ESSENTIALS OF PHILIPPINE LAW compel their performance; performed because

Title One: Obligations it is the proper and moral thing to do

I. CHAPTER 1: GENERAL PROVISIONS
Article 1156
An obligation is a juridical necessity to give, to do
or not to do.
ELEMENTS OF AN OBLIGATION
1. CREDITOR or OBLIGEE (an active subject):
® the party who has the right or
demand a particular conduct of
behaviour or prestation from the
debtor.
2. DEBTOR or OBLIGOR (a passive subject):
® the party who has the duty to
fulfill an obligation.
3. OBJECT or PRESTETATION:
which may be:
a. a thing that must be given
b. a thing that must not be given
c. a service or an act that must be
done; or
d. a service or an that must not be
done
The object or prestation must be lawful,
possible, determinate or determinable, useful
and capable of pecuniary estimation. If the
object of the obligation is contrary to one of
these, then the obligation is defective in some
way.
4. JURIDICAL TIE or VINICULUM:
® this is the reason that cause an
obligation to arise.
5. *FORM
® some add form; however, except
in some cases, obligations
generally need not be in a
particular form to be valid and
binding. Obligations can have
different forms; it can be oral, or
written; and with the
advancement in technology, it
can even be digital, electronic,
virtual, in SMS, and the like.
1.1 Juridical Necessity
2 KINDS OF OBLIGATION
Þ CIVIL OBLIGATIONS – creditor may file a case in
court to demand and enforce her rights; an
obligation if not fulfilled when it becomes due
and demandable, may be enforced in court
through action; based on law.
Þ NATURAL OBLIGATIONS – obligations that
cannot be enforced in court; court cannot
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Article 1157
Obligations arise from:
® Law;
® Contracts;
® Quasi-contracts;
® Acts or omissions punished by law
(felonies and civil liabilities); and
® Quasi-delicts (negligence)
SOURCES OR REASONS THAT CAUSE AN OBLIGATION
TO ARISE:
1. LAW– is a rich source of obligations,
and the obligation may be owed to the
State or for the benefit of private
persons.
Ex.
The National Internal Revenue Code or Republic Act
No. 8424, compels taxable entities to pay taxes. The
Family Code obliges parents to support their children;
thus giving the children the right to demand from
their parents everything that is indispensable for their
sustenance, dwelling, clothing, medical attendance,
education, and transportation; with the amount of
support depending on the financial capacity of the
family.
2. CONTRACTS – a contract is a meeting of
minds whereby one binds oneself with
respect to the other to give something
or to render some service. In a contract
of sale, the seller is obliged to sell or
deliver the object of the contact like a
car, while the buyer is obliged to pay for
the car.
3. QUASI-CONTRACTS –pertains to certain
lawful, voluntary, unilateral acts which
give rise to a juridical relation to the
end that no person may unjustly enrich
herself or benefit at the expense of
another.
Ex.
If a person mistakenly pays or gives money to
another, who in truth has no right to demand such
payment, said act of paying by mistake gives rise to
an obligation to return the money.
4. ACTS OR OMISSIONS PUNISHED BY LAW
– these are also called delicts or crimes.
Article 100 of the Revised Penal Code
provides that every person who is
criminally liable is also civilly liable.
Ex.
A con artist who swindles or defrauds a victim is to be
punished not only with imprisonment, but also with
liability to pay damages or sums of money to the
victim. The offended party has the right to demand
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restitution, reparation, or indemnification for the
damage or injury done to her.
5. QUASI-DELICTS or TORTS – consist of
voluntary but negligent acts not
punishable under criminal law between
parties who have no pre-existing
contractual relationship.
Thus, although Book IV of the Civil Code lumps
“obligations” together with “contracts,” Article 1157
shows that obligations can arise from other sources
besides contracts. A contract requires the meeting of
the minds or consent between two contracting
parties; but obligations can arise even without the
consent of one part. The consent of a taxable entity is
not required in order for it to be subject to the
payment of taxes, and the parents of delinquent
children have the obligation to provide support even
if the parents would not like to.
Article 1158
Obligations derived from law are not presumed.
Only those expressly determined in this Code or
in special laws are demandable, and shall be
regulated by the precepts of the law which
establishes them; and as to what has not been
foreseen, by the provisions of this Book.
This provision gives the scope and sets
the limits of law as a source of obligation. Rights
which are clearly spelled out In the law may be
demanded while those which are merely the fruit of
derivation or inference from existing law are not.
Thus, the law on obligations and
contracts is the general law, which shall govern the
relationship of parties whenever obligations exist,
including those arising from other laws.
Article 1159
Obligations arising from contracts have the force
of law between he contracting parties and should
be complied with in good faith.
Contract is the law between the parties
and must therefore be complied with in “good faith.”
Compliance in good faith requires that the parties
fulfill their obligations according to the term and
conditions of the contract. Individuals who have legal
capacity to contract may freely contract with other
persons who are likewise legally capacitated. A
contract binds all contracting parties; and its validity
or compliance cannot be left to the will of one of
them. Thus it is only fair for the contracting parties to
respect and follow the terms and conditions
contracts as they have freely assented to.
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1.3 Quasi-contracts
Article 1160
Obligations derived from quasi-contracts shall be
subject to the provisions of Chapter I, Title XVII of
this book.
The Chapter on Quasi-Contracts is
divided into three sections:
a.) Negotiorum gestio
b.) Solution indebti
c.) Other quasi-contracts
The word “ quasi-contracts” is define by the
Civil Code as “certain lawful, voluntary,
unilateral acts which give rise to a judicial
relation to the end that no person may
unjustly enrish herself or benefit at the
expense of another.” In a quasi contract, there
is no contract; but the word “quasi: signifies
that it is as if there is a contract. What causes
an obligation to arise is the lawful, voluntary,
unilateral act of a person that benefits or
tends to benefit another person. And the
underlying reason for the obligation of the
other person who benefits, to compensate the
one who acts lawfully, voluntarily, unilaterally
is that no one should be unjustly enriched at
the expense of another.
1.3.a. Negotiorum gestio
Ø arises if the business is abandoned
Ø if owner does not appoint the manager
Ø a.k.a. case of the officious manager
Ø Article 2144 states that whoever
voluntarily takes charge of the agency
or management of the business or
property of another, without any power
from the latter, is obliged to continue
the same until the termination of the
affair and its incidents, or to require the
person concerned to substitute her, if
the owner is in a position to do so.
Ø Does not arise if the business or
property was in fact no abandoned, or if
the owner of the business or property
tacitly authorized the person who
voluntarily takes charge or manages.
Ø Concept of negotiorum gestio creates
an obligation on the part of the owner
of the business or property in any of the
three following situations:
o The owner of the business or
property benefits from the
officious management;
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 o Even if the owner did not
