is interested in the payment of the obligation.

13. What are the effects of TOTAL subrogation?

 Total subrogation transfers to the person subrogated (new creditor) the credit and all
the rights and actions that could have been exercised by the former creditor, either against the
debtor or against third persons, be they guarantors or mortgagors. (See the Examples under No.
12 above.)

14. What are the effects of PARTIAL SUBROGATION?

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  The creditor to whom partial payment has been made by the new creditor remains a
creditor to the extent of the balance of the debt.

 As between the first creditor, and the third person (new creditor) who may have been
partially subrogated to the rights of the first creditor, it is still the first creditor who is preferred in
case of insolvency of the debtor.

Example: D owes C P100,000.00. Before the due date of the obligation, a third person, S, paid
C 60,000.00 with the consent of D. D now has two creditors, S for P60,000.00, and C for the
balance of P40,000.00. If D has only P50,000.00 to pay his obligation C will be preferred to S.
Thus, P40,000.00 will be paid to C first, and the remaining P10,000.00 will be paid to S.

 CASE STUDY:

 Caltex (Philippines), Inc. vs. PSTC,

G.R. No. 150711, August 10, 2006.

 Reyes vs. CA, G.R. No. 120817, November 4, 1996.

APPLICATION/PROBLEMS :

1. D owes C P100,000.00. Later, D proposed to C that S will pay D’s debt, and that D will
be released from all liabilities. C and S agreed to the proposal. On due date, however, when C
tried to collect the debt, C found out that S was insolvent. It was also proven that at the time of the
delegation, S was already insolvent. Hence, C demanded from D the payment of the P100,000.00.
Under the factual circumstances obtaining in this case, can C hold D liable for the obligation?

2. On August 10, 2015, Ging obtained a loan from Ruth in the amount of P300,000.00. As
security for the loan, Ging mortgaged to Ruth a house and lot valued at P500,000.00. On
September 15, 2015, Ging obtained another loan from Lei in the amount of P200,000.00. Both
debts are due for payment on July 30, 2016. On June 10, 2016, without the knowledge of Ging,
Lei paid Ging’s debt in the amount of P300,000.00 to Ruth. As the new creditor of the P300,000.00
debt, Lei now demands payment of the P300,000.00 debt from Ging on July 30, 2016. Ging,
however, was unable to pay. Can Lei be subrogated to the rights of Ruth under this obligation, and
foreclose on the mortgage?

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 3. D owes C P500,000.00. With the consent of D and C, S pays C P250,000.00. Now, C
and S are the creditors of D in the amount of P250,000.00 each. Supposing that on due date A
has only P250,000.00, who should be preferred in the payment?

TITLE II - CONTRACTS
(Articles 1305-1422, New Civil Code)

CHAPTER 1 – GENERAL PROVISIONS

(Arts. 1305-1317)

1. What is a contract? (Art. 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.

2. Contracts distinguished from obligations and agreements.

 There can be no contract if there is no obligation. But an obligation may exist
without a contract.
 All contracts are agreements but not all agreements are contracts.

3. What are the basic principles governing contracts?

(a) Autonomy or Liberty 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.”
(Art. 1306)

 READ THESE CASES IN THEIR ORIGINAL TEXT:

 William Golangco Construction Corporation (WGCC) vs. PCIB,

G.R. No. 142830, March 24, 2006.
 Sesbreño vs. Court of Appeals, G.R. No. 117438, June 8, 1995.

(b) Mutuality of Contracts – “The contract must bind both contracting

parties, its validity or compliance cannot be left to the will of one of them.” (Art. 1308)

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 (b.1) The determination of the performance of a contract may be left to a third
person whose decision, however, must be equitable or fair, and made known to both
parties. (Arts. 1309-1310)

(c) Consensuality of Contracts – As a general rule, contracts are perfected

by mere consent. (Art. 1315)

(d) Relativity of Contracts – As a general rule, contracts take effect only

between the parties, their assigns and heirs. (Art. 1311) The following are the
EXCEPTIONS :

(d.1) Where the obligations arising from the contract are not transmissible by their
very nature, by stipulation or by provision of law. (Art. 1311, par. 1)

(d.2) In contracts containing a stipulation pour autrui

(Art. 1311, par. 2).
 It is very important that the third person communicate his acceptance of the
favor to the obligor before its revocation.

(d.3) In contracts creating real rights, third persons who come into possession of
the object of the contract are bound thereby.
(Art. 1312)

(d.4) In contracts entered into to defraud creditors. (Art. 1313)

(d.5) In contracts which have been violated at the inducement of a third person.
(Art. 1313)
 READ THESE CASES IN THEIR ORIGINAL TEXT:

 Naawan Community Rural Bank, Inc. vs. Court of Appeals, G.R.

No. 128573, January 13, 2003.

 Ace Foods, Inc. vs. Micro Pacific Technologies Co., Ltd., G.R. No.
200602, December 11, 2013.

(e) Obligatory Force of Contracts – “Obligations arising from contracts

have the force of law between the contracting parties and should be complied with in good

75
faith.” (Art. 1159) From the moment a contract is perfected, “the parties are bound not
only to the fulfilment 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. (Art. 1315)

4. What are the different stages in the life of a contract?

(a) Conception (preparation or negotiation) – It includes all the

negotiations or steps taken by the parties leading to the perfection of the contract. At this
stage, the parties have not yet arrived at any definite agreement.

(b) Perfection or birth – This is when the parties have come to a definite
agreement or meeting of the minds regarding the subject matter and cause of the contract
(Art. 1319). At this stage, there is already a concurrence of all the essential elements or
requisites of a contract.

(c) Consummation or termination – This is when the parties have

performed their respective obligations and the contract may be said to have been fully
accomplished or executed, resulting in the extinguishment or termination thereof.

5. What are the kinds of contracts according to perfection or formation?

(a) Consensual – perfected by mere consent.
(Art. 1315)

(b) Real – perfected by the delivery of the thing object of the contract.
(Art. 1316)

(c) Solemn – perfected after compliance with certain legal formalities.

(Art. 1356)

6. The general rule is that a person cannot be bound by the contract of another. A
person (principal), however, may be bound by the contract entered into in his name by
another (agent) when the following requisites concur :

76
 (a) When the person entering into the contract (agent) is duly authorized by,
or has the legal right to represent, the person in whose behalf he is acting
(principal); and
(b) He acts within the authority given. (Art. 1317)

 READ THIS CASE IN ITS ORIGINAL TEXT:

 Frias vs. Esquivel, G.R. No. L-24679, October 30, 1975.

APPLICATION/PROBLEMS :

1. D owes C 100,000.00. On maturity date, since D did not have the money to pay
C, D obliged himself to work as C’s servant, without pay, until such time that D could find
the money with which to pay her debt. Later, D left the house of C without paying her debt,
so C filed an action against D to compel her to pay and/or work as a servant without pay
until D had the means to pay his debt. D, however, refused to fulfil his obligation, and
instead asked payment for services already rendered to C. Decide on the parties’ claims.

2. On New Year’s Eve, George witnessed Allan indiscriminately fire his gun. In the
course thereof, a four-year old boy who was in the surrounding area was hit by a stray
bullet and died instantaneously. As a result of the incident, a case for homicide was filed
by the parents of the boy against Allan. George was summoned as a witness in the case.
Shortly before the scheduled hearing, Allan went to the house of George, and offered
George the amount of P300,000.00 as long as George would not testify in the case against
Allan. George agreed not to testify, and accepted the P300,000.00 offered by Allan. On
the hearing date, however, George testified. Allan was subsequently convicted on the
basis of the testimony of George. Allan, now, seeks to recover from George the
P300,000.00 on the ground that George did not comply in good faith with his obligations
under their contract. Can Allan recover the P300,000.00 from George?

3. On July 15, 2016, Edna sold her car to Elvie for P1.5M. Payment for and delivery
of the car was set on August 15, 2016. On July 30, 2016, Edna called Elvie and pleaded if
it was alright to cancel the sale considering that Edna’s son passed the entrance test to the
Ateneo Law School, and needed the car. Elvie, however, refused, and demanded for the
delivery of the car on the agreed date. May Edna be compelled to deliver despite her
son’s urgent transport needs?

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 4. On July 15, 2016, Jowell sold his land to Carlito for P4M. Later on, the title to the
land was transferred to Carlito. It appears, however, that Carlito still owed Jowell a portion
of the purchase price in the amount of P500,000.00. As of September 5, 2016, Carlito,
despite repeated demands from Jowell, failed to pay the remaining P500,000.00 balance.
As it now stands, Jowell gave up all hope on his claim. When his best friend Ricky learned
about the non-payment, and Jowell’s inability to collect the P500,000.00, Ricky was
annoyed. To vindicate his friend, Ricky filed an action against Carlito demanding that
Carlito pay Jowell the remaining balance on the land purchased. Does Ricky’s action have
legal basis?

5. Ambert owes Gina P500,000.00 due on September 15, 2016, plus 10% interest in
the amount of P50,000.00. It was agreed by the parties that Ambert will pay Gina the
principal amount of P500,000.00. The interest payment in the amount of P50,000.00 will,
however, be paid to Charlie, who is a creditor of Gina. Charlie was informed of the
aforesaid stipulation in his favor. On August 30, 2016, Gina called Ambert and requested
him to deliver to her on maturity date of the obligation both the principal amount and the
interest as she was in dire need of money for her son’s operation. Ambert agreed. On
September 15, 2016, can Charlie demand from Ambert payment of the P50,000.00
pursuant to the stipulation of which he was earlier informed?

6. Pia owes Dindo P5M due on August 30, 2016. To secure the obligation, Pia
mortgaged her house and lot worth P8M to Dindo. The Deed of Mortgage was notarized
and registered with the Register of Deeds. On July 28, 2016, Pia was able to sell her
house and lot to Roger for P10M. After Roger paid the purchase price, he immediately
took possession of the premises. On August 30, 2016, Pia failed to pay her obligation to
Dindo despite repeated demands. Hence, Dindo filed an action to foreclose the mortgage
on Pia’s house and lot. Under the factual circumstances obtaining, can Dindo still succeed
in causing the sale of the mortgaged property at public auction to pay for Pia’s obligation?

7. Kerwin owes Thea P3M due on September 15, 2016. On due date, Kerwin was
insolvent and did not have any property with which to settle his obligation. Thea, however,
came to know that on August 13, 2016, Kerwin sold his only remaining property, a 200
square-meter lot in Makati, to Jordan for P4.5M, but Kerwin squandered all the proceeds in
a span of 1 week while playing in the casino. Thea also found out that Jordan bought the
property despite knowing that Kerwin was already insolvent, and still owed Thea P3M.
Under the circumstances, can Thea, who is a stranger in the contract of sale between
Kerwin and Jordan, file an action to set aside the sale?

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 8. Lea signed as an exclusive recording artist for two years with ABC Productions for
a contract price of P10 million. It was stipulated that should Lea breach her contract, she
will be liable for penalty amounting to P2 million. Three months after the signing, Lea met
her high school classmate Rona, who was working with DEF Productions. Rona told Lea
that if she signed the recording contract with DEF, the company was willing to give her P20
million for the same two-year period. Because of the offer, Lea signed another exclusive
recording contract with DEF Productions. Because of the breach, ABC Productions
suffered damages amounting to P10 million. Can Rona, who is not a party to their
contract, be made liable by ABC Productions for damages? If so, how much?

9. On June 15, 2016, Art agreed to sell his BMW car to Tina for P8 million. The
parties agreed that delivery of the car and payment of the purchase price will be made on
September 15, 2016. Can we say here that as of June 15, 2016, there was already a
perfected contract of sale between Art and Tina?

10. On July 5, 2016, Rene borrowed from Risa P600,000.00 due for payment on
August 30, 2016. To secure the obligation, Rene promised to deliver to Risa his Rolex
watch worth P750,000.00. On August 30, 2016, Rene failed to pay his obligation despite
repeated demands from Risa. Hence, Risa filed an action for collection and asked the
court to compel Rene to deliver the Rolex watch as he had promised, so that she may
cause its sale at public auction to cover the indebtedness. Will Risa’s instant prayer
prosper?

CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACTS

GENERAL PROVISIONS
Art. 1318. There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.

Section 1 – CONSENT
(Arts. 1319-1346)
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1. How is consent in a contract manifested? (Art. 1319)

 Consent is manifested by the meeting of the offer and the acceptance upon the thing
and the cause which are to constitute the contract.

 The OFFER must be certain and the ACCEPTANCE must be absolute, and
unqualified. After acceptance, the contract is already perfected.

2. What are the causes which render an offer ineffective?

(a) Withdrawal of the offer before acceptance. (Art. 1319)

(b) Qualified acceptance of the offer. (Art. 1319)
(c) Death, civil interdiction, insanity, or insolvency of either party before acceptance is
conveyed. (Art. 1323)
(d) Expiration of the period fixed in the offer for acceptance. (Art. 1324)

3. Suppose the offeror has allowed the offeree a certain period to accept, may the offer be
withdrawn even before the expiration of the period? (Art. 1324)

 YES, provided that :

(a) The offer has NOT as yet been accepted; and
(b) There is no “option contract” between the parties.

NOTE: 1. Know the distinction between option money and

earnest money.
2. Distinguish Article 1324 from Article 1479.

 READ THIS CASE IN ITS ORIGINAL TEXT:

Sanchez vs. Rigos,

G.R. No. L-25494, June 14, 1972.

4. Do advertisements for business and bidders constitute definite offers?

(a) Business advertisements are generally mere invitations to make an offer; hence, their
acceptance will not create a contract. (Art. 1325)

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 (b) Advertisements calling for bidders are mere invitations to make proposals, and the
advertiser is not bound to accept the highest or lowest bidder. (Art. 1326)

5. What are the characteristics of consent?

(a) It is INTELLIGENT. – There must be capacity to act. (Arts. 1327-1329)

(b) It is FREE and VOLUNTARY. – There is no vitiation of consent by reason of violence or

intimidation. (Arts. 1330 & 1335)

(c) It is CONSCIOUS and SPONTANEOUS. – There is no vitiation of consent by reason of

mistake, undue influence, or fraud. (Arts. 1330, 1337, 1338& 1339)

NOTE: Contracts entered into by persons who are incapacitated, or whose consent is vitiated, are
NOT VOID but merely VOIDABLE. (Art. 1330 & 1390)

6. Who are incapacitated to give valid consent to contracts?

(a) Minors [Art. 1327(1)]

(b) Insane or demented persons [Art. 1327(2)]
- The contract is valid if entered into during a lucid interval.
(Art. 1328)
(c) Deaf-mutes who do not know how to write. [Art. 1327(3)]
(d) Persons in a state of drunkenness or under a hypnotic spell. (Art. 1328)

NOTE: The law presumes that every person is fully competent to enter into a contract until
satisfactory proof to the contrary is presented. 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.

 READ THIS CASE IN ITS ORIGINAL TEXT:

Yason vs. Arciaga,

G.R. No. 145017, Jan. 28, 2005.

7. When does mistake vitiate consent in a contract? (Art. 1331)

 The mistake must be a “substantial mistake of fact”. It must refer either to :

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 (a) the substance of the thing which is the object of the contract (par. 1); or
(b) those conditions which have principally moved one or both parties to enter into the
contract (par. 1); or
(c) the identity or qualifications of one of the parties, provided the same was the principal
cause of the contract (par. 2).
(d) an excusable mistake, i.e., one not caused by negligence. Thus, there is no mistake if the
party alleging it knew the doubt, contingency or risk affecting the object of the contract.
(Art. 1333)

8. Who has the burden of proof in case of mistake or fraud?

 General rule: the party who alleges mistake or fraud.

 Exception: When one of the parties is unable to read, or if the contract is in a

language not understood by him, it is the party enforcing the contract who is duty-bound to show
that there has been no fraud or mistake, and that the terms of the contract have been fully
explained to the former. (Art. 1332)

9. When is there violence as a vice of consent?

(a) When consent is obtained by the employment of serious and irresistible force (Art. 1335,
par. 1); and
(b) It is the reason why the other party gave his consent.

10. What constitutes intimidation as a vice of consent?

 There is intimidation when a person is compelled to give his consent because of (a) a
reasonable and well-grounded fear (b) of an imminent and grave evil (c) upon his person or
property, or, upon the person or property of his spouse, descendants, or ascendants. (Art. 1335,
par. 2)

 The intimidation or threat must be of an unjust act, an actionable wrong. Hence, a

threat to enforce a just or legal claim does not vitiate consent. (Art. 1335, par. 4)

 READ THIS CASE IN ITS ORIGINAL TEXT:

Spouses Binua vs. Ong,

G.R. No. 207176, June 18, 2014.

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11. When is there undue influence as a vice of consent?

 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. (Art. 1337)

 Example: Lolo Tomas, an 85 year-old wheelchair-bound convalescent, lived alone

with his trusted helper Inocencia. Inocencia managed to prepare a deed of donation in her favor
covering a house and lot owned by Lolo Tomas. Everyday, she convinced Lolo Tomas to sign the
deed. Since she would not leave Lolo Tomas in peace, the latter ultimately signed the deed of
donation transmitting his ownership over his land to Inocencia. There is here undue influence
employed by Inocencia which vitiated the consent of Lolo Tomas.

12. When is there fraud as a vice of consent?

 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. (Art. 1338)

 Kinds of fraud (dolo) :

(a) Fraud in the celebration of the contract.

(1) Incidental fraud (dolo incidente) – The contract is valid, but there can be an
action for damages. (Art. 1344, par. 2)
(2) Causal fraud (dolo causante) – Here, were it not for the fraud, the other party
would not have consented (Art. 1338). The contract is voidable.

 READ THIS CASE IN ITS ORIGINAL TEXT:

ECE Realty and Development Inc. vs. Mandap,

G.R. No. 196182, September 1, 2014.

(b) Fraud in the performance of the obligations stipulated in the contract. – This kind of fraud
presupposes the existence of an already perfected contract. (Art. 1170)

13. What are the essential requisites for fraud to vitiate consent?

83
 (a) There must be misrepresentation (Art. 1338) or concealment (Art. 1339).
(b) It must be serious (Art. 1344).
(c) It must have been employed by only one of the contracting parties (Art. 1344).
 Hence, fraud committed by a third person does not vitiate consent, unless it was
practiced with the knowledge of the favored contracting party (Art. 1342).

(d) It must be made with intent to deceive. Hence,

(1) Misrepresentation made in good faith is not fraudulent, but may constitute error
or mistake (Art. 1343).

(2) The usual exaggerations in trade, when the other party had an opportunity to
know the facts, are not in themselves fraudulent (Art. 1340).

(3) The 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. (Art. 1341).

(e) It must have induced the consent of the other contracting party.

14. What is meant by simulation of a contract?

 Simulation of a contract is the act of deliberately deceiving others by pretending by
agreement the appearance of a contract which is either non-existent or concealed.

 Hence, simulation may either be : (Art. 1345)

(a) ABSOLUTE – when the contract does not really exist, and the parties do not intend to be
bound at all. The contract is void (Arts. 1345 & 1346).

(b) RELATIVE – when the contract entered into by the parties is different from their true
agreement. The parties are bound by their real agreement provided it does not prejudice a third
person and is lawful (Arts. 1345 & 1346).

 READ THIS CASE IN ITS ORIGINAL TEXT:

Intac vs. Court of Appeals, G.R. No. 173211, October 11, 2012.

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APPLICATION/PROBLEMS :
(1) S offered to sell B 80 copies of Dr. Seuss’s Beginner Books for children for the price of
P250.00 each. The books were available for immediate delivery upon acceptance of the offer. B
agreed to buy the specified books if S could deliver 120 copies the following day. The following
day, S delivered to B the 80 copies of the books promised, and sought to collect from B the total
price therefor in the amount of P20,000.00. B, however, contends that he is not bound to accept
the delivery as no contract was perfected between him (B) and S. Do you agree with B’s
contention?  Art. 1319

(2) On September 1, 2016, S offered for sale to B a BMW Z4 with plate no. ZLR-603 for
P2.1M. On September 4, B accepted the offer and informed S in a letter mailed on the same date.
The letter of acceptance was received by S on September 6. S, however, later came to know that,
on the night of September 4, B’s car figured in an accident resulting in the instantaneous death of
B. The wife of B, who knew how his husband wanted the BMW car so much, now informs S that
she already has in her possession the P2.1M payment for the BMW, and demands from S delivery
of the car sold. May S be compelled to make delivery?  Art. 1323

(3) On September 1, 2015, S offered to sell his 250 square-meter house and lot in Manila for
P8M to B, who was interested in buying the same. In his letter to B, S stated that he was giving B
a period of 15 days beginning September 2, 2015 within which to accept the offer. As
consideration for the option, B paid S the amount of P10,000.00. On September 10, 2016, B went
to S to exercise his option and to pay the purchase price in the amount of P8M. S, however,
refused to sell the house and lot to B because somebody wanted to buy the property for P10M. B
sued S to compel him to accept the payment, and execute a deed of sale in his (B’s) favour.
Decide on the rights and obligations of the parties.  Art. 1324

(4) On September 1, 2016, Tara offered for sale to Bong her BMW car for P8M. Since Bong
was undecided, Tara gave Bong 15 days or until September 16 within which to decide whether he
would accept the offer. On September 15, Dodgie offered to buy Tara’s BMW car for P10M. Since
Bong had not as yet communicated with her, Tara decided to accept the offer and sold her BMW
car to Dodgie for P10 million. She made delivery on the same day. Early morning of September
16, Bong went to see Tara and signified his acceptance to the offer, at the same time tendering
payment of the P8M purchase price for the car. Tara informed him, however, that she had already
sold the car to Dodgie. If you are Bong’s lawyer, what legal action will be take against Tara? 
Art. 1324

(5) An advertisement in the classified ads of the Manila Bulletin reads: “For Sale: One 150
square-meter residential house on a 500 square-meter lot at P10 M to P11 M located at No. 29
Maasim Street, Las Piñas, M.M.” Call tel. no. 888-1234.” After reading the advertisement, Cris
called the number, talked to the owner Sheena, and signified his acceptance to the offer and

85
willingness to buy the property at P11M. Is there now a perfected contract of sale between Cris
and Sheena?  Art. 1325

(6) Masipag Corporation caused the publication of an advertisement in the Philippine Daily
Inquirer inviting bids for the construction of a twelve-story commercial building in Manila. The
advertisement also included the specifications of the building to be constructed. Three
construction companies submitted their bid proposals as follows: Mabilis Construction Company
(MCC), P50M; Maayos Construction, Inc. (MCI), P55M; and Laos Developers, Inc. (LDI),
P60M. Masipag Corporation accepted the bid of MCI. MCC now filed a complaint against
Masipag Corporation questioning the award of the contract to MCI which submitted a higher bid.
Will the complaint filed by MCC prosper?  Art. 1326

(7) Rita, 16 years old, sold her BMW car to Henry, an insane. Is this contract valid? Is this
contract enforceable?  Art. 1327 (Study in coordination with Art. 1390, No. 1, and Art. 1403, No.
3)

(8) While Ron was a deaf-mute, he rose above his disability, and eventually passed the Bar
Exams. One month after he took his oath as a lawyer, he figured in a car accident. He had to
undergo an operation thereafter. He recovered, but lost both his arms and his right leg. One
month after the accident, he was forced to sell his car to Julie, to cover for his medical expenses.
Is this contract of sale between Ron and Julie valid? Is it enforceable?  Art. 1327

(9) Psychiatrist Dr. Merced put Claire into a hypnotic spell, and asked her to sign a deed of
sale which transferred the ownership of a 1000 square-meter house and lot to Dr. Merced for a
consideration of P20 M. Is this contract valid?  Art. 1328

(10) Zsazsa wanted to buy a pig to be slaughtered for the upcoming town fiesta. She then
talked to Aling Iska, who offered to sell to Zsazsa a female pig for P5,000.00. Aling Iska also
represented that her pig was very fertile and gave birth to 6 six pigs every time. Two days after
Zsazsa bought the pig, her sister-veterinarian informed her that the pig was already barren, and
could no longer become pregnant. Can Zsazsa file an action to annul this sale on the ground of
mistake?  Art. 1331

(11) David had a high regard for doctors because both his deceased parents were doctors.
On September 12, 2016, David sold a lot to Krissa, who represented to David that she was a
doctor. Krissa paid him P5M as consideration. Three days after the sale, David came to know
from a neighbor that Krissa, who was always wearing a white suit to work, was a facial therapist at
Flawless. Can the contract of sale here be annulled on the ground of mistake?  Art. 1331

(12) Casimiro, an illiterate farmer, is the owner of a one-hectare farm lot in Laguna. When
his daughter graduated from college, and expressed her desire to go to medical school, Casimiro

86
was forced to offer his farm lot for sale for the the price of P5M. Atty. Enriquez, who was into
organic farming bought the lot. Later, the sister of Casimiro learned of the sale. She informed her
brother that he could have sold the lot for P8M, and incited his brother to file an action for
annulment of the contract of sale on the ground that the lawyer had taken advantage of his lack of
education, especially that the deed of sale signed by Casimiro was prepared by the lawyer and
drafted in English. Casimiro then filed an action to annul the contract on the ground of fraud. Will it
be legally tenable to aver that, under the facts, Casimiro is burdened in this action for annulment to
present sufficient evidence to prove the fact of fraud on the part of Atty. Enriquez?  Art. 1332

(13) Selma signed a “Deed of Sale” transferring ownership of his land to Bobot. Later, Selma
sought to have the deed of sale annulled on the ground that she was forced to sign the deed of
sale against his will by Bobot who threatened to report her to the BIR authorities in connection with
tax evasion activities. Will the action for annulment of the contract on the ground of intimidation
filed by Selma prosper?  Art. 1335

(14) Pancho inherited from his great grandfather a 1000 square-meter house and lot in Makati
currently assessed at P50M. Evelyn, an entrepreneur in the food industry, is offering to buy the
property from Pancho for P85M because she wants to convert the old house into an exotic
restaurant, which she thinks will earn her millions. Pancho, however, refuses to sell the house for
sentimental reasons. Inggo is the owner of the 1,200 square-meter lot (currently assessed at
P20,000.00 per square meter) just adjacent to Pancho’s property. From Inggo’s projection, if
Pancho sells his property to business tycoon Evelyn, Inggo’s property’s assessed valuation will
increase by not less than 35%. When Inggo learned that Pancho did not want to accept Evelyn’s
offer to buy the property, he employed Tim, an ex-convict, to give Pancho a visit one night. Inggo
drafted a deed of sale in favor of Evelyn, and asked Tim to compel Pancho to sign the document.
Tim then went to Pancho and presented the deed of sale to him for signature. Since Pancho
refused, Tim held Pancho’s arm and twisted it with the intention of breaking it. Since Pancho could
not endure the pain, he was forced to sign the deed of sale. The following day, Inggo presented
the deed of sale to Evelyn who was very happy that Pancho had agreed to selling his property, and
immediately deposited to Pancho’s account the full purchase price. If Pancho subsequently files
an action for annulment of the contract of sale on the ground of intimidation, can the action prosper
considering that Evelyn, the buyer who benefited from the sale, had nothing to do with the
intimidation employed on the person of Pancho?  Art. 1336

(15) Techie bought a Class “A” replica of a Louis Vuitton bag in Greenhills for P8,000.00.
Representing that it was an original, Techie sold it to Nilo, who bought it for P45,000.00 as a gift for
his wife. After Nilo handed the gift to his wife, the latter who was an LV aficionado informed him
that the bag was a fake. Can Nilo recover the P45,000.00 he paid to Techie and hold her liable for
damages?  Art. 1338

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 (16) Armin advertised his farm lot in Cavite for sale at P6.5M. Henry offered to buy the farm
lot. At the time they were negotiating the sale, Henry represented to Armin that Henry’s sister was
helping him buy the property to help him engage in organic farming as he was in dire need of
finances for his five children’s college tuition. Because of this, Armin accepted Henry’s offer to buy
the property at P5M. Later, Armin came to know that Henry was not an organic agriculturist but
was a rich businessman who wanted to convert Armin’s farm lot into a memorial garden, with
columbarium. Under the facts, can Armin file an action for annulment of their contract of sale on
the ground of fraud?  Art. 1338

(17) Celso and Cely were real estate partners. Celso came to know that an Australian
corporation was interested in buying a parcel of land in Makati belonging to their firm. The offer to
buy, if pursued will earn Celso and Cely not less than P50million. In the meantime, Cely who was
hard up on finances because of her sick husband, offered to sell to Celso her share in the
partnership. After the buy-out was consummated, Celso then closed the sale over the Makati
property with the Australian corporation and he accumulated net profits amounting to P53 million.
Later, Cely came to know from another business associate about the circumstances surrounding
the sale. Cely then filed an action for annulment of the contract of sale wherein she sold her share
of the partnership to Celso. Will Cely’s action prosper? Can she consequently demand from Celso
her share of the profits from the sale of the Makati property to the Australian Corporation, plus
damages?  Art. 1339

(18) Cecille, a housewife, saw a television advertisement which states, “Buy now!!!! Savon
Hugashi, the antibacterial liquid soap that can wash and sanitize 5,000 plates per 200mL
preparation! 50% off…limited offer!” Relying on the advertisement, Cecille bought 1 box of 48
200mL-bottles of the liquid soap, and paid P3,000.00 for the goods. After trying the first bottle,
Cecille finished washing only 800 plates. She was furious, and realized that she had been
scammed. Hence, she filed an action for annulment of the contract of sale on the ground of fraud.
Will her action prosper?  Art. 1340

(19) After Kyra was diagnosed for kidney failure, she was forced to stop working as a
domestic helper in Singapore. She spent all her savings on her treatments. She sold everything
she owned, and now the only thing she had left that was of value was a diamond ring which her
grandmother gave her as a gift on her 18th birthday. She then offered the ring for sale to Sally,
who bought the ring for P100,000.00 based on Kyra’s representation that the ring was adorned
with pure diamond. Later, however, after Sally brought the ring to an appraiser, she was informed
that the stone on the ring was merely Russian diamond which is worth P5,000.00. Under the
factual circumstances obtaining in this case, will Sally have any cause of action for annulling her
contract of sale with Kyra?  Arts. 1341 & 1343

(20) Kitoy is offering his 800 square-meter land for the price of P8,000.00 per square meter.
Buboy, an interested buyer, consults regarding the valuation of the offered property with his friend
Leviña, who works at the city hall of Quezon City where the property is located. Leviña tells Buboy

88
that the P8,000.00 square meter price is reasonable, since the property is worth P10,000.00 per
square meter as per the city’s zonal valuation. Relying on the information given to him by Leviña,
Buboy bought the property from Kitoy. Later, however, Buboy came to know that the information
given to him was not true, because Leviña purposely did it to mislead him because she still held
grudges against him dating back to high school. He also found out upon further inquiry that the
property’s worth was only P5,000.00 per square meter as per the city’s zonal valuation. If Buboy
files an action to annul the contract of sale on the ground of fraud, will his action prosper?  Art.
1342

(21) Efren offered to buy the agricultural lot of Lorie because he wanted to cultivate seedless
grapes thereon. However, since neither Efren nor Lorie knew whether it was viable to raise
seedless grapes on the lot, they asked Menchie, an expert on soil analysis, to examine the soil.
Menchie then informed Efren and Lorie that the soil on the lot was suitable for raising seedless
grapes. Relying on the statement of Menchie, Efren and Lorie signed a Deed of Sale. The
representation of Menchie, however, turned out to be false. Since Efren couldn’t use the land for
which it was intended, can he file an action for annulment of the contract of sale on the ground of
fraud?  Art. 1342

(22) While walking in Luneta, Enteng found a diamond ring, the same kind he saw in the
television advertisement which was worth P55,000.00. Since he needed the money, he sold the
ring to Trinidad for P50,000.00, and represented to her that the stone on the ring was pure
diamond. Trinidad later learned that the ring was only worth P4,000.00 because its stone was
simply Swarovski crystal. Thereafter, Trinidad filed an action for annulment of the contract. Can
this contract of sale be annulled on the ground of fraud?  Art. 1343

(23) Romy owes Leah P5M. To secure the obligation, they agreed that Romy will mortgage
to Leah his lot in Makati worth P8M. Not wanting to let his friends know that his property was
subject to a mortgage, Romy and Leah agreed to execute a Deed of Sale of the lot. They agreed
that if Romy fails to pay his obligation, Leah will become the owner of the lot by the sale. But if
Romy pays his obligation on due date, then Leah will be obliged to execute a Deed of Sale
conveying back ownership of the lot to Romy. Later, before maturity date of the obligation, Leah,
as the new purported owner of the lot managed to sell the lot to Brigitte, who paid P10M for the lot.
Romy now seeks to recover the lot from Brigitte alleging that the sale was merely simulated, and
the real agreement between him and Leah was only a contract of mortgage; hence, Leah had no
right to alienate the lot. Will Romy be able to recover the lot from Brigitte?  Arts. 1345 &
1346

CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACTS
Section 2 – OBJECT OF CONTRACTS
(Arts. 1347-1349)

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1. What may be the object (or subject matter) of a contract? (Art. 1347)
(a) things; (b) rights; or (c) services.