benefit, the unauthorized
management had for its purpose
the prevention of an imminent
and manifest loss to the business
or property;
o Even if there was no benefit to
the owner, or no imminent and
clear danger to the business or
property, the officious manager
nonetheless
§ a.) acted in good
faith
§ b.) the property or
business is intact
and ready to be
returned to the
owner
Ø The specific obligation of the business
or property owner is to:
o pay for obligations incurred in his
interest (e.g. loans that were
used to preserve the business or
property)
o reimburse the officious manager
for the necessary and useful
expenses, and for the damages
which the officious manager may
have suffered in the
performance of his duties.
Ø Absence of consent is not an excuse for
the business property
1.3.b. Solutio indebiti
Ø This situation involves payment by mistake.
Ø If a thing is received by a person who has no
right to demand it, and if that thing was unduly
delivered through mistake, said recipient has
the obligation to return it.
1.3.c. Other quasi-contracts
Ø Several instances are given by the Civil Code,
such as the following:
o When, without the knowledge of
the person obliged to give
support, said is given by a
stranger, the latter shall have a
right to claim the same from the
former, unless it appears that
she gave it out of it pity and
without intention of being
repaid,
o When funeral expenses are
borne by a third person, without
the knowledge of the relatives
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who were obliged to give
support to the deceased, and
relatives shall reimbured the
third person, should the latter
claim reimbursement.
o When during a fired, flood,
storm, or other calamities,
property is saved from
destruction by another person
without the knowledge of the
owner, the latter is bound to pay
the former just compensation;
Article 1161
Civil obligations arising from criminal offenses
shall be governed by the penal laws, subject to
the provisions of article 2177, and of the
pertinent provisions of Chapter 2, Preliminary
Title, on Human Relations, and of Title XVIII of
this Book, regulating damages.
Under the Article 100 of the Revised
Penal Code, every person criminally liable is
also civilly liable. The civil liability is also civilly
liable. The civil liability includes restitutions,
reparation of the damage cause, or
indemnification for consequential damages.
Restitution is the restoration or return
of the thing which is the object of the crime. It
is the court that will determine the amount of
damages, taking into consideration he price of
the thing and if possible, its special
sentimental value to the injured party and
reparation shall be made accordingly.
Indemnification shall include not only those
caused the injured party, but also those
suffered by his family or by a third person by
reason of the crime.
Article 2177 of the Civil Code provides
that responsibility for fault or negligence that
causes quasi-delict is entirely separate and
distinct front the liability arising from
negligence under the Penal Code. But the
plaintiff cannot recover damages twice for the
same act or omissions of the defendant (Civil
Liability in Civil Code and Civil Liability of Penal
Code).
In the Sample Case:
Ø The pendency of the civil action before the
court trying the criminal case prohibits the
filing of another civil action in another court on
the ground of litis pendentia (ground to
dismiss civil action). The prime purpose of the
criminal action is to punish the offender to
deter her and others form committing the
same or similar offense, to isolate her and
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 others from committing the same or similar
offense, to isolate her from society, reform or
rehabilitate her or, in general, to maintain
social order. The purpose of the civil action is
for the restitution , reparation or
indemnification of the private offended party
for the damage or injury she sustained by
reason of the delictual or felonious act of the
accused.
1.4 Damages
Titile XVII of Book Iv is entitled Damages. “Damages’
refers to the sum of money which the law awards or
imposes as pecuniary compensation, recompense, or
satisfaction for an injury done or a wrong sustained
as a consequence of either a breach of a contractual
obligation or a tortuous or illegal act..” It is different
from “damage” which pertains to the actionable loss,
hurt or harm which results from the unlawful act,
omission or negligence of another. Thus, “damages
are the amounts recoverable or that which can be
awarded for the damage done or sustained.”
There are different kinds of damages
that the court may impose and include:
- Actual or compensatory
- Moral
- Nominal
- Temperate or moderate
- Liquidated
- Exemplary or corrective
The kinds and amount of damages that the
courts will award depend on the circumstances of the
case. Actual or compensatory damages cannot be
presumed; it must be duly proved and proved with
reasonable degree of certainty.
Moral damages include physical suffering,
mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social
humiliation, and similar injury. Though incapable of
pecuniary computation, moral damages may be
recovered if they are the proximate result of the
defendant’s wrongful act or omission.
Article 2201 states that “(i)n contacts 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.”
1.4 Quasi-delicts
Article 1162
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Obligations derived from quasi-delicts shall be
governed by the provision of Chapter 2, Title XVIII
of this Book, and by special laws.
Article 2176 of the Civil Code defines
“quasi-delict”
as a person’s act or omission that causes damage to
another, there being fault or negligence of the former,
and there being no pre-existing relation between the
offending and offended parties. Quasi-delicts are
therefore, are voluntary but negligent acts not
punishable under criminal law that make the
offending party liable for damages.
1.4.a. Negligence
Negligence:
The failure of a person to observe for
the protection of the interests of
another that degree of care, precaution
and vigilance which the circumstances
justly demand, and which causes injury
to the other person.
1.4.a.i Two Kinds of Negligence
1.) Culpa Aquiliana
Negligence as a source of obligation.
This is what is applicable to quasi-delict,
and the pertinent provisions of the Civil
Code are found in Chapter 2 of Title XVII
of the Civil Code, specifically Articles
2176 to 2194.
2.) Culpa Contractual
Negligence in the performance of a
contract
1.4.b. The Requisites of Quasi-delict
(a) There must be an act or omission;
(b) Such act or omission causes damage to another;
(c) Such act or omission is caused by fault or
negligence; and
(d) There is no pre-existing contractual relation
between the parties
1.4.c. Crimes Distinguished from Quasi-delicts
1. In crime, there is criminal or malicious intent or
criminal negligence, while in quasi-delict, there is only
negligence.
2. In crime, the purpose is punishment, while in
quasi-delict, indemnification (compensation for harm
or loss; security against legal liability for one’s
actions) of the offended party
3. Crime affects public interest, while quasi-delict
concerns private interest.
4. In crime, there are generally two liabilities:
criminal and civil, while in quasi-delict there is only
civil liability (legal obligation arising from private
wrongs);
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5. Criminal liability cannot be compromised or
settled by the parties themselves, while the liability
for quasi-delict can be compromised as any other civil
liability;
6. In crime, the quilt of the accuse must be proved
beyond reasonable doubt, while in quasi-delict the
fault or negligence of the defendant need only be
proved by preponderance (i.e., superior or greater
weight) of evidence.
II. Nature and Effect of Obligations