2. What are the preconditions in order that things may be the object of a
contract?

(a) It must be within the commerce of men – that is, it can legally be the subject of
commercial transactions. (Art. 1347, par. 1)
(b) It must not be physically or legally impossible. (Art. 1348)
(c) It must be in existence or capable of coming into existence.
NOTE, however, that future inheritance (not hereditary rights) cannot be the object of a
contract, except in the cases expressly authorized by law. (Art. 1347, par. 2)

(d) It must be determinate, or determinable, without the necessity of a new contract between
the parties.

3. What services may be the object of a contract?

 All services which are not contrary to law, morals, good customs, public order, or
public policy may be the object of a contract. (Art. 1347, par. 3)
4. What rights may be the object of a contract?

 All rights may be the object of a contract, except those which are instransmissible.
(Art. 1347, par. 3; See also Art. 1311, par. 1)

APPLICATION/PROBLEMS :
1. Leon owns a 2-hectare farmland in Villareal, Samar, which was planted with mango
trees. In one of their leisurely walks, Leon promised his son, Lydio, that after he (Leon) is gone,
Lydio is sure to inherit the particular farmland. Two months thereafter, Lydio executed a deed of
sale covering the 2-hectare farmland in favour of Manuel. Two years after the sale, Lydio died. Is
the sale of the farmland to Manuel valid?

2. Every night, Luis and his younger brother Tim climb to the roof top of their 3-storey house
to fly a remote-controlled plane. They are able to let the plane fly at an altitude of 30 meters, and
within a radius of 15 meters atop the houses of their neighbors in the subdivision. One night, Mr.

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Cruz, their next door neighbor, talked to their father and proposed that a contract of lease be
executed between them. Mr. Cruz proposed that Luis and his family should pay him a rental of
P1000.00 a month so Luis and his brother can use the airspace above the property of Mr. Cruz in
flying their plane. Mr. Cruz and their father then signed a contract of lease, and had it notarized by
a notary public. Is this contract valid? Is it enforceable?

3. Today, Lolong promised to sell to Raerae for P50.00 per kilo all the harvest from his
mango plantation for the month of October, 2016. As of today, is there already a perfected
contract of sale between Lolong and Raerae? Is there a valid object considering that the quantity
of the object cannot as yet be determined as of today?

4. On September 1, 2016, since Shiela was migrating to the Canada with her family, she
executed a Deed of Assignment in favor of Travis assigning to him her right to vote at precinct no.
125-A in Las Piñas. She then attached to the deed her voter’s ID. The agreement was signed by
both parties, and was duly notarized by a notary public. Is this agreement valid? Is it enforceable?

Section 3 – CAUSE OF CONTRACTS

(Arts. 1350-1355)

1. What is the meaning of cause?

 The cause of a contract is the “why” of the contract, the essential reason which impels
the contracting parties to enter into the contract.

2. What is the cause of a contract? (Art. 1350)

(a) In onerous contracts – the prestation of the other party.
(b) In remuneratory contracts – the service or benefit remunerated.
(c) In gratuitous contracts – the mere liberality of the benefactor.

3. What is the distinction between cause and object?

 The difference is only a matter of viewpoint. Thus, in reciprocal contracts, the object
or subject matter for one is the cause for the other, and vice versa. For example, in a contract of
sale of a lot for P5M, as to the seller, the object is the lot and the cause or consideration (the
primary reason why he sells his lot) is the payment to him by the buyer of the P5M purchase price.

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As to the buyer, the object is the P5M and the cause or consideration (the primary reason why he
buys the lot) is the delivery to him by the seller of the lot.

4. What is the distinction between cause and motive?

CAUSE MOTIVE
1. The immediate or direct reason. 1. The remote or indirect reason.
2. It is always known to the other 2. May be unknown to the other
party. party.
3. It is an essential element of a 3. Not an essential element of a
contract. contract.
4. Its illegality affects the contract’s 4. Illegality does not void the
validity. contract.

 READ THIS CASE IN ITS ORIGINAL TEXT: Olegario vs. Court of Appeals,
G.R. No. 104892, November 14, 1994.

5. What are the requisites for cause in a contract?

It must be present (existing at the time of perfection of the contract). Hence,
absence of cause (as distinguished from inadequacy, and failure of cause) voids a
contract. (Art. 1352)
(a) It must be lawful. (Art. 1352)
(b) It must be true or real. If the cause stated is false, the contract is VOID, unless some
other cause which is lawful really exists. (Art. 1353)

6. Is the contract valid although the cause is not stated?

 Yes, because it is presumed that the cause exists and is lawful, unless the debtor
proves the contrary. (Art. 1354)

7. What is the rule on lesion or inadequacy of cause in a contract? (Art. 1355)

(a) General Rule – Lesion per se does not invalidate a contract.

(b) Exceptions :
(a.1.) When the lesion is attended with fraud, mistake, or undue influence.

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 (a.2.) When specified by law. (e.g., Art. 1381, pars. 1 & 2.)

APPLICATION/PROBLEMS :
1. What is the status of a contract wherein any of the defects enumerated below are found to
be existing? Give an example of contracts where each of the following defects can be shown.
(a) Want or absence of cause
(b) Illegality of cause
(c) Failure of cause
(d) Failure to state the cause
(e) False cause
(f) Lesion or inadequacy of cause

2. Tony wanted to kill Alvin and hired Billy, the hitman, to do the job. Billy demanded
P250,000.00 in cash for his services. Since Tony was out of cash, he sold his Nikon camera to
Fred for P300,000.00, so that the planned execution will be carried out. When the mother of Tony
found out about the sale, and the reason why Tony had sold his camera, Tony’s mother sought to
have the sale avoided on the ground of illegality of cause. Will the action of Tony’s mother
prosper?  Arts. 1350 & 1351

3. On August 30, 2016, Smith sold to Caloy his BMW big bike for P250,000.00. It was
stipulated in their contract that delivery and payment was to be simultaneously made on
September 15, 2016. On the agreed date, Smith delivered the bike to Caloy who promised to pay
the P250,000.00 the following day as he was short of cash. Caloy, however, failed to make
payments despite demands from Smith. Hence, Smith filed an action to have the sale declared
null and void by the court on the ground of absence of cause since the consideration had not been
paid. Is the remedy taken by Smith proper?  Art. 1352

4. On June 15, 2016, Susie signed a promissory note in favor of Milcah. The promissory
note is worded as follows: “I promise to pay Milcah the amount of P50,000.00 on or before
September 15, 2016.” The promissory note, however, does not state what Susie received from
Milcah in exchange for the P50,000.00 promised to be paid. Is this promissory note valid despite
the apparent absence of cause?  Art. 1354

5. On September 6, 2016, Mrs. Reyes offered to sell her beach resort in Batangas to Mr.
Cayco for P14M. Considering the prevailing price of similarly situated resorts in the area, Mr.
Cayco felt he found himself a good deal. Hence, Mr. Cayco readily accepted the offer, and

93
immediately bought the resort from Mrs. Reyes. Three weeks after the parties closed the sale,
Mrs. Reyes came to know from a friend that the resort she had sold to Mr. Cayco had a valuation
of P20M. Mrs. Reyes then filed an action to have the contract of sale cancelled. May the contract
of sale between Mrs. Reyes and Mr. Cayco be cancelled on the ground of lesion or inadequacy of
cause?  Art. 1355

CHAPTER 3
FORM OF CONTRACTS
(Arts. 1356-1358)

1. What is the meaning of “form of a contract”?

 The “form of a contract” refers to the manner in which a contract is executed or

manifested.
 The form of a contract may be oral or in writing, or partly oral and partly in writing. If in
writing, it may be in a public or a private instrument.

2. What is the form required for the validity of contracts? (Art. 1356)

(a) General Rule : Contracts shall be obligatory, in whatever from they may have been
entered into, provided all the essential requisites for their validity are present. In other words, the
contract is valid as long as there is :

Consent
Consensual Contracts Object
Real Contracts
subject matter
Delivery

(b) Special Rule : However, when the law requires that a contract be in some specified
form, that requirement is absolute and must be complied with. Thus, the law may require a specific
form for any one of the following three (3) substantial purposes :

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 Status of the contract that
PURPOSE fails to comply with the EXAMPLES
required form

1. The donation of real

property, and the acceptance
of the donee, must be in a
public instrument in order to
be valid, even between the
donor and the donee.
 (Art. 749, NCC)
FOR 2. A stipulation to pay
VALIDITY VOID
interest must be in writing;
OF THE otherwise, no interest is due.
CONTRACT (Art. 1956, NCC)

3. In the sale of land thru

an agent, the authority of the
agent must be in writing;
otherwise, the sale is null
and void. (Art. 1874, NCC)

 UNENFORCEABLE,
i.e., cannot be
The contracts enumerated
under Article 1403, No. 2, (a)
FOR
ENFORCEABILITY enforced even to (f), are unenforceable by
OF THE between the parties action unless they are made
CONTRACT unless ratified in writing.

These refer to all the

 Valid and enforceable
contracts enumerated under
Article 1358 which are
FOR as between the
CONVENIENCE required to appear in a public
parties ONLY, BUT
OF THE PARTIES document, NOT for their
not binding on third
AND TO BIND validity or enforceability, but
persons
THIRD PERSONS merely for the convenience
of the parties.

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3. What are the contracts which are required under Article 1358 to appear in a public instrument
as a precondition for their registration in the proper recording office, so that they may be
binding and enforceable even against third persons?

(a) Acts and contracts which have for their object the creation, transmission, modification or
extinguishment of real rights over immovable property.
Examples: D owes C P5M. To secure the loan, D mortgaged his lot to C. The constitution of the
real estate mortgage, which results in the creation of a real right over immovable property, is
required to appear in a public document.
Later, if D pays his loan to C on maturity date, the mortgage over the lot will be extinguished.
In this case, the extinguishment of the mortgage is likewise required to appear in a public
document.

(b) The assignment, repudiation or renunciation of hereditary rights (inheritance) or of rights

in the conjugal partnership of gains or in the community of property between husband and wife.
Example: A and B are the only heirs of D. After D dies, A renounces his share in the inheritance
in favor of B. The renunciation by A of his share must be in a public document.

(c) Powers of attorney to administer property or to perform an act requiring a public

instrument, or to perform an act which is to affect third persons; and

Examples:  P authorized A to manage his business or property. The authority given to A must
be in a public document.

 P authorized A to mortgage the lot of P. Since the mortgage is required to be in

a public document, the authority given by P to A to mortgage the lot must also be
in a public document.

(d) The assignment of actions or rights arising from an act or contract contained in a public
document.
Example: D mortgaged his lot to secure his debt to C. C assigned his credit right together with the
real estate mortgage to T. Since the mortgage is required to be in a public document, its cession
or assignment from C to T must also be in a public document in order to bind third persons.

NOTE: All other contracts where the amount involved exceeds P500.00 must appear in writing,
even a private one. But sales of goods, chattels, or things in action are governed by Articles 1403
and 1405. (Art. 1358, par. 2)

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Example: D leased his delivery truck to C at P10,000.00 per month for 2 years. Lease of of
movable property is neither one of the contracts that must be in a public document (Art. 1358), nor
required to be in writing for its enforceability (Art. 1403, No. 2[e]). However, since the contract
involves movable property and the consideration for the contract exceeds P500.00, this lease
contract (while already binding as between the parties to the contract) is required to be in writing,
even a private one, BUT only for the convenience of the parties and to bind third persons.

4. TO REITERATE, the enumeration under Article 1358, whereby a public instrument is required,
is only for the convenience of the parties, and NOT for the validity or enforceability of the
enumerated contracts. In other words, the contracts enumerated under Article 1358 remain to be
valid and enforceable as between the contracting parties thereto even if they do not appear in a
public instrument, BUT the said contracting parties are given the right to compel each other to
execute the needed public document for their convenience and to bind third persons (Art. 1357).

Thus, under Article 1357, before a party (the active subject) can exercise his right to
compel the other contracting party (the passive subject) to execute the REQUIRED FORM, their
contract as entered into must already be:
(a) VALID and
(b) ENFORCEABLE (Art. 1403).

Example: S orally agreed to sell his lot to B for P10M. The contract of sale here, even if orally
made, is valid. This is because a contract of sale is a consensual contract which is perfected by
mere consent. While valid though, this contract is unenforceable under Article 1403, No. 2(e), which
requires sales of immovable property to be in writing (private or public) in order for the sale to be
enforceable even as between the contracting parties. In this case then, because the contract of
sale of real property between S and B as orally entered into is unenforceable by action, B will have
no right under Article 1357 to compel S to execute a public document so he (B) can have the sale
registered in the Registry of Property to make the sale binding against the whole world.
 READ THESE CASES IN THEIR ORIGINAL TEXT:

(1) Yaneza vs. CA, G.R. No. 149322,

November 28, 2008.
(2) Agasen vs. CA, G.R. No. 115508,
February 15, 2000.

APPLICATION/PROBLEMS :
1. How do you distinguish between a private and a public document?

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 2. On April 15, 2016, D and C entered into a verbal contract of loan for the amount of
P100,000.00. It was agreed by the parties that D was to pay C the amount of the loan on
September 15, 2016, plus 10% interest in the amount of P10,000.00. Is the parties’ contract valid?
Can C, on due date, demand from D payment of the loan and the interest agreed upon?  Art.
1356 in relation to Art. 1956.

3. On September 15, 2016, Quintin verbally sold his 300 square-meter lot in Manila to
Melania for P5M. It was agreed by the parties that delivery of the lot as well as payment of the
purchase price will be made on October 15, 2016. On September 25, 2016, Melania requested
Quintin to execute a Deed of Sale in her favor, so she can have the instrument notarized and later
registered with the Register of Deeds of Manila. Quintin refused Melania’s request. Under the
facts, can Melania legally compel Quintin to execute a public document of sale in her favor? 
Arts. 1356 & 1357, in relation to Art. 1403, No. 2(e)

4. Alfred donated his lot to Kristine. The donation and and acceptance were made in a
private instrument. Kristine wants to have the donation registered. Can Kristine compel Alfred to
execute a public instrument of donation?  Art. 1356 in relation to Art. 749

5. Cheche obtained a loan from Tsutsu in the amount of P5M. To secure the loan, Cheche
mortgaged her lot to Tsutsu. Both the contracts of loan and the mortgage were entered into orally.
On maturity date, Cheche failed to pay the obligation despite repeated demands from Tsutsu.
Considering that the contract of mortgage was not embodied in a public instrument, can Tsutsu
foreclose on the mortgage? Will your answer to the foregoing question be the same if Cheche was
able to sell the property to Bembem, who is now the owner of the mortgaged lot and has been in
possession of the lot even before Cheche’s obligation matured?  Art. 1358 (1)

6. Kokoy and Mimi are husband and wife, respectively. In a complaint for legal separation
filed by Mimi against Kokoy, the court declared the judicial separation of the properties of the
spouses. Kokoy renounced his share in the properties in favor of Mimi. Will Kokoy’s renunciation
of his share in the conjugal properties be valid and enforceable if it is not embodied in a public
instrument but is merely made verbally?  Art. 1358 (2)

CHAPTER 4
REFORMATION OF INSTRUMENTS
(Arts. 1359-1369)

STUDY GUIDE : SESSION 8

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1. What is “reformation of instruments” as a remedy at law?
 Reformation of instruments is that remedy in equity by means of which a
written instrument is changed, modified or construed so as to express or conform to the
real intention of the parties when some error or mistake has been committed.
 It is an equitable remedy consisting of “rewriting” of a contract or other
document in cases where the written terms of the contract do not express what was
actually agreed upon.

2. Be able to distinguish ‘reformation of instruments’ from ‘reformation of contracts. –

 In reformation of instruments, what is reformed is not the contract itself, but the
instrument embodying the contract (i.e., the writing which serves as evidence of the
parties’ contract).

 On the other hand, ‘reformation of contracts’ is a modification of the terms or

stipulations of a contract previously agreed upon by the parties, and can therefore be
equated to novation of contracts.

3. What is the rationale for the doctrine of reformation?

 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.

4. What are the requisites of an action for reformation of instrument?

(a) There must be a meeting of the minds between the parties to the contract.
(b) The instrument must not express the true intention of the parties.
(c) The failure to express the true intention must be due to either of the following
causes:

 MISTAKE. – To justify the reformation of a written instrument upon the ground

of mistake, the concurrence of three things is necessary:

 The mistake must be of fact.

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  The mistake must be mutual or common to both parties (Art.
1361).
Exception: Though the mistake is unilateral, but the other party acted
fraudulently or inequitably or is guilty of concealment, the party
who was mistaken can still ask for reformation (Art. 1362).

 The mistake must be proved by clear and convincing evidence.

 FRAUD  active (Art. 1362) or passive (Art. 1363)

 Illustrative Example of Passive Fraud under Art. 1363. - Niño sold his farm lot to Niña.
The lot consisted of 9,300 square meters and was part of a bigger lot owned by Niño.
There was here a meeting of minds as regards the lot area. The written contract of
sale executed by the parties, however, showed an area of 9,800 square meters. Niño
signed the contract in the honest belief that the area stated therein was 9,300 square
meters. On the other hand, Niña signed the contract with knowledge that the area
stated was 9,800 but concealed such fact from Niño because she wanted to acquire a
bigger area. In this case, Niño may ask for the reformation of the instrument of sale so
as to show that the area was only 9,300 square meters.

 INEQUITABLE CONDUCT (Art. 1362)

 ACCIDENT (Art. 1364)

(d) There must be clear and convincing proof of the said causes.

5. Reformation (as a remedy) distinguished from Annulment. –

 In reformation, there is a meeting of the minds of the parties; hence, a contract
is perfected and comes into existence, but the written instrument purporting to embody the
contract does not express the true intention of the parties (Art. 1359).
 In annulment, there has been no meeting of the minds, the consent of one of
the parties being vitiated (Art. 1390).
 Reformation does not invalidate a contract; while annulment invalidates a contract.

 Illustrative Example of the Distinction:

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  Where reformation is the proper remedy. – Jun sold to Jane his 1000 square-meter lot
which is covered by Transfer Certificate of Title (TCT) No. 14344 for P10 million. Due to the error
of the typist, the deed of sale signed by the parties shows TCT No. 14345, which covers another
1,000 square-meter lot that also belongs to Jun. In this case, there was a meeting of minds
between Jun and Jane as to the sale of the lot covered by TCT No. 14344. The instrument,
however, signed by the parties shows another lot number – TCT No. 14345. Either party may
bring an action to reform the instrument evidencing their sale, so as to show that the true intention
of the parties was the lot covered by TCT No. 14344. (This example also illustrates the application
of Art. 1364.)

 Where annulment is the proper remedy. – Jun offered to sell to Jane his inside lot
consisting of 1000 square meters and covered by TCT No. 14344. Jane thought that she was
buying the lot of Jun located beside the road which also consisted of 1000 square meters and
covered by TCT No. 14345. The Deed of Sale, which was prepared by Jun’s secretary, reflected
the sale of the inside lot which was covered by TCT No. 14344. Here, there was no meeting of
minds between the parties as to the object of the contract of sale. Hence, the proper remedy in
this case is not reformation, but annulment of the contract of sale on the ground of mistake on
Jane’s part. [Art. 1331 in relation to Art. 1390(2)]

6. What instruments cannot be the proper subject of reformation?

(a) Simple donations inter vivos wherein no condition is imposed.

[Art. 1366(1)]
Reason: Donation is essentially gratuitous and the donee, therefore, has no cause
for complaint.

(b) Wills. [Art. 1366(2)]

Reason: The making of a will is strictly a personal act. They cannot be reformed
except by the testator himself.

(c) Void agreements. [Art. 1366(3)]

Reason: Void contracts are inexistent, so there is nothing to reform.

(d) Instruments for which an action to enforce has been brought by one of the
parties. (Art. 1367)
Reason: In such case, there is estoppel, waiver or ratification by the party who
seeks to enforce the contract.

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7. Who may file an action for reformation of instrument? (Art. 1368)

(a) If the mistake is mutual, either of the parties or their successors in interest.
(b) In all other cases, the injured party or his heirs and assigns.

 READ THESE CASES IN THEIR ORIGINAL TEXT:

(1) Sarming vs. Dy, G.R. No. 133643,

June 6, 2002.
(2) Rosello-Bentir vs. Hon. Leanda,
G.R. No. 128991, April 12, 2000.

APPLICATION/PROBLEMS :
1. S owns two (2) cars: a BMW 525i worth P3.9M and a BMW 320i worth P2.1M.
Today, S offers for sale to B the BMW 320i for 3.5M. B accepts the offer of S because B
thinks all the while that S is offering his BMW 525i, and not the BMW 320i. In the
instrument of sale, however, as drafted, the car specified as object of the sale is the BMW
320i. Can B ask for reformation?

2. S agreed with B that S would be loaned P10M by B. In the contract, however,

drafted by B, it was stated that S was selling his house to B for said amount. It had been
B’s experience in previous transactions that S outrightly signed their contracts without
examining the same but relied in good faith on the representations of B. As expected, S
subsequently signed the contract in the belief that it was really a contract of loan. Under
the facts, can B ask for reformation of the instrument of sale?

3. S sold B a house. S fraudulently made the contract one of mortgage instead of

sale. Both signed the contract of mortgage, with B believing all the time that it was a
contract of sale. Later, B brought an action to foreclose the mortgage and at the same
time brought an action to reform the contract of mortgage on the ground that S had acted
fraudulently in making him (B) sign a contract of mortgage when what they had in fact
agreed upon was a contract of sale over the house of S. If B is able to positively prove the
fact of fraud on the part of S, can the contract of mortgage be reformed in favor of B?

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 CHAPTER 5
INTERPRETATION OF CONTRACTS
(Arts. 1370-1379)

STUDY GUIDE : (SESSION 9)

1. What is meant by interpretation of contracts?

 Interpretation of contracts is the determination of the meaning of the terms or
words used by the parties in their contract.

2. What are the basic rules in the interpretation of contracts?

(a) If the terms of a contact are clear, the literal meaning of its
stipulations shall control. (Art. 1370, par. 1)

Example : One of the conditions in a fire insurance policy is that the insured “must give
notice of the existence of other policies against fire upon the property insured; otherwise,
the policy shall be null and void.” The insured violated the condition and the property was
destroyed by fire. The stipulation may be rather onerous but, as its terms are clear, they
must be taken in their ordinary sense. Therefore, the insured cannot recover.

(b) The evident intention of the parties shall prevail over the words of
the contract. (Art. 1370, par. 2)

Example : S delivered to B his parcel of land and B gave S P2.5M The market value of
the land is P4M. The contract as executed is a “lease”, and it was stipulated that: “For
value received, I hereby transfer the possession and ownership of my parcel of land to B”.
Is this a sale or a lease contract?
 It should be a contract of sale because what was transferred is not only the
possession but also the ownership of the land. The mere fact that the price is inadequate
will not disturb the contract because under Article 1470 (see also Article 1355), the law
states that the gross inadequacy of the price will not invalidate a contract of sale.

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 (c) The contemporaneous and subsequent acts of the parties shall be
principally considered in order to ascertain their intention. (Art. 1371)

Example : S and B entered into a contract entitled “Contract of Lease.” After the
execution of the contract, B entered the property, fenced it with hollow blocks, began
cultivating the land, made concrete improvements, and kept on paying the real estate tax
of the land for ten (10) years, all with the knowledge of S.
 In here, it is clear from their subsequent acts that the parties entered into a contract
of sale, and what was transferred is not only the possession but also the ownership of the
land.

(d) Contracts shall not be understood to comprehend things and cases

distinct or different from that intended by the parties. (Art. 1372)

Example : In a “Deed of Sale”, the phrase “including all furniture therein” does not include
a “refrigerator” nor furniture not belonging to the seller.

(e) If a stipulation in a contract admits of several meanings, it shall be

given the meaning which will render the contract effectual. (Art. 1373)

Example : S sold his parcel of land to B. S, however, has two lands: one owned by him
absolutely; and another land of which B and C are co-owners. C did not give his consent
to the sale.
 The sale should refer to the land owned by B alone.
(f) The various stipulations of a contract shall be interpreted as a
whole. (Art. 1374)

Example : A contact of lease contains a prohibition against the sublease of a house

without the consent of the lessor. Another stipulation, however, states the penalty for the
violation of the prohibition.
 The lessor has no right to eject the lessee for subleasing the property. The lessor
can collect the stipulated penalty for the breach.

(g) Words with different meanings shall be understood in that sense

which is most in keeping with the nature and object of the contract. (Art.
1375)

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Example : In the contract of sale, it is stated that the parcel of land sold by S to B has an
area of “1,000 square meters, more or less.” It turned out that the area is only 900 square
meters. S was aware of the intention of B to build a factory on the land. The factory
cannot be built on a 900 square-meter land. S acted in good faith. Is S liable for the
difference in area?
 Yes, notwithstanding that S acted in good faith. The phrase “more or less” should
be understood as covering only a reasonable excess or deficiency.

(h) The omission or deficiency in a contract may be filled by the

custom or usage of the place. (Art. 1376)

Example : S made a contract with B regarding “pesetas”. In the place where the contract
was made, Mexican pesetas were more commonly used than Spanish pesetas.
 The Court held that the term “pesetas” should be construed to mean Mexican
pesetas.

(i) Obscure words or stipulations in a contract shall not favor the

party who caused the obscurity. (Art. 1377) - This rule is generally applied to
the so-called “contracts of adhesion”, i.e., a contract drafted by only one party and is
offered to the other party on a “take it or leave it” basis.

Example : X insured his life to Y, the insurer. In the contract of insurance it was stated
that in the event of death, the beneficiary may collect P500,000.00 or P1M. After two (2)
years, X died. How much is the insurer liable to pay the beneficiary of X?
 P1M, because it was the insurer who drew up the contract of insurance and caused
the obscurity or doubtful figure appearing in the policy. Hence, the obscurity should be
construed against Y.

(j) Doubts in gratuitous contracts shall be settled in such a way that

the least transmission of rights and interests shall prevail. (Art. 1378, par. 1)

Example : If you are in need of an electric juicer and I gave one to you, how would the
transaction be considered – a loan or a donation?
 This is a contract of loan (commodatum), because it involves the least transmission
of rights.

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 (k) Doubts in onerous contracts shall be settled in favor of the
greatest reciprocity of interests. (Art. 1378, par. 1)

Example : D borrowed from C P1M with 15% interest per annum. However, it was not
made clear whether the loan is for three or six years.
 The loan is presumed to be for six years. This will favor the greatest reciprocity of
interest, since C can earn interest for a longer period and D can also use the money for a
longer term.

(l) 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. (Art. 1378, par. 2; see
also Art. 1409, par. 6)

Example : S sold “his land” to B. S has many lands and it cannot be determined which
land was intended by the parties. Here, there is actually no meeting of the minds.

CHAPTER 6
RESCISSIBLE CONTRACTS
(Arts. 1380-1389)

1. What is rescission?
 Rescission is a remedy granted by law to contracting parties and third persons
alike to render inefficacious a contract validly entered into in order to secure reparation for
pecuniary injury or damage caused them by the contract.

2. What are the basic preconditions for the rescission of a contract?

(a) The contract must be valid. (Art. 1380)

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 (b) There must be lesion1 or pecuniary prejudice to one of the parties or to a third
person. (Art. 1381)
(c) The rescission must be based upon a case especially provided by law. (Arts.
1380, 1381 & 1382)
(d) There must be no other legal remedy to obtain reparation for the damage.
 Rescission, therefore, is a subsidiary remedy (Art. 1383). It
cannot be availed of where, for example, a party is willing to pay for the damage
suffered.

(e) Mutual restitution must still be possible. (Art. 1385, par. 1)

(f) The thing object of the contract must not be in the legal possession of third
persons who acted in good faith. (Art. 1385, par. 2)

 Illustrative Example No. 1 : Examine Illustrative Example No. 2 below.

Assume that Jim, upon reaching the age of majority, files an action for rescission of the
sale on the ground of lesion. After the sale is rescinded, Jim shall return the P3M
purchase price he received by virtue of the sale of the property, plus the interest thereon
computed from the time of its payment to him. On the other hand, Ben shall be obliged to
return the lot and the fruits he received therefrom from the time it was delivered to him. If
Jim cannot return the price and interest thereon, he will not be allowed to rescind the sale.
Assuming also that Ben had already sold the lot to Timmy, who acquired it in good faith
and caused the registration of the sale in the Registry of Deeds, the sale can no longer be
rescinded because the lot can no longer be returned to Jim. In this case, Jim’s only
recourse is to file an action for damages against Thelma, his guardian, who was
responsible for the loss that he suffered (Art. 1385, par. 3).

(g) The action must have been timely filed, i.e., not yet prescribed. (Art. 1389)

3. What are the rescissible contracts? (Art. 1381)

 A contract entered into by a guardian in behalf of a ward where

there is lesion by more than one-fourth [Art. 1381(1)].

1Lesion refers to a loss from another’s failure to perform a contract. It is the injury suffered by one who did
not receive the equivalent value of what was bargained for.

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  Illustrative Example No. 2 : Thelma is the guardian of Jim, a minor, who is
the owner of a lot valued at P4M. On January 15, 2016, two days after Jim turned 16,
Thelma sold the subject lot to Ben for only P3 million. By reason of the sale, Jim suffered
damages (lesion) amounting to P1 million, which is more than one-fourth (1/4) of the value
of the lot. Upon reaching the age of majority, Jim’s remedy will be to file an action in court
to rescind the sale made by Thelma to Ben on the ground that, by such sale of the
property by his guardian, he suffered lesion by more than one-fourth of the value of his lot.

 NOTE 1: In this case, one-fourth (1/4) of the value of the lot is

P500,000.00. This means that if Thelma sold the lot for P3.5 million, the lesion that Jim
would have suffered would amount only to exactly one-fourth (1/4) of the value of the lot
which is P4M. Should such be the case, the contract of sale will not have been subject to
rescission considering that the lesion that would be suffered by Jim will not amount to
more than one-fourth of the value of the object of the contract sought to be rescinded.

 NOTE 2: How do you compute? How will you know if the lesion is
indeed more than one-fourth of the value of the thing which is the object of the contract?

 Determine the valuation of the thing object of the contract. In the example
above, the value of Jim’s lot is P4M. [Let V be the value of the property]
 Determine one-fourth of the value of the property. (Formula: PL = V÷4) One-
fourth of P4M is P500,000.00. This is the maximum lesion permitted by law to be suffered
by the minor. In other words, if the minor suffers lesion by only P500,000.00, the contract
cannot still be subject to rescission. [Let PL be the permissible lesion under the law.]
 Subtract P500,000.00 from P4M. (Formula: RP = V-PL) The difference is
P3.5M. When you get this figure, you’ll know that this is the maximum reasonable value at
which the guardian of the ward or the representative of an absentee can validly sell the
property of the ward or the absentee without the latter incurring a lesion which is more than
one-fourth of the subject property’s value. (Let RP be the reasonable price at which the
guardian can sell the ward’s property without subjecting the contract to attack by the minor
for being rescissible).
 Assume that the property is worth P5M. If it is sold at P4M, will the contract of
sale be rescissible?