Article 1163
Every person obliged to give something is also
obliged to take care of it with the proper
diligence of a good father of a family, unless the
law or the stipulation of the parties requires
another standard of care.
This provision applies to an obligation to give. It lays
down the standard of care required of the debtor so
that the thing or object will be preserved from the
perfection of the contract until the thing is delivered
to the vendee. The diligence of a good father of a
family is the minimums standard of care required. It
means that the obligor must take care of the thing
the way a prudent person would as to his own
property. But this standard of care applies only when
the parties do not agree on another standard of care,
or if the law does not require a higher standard of
care.
Article 1164
The creditor has a right to the fruits of the thing
from the time the obligation to deliver arises.
However, he shall acquire no real right over it
until the same has been delivered to him.
Aside from the thing itself, the creditor has the right
to the fruits of the thing, be they natural, industrial or
civil fruits.
Natural Fruits
® Are the spontaneous products of the
soil, and the young and other products
of animals
Industrial Fruits
® Those produced by lands of any kind
through cultivation or labour
Civil Fruits
® Are the rents of buildings, the prove of
leases of lands and other property and
the amount of perpetual or life
annuities or other similar income
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The right to the fruits commences from the time the
object, or principal thing is due. If the object is not yet
demandable, then neither are the fruits.
2.1 Delivery
A creditor will have dominion or ownership over the
object or thing only when the object or thing has
been delivered to her, and not from the moment that
the parties enter into an agreement. Before delivery,
the object remains to be a mere expectation.
“nonnudis pactis, sed traditione dominie rerum
transferentur”
(tradition or delivery is needed to pass ownership)
In a contract of sale of real property, such as a a
house and lot, constructive delivery, as a general rule,
takes place when the instrument of sale Is executed
in a public document. But the Court also has stated
that the execution of a public instrument “only gives
rise to a prima facie (based on the first impression;
accepted as correct until proved otherwise)
presumption of delivery, and this presumption is
negated in the following situations:
(1) The instrument itself expresses or
implies that delivery was not intended
(2) Failure of the vendee to take actual
possession of the land sold
(3) It is shown that such delivery was not
effected, because a third person was
actually in possession of the thing
It is only when delivery has been made that the
creditor acquires real right over the thing. A real right
is enforceable against the whole world which means
that the owner can prevent anyone from using the
thing. Prior to delivery, the buyer only has personal
right specifically against the seller, which consists
mainly of the right to demand delivery when the
thing is due.
Article 1165
When what is to be delivered is a
determinate thing, the creditor, in addition to the
right granted to him by Article 1170, may compel
the debtor to make the delivery.
If the thing is indeterminate or generic, he
may ask that the obligation be complied with at
the expense of the debtor.
If the obligor delays or has promised to
deliver the same thing to two or more persons
who do not have the same interest, he shall be
responsible for fortuitous (happening by accident
or chance rather than design) event until he has
effected the delivery.
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 of the debtor (Civil Code, Art. 1165). This means that
2.1.a. Things to be Delivered the creditor can source the thing from another
2.1.a.i. Determinate Thing person, with the cost thereof being borne by the
“A concrete, particularised object, indicated by its debtor, with additional liability for damages.
own individuality.”
2.1.e. Liability of Debtor for Fortuitous
Ø Therefore, it is not substitutable. Event
The third paragraph of Article 1165 makes the debtor
2.1.a.ii Indeterminate Thing liable for fortuitous event in two instances:
“Is only indicated by its class, without being 1. If the obligor delays, or
distinguished from the rest of its kind.” 2. Has promised to deliver the same thing
to two or more persons who do not
Ø In an obligation to deliver a generic or have the same interest
indeterminate thing, one can deliver any
object for as long as it satisfies the description Fortuitous events are essentially beyond a
of the object to be delivered. If the quality was person’s control; and the concept is discussed more
not stated, the creditor cannot demand a thing in detail under Article 1174, which governs fortuitous
of superior quality and neither can the debtor events. Essentially though, the general rule is that no
deliver a thing of inferior quality, and to settle person is held responsible for such events. Article
the issue, the purpose of the obligation and 1165, specifically its third paragraph, is therefore an
other circumstances shall be taken into exception to the general rule.
consideration. Delay in the legal sense is different from the
Ø Because the generic or indeterminate thing is usual concept of delay or tardiness, and is discussed
substitutable, the loss of the motorcycle about extensively in Article 1169. Suffice to say that an
to be delivered will not extinguish the obligor who is in legal delay vis-avis (in relation with
obligation, the obligation remains since the regard to; face-to-face) the performance of his
obligor may provide another motorcycle to the obligation will be responsible for the consequences of
creditor. fortuitous events.
Similarly, if the debtor has obliged herself to
2.1.b. Remedies of the Creditor/Obligee deliver the same determinate thing to two people
Article 1165. the creditor has different remedies if the who have different interests, then she shall also be
debtor is unable to deliver. The remedies will depend liable for fortuitous event. It will not be possible for
on whether the thing to be delivered is determinate the debtor to fulfil the same obligation to two people
or indeterminate. who desire the same object for different purposes;
thus eventually, the debtor will be liable for the
2.1.c. Failure to Deliver Determinate damages to at least one of the obliges.
Thing The following chart summarises the remedies
Under the first paragraph of Article 1165, the creditor of a creditor or oblige based on Article 1165:
has a right to have the object deliverd and she may Obligation to Obligation to
enforce this right by the filing of a case for specific deliver a deliver a
performance. If it is a specific thing that is to be determinate generic
delivered, only the debtor can comply with the thing thing
obligation. The debtor could be demanded upon to Specific Remedy Remedy
make delivery, with additional liability for damages, Performance available (Art. available,
or the obligee can opt for rescission (the revocation, 1165, para. plus damages
cancellation, or repeal of a law, order, or agreement) 1), plus
of the contract, with a right to also ask for damages damages
from the obligor. A third option is for the oblige to Rescission Remedy Remedy
demand for damages only under Article 1170. available (Art. available,
1191), plus plus damages
2.1.d. Failure to Deliver Indeterminate damages
Thing Substitute Not available Remedy
A creditor who has the right to the delivery of a Performance available (Art.
generic or indeterminate thing has same rights as a 1165, para.
creditor who has the right to the delivery of a 2), plus
determinate thing. In addition, the creditor can have damages
the thing delivered by a third person at the expense