 PL = P5M ÷ 4 = P1.25M

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  RP = P5M – 1.25M = P3.75M

 Here, the P4M contract price is more than the RP. Hence, we can be
sure that the lesion suffered will not amount to more than one-fourth of the V
(=P5M). Let’s check: Subtract the contract price of P4M from the value of the lot
which is P5M. The difference is P1M. P1M is less than P1.25M which is the
computed PL of the lot. Hence, in this example, the contract of sale will not be
rescissible.

 A contract entered into in behalf of an absentee when there is

lesion by more than one-fourth [Art. 1381(2)].

 NOTE: In Articles 1381 (1) & (2), if the contract is entered into with the
approval of the court, the contract is VALID, regardless of lesion. (Art. 1386)

 A contract made to defraud a creditor who has been left with no

other means of collecting his credit [Art. 1381 (3)]. (Relate to Arts. 1312
and 1358, par. 1)

 A contract made by the defendant disposing of a property subject to

litigation without the knowledge and approval of the plaintiff or of
competent judicial authority [Art. 1381(4)].

 Illustrative Example No. 3 : Heart sued Chiz to recover some pieces of

jewelry. While the case was pending, Chiz, without the approval of the court or of Heart,
sold the jewelry to Tara. Tara was a buyer in bad faith since she was aware that the
jewelry was the subject of litigation in court between Heart and Chiz. Under the facts, the
sale to Tara is rescissible at the instance of Heart if she obtains a favorable judgment
against Chiz in the original case she filed.

 Premature payments made in a state of insolvency (Art. 1382).

 Article 1382 does not exactly speak of a contract. It refers to payment. Hence,
it is not included under Article 1381.

 Prerequisites for premature payments to be rescissible :

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  The debtor-payor must have been insolvent; and
 The debt was not yet due and demandable at the time of payment.

 Illustrative Example No. 4 : Dodoy owes Cacay P500,000.00 which is due

on December 15, 2016. Dodoy also owes Carmen P500,000.00 which fell due on October
8, 2016. As of October 10, 2016, Dodoy has only P500,000.00, but he pays Cacay’s credit
first instead of his debt to Carmen which was already due. Here, the payment made by
Dodoy to Cacay is rescissible under Article 1382 at the instance of Carmen.

4. Under Article 1381 (3), the action to rescind contracts made in fraud of creditors is
called “accion pauliana.” (See also Art. 1177, the last sentence of which speaks of accion
pauliana.) The requisites for accion pauliana are :

(a) There must be a credit prior to the contract to be rescinded.

(b) There must be fraud on the part of the debtor.
(c) There must be no other remedy for the prejudiced creditor.
5. In the second requirement for accion pauliana above outlined, it must be proven that
there was fraud on the part of the debtor, i.e., that the debtor acted in bad faith in entering
into the contract knowing that it would cause damage to his creditor(s).

 There are, however, instances when the existence of fraud is presumed and need
not be proven by the creditor in an accion pauliana. What are some of these instances
when fraud on the part of the debtor is presumed by law? (Art. 1387)

 GRATUITOUS ALIENATIONS are PRESUMED FRAUDULENT when the debtor did

not reserve sufficient property to pay all debts contracted before the donation.
(Art. 1387, par. 1)

 ONEROUS ALIENATIONS (Art. 1387, par. 2) are PRESUMED FRAUDULENT when

made by persons :

 against whom some judgment has been rendered, even if not yet final;
OR
 against whom some writ of attachment has been issued.

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  Bear in mind that in the case of ONEROUS ALIENATIONS :

 The decision or attachment need not refer to the property

alienated (i.e., the judgment-debtor cannot sell ANY property).

 Illustrative Example No. 5 : Consuela filed an action for collection against Diego
for his unpaid indebtedness in the amount off P6M. Upon motion of Consuelo, and to
secure the payment of any judgment that may be rendered by the court in her favor,
Diego’s house at No. 1 Juan Luna Street was attached by the court. After the
attachment2, Diego sold his other house at No. 2 Jose Rizal Street to Third. Consuelo
avers that Diego’s sale of the subject property to Third is presumed fraudulent under the
law. Diego, however, counters by saying that there is no such presumption because, after
all, the house which he sold to Third is not the house which is subject to the order of
attachment issued by the court. Is Diego’s argument tenable?
 D’s argument is not justifiable. It is true that the house Diego sold to Third was
not the one levied upon or attached. The fact, however, remains that Diego is a person
against whom a writ of attachment has been issued. Hence, while that writ of attachment
subsist against him, the law prohibits him from alienating any of his properties, whether or
not they are the properties subject of the order of attachment issued by the court. To
reiterate, Article 1387, par. 2, states that the attachment need not refer to the property
alienated.


The decision or attachment need not have been obtained by the
party seeking the rescission (i.e., NOT ONLY the judgment creditor can
rescind).

 Illustrative Example No. 6 : Consuelo brought an action against Diego to collect

the latter’s P6M indebtedness. Consuelo won in the collection suit. After the court
rendered judgment in the case, Diego sold his property to Third. Constancia, another
creditor of Diego, wants to rescind this sale to Third. Both Diego and Third claim that
Constancia does not have the right to interfere because, after all, it was Consuelo, not
Constancia, who had won in the judgment against Diego. Do the claims of Diego and
Third have legal basis?

2Attachment is a provisional remedy by which property of the defendant is taken into custody of the law as
a security for the satisfaction of any judgment which the plaintiff may recover.

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  The claims of Diego and Third do not find support in law. It is true that it was
Consuelo, not Constancia, who won the judgment in the collection suit against Diego. This
fact, however, is immaterial since Article 1387, par. 2 states that the decision need not
have been obtained by the party seeking the rescission. Hence, since a judgment has
been rendered against Diego, all his other creditors (not necessarily the plaintiff-creditor
who obtained the judgment in the case) can question the fraudulent nature of the
alienation of any property belonging to the judgement-debtor.

 NOTE: The foregoing presumptions of fraud are mere disputable presumptions, and
can be rebutted by evidence to the contrary.

6. Under Article 1385, par. 1, an action for rescission requires the obligation of mutual
restitution. What should be returned by the parties after a contract is rescinded?
(a) The object of the contract, with its fruits.
(b) The price, with its interest.

7. Under Article 1385, par. 2, for rescission to prosper, the acquirer-possessor of the
object of the contract must have acted in bad faith.

 Illustrative Example No. 7 : To defraud his creditor Conchita, Darwin sold to

Bruce a piece of land. After paying the purchase price for the land, Bruce took legal
possession thereof. If Conchita has no other means of collecting her credit, can she
rescind the contract of sale between Darwin and Bruce?  It depends :

 If B was in GOOD FAITH, rescission CANNOT take place.

 If B was in BAD FAITH, rescission is PROPER.

(a) The acquirer-possessor in BAD FAITH of the object of the contract to be rescinded
must RETURN or INDEMNIFY (in case of loss due to “ANY CAUSE”). (Art. 1388,
par. 1)
(b) In case of subsequent transfers, the first acquirer shall be liable first, and so on
successively. (Art. 1388, par. 2)

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  Illustrative Example No. 8 : With intent to defraud his creditors, Dingdong sold
his BMW car to Bambam, who knew of his intention. Later on, Bambam sold the car to
Cringcring. Cringcring subsequently sold the car to Lingling. Cringcring and Lingling were
also aware of the fraudulent design of the previous parties involving the car’s transfer. The
creditors brought suit against all the parties to the transaction, and the court granted the
remedy of rescission. The BMW car, however, perished in a fire, and could no longer be
returned. Under the circumstances, Bambam (the first purchaser in bad faith) shall be
liable first. If she cannot pay, then Cringcring will be liable next. If the latter cannot still
pay, then Lingling will be liable. This is because under the law, if there are two or more
alienations, the first acquirer shall be liable first, and so on successively.

8. What is the prescriptive period for filing an action for rescission? (Article 1389)

(a) General rule – 4 years from perfection of the contract (par. 1)

(b) Exceptions : (par. 2)
(b.1.) persons under guardianship – 4 years from termination of
incapacity

 Illustrative Example No. 9 : Thus, with reference to Illustrative Example

No. 1 above, Jim has until January 13, 2022 within which to file an action for rescission of
the contract of sale entered into by his guardian Thelma and the buyer Ben. The four year
prescriptive period will be reckoned from January 13, 2018 (the day when Jim attains the
age of majority), and not January 15, 2016 (the day the sale was perfected).

(b.2.) absentees – 4 years from the time the domicile is known

 READ THESE CASES IN THEIR ORIGINAL TEXT:
(3) Air France vs. Court of Appeals,
G.R. No. 104234, June 30, 1995.
(4) Anchor Savings Bank vs. Furigay,
G.R. No. 191178, March 13, 2013.
(5) Reyes vs. Lim,
G.R. No. 134241, August 11, 2003.
(6) Campos vs. Pastrana,

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 G.R. No. 175994, December 8, 2009.
(7) Lee vs. Bangkok Bank Public Co., Ltd.,
G.R. No. 173349, February 9, 2011.

APPLICATION/PROBLEMS :

1. D owes C P3M due on October 30, 2016. On September 15, 2016, knowing that
he cannot pay his obligation to C, D sold to B his only property in Makati for P3.5M. When
C tried to collect D’s debt on due date, D was already insolvent. Having been advised of
the earlier sale of the Makati property made by D to B, C now seeks to rescind the sale
between D and B on the ground that the contract was executed by D to escape the
payment of his P3M debt to C. In the meantime, D received notice that he had inherited
the properties left by his childless aunt who had recently died on April 2. The inheritance
amounted to P6M. Will C’s action for rescission in the instant case prosper?
 Arts. 1381(3) & 1383

2. P sues D for the recovery of a diamond ring. Pending the proceedings in the
case, D surreptitiously sells the ring to B without informing B that the ring was the subject
of a pending case. Thereafter, the court rendered judgment in the case adjudicating
ownership over the ring in favor of P. When P learned that the ring had already been sold
to B, P filed an action to rescind the contract of sale. Will P’s action prosper?  Arts.
1385, pars. 2&3.

3. D owes C P1.5M payable on September 30, 2016. He owns a parcel of land

valued at P2M. On September 15, 2016, knowing that he cannot pay his obligation to C, D
sold this land for P2M to his friend B who was aware of D’s obligation and insolvency. On
the due date, C demanded payment from D but the latter is already insolvent. After a year,
since D had no other properties with which to answer for his obligation, C succeeded in
having the contract of sale between D and B cancelled or rescinded. What are now the
obligations of D and B to each other?  Art. 1381, par. 1.

4. D is the owner of two parcels of land: one situated in Manila, and the other in
Quezon City. On August 29, 2016, D borrowed from C the amount of P1M payable two
months thereafter. On maturity date, D failed to pay his debt to C. C then filed an action
for collection, and asked the court to attach the land of D situated in Manila. After the
Manila property of D was attached by the court, D sold his land sited in Quezon City to B.

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C now seeks to rescind the contract of sale between D and B on the ground that it is
presumed to be a fraudulent sale. D, however, counters by saying that there is no such
presumption because after all the Manila property which has been attached was not the
one sold to B. Does D’s argument have legal basis?  Art. 1387, par. 2.

5. To defraud his creditors, D sold his house to B who knew of D’s purpose. Later,
C, one of the creditors, sought to have the sale rescinded. Upon investigation, however, C
found out that the house was burned to ashes because of a falling meteorite from space.
Since C could no longer collect his credit as D had no other existing properties, C now
demands from B payment of D’s debt plus damages. B, however, denies liability. B
asserts that aside from the fact that he was never a party to the contract between D and C,
the house which D sold to him (B) perished in a fortuitous event which was without fault on
his part. Is B’s claim justifiable?  Art. 1388, par. 1
6. On January 15, 2012, M celebrated his 15th birthday. On this same day, G, the
guardian of M, sold the harvest of M’s farm to B. The harvest, which was valued at
P400,000.00 was sold for P250,000.00. On March 15, 2016, M filed an action for
rescission of the contract of sale on the ground that he had thereby suffered lesion by
more than one-fourth of the value of the harvest from his farm. B opposed the action on
the ground that M’s action had already prescribed having been filed more than four years
from the time the contract was entered into. If you were the judge, will you dismiss M’s
action for rescission on the ground of prescription?  Art. 1389, par. 2.

CHAPTER 7
VOIDABLE CONTRACTS
(Arts. 1390-1402)

1. What is a voidable contract?

 It is a contract which possesses all the essential requisites of a valid contract,
but one of the parties is incapable of giving consent, or consent is vitiated by mistake,
violence, intimidation, undue influence, or fraud.

 The following are the characteristics of a voidable contract :

(a) It is valid and binding unless annulled by a proper action in court.

(b) It is susceptible of ratification.

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 (c) It requires no pecuniary damage to the contracting parties; and
(d) Its defect is that the consent of one of the contracting parties is vitiated. (Art. 1390)

2. What is annulment?

 It is a remedy granted by law, for reason of public interest, for the declaration
of the inefficacy of a contract based on a defect or vice in the consent of one of the
contracting parties in order to restore them to their original position before the contract was
executed.

3. When should an action for annulment be filed? (Art. 1391)

 WITHIN the prescriptive period of four (4) years counted from the time:

(a) the defect of the consent ceases

 in case of intimidation, violence or undue influence
(b) it is discovered  in case of mistake or fraud
(c) the guardianship ceases  in case of contracts entered into by incapacitated
persons

 BEFORE ratification (confirmation or validation)

 READ THIS CASE IN ITS ORIGINAL TEXT:

Miailhe vs. Court of Appeals,
G.R. No. 108991, March 20, 2001.

4. What is ratification?

 By ratification, one voluntarily adopts a defective contract which, without such

subsequent approval or consent, would not be binding on him.

 REQUISITES :

(a) There must be knowledge of the reason which renders the contract voidable.

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 (b) Such reason must have ceased.
(c) The ratification must have been made expressly or impliedly. (Art. 1393)

 Illustrative Examples of Implied Ratification. –

 Sixteen year-old Allyanna sells a parcel of land to Bruce for P7 million.

They agree that one-half of the purchase price is to be paid at the time of the signing of the
contract and the other half, when Allyanna reaches the age of majority. After she turned
18, Alyanna demands from Bruce payment of the P3.5 million, in full payment of the
contract price. In this case, there is ratification of the contract by Allyanna because she
executed an act (demanding for payment from Bruce) which necessarily implies an
intention to waive her right to annul by reason of minority.
 Zach gave his motorcycle to Zen in exchange for her car because of
violence employed upon him by Zen. Two years after the exchange, Zach had the car
repainted and he installed various accessories thereon. Zach here is deemed to have
ratified the contract by reason of his introduction of improvements on the car.

(d) The ratification is made by the injured party, to wit:

 The guardian of the incapacitated person during the latter’s incapacity. (Art.
1394)
 The incapacitated person after he has attained capacity.
 The party whose consent is vitiated by mistake, violence, intimidation, undue
influence or fraud.
 REMEMBER that the party who employed such vices of consent cannot
ratify the contract; neither is his conformity to the ratification required (Art. 1395). If consent
was given by a person in a state of drunkenness or during a hypnotic spell (Art. 1328), he
may also ratify the contract when he is no longer in such condition or state.

 EFFECTS :
 Ratification extinguishes the action to annul the voidable contract (Art. 1392). 
Since ratification is the adoption of the contract by the party who has the right to seek its

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annulment, once he ratifies it, he can no longer subsequently bring an action for its
annulment as he cannot take inconsistent positions thereon.
 Ratification has a RETROACTIVE EFFECT  Ratification cleanses the contract
from all its defects from the time of its perfection (Art. 1396).

 READ THIS CASE IN ITS ORIGINAL TEXT:

ECE Realty and Development Inc. vs. Mandap,
G.R. No. 196182, September 1, 2014.