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 Damages Remedy Remedy
available available
Article 1166
The obligation to give a determinate thing
includes that of delivering all its accessions and
accessories, even though they may not have
been mentioned.
All the things attached to the principle thing and
those, though not attached but serve to complete it,
must be delivered. This stems from the legal principle
that the “accessory follows the principal.” Thus an
obligation to deliver the principal includes the
obligation to deliver the accessory as well. However,
if the parties stipulate to exclude the accessions and
accessories, then they are not included in the sale.
Conversely, if the parties only agreed on the
accessions or accessories, the principal thing would
not be included.
ACCESSORIES: those things which are meant for the
embellishment, use or preservation of a thing which
is more important.
Ex.
The tools and spare tire are deemed
included when a car is sold although they have not
been mentioned in the contract.
Article 1166 does not include fruits, which is covered
by Article 1164.
Article 1167
If a person obliged to do something fails to do it,
the same shall be executed at his cost.
This same rule shall be observed if he does it in
contravention of the tenor of the obligation.
Furthermore, it may be decreed that what has
been poorly done be undone.
This provision refers to an obligation to do.
- PERSONAL OBLIGATION: something
that only the obligor can do.
- NON-PERSONAL OBLIGATION:
something that anyone can do
Ex.
A personal obligation is when a client engages a
famous artist to render a painting. Only that artist can
produce that painting in that style.
A non-personal obligation is when a client hires a
painter to paint a house. This is an act that be
performed by any carpenter.
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THREE POSSIBLE INSTANCES WHEN THE OBLIGOR IS
CONSIDERED IN BREACH OF THE OBLIGATION:
1. Non-fulfilment of the act;
2. Fulfilment of the obligation but contrary
to what is required of the obligor; and
3. Fulfilment of the obligation but in a
poor manner.
Unlike the case of “an obligation to give,” in case of
“an obligation to do,” the creditor cannot file a case
to compel the specific performance of an obligation
to do.
- Provision in the Philippine Constitution
that prohibits involuntary servitude
- No person can be forced to render
service against her will as this is
tantamount to slavery or involuntary
servitude.
- Obligor cannot be forced to render the
service even if she is in breach of his
obligation
REMEDIES OF THE OBLIGEE
In the case of a/an…
PERSONAL OBLIGATION:
- The remedy in Article 1167 does not
apply.
- Ex.
If the artist will refuse to render the portrait, a
portrait done by another artist would not
capture the same unique style. The only
remedy of the client is to a file a case for
damages.
NON-PERSONAL OBLIGATION:
- The remedies in Article 1167 apply.
- Ex.
If the painter refuses to pain the house or if
the colours used are wrong, or if the painting
job is faulty, the remedies would be:
a.) The client can hire another painter to
do the job, and then charge the costs to
the painter first hired;
b.) The client can have the wrong colours
or the sloppy work be undone and
redone properly; and
c.) The client can sue for damages instead
of remedies (a) or (b), or in addition to
remedies (a) and (b).
Article 1168
When the obligation consists in not doing and
the obligor does what has been forbidden him, it
shall also be undone at his expense.
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Considers an obligation to do. If the obligor does an
act which she agreed not to do, it will have to be
undone at her expense. In addition, an obligor can be
liable for damages for doing things which she was
forbidden from doing.
Ex.
A bought a piece of land adjoining the
property of B. She agreed with B that B
will not construct a fence around her
property so that the farm animals of A
can freely graze on the land of B.
Should B construct a fence on her
property, A can demand removal of the
fence. If B does not demolish the fence,
A has the legal right to sue in court for
the wall’s removal, with the cost being
shouldered by B.
Article 1169
Those obliged to deliver or to do something
incur in delay from the time the oblige judicially
or extrajudicially demands from hem the
fulfilment of their obligation.
However, the demand by the creditor shall not
be necessary in order that delay may exist:
(1) When the obligation or the law
expressly so declare; or
(2) When from the nature and
circumstances of the obligation it
appears that the designation of the
time when the thing is to be
delivered or the service to be
rendered was a controlling motive
for the establishment of the
contract; or
The legal concept of delay is different from that of
ordinary delay. The inability of the obligor to perform
the obligation on due date does not constitute legal
delay; and will not make the obligor liable for the
consequences of legal delay, such as responsibility for
fortuitous events, and liability for damages.
As a general rule, the law requires
creditor to make a judicial or extra-judicial demand
on the debtor to perform he obligation in order for
legal delay, or default to take place. Without said
demand, the debtor is only in ordinary delay, and not
liable for damages.
LEGAL DELAY, OR MORA, MAY BE CLASSIFIED INTO
THREE:
1. MORA SOLVENDI:
delay of the debtor in fulfilling his
obligation.
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2. MORA ACCIPIENDI:
delay on the part of the creditor in
accepting the performance of the
debtor; and
3. COMPENSATIO MORAE:
the delay of both the creditor and
debtor in reciprocal obligations.
ELEMENTS OF LEGAL DELAY OR DEFAULT:
The requisites for default or legal delay to set are as
follows:
(a) The obligation is demandable and
liquidated;
(b) The debtor delays performance and
(c) The creditor judicially or extra-judicially
requires the debtor’s performance.
Ex.
On 1 January, A and B entered into a contract
whereby A will sell his laptop to B for P30,000 in cash,
and that delivery will be made at the end of the
month. The failure of A to deliver on 31 January will
not make her in legal delay or in default. Thus she will
not be liable for fortuitous event and damages.
However, if on the due date, B
demands delivery of the laptop and A is unable to
comply with the demand, then A will be in legal delay,
and is then liable for damages.
DEMANDS ON THE DEBTOR
Article 1169 requires the creditor to make a demand
in order for default to set in. Such demand an either
be judicial or extra-judicial.
- JUDICIAL:
demand pertains to the filing of a
complaint in court to ask the court to
order the debtor to perform her
obligations.
- EXTRA-JUDICIAL:
a demand made outside the court and
can either be verbal or written.
o It is more prudent to
make an extra-judicial
demand in writing
(demand letter).
o Prepare evidence of
receipt by the debtor of
the demand letter.
EXCEPTIONS TO THE GENERAL RULE:
Article 1169 enumerates certain exceptions to the
general rule that demand is required to put the debtor
in legal delay.
1. When the obligation so declares
If the parties stipulate that there is no need for
demand, then delay will set in the debtor is unable to
8
fulfil the obligation upon its maturity. This exception
is strictly construed.
Ex.
A promised to deliver a mobile phone to B on
November 6, 2013 without need for demand.
The failure off A to deliver the phone on
November 6, 2013 will put her immediately in
legal delay, and liable for damages, even
without demand being made by B.
2. When the law expressly so declares
There are laws with specify the date of compliance. In
these situations, a demand is no longer necessary
because everyone is enjoined to obey the law.
(necessary for someone as a duty or responsibility)
upon her.
Ex.
A agreed to sell her land to B. Part of
the agreement is for B to pay down
payment upon execution of the
contract of sale (including A’s delivery
of the land title), and the balance to be
paid one (1) year from the date of the
contract’s execution. A’s failure to
deliver the original copy of the contract
and the title, to the mutual delay by
both parties since there is mutual
inaction by both parties – neither has
completed their part in their reciprocal
obligation. This gives rise to
compensatio morae.

3. When from the nature and

circumstance of the obligation is
appears that the designation of the time
when the thing is to be delivered or the
service to be rendered was a controlling
motive for the establishment of the
contract
In the obligations where time is of the essence or
time was a primary consideration for the agreement,
demand is not necessary. The failure of the debtor to
deliver the thing due or perform the service required
on due date will render said thing or service useless
for the purpose for which the creditor has contracted
for said thing or service.
Ex.
Failure to deliver wedding gown.

4. When demand would be useless

because of debtor’s fault
If It has become impossible for the debtor to perform
the obligation because of the debtor’s fault, demand
is not necessary because it is useless.

5. In reciprocal obligations to be
performed simultaneously
“Reciprocal obligations are those which arise from
the same cause, and which each party is a debtor and
creditor of the other, such that the obligation of one
is dependent upon the obligation of the other. They
are to be performed simultaneously, do that the
performance of one is conditioned upon the
simultaneous fulfilment of the other.”
One party is considered in delay from
the moment the other party fulfils her obligation,
while the former does not comply or is not ready to
comply in a proper manner with what is incumbent

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III. Chapter 3: DIFFERENT KINDS OF OBLIGATIONS conditions and is considered as immediately
Title 1, Chapter 3 of Book IV of the Civil Code details demandable.
the primary classification of obligations, which are: THREE INSTNACES WHEN AN OBLIGATION IS
a. Pure and Conditional Obligations DEMANDABLE IMMEDAITELY:
(Article 1179 to 1192) 1. when the obligation is pure
b. Obligations with a Period 2. when the obligation is subject to a
(Articles 1193 to 1198) resolutory condition; or
c. Alternative and Facultative 3. when the obligation is subject to a
Obligations (Article 1199 to resolutory period.
1205)
d. Joins and Solidary Obligations CONDITIONAL OBLIGATION
(Article 1223 to 1225) An object subject to a condition.
e. Divisible and Indivisible - obligations whose effectivity, or
Obligations (Article 1223 to extinguishment is subject to the
1225) fulfilment of a condition.
f. Obligations with a. Penal Clause - *CONDITIONS: a future and uncertain
(Article 1226 to 1230) event, or a past event that is unknown
to the parties.
o Article 1179 mentions
3.1 Section 1: PURE AND CONDITIONAL OBLIGATIONS future “or” uncertain
Article 1179 events.
Every obligation whose performance does not o must be future and
depend upon a future or uncertain event, or uncertain; use of “or” in
upon a past event unknown to the parties, is the provision is improper
demandable at once. o past events unknown to
Every obligation which contains a resolutory the parties means that
condition shall also be demandable, without the parties are not aware
prejudice to the effects of the happening of the that at the time the
event. condition is imposed the
event has already taken
*CONDITION – an event which is both future and place.
uncertain upon which the existence or o the uncertainty is in
extinguishment of an obligation is made to depend. whether the past event is
proved or not
PURE OBLIGATION o must not be impossible or
an obligation which does not contain any condition or illegal contrary to public
term upon which the fulfilment is made to depend; customs, morals or public
immediately demandable by the creditors and debtor policy; those that which
cannot be excused from not complying with his are, are ruled void.
prestation. Ex.
- one which is not subject to any Student’s graduation from the university – this is a
condition. future and uncertain event. There are many factors
- no specific period or date mention for that could determine whether a student will graduate
its fulfilment and is, therefore, or not. If the obligation arises upon graduation (e.g.
immediately demandable parents to give daughter a car on graduation), then
- quality of instant demandability cannot the obligation Is conditional.
be subject to an absurdity
KINDS OF CONDITIONS
To put it simply… 1. SUSPENSIVE CONDITIONS – conditions
- no condition the fulfilment of which gives rise to an
- no period/time obligation; the demandability of the
- immediately demandable obligation or the effectivity of the
contract can take place only after the
condition has been fulfilled;
Ex. If the condition is not fulfilled, then the
A buys a car from B, and A agrees to pay P1,000,000. parties would stand as if the conditional
The agreement is not subject to any other terms or obligation never existed.

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Ex.
A will sell his car to B if Ateneo becomes the
champion in the next season’s UAAP men’s basketball
championship in the following season. If the
condition is not fulfilled, then B will not be able to
demand the car’s delivery.

2. RESOLUTORY OBLIGATION – its

happening extinguishes the obligation
which is already existing; demandable
at once; but once the resolutory
condition is fulfilled, rights previously
acquired will be lost.

Ex.
A will give B P5,000 per month until B passes all the
required subjects in his sophomore year in college.
Thus, B can immediately demand P5,000 per month
from A; but once B passes all the required subjects
during his sophomore year, A’s obligation will cease
and B will no longer be entitled to P5,000 per month.

SUSPESNIVE CONDITION vs. RESOLUTORY CONDITION

Suspensive Resolutory
Condition Condition
Effect of the If the suspensive If the resolutory
happening of condition is condition is
the condition fulfilled, the fulfilled, the
on the obligation arises. obligation is
existence of extinguished.
the obligation
When the law If the suspensive If the resolutory
begins to condition does condition takes
affect the not take place, pace, the legal
parties the legal tie does tie is
not appear. consolidated.
Existence of Until the The obligation
the obligation suspensive begins
condition takes immediately,
place, the but over this
existence of the obligation
obligation is a hovers the
mere hope. possibility of its
termination, if
the resolutory
condition takes
place.

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CHAPTER 4: EXTINGUISHMENT OF OBLIGATIONS
PAYMENT – the fulfilment of the obligation.
ART. 1231. Obligations are extinguished: Manner of fulfilling depends on whether it is…
(1) By the payment or performance: (a) to give or deliver a thing
(2) By the loss of the thing due: (b) to do or perform a service or an act
(3) By the condonation or remission of (c) not to do
the debt; - must be complete delivery or performance
(4) By the confusion or merger of the to extinguish the obligation; integrity =
rights of the creditor and debtor; complete or full payment
(5) By compensation
(6) By novation. GR.
Other causes of extinguishment of Incomplete delivery or incomplete performance is
obligations, such as annulment, rescission, not considered payment
fulfilment of a resolutory condition, and
prescription, are governed elsewhere in this 1. COMPLETE DELIVERY
Code. (a) DETERMINATE THING – the thing agreed upon
must be delivered; can’t insist on another thing.
SUMMARY GR.
Person who borrows a specific thing must return the
Obligations are extinguished by
very same thing to the owner who lent it.
payment or condonation or
performance remission of debt
(b) INDERTERMINATE THING – complete delivery if
loss of the thing compensation
the thing belongs to the same genus or species
confusion or merger of fulfilment of resolutory
agreed upon.
rights of CR and DR condition
GR.
novation annulment
If the parties have not specified the quality and
prescription rescission
circumstances of the. Generic or indeterminate thing,
the obligee cannot demand delivery of a thing of a
superior quality; obligor can’t insist on giving a thing
Additional Terms: of inferior quality.
PRESCRIPTION – the role that the passage of time plays in
the making and ending of certain rights.
GR.
If money to be delivered, the full amount due must
CONDONATION – the forgiveness, purposeful disregard,
be given. The prestation must be performed in one
or tacit approval by a virtue of another’s illegal or
act, not in parts; cannot be in partial payment unless
objectionable act especially by treating the other as if
stipulated. Debtor cannot be required to make partial
nothing happened.
payments before due date unless stipulated.