5. Who may bring the action for annulment? (Art. 1397)

 Only the principal or subsidiary party to the contract

(see also Art. 1311) :

 The guardian of the incapacitated person during the latter’s incapacity; or

 The incapacitated person after he has attained capacity.
 The party whose consent is vitiated by mistake, violence, intimidation, undue
influence or fraud, or who gave his consent in a state of drunkenness or
during a hypnotic spell.

 READ THIS CASE IN ITS ORIGINAL TEXT:

Equitable PCI Bank, Inc. vs. Heirs of Antonio Tiu,
G.R. No. 178529, September 4, 2009.

6. What is the effect of the annulment of a voidable contract? (Art. 1398)

(a) IN EXECUTORY CONTRACTS  the parties are excused from their obligations.

(b) IN EXECUTED CONTRACTS  mutual restitution

 real obligation  property + fruits, and money + interest

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 (Art. 1398, par. 1)

 personal obligation  value of the service + interest

(Art. 1398, par. 2)

 Illustrative Example on Mutual Restitution.  On May 5, 2015, Selma was

intimidated by Boyen to sign a deed selling her farm lot for P5 million to him because he
threatened to shoot her. Assuming that the sale is thereafter annulled on October 5, 2016,
Selma is obliged to return the price of P5 million to Boyen together with interest thereon at
12% starting from January 5, 2015. Boyen, on the other hand, is obliged to return the farm
lot with its fruits from January 5, 2015, together with damages sustained by Selma by
reason of the sale.

 SPECIAL RULE ON RESTITUTION WHEN THE ANNULMENT IS GROUNDED ON

INCAPACITY  The incapacitated party is required to restore only to the extent of his
beneficial interest. In other words, if he did not derive any benefit from the thing or price
received by him, he is NOT obliged to restore. (Art. 1399)

 READ THIS CASE IN ITS ORIGINAL TEXT:

Katipunan vs. Katipunan,
G.R. No. 132415, January 30, 2002.

7. What is the effect of the loss of the object of the contract on the action for annulment?
(a) If with FAULT on the part of the :

 DEFENDANT  his obligation is converted into an indemnity for damages.

Indemnity = (value of the thing at the time of the loss) + (interest on said value
also computed from the time of the loss) + (fruits received from the thing reckoned
from the time the thing was given to him to the time of its loss). (Art. 1400)

 PLAINTIFF  the right to annul is extinguished.

(Art. 1401, par. 1)

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  the same rule applies even if the action for annulment is
grounded on incapacity. (Art. 1401, par. 2)

(b) If due to a FORTUITOUS EVENT

 DEFENDANT  the same rule applies when the loss is with

his fault.
Rationale: The defendant is considered a possessor in bad faith who bears
the loss even in case of a fortuitous event.

 PLAINTIFF  the right to annul can be maintained, BUT the defendant

cannot be compelled to restore what he had received if the plaintiff can himself no
longer restore what he is bound to return after the contract is annulled. (Art. 1402).

Exception: But if the plaintiff was incapacitated at the time the contract was perfected,
the defendant must restore what he has received despite the plaintiff’s inability to
restore what he is bound to return under the annulled contract. (Art. 1401, par. 2)

 Illustrative Example on Loss : G forced V to acquire G’s apartment in Makati in

exchange for V’s rest house in Batangas. V subsequently asked for annulment, and the
court gave the decree of annulment ordering G and V to return to each other what they
had respectively received under the contract.

A. If, due to G’s fault, or due to a fortuitous event, the Batangas rest house is destroyed,
G should give V the following :

 The fruits or rentals of the rest house, computed from the time the house was
given to G up to the time of its loss;
 The value of the rest house at the time of the loss; AND
 Interest on the value of the rest house from the time the rest house was
destroyed.

B. If, due to V’s fault, the Makati apartment is destroyed, V loses his right to file an action
against G to annul the contract.

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C. If, due to a fortuitous event, the Makati apartment is destroyed, V can still annul the
contract. But G cannot be compelled to give back V’s Batangas rest house since V
can no longer restore to G the Makati apartment that was destroyed. Should V,
however, desire to get back his Batangas rest house, he can offer G the value of the
Makati apartment, but without interest on such value. (Rationale: Before annulment,
the contract is VALID, and the innocent party, being the owner of the thing lost by a
fortuitous event, must bear the loss.)

D. Let us assume that V is a minor, and the Makati apartment was destroyed by a
fortuitous event. In this case, Article 1399 will apply. V can still seek for annulment
and recover his Batangas rest house because V will not, in any way, benefit from the
Makati apartment which has already been destroyed.

E. If V (a minor), however, intentionally sets fire to the Makati apartment, he cannot later
on seek for annulment of the contract.

APPLICATION/PROBLEMS :

1. The spouses Betty and Armando, and Ben, are next-door neighbours in Bel-Air
Makati. Both of them are also owners of adjacent parcels of land in Bulacan. Ben was
interested in building a garments factory, but the area of his land was not sufficient for the
plan. Hence, he convinced the spouses Betty and Armando to sell to him their land, so
that he may be able to push through with his business venture. The spouses, however,
refused to sell their land. On the evening of October 12, 2012, Ben visited the house of
the spouses and, with the point of a gun, compelled the spouses to sign a deed of sale
selling their land to Ben. Ben also threatened them that if they spoke about the incident to
anyone, he will have the spouses killed by a hitman. Because of this, the spouses kept
silent about the incident. On June 30, 2015, Ben suffered from a massive heart attack and
died before he could be brought to the hospital. On October 15, 2016, the spouses filed
an action for annulment of the contract of sale grounded on intimidation. The heirs of Ben
moved to dismiss the spouses’ action on the ground that the same has already prescribed.
Is this argument of Ben’s heirs legally justified?  Art. 1391

2. On her sixteenth birthday, Mary bought a 250-square meter land from Joe for
P3M. Three days after her twentieth birthday, she sold the 250-square meter land to Jim
for P4M. On her twenty-first birthday, Mary filed an action to annul the contract of sale
between her and Joe alleging that at the time of the sale she was still a minor. She also

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pleaded that her action was filed within the four-year prescriptive period. Can Mary’s
action for annulment prosper?  Arts. 1392 & 1393

3. On September 20, 2010, Dencio borrowed P200,000.00 from Claro. Dencio and
his 17 year-old son, Solomon, solidarily signed the promissory note for the loan, which
note did not mention anything about the capacity of the signers. Dencio made partial
payments little by little. On October 15, 2016, Dencio died leaving a balance of
P150,000.00 on the note. Claro now demands payment from Solomon who, however,
refused to pay. Solomon raises the defense that, at the time he signed the promissory
note, he was still a minor. Can Solomon be held liable under the note?  Arts. 1391

4. On May 15, 2016, Piolo sold a piece of land to his sixteen year-old nephew John.
One month later, Piolo died. On October 15, 2016, Donna, the only daughter of Piolo, then
brought an action to annul the contract of sale on the ground that John was still a minor
and, therefore, without legal capacity to contract. Can the contract be annulled?  Art.
1397

5. Sherwin, a minor, owns a farmland planted with rambutan. Sherwin sold this land
to Benjo for P1.5M. Of the P1.5M purchase price received from Benjo, Sherwin deposited
the P1M at BPI. The remaining P500,000.00, which Sherwin intended to invest in a fast
food business, was among those stolen from their house when they were robbed the night
after Sherwin sold the farmland. A week after Sherwin celebrated his 18 th birthday, he filed
an action for the annulment of the contract of sale of his farmland. After due hearing, the
court annulled the contract. What are now the rights and obligations of Sherwin and Benjo
to each other?  Arts. 1398 & 1399

6. On October 2, 2015, Budoy pointed a gun at Simon and asked Simon to execute a
contract of sale in favor of Budoy. The contract of sale was supposed to transfer the
ownership of Simon’s 950 square-meter lot in Manila to Budoy. At the point of the gun,
Simon executed the contract of sale and simultaneously received from Budoy the
purchase price therefor in the amount of P5M. Of the P5M received by Simon, P4M was
deposited to Simon’s account in Banco de Oro. The P1M, however, was completely
burned to ashes when Simon’s car turned turtle. Should Simon later on ask for the
annulment of the contract of sale on the ground of intimidation, is Simon obliged to restore
to Budoy the entire P5M purchase price?  Art. 1398

7. In the problem above, Cresencio, who is a creditor of Simon learns of the contract
of sale perfected on October 2, 2015. It so happens that in a separate contract of loan,

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Simon is indebted to Cresencio in the amount of P4M due on March 15, 2016. On March
15, 2016, since Simon was not able to pay his loan to Cresencio, and did not have any
other properties to pay off his obligation to Cresencio, Cresencio filed an action to annul
the contract of sale dated October 2, 2015 between Simon and Budoy. Is Cresencio
allowed to do so considering that he stands to be prejudiced by the said contract of sale
between Simon and Budoy?  Art. 1397

CHAPTER 8
UNENFORCEABLE CONTRACTS
(Arts. 1403-1408)

STUDY GUIDE : FT SESSIONS 12 & 13

1. What is an unenforceable contract?

 An unenforceable contract is one which cannot be enforced in court or sued

upon unless it is first ratified. Once ratified, it can have the effect of a valid contract. In
one sense, therefore, it may be called a “validable” contract.

 Unlike voidable and rescissible contracts, which are valid and binding until
annulled or rescinded, an unenforceable contract is not enforceable, or cannot take effect
even as between the parties to the contract unless it is ratified.

2. What are the kinds of unenforceable contracts?

(a) Unauthorized or disauthorized contracts. [Art. 1317 & 1403(1)]

(b) Those that fail to comply with the Statute of Frauds. [Art. 1403(2)]
(c) Those where both parties are incapable of giving consent. [Art. 1403(3)]

3. What is the nature and purpose of the Statute of Frauds?

 The Statute of Frauds, found in Article 1403, No. 2 of the New Civil Code, is a
law which requires that all the agreements enumerated therein [letters (a) to (f)] must be in
writing, and signed by the party obliged under the contract (passive subject) against whom

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the contract will be enforced. Hence, if there is no note or memorandum (i.e., writing as
evidence of the agreement) of the specified agreements, said agreements cannot be
enforced by the other party (active subject) in court. This is because the court will not
receive evidence of the existence of the agreement without the writing, or a secondary
evidence of its contents.

 Remember that the failure to execute the contract in writing does NOT
render the contract VOID. The contract is VALID, but it is UNENFORCEABLE, unless
ratified.

 The Statute of Frauds seeks to prevent the commission of injustice due to

faulty memory, and to guard against intentional misrepresentation.

 Illustrative Example: Marian verbally agreed to sell her car to Dingdong

for P950,000.00. The parties agreed that delivery of the car as well as payment of
the purchase price will be effected on October 15, 2016. On October 15, 2016,
Marian refused to honor the verbal agreement, and turned down Dingdong’s
demands for her to deliver the car nor his tender of the P950,000.00 purchase
price. Dingdong then filed an action in court for specific performance to enforce
their verbal contract of sale.
 In this case, if the lawyer of Marian objects, Dingdong will not be allowed
by the court to present oral or testimonial evidence to prove the existence of their
verbal contract of sale. This is because a verbal contract of sale of personal
property where the consideration is not less than P500.00 must be in writing in
order to be enforceable even between the parties [Art. 1403(2)(d)].

4. What are the contracts covered by the Statute of Frauds which are required to appear
in writing in order to be enforceable: [Art. 1403, No. (2)]

 An agreement which is to be executed after one (1) year from the date of
perfection of the contract.

 Illustrative Example: On October 1, 2015, Sally entered into a contract with Brian
for the sale of her car to him. Delivery of the car and payment of the purchase price was
set on October 5, 2016. This contract must be in writing to be enforceable because the
execution or consummation of the contract is set on a date more than a year from the
perfection of the contract.

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  A special promise to answer for the debt, default or miscarriage of
another.

 Illustrative Example: Dennis borrowed money from Carina with Gorio as

guarantor. As guarantor, Gorio obliges himself to answer for the obligation to Carina, if
Dennis is not able to pay the debt on maturity date. This promise of Gorio to answer for
the default of Dennis must be in writing, so that Gorio can be held liable by Carina if
Dennis fails to pay his obligation on due date.

 An agreement made by reason of marriage other than a mutual promise

to marry.

 Illustrative Example: Martin agrees to build a house for Wilma worth P10M if she
will marry him. If Wilma subsequently marries Martin, she cannot oblige Martin to make
good his promise to build a house for her if their agreement was not made in writing.

 NOTE: However, a mutual promise to marry is enforceable even if merely

orally entered into. At any rate, enforceability will be limited only to claiming
damages for non-performance of the promise, but NOT to compel the other party
to proceed with the marriage. This is because nobody can be compelled to marry
against his will. It will make the consent defective, and the marriage voidable.

 An agreement for the sale of personal property where the consideration is P500
or more, unless there has been partial delivery or payment. [Art. 1403(2)(d)]

 Illustrative Example: Sylvia and Barry entered into a verbal contract for the sale
of a pair of silver earrings for P500.00. Delivery and payment was set on October 30,
2016.

 IF on due date Sylvia does not deliver, Barry cannot compel her to do so
even if he is willing to pay because the contract falls under the Statute of Frauds, and must
be in writing to be enforceable between the parties.

 ASSUME THAT on due date Sylvia makes, and Barry accepts, delivery of the
silver earrings. Later, Sylvia files an action to compel Barry to pay the purchase price of
P500.00. This time, Barry will be obliged to pay. Barry cannot set up the defense that

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Sylvia cannot enforce their agreement for not having been made in writing. This is
because there has already been delivery of the object of the contract, and by accepting the
earrings, Barry in effect admits the existence of the agreement.

 An agreement for the lease of real property where the term is more than
one year. [Art. 1403(2)(e)]

 Illustrative Example: On January 15, 2015, Orly agreed to lease his building to
Tirso for a period of two (2) years starting February 15, 2015, until February 14, 2017. On
February 15, 2015, if Orly does not allow Tirso to take possession of the leased property
as agreed upon, Tirso cannot legally compel Orly to do so if their lease contract is not in
writing.

 READ THIS CASE IN ITS ORIGINAL TEXT:

Maria Paterno vs. Jao Yan,
G.R. No. L-12218, February 28, 1961.

 An agreement for the sale of real property or of an interest therein. [Art.

1403(2)(e)]

 Illustrative Example: Isko and Bernie entered into a verbal contract for the sale
of a parcel of land. Delivery and payment was set on October 30, 2016. On October 30, if
Isko changes his mind about the sale, Bernie cannot sue Isko to compel the latter to
perform his obligation under the contract of sale which was not put in writing; hence,
unenforceable.

 NOTE, however, that under Article 1874 of the Civil Code, “when the 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.”

 A representation as to the credit of a third person.

[Art. 1403(2)(f)]

 Illustrative Example: Delfino is applying for a loan with Cielo. Before she
releases the money, Cielo asks Ramiro about the credit standing of Delfino. Ramiro orally
assures Cielo that Delfino is solvent, and has good credit reputation. On the basis of this

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representation, Cielo extends a loan to Delfino. However, it turns out that Ramiro made a
false representation as to Delfino’s credit standing because Delfino defaulted in his
obligation to Cielo on due date. In this case, if the representation of Ramiro as to Delfino’s
credit standing was not made in writing, Cielo cannot hold Ramiro liable for damages for
such misrepresentation.

5. What are some basic principles governing the Statute of Frauds?

(a) It applies only to executory contracts. It does not apply to totally or partially
executed contracts.
(b) The defense under the Statute of Frauds may be waived by ratification. (Art.
1405)
(c) It is exclusive. It applies only to the agreements or contracts enumerated under
Article 1403 (2).
(d) The Statute of Frauds is a personal defense (Art. 1408). Just as strangers cannot
attack the validity of voidable contracts, so also can they not attack a contract
because of its unenforceability. The defense that a contract does not comply
with the Statute of Frauds can be set up and is available only to the contracting
parties and their heirs.