NOVATION – the act of replacing an obligation to perform

GR.
with another obligation; adding an obligation to perform;
Acceptance of partial payment does not extinguish
replacing a party to an agreement with a new party.
the obligation if the creditor demands for the
remainder.
EXTINGUISHMENT OF AN OBLIGATION – termination of
the obligation; ceases to be due and demandable.

2. COMPLETE PERFORMANCE
Þ The act agreed upon must be performed.
Þ Cannot be substituted for another act unless
SECTION 1 – PAYMENT OR PERFORMANCE
stipulated
EXCEPTION:
ART. 1232. Payment means not only the delivery of
Inability to perform the act due to fortuitous events.
money, but also the performance, in any other
manner, of an obligation.

ART. 1233. A debt shall not be understood to have
been paid unless the thing or service in which the
obligation consists has been completely delivered or
rendered as the case may be
3. COMPLETE NON-PERFORMANCE
Obligor not doing anything that will contravene or violate
the obligation.
EXCEPTION: INTEGRITY OR COMPLETENESS RULE
Sometimes partial delivery or performance may
suffice to extinguish the obligation.

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 ART. 1234. If the obligation has be substantially
performed in good faith, the obligor may recover as
though there had been a strict and complete
fulfilment, less damages suffered by the obligee.
SUBSTANTIAL PERFORMANCE IN GOOD FAITH – exception
to the rule of integrity or completeness in the
performance of an obligation.
REQUISITES:
1. There must have been an attempt in good
faith to perform the obligation, without
any wilful or intentional deviation from said
obligation.
2. Deviation from obligation must be slight.
3. Omission or defect must be technical and
unimportant; must not permeate the
whole obligation which would otherwise
frustrate the parties’ intended objective.
ART. 1235. When the oblige accepts the
performance, knowing its incompleteness or
irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied
with.
OBLIGEE’S ACCPETANCE OF INCOMPLETE OR IRREGULAR
PERFORMANCE – Obligee’s waiver of full or complete
performance = another exception to the rule on integrity
or completeness of performance.
GR.
If the obligee accepts the payment of the obligor
(even if it is not full), it is considered full payment, if
and only if, the obligee does not make a demand for
the remainder (written or verbal).
PARTIAL PERFORMANCE AGREED UPON – partial
performance is acceptable so long as it is expressly
stipulated.
DEBT IS PARTLY LIQUIDATED AND UNLIQUIDATED –
Obligor owes sums of money to the obligee, and some of
them are already liquidated or known, while others are
still subject to computation, the obligor has the right to
pay already for the debt whose amount is known.
ART. 1236. The creditor is not bound to accept
payment or performance by a third person who has
no interest in the fulfilment of the obligation, unless
there is a stipulation to the contrary.
Whoever pays for another may demand from
the debtor what he has paid, except that if he paid
without the knowledge or against the will of the
debtor, he can recover only insofar as the payment
has been beneficial to the debtor.
CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019
SUMMARY
CR does not have to accept payment from a third person
who has no interest in the fulfilment of the obligation
unless stipulated. Whoever paid may demand to be paid
back, but only the amount that was beneficial to the
person in debt.
ART. 1237. Whoever pays on behalf of the debtor
without the knowledge or against the will of the
latter, cannot compel the creditor to subrogate him
in his rights, such as those arising from mortgage,
guaranty, or penalty.
ART. 1238. Payment made by a third person who
does not intend to be reimbursed by the debtor is
deemed to be a donation which requires the
debtor’s consent. But the payment is in any case
valid as to the creditor who has accepted it.
OBLIGOR or DEBTOR – party who has the obligation to pay
or fulfil the obligation.
- If the obligor’s payment is complete,
obligee is also required to accept it so long
as there is no valid reason to refuse it.
THIRD PERSONS WITH INTEREST:
GUARANTOR or SURETY – acts as a co-signer of sorts, in
that they pledge their own assets or services if a situation
arises in which the original debtor cannot perform their
obligations. (solidarily bound)
§ GUARANTOR – assures the solvency of the
debtor
§ SURETY – insurer of the debt
THIRD PERSON WITHOUT INTEREST:
THIRD PERSON – having no interest in the obligation
because she cannot be compelled to fulfil the debtor’s
obligation.
- If a complete strange offers to fulfil the
obligation, offer can be turned down by
creditor.
- Creditor is not required to accept the
payment unless it is stipulated by the
parties.
- Once creditor accepts the pay, the
obligation is extinguished à third person
may recover from the debtor depending on
whether it was made without debtor’s
knowledge or against their will.
GR.
Payment made with debtor’s knowledge the third
person can collect the entire amount he paid.
However, if the payment was made without the
debtor’s knowledge or against his will, the third
person can only collect the amount that benefited
the debtor.
13
WHAT A THIRD PERSON CAN COLLECT: Sample Case ART. 1239. In obligation to five, payment made by
(D – debtor, C – creditor, TP – third person) one who does not have the free disposal of the thing
D borrowd P1M from C due and capacity to alienate it shall not be valid,
D paid half without prejudice to the provisions of ART. 1427
TP paid C P1M with knowledge of D under the Title of “Natural Obligations”
So, TP can collect from D and D can collect the excess
P500,000 from C because… WHEN PAYMENT IS NOT VALID
GR. Invalid when;
No one shall be unjustly enriched at the expense of (a) The person making payment does not have
another. the right to dispose of it
However, (b) Is incapacitated like a minor or an insane
If TP paid without knowledge or against the will of D, then person
TP can only collect from D the beneficial amount which is GR.
P500,000. But TP can collect from C the excess payment (ART. 1427) a minor, between 18 and 21, who enters
on the basis of solutio indebiti. into a contract, is deemed to have been repealed by
the Family Code of the Philippines, which provides
THIRD PARTY’S RIGHT TO SUBROGATION that the age of majority is now eighteen.
SUBROGATION – the right of a third party to acquire all
the rights of the creditor.
- Subrogation rights depend on whether the
ART. 1240. Payment shall be made to the person in
third party has interest in the fulfilment of
whose favour the obligation has been constituted, or
the obligation.
his successor in interest, or any person authorised to
GR.
receive it.
(ART. 1236 and ART. 1237) third person with interest
(guarantor or surety) can compel the creditor to
subrogate or substitute her into the creditor’s rights TO WHOM PAYMENT IS MADE
even if payment is made by the third person without Þ To extinguish obligation, payment must be made
the debtor’s knowledge or consent. to the creditor or the creditor’s successor-in-
interest.
- Third person without interest who pays the
AGENTS – get their authorisation to represent the creditor
obligation with debtor’s knowledge or
from the creditor herself.
consent can demand subrogation from the
creditor.
GUARDIANS – authorised by law or are appointed as such
- Third person pays for the debt without the
by the court to protect the interest of the creditor.
debtor’s knowledge or against his will, third
person cannot ask for subrogation. GR.
- Debtor’s obligation is secured by mortgage Obligation is not extinguished if payment is made to
in favour of the creditor, third person who the deceased creditor’s parents if there is the
has a right of subrogation is protected by existence of a child/successor. Payment must first be
the same security. given to the legitimate descendant as they are the
first successor-in-interest.
WHEN THIRD PERSON DOES NOT INTEND TO BE PAID - Payment made to wrong person àdebtor
DONOR – a person who gratuitously gives, and the debtor will remain in debt if there is no fault or
will be considered as the done. negligence on the creditor’s part.
GR. - Even if debtor acted in utmost good faith
For the third person’s donation to be valid, the or was induced by the fraud of a third
debtor must accept. person, payment to one who isn’t the
creditor or one who is not authorised to
receive payment is void.
SUMMARY: THIRD PERSON’S PAYMENT
Third Person’s Recovery Subrogation
Payment Payment
ART. 1241. Payment to a person who is incapacitated
w/ interest full ✓
to administer his property shall be valid if he has kept
w/ knowledge
the thing delivered, or insofar as the payment has
w/ interest full ✓ been beneficial to him.
w/o knowledge
Payment made to a third person shall also be
w/o interest full ✓ valid insofar as it has redounded to the benefit of the
w/ knowledge
creditor. Such benefit to the creditor need not be
w/o interest beneficial ✗ proved in the following case:
w/o knowledge (1) If after the payment, the third person
acquires the creditor’s rights.

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 (2) If the creditor ratifies the payment to
the third person.
(3) If by the creditor’s conduct, the
debtor has been led to believe that
the third person had authority to
receive the payment.
DEFECTIVE PAYMENT
PAYMENT TO AN INCAPACITATED PERSON
EXCEPTION: PAYMENT TO AN INCAPCITATED PERSON
Is not valid unless;
(1) The incapacitated creditor kept the
thing delivered
(2) The payment benefited the
incapacitated creditor.
To extinguish the obligation, payment must then be
made to the guardian.
PAYMENT TO A THIRD PERSON
Payment made to a third person, instead of the creditor,
is not valid, and will not extinguish the obligation.
Exception is when such payment benefits the creditor,
and the debtor has the burden of proving the benefit.
INSTANCES WHEN BENEFIT TO CREDITOR
1. THIRD PERSON ACQUIRES CREDITOR’S RIGHTS
Payment made to third person will become valid if
the third person acquires the rights of the creditor.
2. PAYMENT TO THIRD PERSON IS RATIFIED BY THE
CREDITOR
RATIFICATION – the approval or confirmation of the act of
payment as when the creditor tells the debtor that
payment to the third person accepted or approved by the
creditor
3. ESTOPPEL
*if by the creditor’s conduct, the debtor has been
led to believe that the third person had authority to
receive the payment.
ESTOPPEL – where a person is prohibited from denying
something that has previously said or represent as the
truth if it will injure another.
ELEMENTS OF ESTOPPEL:
(1) Conduct of a party that falsely represents
or conceals material facts that are
inconsistent with those that said party
subsequently attempts to assert.
(2) Intent, or at least expectation, that this
conduct shall be acted upon by, or at least
influence, the other party
(3) Knowledge, actual or constructive, of the
real facts
ELEMENTS – PARTY CLAIMING ESTOPPEL:
(1) Lack of knowledge and of the means of
knowledge of the truth as to the facts in
question
(2) Reliance, in good faith, upon the conduct
or statements of the party to be estopped
CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019
(3) Action or inaction based thereon of such
character as to change the position or
status of the party claiming estoppel, to his
injury, detriment, or prejudice
ART. 1242. Payment made in good faith to any
person in possession of the credit shall release the
debtor.
GR.
Only payment made to the creditor herself will
extinguish the obligation.
EXCEPTION: PAYMENT TO CR= EXTINGUISHED OBLIG.
(a) Payment must have been made in
good faith
(b) Payment must be made to the person
in possession of the credit.
PERSON IN POSSESSION OF CREDIT – not the creditor
herself and not someone authorised by the creditor to
collect the debt; person who appears under the
circumstances to own the credit.
POSESSION OF CREDIT – does not refer to material
custody; apparent or actual ownership of the credit.
ART. 1243. Payment made to the creditor by the
debtor after the latter has been judicially ordered to
retain debt shall not be valid.
*in relation to ART. 1177
EXCEPTION: PAYMENT TO CR= EXTINGUISHED OBLIG.
There is a COURT ORDER addressed to the debtor to
retain the debt. If DR insists on paying CR in violation
of court order, the payment wont extinguish the DR’s
obligation and the DR could be made to pay again.
ART.1244. The debtor of a thing cannot compel the
creditor to receive a different one, although the
latter may be of the same value as, or more valuable
than that which is due.
In obligations to do or not to do, an act or
forbearance cannot be substituted by another act or
forbearance against the obligee’s will.
ART. 1245. Dation in payment, whereby property is
alienated to be the creditor in satisfaction of a debt
in money, shall be governed by the law of sales.
DATION EN PAGO – giving back the property mortgaged
to the lender in exchange for the discharge of a mortgage
debt. As the debt accumulates and becomes
unmanageable, DACION EN PAGO becomes A SOLUTION
of last resort that a borrower can take.
15
 ART. 1246. When the obligation consists in the
delivery of an indeterminate or generic thing, whose
quality and circumstances have not been stated, the
creditor cannot demand a thing of superior quality.
Neither can the debtor deliver a thing of inferior
quality. The purpose of the obligation and other
circumstances shall be taken into consideration
ART. 1247. Unless it is otherwise stipulated, the
extrajudicial expenses required by the payment shall
be for the account of the debtor. With regard to
judicial costs, the Rules of Court shall govern.
EXCEPTION: PAYMENT IN LEGAL TENDER
- Creditor can refuse if debtor doesn’t
pay in legal tender.
- Parties may stipulate the currency in
which payment will be made.
OBLIGATION IS EXTINGUISHED IF CREDITOR ACCEPTS
PAYMENT BY CHECK:
Þ PAYMENT WITH CHECK
Payment by check is considered payment
only when the check has been cashed or credited
to the account of the obligee.
No payment if there is lack of funds in the
drawees bank when payment is due.

ORDINARY EXPENSES – incurred by the debtor to fulfil the

Þ CASHIER’S CHECK
obligation, like packaging or transportation expenses, will
A check certified by the bank on which it is
be shouldered by the debtor.
drawn, and the certificate is equivalent to
acceptance.
JUDICAL EXPENSES – arising from a court case when it is
filed to compel fulfilment of the obligation is usually borne
Þ STALE CHECK IS NOT IMPAIRED CHECK
or paid by the losing party.
Failure of creditor to encash the check within 6
months from its due date leads to the check being
stale.
ART. 1248. Unless there is an express stipulation to
that effect the creditor cannot be compelled partially
Þ IMPAIRED MERCANTILE DOCUMENT NOT DONE
to receive the prestations in which the obligation
consists. Neither may the debtor be required to
make partial payments.
ART. 1250. In case an extraordinary inflation or
However, when the debt is in part liquidated
deflation of the currency stipulated should
and in part unliquidated, the creditor may demand
supervene, the value of the obligation shall be the
and the debtor may effect the payment of the
basis of payment, unless there is an agreement to
former without waiting for the liquidation of the
the contrary.
latter.