6. Illustrative Examples of the Principles :

(a) & (b)  Soledad verbally sells to Basilio a parcel of land for P2M. The contract
is unenforceable under Article 1403(2)(e), which requires that the sale of real property must
be in writing. However, if Basilio pays the price of the sale, and Soledad accepts it, she
cannot refuse to deliver the land because there was already partial performance of the
contract. Since Soledad has accepted benefits under the contract, the contract is no
longer executory (but is now partially executed or consummated); hence, the Statute of
Frauds will not apply. Soleded is deemed to have ratified the contract under Article 1405.
With the ratification, the contract now becomes enforceable. In the same manner, if
Soledad delivers the land to Basilio, and he accepts delivery, the contract becomes
enforceable, because there is already partial execution (or consummation) of the contract.

(c) A loan of P1,000.00 does not have to be in writing to be enforceable because

the contract of loan is not one of those enumerated in the Statute. Hence, an oral loan for
P1,000.00 is valid and enforceable. (See the last paragraph of Article 1358)

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 (d)  Olivia is the owner of a house leased by Tiago. During the term of the lease,
Olivia verbally sold the house to Braulio. Braulio had not yet occupied the house nor given
the purchase price for the sale. Now, despite Braulio’s demand as new owner of the
house, Tiago refuses to remit his monthly rental payments to Braulio. Tiago argues that
the contract of sale between Olivia and Braulio, having been verbally made, is not
enforceable under Article 1403(2)(e). This argument of Tiago is not valid. The defense
under the Statute of Frauds is a personal defense, and can be raised or set up only by the
parties to the contract contended to be unenforceable for not having been made in writing.
Therefore, Tiago who is not a party to the contract of sale cannot set up the defense under
the Statute of Frauds.

 NOTE: In this case, Braulio may set up the defense under the Statute of
Frauds. It becomes apparent, however, that instead of assailing the unenforceability
of the contract of sale, Braulio has executed acts of ratification by exercising acts of
ownership over the house as manifested by his collection of the rentals from its tenant.
The same can be said of Olivia who, under the facts, has offered no objection to
Braulio’s acts of dominion by demanding rents on the property from the tenant Tiago.

7. ARTICLE 1405. Ratification of Contracts Infringing the Statute of Frauds. – Under

this provision, contracts infringing the Statute of Frauds are ratified through any of the
following acts:

(a) The failure to object to the presentation of oral evidence.

 When the purpose of the testimony of the person enforcing the contract or of
his witness is being offered, which is to prove the contract by oral evidence, the other party
should immediately object to such purpose.

 Illustrative example of an excerpt from court proceedings

elucidating this rule.

PLAINTIFF’S LAWYER: Your Honor, we would like to offer the testimony of the
plaintiff to prove the existence of the oral contract of sale of the subject 1,000
square-meter lot in Manila executed between the parties on August 30, 2016.

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 DEFENDANT’S LAWYER: Your Honor, we would like to object to the purpose
of plaintiff’s testimony on the ground that since this involves a verbal contract of
sale of real property, it infringes the Statute of Frauds. Under Article 1403(2)(e),
the plaintiff is not allowed to present evidence to prove the existence of the sale
of the subject real property by means of oral evidence.
JUDGE: Objection sustained. Counsel for the plaintiff is directed to present
other evidence. Witness is excused.

 Also, when a question is asked the witness, which would allow him to present
oral evidence to prove the contract, the other party should object to the witness answering
the question.

 Illustrative example of an excerpt from court proceedings

elucidating this rule.

PLAINTIFF’S LAWYER: Miss plaintiff, where were you on August 30, 2016?
PLAINTIFF: I was with defendant in Starbucks in Robinsons Otis.
PLAINTIFF’S LAWYER: What were you doing in Starbucks with defendant?
PLAINTIFF: Defendant was selling to me her lot in Manila for P10 million, and I
agreed to buy it.
DEFENDANT’S LAWYER: Objection, Your Honor. The plaintiff is trying to
prove the existence of the contract of sale of real property by means of oral
testimony which violates the Statute of Frauds.
JUDGE: Objection sustained. Counsel, proceed to another question.
PLAINTIFF’S LAWYER: You said you were in Starbucks with defendant. What
happened next if any?
PLAINTIFF: The defendant sold to me the subject real property for P10 million.
DEFENDANT’S LAWYER: Objection, Your Honor…on the same ground. We
move that the answer of the witness be stricken off the record.
JUDGE: Objection sustained. The stenographer is directed to delete from the
stenographic notes the last testimony of the witness. The plaintiff’s counsel is
warned not to ask the same question.

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  The failure to make the foregoing timely objections will be deemed a waiver
on the part of the party’s right to raise the unenforceability of the contract. The effect of the
waiver is to make the contract binding as if it had been reduced to writing.

(b) Acceptance of benefits under the contract. (See the discussion and example in
page 165, No. 6 (a) & (b) above.)

8. ARTICLE 1406. –

 This provision is a reiteration of Article 1357. Hence, when a public instrument is

required for mere convenience of the parties, the contracting parties may require each
other to execute the necessary document; but only if the following elements are present:
(a) The contract must be valid; AND
(b) The contract must be enforceable.

 Illustrative Example: Filemon sells his lot to Ramona for P5 million. Their sale is
embodied in a private document. This contract of sale of real property is valid and
enforceable under the statute of frauds because it is evidenced by a writing. However, it
cannot be registered to affect third persons. In this case, Ramona can compel Filemon to
reduce the contract into a public document in order that the same may be registered in the
Registry of Deeds.
QUESTION: Supposing the contract of sale above was made orally, but Ramona paid
Filemon P1.5 million of the purchase price as downpayment. Can Ramona compel
Filemon to execute a public document of sale so she can register the sale?  YES. If a
contract is totally or partially executed, it becomes enforceable under the rule of
ratification.

9. ARTICLE 1407. –

 In contracts were both parties are incapacitated, the contract is unenforceable.

However,
(a) If the parent or guardian of one of the contracting parties expressly or impliedly
ratifies the contract, the contract transforms into a voidable contract.

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 (b) If the parents and guardians of both contracting parties ratify the contract, it
becomes enforceable, and is validated from the time of its perfection.
 Illustrative Example: Natividad and Narciso, both 16 years old, entered into a
contract of sale of a Rolex watch for P600,000.00 without the consent of their guardians.
The sale was made in a public document. This contract of sale is unenforceable because
both parties are incapacitated. If the guardian of Natividad thereafter ratifies the contract,
the same becomes voidable because only one of the contracting parties is incapacitated.
If the guardian of Narciso later on also ratifies the contract, it becomes enforceable upon
its inception, or effective when the contract was perfected.

APPLICATION/PROBLEMS :

1. Dillon and Gene are best friends. Dillon then requested Gene to introduce him to
Caitlyn who is an officer in a lending company. Since Caitlyn and Gene were high school
friends, Gene was able to convince Caitlyn to lend Dillon P200,000.00. Gene assured
Caitlyn that Dillon would pay on time. Gene also promised Caitlyn that if Dillon does not
pay, Gene will take care of Dillon’s obligation. On maturity date, Dillon did not pay his
obligation, and could no longer be found. Caitlyn was then forced to file an action against
Gene obliging him to pay the P200,000.00 as promised. Can Caitlyn compel Gene to pay
Dillon’s indebtedness?

2. Dionisia is the owner of a 2-hectare farmland in General Santos City. Dionisia

orally authorized Manny to sell her farmland to Fred. As instructed, Manny was able to sell
the farmland to Fred for P7M. The sale, however, was merely verbal. Is the sale valid? Is
it enforceable?

3. Gabriel is the owner of a Toyota Altis car with plate no. ABC-123. Without
informing his father, Michael sold the car to Donito for P1.2M. Michael signed the “Deed of
Sale” for and in behalf of his father. The Deed of Sale was subsequently notarized. Can
Donito demand delivery of the car from Gabriel?

4. In the preceding problem in No. 2, assume that the sale was executed in writing
but not in a public document. Is the sale valid? Is it enforceable?

5. Lionel leased to Cristina his Olympic cash register. It was orally agreed that the
lease will cover the period from October 15, 2014 to November 15, 2016. Cristina also
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agreed to pay a monthly rental of P500. When October 15, 2014 came, Cristina learned
that Lionel had already delivered and rented the cash register to Madonna. Since Lionel
refused to deliver the cash register, Cristina filed an action for specific performance to
compel Lionel to comply with their earlier agreement. If you are the judge, how will you
resolve Cristina’s case?

6. Mandy sold to Sandy a flashlight pen for P500.00. Their agreement was orally
made. What is the status of this agreement? Should Mandy refuse to deliver the flashlight
pen, can Sandy compel him by means of an action for specific performance filed in court?

7. Mimay and Mokmok are neighbors in Bulacan. Mimay, who was a preschool
teacher, planned on initially setting up a preschool class in her backyard. Mimay then
entered into a contract with Mokmok. Mokmok told and promised Mimay that he will not
fence his property for three years to give Mimay sufficient space for her preschool class.
As consideration for the promise, Mimay agreed to pay Mokmok P150,000.00. A week
after the agreement, Mokmok began to fence his property in violation of his agreement
with Mimay. Mimay then comes to you for consultation asking if she can file an action to
compel Mokmok not to push through with the fencing in deference to their previous
agreement. What advice will you give Mimay?

8. On January 15, 2016, Buddy sold a 250 square-meter lot to Sonia for P2M. It was
orally agreed upon by the parties that delivery of the lot, as well as full payment of the
purchase price, was to be made on February 20, 2016. On January 16, 2016, Buddy
received from Sonia the amount of P200,000.00 as initial downpayment. On February 20,
2016, Sonia offered to pay the remaining balance of the purchase price in the amount of
P1.8M. Buddy, however, refused to deliver the property. Buddy argues that the contract
of sale between him and Sonia was unenforceable having been orally made. Can
Sonia enforce the contract of sale, and compel Buddy to deliver the lot?

9. On June 30, 2016, Sharon promised Kiko that she will sell to him her Voltes-V
collectible cards for only P400.00 when she leaves for the U.S. on July 4, 2017. What is
the status of this contract of sale between Sharon and Kiko? Can Kiko, under this
contract, compel Sharon to deliver the cards on July 4, 2017?

10. On October 2, 2016, Editha promised to sell to Joy a 250 square-meter lot for
P450.00 only. Delivery of the lot, as well as payment of the purchase price was to be
made on January 15, 2017. Is this agreement valid? Will an action by Joy against Editha
for specific performance prosper?

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 11. Shielito orally sold to Bonito a 90 square-meter lot for P850,000.00. Is this sale
valid? Can Bonito compel Shielito to execute their agreement in writing so Bonito can
bring it to a lawyer for notarization?

12. Trixie rented out to Iggy, in a public instrument, registered with the Registry of
Property, Apartment No. 8 for three (3) years beginning January 1, 2014 until December
31, 2016. After the first year of the term of the lease, Trixie sold the apartment to Dixie for
P3M. The sale was orally made. Although there had been as yet no attempts to register
the sale, and to pay the purchase price for the apartment, Dixie informed Iggy that rental
payments should now be remitted to Dixie as new owner of the apartment. Is the sale
between Trixie and Dixie enforceable? Can Iggy refuse to pay his rentals to Dixie
considering that the contract of sale between Trixie and Dixie was orally made?

13. Eloy and Belen, both minors, verbally entered into a contract of sale of a 200
square-meter lot in Bulacan for a contract price of P1.5 million. Later, when the guardians
of both minors found out about the sale, they impliedly ratified the contract. What is now
the status of the parties’ contract of sale?

CHAPTER 9
VOID AND INEXISTENT CONTRACTS
(Arts. 1409-1422)

STUDY GUIDE : SESSION 13

1. DEFINITION : These are the contracts which have absolutely no force and effect, and
are inexistent from the beginning. It is as if they have never been entered into, and
they cannot be validated either by time or ratification. The maxim is “NO CONTRACT
AT ALL”.

2. What are the void contracts under Article 1409?

[ CODE: LAE-OII-Void ]

(a) Those whose cause, object or purpose is contrary to law, morals, good customs,
public order, or public policy;

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  Illegal contracts (Review Art. 1306, and See Art. 1416)

 READ THIS CASE IN ITS ORIGINAL TEXT:

Canullas vs. Fortun,
G.R. No. L-57499, June 24, 1984.

(b) Those which are absolutely simulated or fictitious;

(Review Arts. 1345 & 1346)
(c) Those whose cause or object did not exist at the time of the transaction; (Review
Arts. 1347, par. 1, & 1352)
(d) Those whose object is outside the commerce of men;
(Review Art. 1347, par. 1)
(e) Those which contemplate an impossible service;
(Review Arts. 1347, par. 3 & 1348)
(f) Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained;
(Review Art. 1378, par. 2)
(g) Those expressly prohibited or declared void by law.

3. Kinds of void contracts :

 INEXISTENT CONTRACTS – Those which lack one or some or all of the

elements, or do not comply with the formalities which are essential for their validity.

 Example: A donation of a parcel of land in a private instrument is VOID.

 It bears emphasis that the effects of the in pari delicto doctrine outlined under
Articles 1411 and 1412 apply only to illegal or illicit contracts, and DO NOT APPLY TO
inexistent contracts within legal contemplation.

 READ THIS CASE IN ITS ORIGINAL TEXT:

Modina vs. Court of Appeals,
G.R. No. 109355, October 29, 1999.

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  ILLEGAL or ILLICIT CONTRACTS – Those contrary to law, morals, good
customs, public order and public policy.

 Example: A contract for the sale of 10 kilos of shabu for a consideration of

P1,000.00 per kilo is VOID. Here, all the essential requisites for the
perfection of a contract of sale is present, but the cause or object of
the sale is illegal.
 An illegal contract can produce effects under certain circumstances where the
parties are not of equal guilt. (See Arts. 1411-1412.)

4. Characteristics of a void contract :

(a) Generally, it produces no effect at all.

 A void contract, being absolutely and entirely null, has no effect whatsoever,
and cannot therefore be enforced. However, the Supreme Court has held that even as
government contracts for additional construction work may be void for violation of
applicable laws, auditing rules and for lacking legal requirements, in the interest of
substantial justice, the contractor’s right to be compensated will be upheld, applying the
principle of quantum meruit.

 READ THIS CASE IN ITS ORIGINAL TEXT:

EPG Construction Co. vs. Hon. Vigilar,
G.R. No. 131544, March 16, 2001.

(b) Generally, no action to declare it void is needed.

 If a void contract is void from the very beginning, what is the use of its being
declared inexistent?  There is no use. But for purposes of convenience, or to avoid
taking the law into our own hands, there is nothing wrong in having a void contract
declared really void.
 Illustrative Example: Ferdie sells to Meldy a 100 square-meter portion of
the shore in front of his beach house in Batangas. Meldy pays P500,000.00 as
cause or consideration for the sale. Of course, this contract is null and void as the

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 object of the sale is outside the commerce of man. Let us assume, however, that
Ferdie refuses to return to Meldy the P500,000.00 price paid, but avers that there
is nothing wrong with their contract. What will be the remedy of Meldy?
 Meldy should file an action in court to declare the nullity or inexistence of the
contract. This right of Meldy does not prescribe. Indeed, the defect in this kind of
contract cannot be cured by prescription or by ratification.

 Thus, 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.

 READ THIS CASE IN ITS ORIGINAL TEXT:

Fuentes vs. Roca,
G.R. No. 178902, April 21, 2010.

(c) The defense of its illegality cannot be waived. (Art. 1409, par. 2)

(d) It cannot be ratified. (Art. 1409, par. 2)

 Unlike an unenforceable contract, a void contract cannot be ratified by the
acceptance of benefits under it (Art. 1405). Also, unlike a voidable contract, a void
contract cannot be ratified by the act of a party or by his parent or guardian.

(e) The action and/or defense to declare its inexistence does not prescribe. (Art.
1410)
 If a contract is void, the action or defense to have it declared void does not
prescribe. In other words, there is no prescriptive period for the filing of an action for the
nullity of a contract. Neither is there a prescriptive period within which a party can set up
the defense of nullity of a contract in an action filed against him for specific performance
under a void contract. To reiterate, mere lapse of time (such as the 4-year prescriptive
period in rescissible and voidable contracts) cannot validate or give effect to a contract that
is void or inexistent.

(f) The defense of its illegality is NOT available to third persons whose interests are
not directly affected. (Art. 1421)

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 (g) It cannot give rise to a valid contract. Hence, a contract which is the direct result
of a previous illegal contract is also void and inexistent. (Art. 1422)

5. Two kinds of illegal contracts :

 Those where there is a criminal offense; and

 Those where there is no criminal offense.

6. Pari delicto defined.  Pari delicto simply means equal fault.

 The term is used with reference to the general rule that illegal transactions or
contracts are not legally enforceable. It is a universal doctrine which holds that no action
arises, in equity or in law, from an illegal contract. Where the parties are in pari delicto, no
suit can be maintained for specific performance under the contract, or to recover the
property agreed to be sold or delivered, or the money agreed to be paid, or damages for its
violation. No affirmative relief of any kind will be given to one against the other.

7. Effects of an illegal contract where there is a criminal offense. –

(a) Where both parties are guilty or in pari delicto (Art. 1411, par. 1):

 Since they are in pari delicto, they shall have no action against each other.
 Both shall be prosecuted.
 The effects or instruments of the crime (things or price of the contract) shall
be confiscated in favour of the government.
 Illustrative Example: Popong sold to Yoyong 5 kilos of shabu for
P50,000.00. Upon agreement, Popong delivered 2 kilos of the shabu to Yoyong,
and the latter paid P20,000.00 therefor. Assuming that Popong later refuses to
deliver the remaining 3 kilos, OR after having delivered the deficiency it is Yoyong
who refuses to pay the price or consideration therefor, the following legal effects
will ensue, to wit:

 Since they are in pari delicto, Yoyong cannot compel Popong in a court of
law to deliver the remaining 3 kilos of shabu; neither can Popong compel Yoyong

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 to pay the balance of P30,000.00 if complete delivery of the shabu had been
made.

 Both Popong and Yoyong will be criminally prosecuted for the sale of
prohibited substances under the Dangerous Drugs Act.

 The shabu and the P20,000 already paid to Popong will be confiscated by
the authorities in favor of the government.

 READ THIS CASE IN ITS ORIGINAL TEXT:

Ramirez vs. Ramirez
G.R. No. 165088, March 17, 2006.

(b) Where only one party is guilty and the other is innocent; OR, where, even if both
are guilty, they are not equally guilty, or not in pari delicto (Art. 1411, par. 2)

 The guilty party will be criminally prosecuted.

 The instrument of the crime (the object of the contract) will be confiscated.
 The innocent party may claim what he has given (e.g., the price paid); or, if he
has not yet given anything, he shall NOT be bound to comply with his
promise.
 Illustrative Example: Popong, a government employee, sold to Yoyong
for P3,500.00 an electric fan officially issued to his office. He made the sale in his
personal capacity without the knowledge and authority of his office. Yoyong was
not aware that what he bought was government property. Hence, the sale is
illegal and constitutes a crime. In this case, only Popong is the guilty party. The
following legal effects will then ensue, to wit:

 Popong will be criminally prosecuted and the electric fan will be

confiscated in favor of the government.
 Yoyong cannot be compelled by Popong to pay the P3,500.00 purchase
price agreed upon. If Yoyong has already made the payment, he may recover it
from Popong.

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8. Effects of an illegal contract where there is NO criminal offense. –

(a) Where both parties are guilty (Art. 1412, par. 1) :

 Neither may recover what he has given by virtue of the contract or demand the
performance of the other’s undertaking.
 Illustrative Example: Ron and Yvonne are both of legal age, and are
under no legal impediment to marry each other. They entered into an agreement
whereby Yvonne agreed to live with Ron as his wife without the benefit of
marriage, in exchange for his giving to her a monthly support of P30,000.00. This
contract is illegal for being contrary to morals, but the illegality does not constitute
a crime. Under the facts, should there be a breach of the contract, and either of
the parties seek relief from a court of law:

 Ron cannot compel Yvonne to live with him if she later changes her mind
after the agreement.
 Yvonne cannot demand that Ron give her the promised monthly support, if
it is Ron who refuses to make good his part of the bargain.
 If Ron has already given any amount of the monthly support agreed upon,
he will not be able to recover it.

(b) Where only one party is guilty and the other is innocent, or, where, even if both
are guilty, they are not equally guilty, or not in pari delicto (Art. 1412, par. 2)

 The guilty party cannot recover what he has given by reason of the contract,
or ask for the fulfilment of what has been promised him.
 The party not at fault may demand the return of what he has given, without
any obligation to comply with his promise.
 Illustrative Example: Watt sold and delivered to Nat for P8,000.00 a cow
which Watt knew was suffering from a contagious disease. This sale is void (See
Art. 1575), but the illegality does not constitute a crime.

 If Nat has paid the price, she can recover it from Watt. If she has not paid
it yet, then she cannot be compelled to make the payment.

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  Watt, the guilty party, cannot recover the cow from Nat if he already
delivered it to Nat. Since it is suffering from a contagious disease, it will be
condemned by the authorities.

9. Exceptions to the “pari-delicto rule”. – Under the “pari-delicto rule” neither of the
guilty parties may recover what each has given under the contract. The following
provisions, however, allow recovery under certain circumstances :

(a) Under Article 1414, recovery by one of the guilty parties to an illegal contract is
allowed if he repudiates the contract under the following conditions :

 The illegal purpose has not yet been accomplished;

 No damage has yet been caused to any third person; and
 The court considers that public interest will be subserved by allowing
recovery.

 Illustrative Example: Zig contracted the services of Hal for the latter to
kill Cheng. Zig gave Hal P500,000.00 for the purpose. Before Hal could kill
Cheng, Zig changed his mind and told Hal not to pursue killing Cheng.
 Is Zig still allowed to withdraw from his evil plan?
 YES, because the act has not yet been accomplished, and no damage has yet
been caused to a third person.
 May Zig be allowed to recover the P500,000.00 he gave to Hal?
 Zig’s right to recover is discretionary on the part of the court. If the court finds
that public interest will be subserved, then it will allow recovery.
 Supposing the repudiation of Zig took place after Hal had already killed Cheng,
what will be the effect?
 Any repudiation made by Zig after Hal has already killed Cheng will serve no
purpose. Both parties will be prosecuted as principals of the crime of murder
– Zig, as principal by inducement, and Hal, as principal by direct participation.

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 (b) Under Article 1415, the courts may allow recovery of money or property
delivered by the incapacitated person, where one of the parties to an illegal contract is
incapable of giving consent.
 Under this article, it is not required that the illegal purpose must not have been
accomplished, or that no damage has been caused to a third person before recovery may
be allowed the incapacitated person.
 Illustrative Example: Fifteen year-old Fritz gave thirty year-old Bing
P5,000.00 for ten bales of marijuana leaves. Fritz here may be allowed to recover
the P5,000.00 given by him to Bing if the court finds that the interest of justice so
demands.

(c) Under Article 1416, recovery is likewise permitted if :

 The agreement is not illegal per se (forbidden because of public interest), but is merely
prohibited (forbidden because of private interests);
 The prohibition is designed for the protection of the plaintiff; and
 Public policy would be enhanced by allowing the plaintiff to recover what he has paid
or delivered.

 Illustrative Example No. 1: Juan, a Filipino national, sold and delivered to

Nakamura, a Japanese national, a 2,000 square-meter land for P20 million. This sale
is violative of the Constitution which prohibits aliens from acquiring private or public
agricultural lands, including residential lands. Hence, although both parties are at
fault, Juan will be allowed to recover the land from Nakamura under Article 1416.
Public policy will be enhanced if the court will set aside the contract of sale, and
restore ownership of the land to its Filipino owner, for whose benefit the constitutional
prohibition has been ordained.

 Illustrative Example No. 2: Crispin donated to Lourdes everything that he

possessed and owned, leaving nothing for himself. This is prohibited but not illegal
per se. Public policy will be enhanced if Crispin is allowed to recover, at least that
necessary for his own support and the support of his relatives.
(d) Other illegal contracts where recovery is allowed even if the contracting parties
are in pari delicto:

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 Art. 1417 – Effect when payment is made above the ceiling price fixed by law for an
article or commodity.

 If the law has set a minimum price for an article or commodity, any person
paying any amount in excess of such price may recover the excess. This is true even if
both parties are in pari delicto as the law has for its object the curbing of the evils of
profiteering.

 Illustrative Example: Morito buys from the Paltex station 30 liters of

unleaded gasoline. The price per liter as regulated by the Energy Regulatory Board is
P41.00 per liter. If the price paid by Morito to the Paltex station is P1,350.00 (at
P45.00 per liter), he can recover the excess of P120.00 because the amount in excess
of that allowed by law is recoverable.

 Art. 1418 – Sanctioning recovery of additional compensation for services rendered

beyond time limit prescribed by law.

 Maximum number of hours of work.  The normal hours of work of any

employee shall not exceed (8) hours a day. (Art. 83, Labor Code)

 Overtime pay.  When an employee performs work beyond eight hours a

day, he is entitled to an additional compensation equivalent to his regular wage plus at
least twenty-five percent (25%) thereof. Work performed beyond eight hours on a holiday
or rest day shall be paid additional compensation equivalent to the rate of the first eight
hours on a holiday or rest day plus at least thirty (30%) thereof. (Art. 87, Labor Code.)
 Illustrative Example: If a worker agreed to work for ten (10) hours without
additional compensation for the two (2) excess hours worked, he shall thereafter be
entitled to recover additional compensation for such excess two (2) hours. This is true
even if the worker and the employer are in pari delicto, i.e., they entered into the
agreement of their own free will, knowing fully well the rates to which they are entitled
to or obliged to give under the circumstances.

 Art. 1419 – Sanctioning recovery of amount of wage less than the minimum fixed.

 The voluntary acceptance by a laborer of a wage lower than the minimum

wage, despite knowledge of what he is entitled to under labor laws, does not constitute a

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valid waiver of his right to recover the deficiency. This is true even if the laborer is in pari
delicto with the employer.
 Illustrative Example: Assume that the law has fixed the minimum wage
at P450.00 per day for an eight-hour work in the NCR, and a laborer agreed to work for a
P250.00 per day wage for lack of other available employment. Despite willingly binding
himself to such a rate under the employment contract signed with his employer, he shall be
entitled to recover the deficiency of P100.00.

10. Article 1420 – Effect when a contract contains both legal and illegal terms

 If the contract is indivisible, the whole contract is void, even if only some
parts or terms are illegal
 Illustrative Example 1: Santiago sold to Roswinda an unlicensed revolver
and a toy air gun for P20,000.00. The sale here is indivisible since there is only one
consideration for both items. Hence, the whole contract is void because that part that is
legal (the sale of the toy air gun), cannot be separated from that which is illegal (the sale of
the unlicensed revolver).

 If the contract is divisible, the legal terms may be enforced if they can be
separated from the illegal terms.
 Illustrative Example 2: In the example above, if the agreement is that
Santiago is selling the revolver to Roswinda for P12,000.00, and the air gun for P8,000.00,
the contract becomes divisible, and the obligations of the parties likewise become divisible.
Hence, that part of the contract which is legal is capable of separation from those parts
which are illegal. In this case, only the sale of the air gun is valid and may be enforced.
The sale of the unlicensed revolver, which is illegal, cannot and will not be enforced.

11. Article 1421 – Who may avail themselves of the defense of illegality of the
contract?

 GENERAL RULE: Only the parties to the void contract may avail themselves of
the defense of its illegality.

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  EXCEPTION: Third persons may set up the defense of illegality as long as their
interest is directly affected by the void contract.
 Illustrative Example: Homer and Wilma are husband and wife, whose
property relationship is governed by the conjugal partnership of gains. Homer sold his
paraphernal lot to Wilma. Here, the sale is illegal and void because the husband and wife
are prohibited from selling property to each other. If Carmen, a creditor of Homer became
his creditor after the void contract of sale was perfected, she cannot question the sale.
However, if Carmen was already a creditor of Homer before the sale was perfected, and
she cannot collect her claim from Homer because he has no other properties, then
Carmen can question the sale made by Homer to Wilma as Carmen’s interest is already
directly affected.

12. Article 1422 – Effect where contract is the direct result of an illegal contract

 An illegal contract is void and inexistent; hence, it cannot give rise to a valid
contract. Therefore, a contract that is the direct result of a previous illegal contract is also
void and inexistent. A void and inexistent contract cannot be novated. (Art. 1298)
 Illustrative Example: Nicanor and Margarita agreed that she would give
Nicanor P500,000.00 if he would burn the house of Pacita. After burning the house of
Pacita, Nicanor and Margarita agreed that instead of Margarita giving Nicanor
P500,000.00, Margarita will instead give to Nicanor her lot. Since the first contract for the
burning of Pacita’s house is an illegal contract, the second contract which is the direct
result of the previous illegal contract is also void and inexistent.

APPLICATION/PROBLEMS :

1. Jackie sold to Ryan a smuggled BMW car for P4.5M. Ryan made an initial
payment of P2M. After the car was delivered to Ryan, and despite repeated demands
from Jackie, Ryan failed to pay the balance of the purchase price in the amount of P2.5M.
Jackie then filed an action in court for the collection of the remaining balance. Will Jackie’s
action for collection prosper?  Art. 1411

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 2. Jess, who was married to Tess, donated to Melissa a parcel of land which was his
paraphernal property. The donation was made on October 2, 2009 on Melissa’s 17th
birthday, and subject to the condition that Melissa would become his mistress. Melissa
agreed and in fact became the mistress of Jess for a period of more than five years, until
before the death of Jess on November 8, 2015. The following year, Tess also died. After
the death of their parents, the children filed an action to recover the land from Melissa
alleging that the donation is void and inexistent because the cause of the contract is illegal
and immoral. Can the children recover the property from Melissa?  Art. 1412

3. Angela promised to give Manny P300,000.00 if he will kill Barry. Angela gave
Manny the P300,000.00 in advance. However, before Manny could kill Barry, Angela
changed her mind and informed Manny that she was withdrawing from the plan. As a
result, Angela demanded from Manny the return of the P300,000.00. Can Angela recover
what she has paid to Manny?  Art. 1414

4. Assume in the immediately preceeding number that Angela is only 17 years old,
and Manny already killed Barry before Angela changed her mind and informed Manny that
she was withdrawing from the plan. Will your answer to No. 3 be the same?

TITLE III
NATURAL OBLIGATIONS
(Articles 1423-1430)

1. Article 1423 distinguishes between the two kinds of obligations from the viewpoint of
sanction. –

(A) Civil Obligations – Those obligations whereby the creditors are given a right of
action to compel their performance in court. There is a juridical tie. (Art. 1156)

(B) Moral Obligations – They are not based on positive law but on equity. They do
not grant a right of action to enforce their performance but after voluntary fulfilment by the
obligor, they authorize the retention of what has been delivered or rendered by reason
thereof. There is no juridical tie. (Art. 1423)

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2. ‘Voluntary fulfilment’ defined. – “Voluntary fulfilment” means that the debtor
complied with the natural obligation even if he knew that he could not have been
legally forced to do so. Therefore, if payment is made through a court process, it is not
considered voluntary, and the provisions of the law on natural obligations cannot be
made to apply.

3. There may be other natural obligations aside from those obtaining in this title. The
enumeration of the natural obligations in this title is NOT EXCLUSIVE.

(a) Art. 1424. – A debtor performs a civil obligation that has already prescribed.

(b) Art. 1425 – A third person, who pays a prescribed debt, is reimbursed by the
debtor.

(c) Art. 1426 – A minor restores to the other contracting party the thing or price
received under the contract, after it is annulled although he has not
been benefited thereby. (Study in coordination with Art. 1399.)

(d) Art. 1427 – A minor pays or delivers a consumable thing to the other contracting
party who spends or consumes it in good faith.

(e) Art. 1428 – A debtor performs his civil obligation even if the creditor’s action to
enforce it has failed.

(f) Art. 1429 – An heir pays the decedent’s debts which far exceed the value of the
heir’s inheritance.

(g) Art. 1230 – After settlement of the debts of the deceased, an intestate heir pays
a legacy under a void will.

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