EXTRAORDINARY INFLATION/DEFLATION OF CURRENCY –

ART. 1249. The payment of debts in money shall be
made in the currency stipulated, and if it is not
possible to deliver such currency, then in the
currency which is legal tender in the Philippines.
The delivery of promissory notes payable to
order, or bills of exchange or other mercantile
documents shall produce the effect of payment only
when they have been cashed, or when through the
fault of the creditory they have been impaired.
In the meantime, the action derived from the
original obligation shall be held in the abeyance.
LEGAL TENDER – the currency which can be used for the
payment of debts, public, and private, which cannot be
refused by the creditor.
PAYMENT IN COINS:
(1.) P1000 for denomination of P1, P5, and
P10;
(2.) P100 for denominations of 1c, 5c, 10c, and
25c.
any uncommon decrease or increase in the purchasing
power of currency which the parties could not have
reasonably foreseen.
REQUISITES FOR ART. 1250:
(1) There is an official declaration of the
extraordinary inflation or deflation by the
Bangko Sentral ng Pilipinas
(2) The obligation is contractual in nature
(3) The parties expressly agreed to consider
the effects of the extraordinary inflation or
deflation
*should this happen, there will be a corresponding
adjustment or increase in the contract price, using as basis
the value of the currency at the time the contract was
entered into.
There must be proof of the extraordinary
change in the purchasing power of the currency, like the
movement of the price index of goods and services from
the time the obligation is entered into compares to the
time of the obligation’s performance or fulfilment.

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 ART. 1251. Payment shall be made in the place
designated in the obligation.
There being no express stipulation and if the
undertaking is to deliver a. determinate thing, the
payment shall be made wherever the thing might be
at the moment the obligation was constituted.
In any other case the place of payment shall be
the domicile of the debtor.
If the debtor changes his domicile in bad faith or
after he has incurred in delay, the additional
expenses shall be borne by him.
These provisions are without prejudice to venue
under the Rules of Court.
SUMMARY
If no place was stipulated, the place of payment will be at
the debtor’s domicile.
SPECIAL WAYS OF MAKING PAYMENT:
Payment is still considered to validly extinguish the
obligation;
1. application of payments;
2. dation of payments;
3. payment by cession; and
4. tender of payment and consignation.
ART. 1252. He who has various debts of the same
kind in favour of one and the same creditor, may
declare at the time of making the payment, to which
of them the same the same must be applied. Unless
the parties so stipulate, or when the application of
payment is made by the party for whose benefit the
term has been constituted, application shall not be
made as to debts which are not yet due.
If the debtor accepts from the creditor a receipt
in which an application of the payment is made, the
former cannot complain of the same, unless there is
a cause for invalidating the contract.
ART. 1253. If the debt produces interest, payment of
the principal shall not be deemed to have been made
until he interests have been covered.
ART. 1254. When the payment cannot be applied in
accordance with the preceding rules, or if application
cannot be inferred from other circumstance, the
debt which is most onerous to the debtor, among
those due, shall be deemed to have been satisfied.
If the debts due are of the same nature and
burden, the payment shall be applied to all of them
proportionately.
ART. 1252 – ART. 1254 apply to a person owning a single
creditor several debts of the same kind.
CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019
ONEROUS DEBT – the sum of loans and financings,
debentures, promissory notes, derivative instruments and
securities issued intentionally, recorded in current
liabilities and long-term liabilities on the issuer’s
consolidated balance sheet.
RULES ON THE APPLICATION OF PAYMENT:
1. If debtor decides on how payment should
be applied, then payment is made
accordingly.
2. If the debtor does not make application,
then the creditor can make the application.
3. If nether the debtor not he creditor makes
application, then payment is applied to the
most onerous debt.
4. If the debts are equally onerous, then
payment is applied proportionately to all
the debts.
RULES TO DERTERMINE WHICH IS THE MOST ONEROUS
OBLIGATION:
1. An interest-bearing obligation is more
onerous than a non-interest-bearing
obligation
2. A prior contracted debt is more onerous
than a later contracted debt.
3. An obligation where a party is bound as the
debtor herself as principal is more onerous
than one where she is bound as merely
bound secondarily, as a surety or
guarantor.
4. An obligation which is secured (such as by
pledge or mortgage) is more onerous than
an obligation which is unsecured.
5. An obligation subject to a penal clause is
more onerous than an obligation without a
penal clause.
ART. 1255. The debtor may cede or assign his
property to his creditors in payment of his debts.
This cession, unless there is stipulation to the
contrary, shall only release the debtor from
responsibility for the net proceeds of the thing
assigned. The agreements which, on the effect of the
cession, are made between the debtor and his
creditors shall be governed by special laws.
PAYMENT BY CESSION – cession applies where there is
one debtor who owes several obligations to different
creditors; not used when there is only one creditor.
- Debtor assigns his properties to her
creditors and proceed from the sale of
properties are applied to the debtor’s
various credits.
- If payment through voluntary cession is not
accepted by the creditors, then the
ALTERNATIVE is through proceedings
under the INSOLVENCY LAW.
17
R.A. 10142* (Financial Rehabilitation and Insolvency Act) – ART. 1256. If the creditor to whom tender of
law governing the gathering of the estates of the insolvent payment has been made refuses without just cause
debtor and the liquidation of her estate. to accept it, the debtor shall be released from
responsibility by the consignation of the thing or sum
INSOLVENCY – the state of being unable to pay the money due.
owed, by a person or company, on time. Consignation alone shall produce the same effect
LIQUIDATION – the selling of assets of a business, paying in the following cases:
bills and dividing the remainder among shareholders, (1) When the creditor is absent or
partners or other investors. unknown, or does not appear at the
place of payment;
(2) When he is incapacitated to receive
DACION EN PAGO the payment at the time it is due;
DATION IN PAYMENT – the delivery and transmission of (3) When, without just cause, he refuses
ownership of a thing by the debtor to the creditor as an to give a receipt;
accepted equivalent of the performance of the obligation. (4) When two or more persons claim the
- Property may not only consist of a thing, same right to collect;
but also of a real right (such as usufruct) or (5) When the title of the obligation has
of a credit against a third person. been lost.

USUFRUCT – from civil law, under which it is a TENDER PAYMENT AND CONSIGNATION
subordinate real right (ius in re aliena) of limited duration,
Tender is an act preparatory to the consignation
usually for a person’s lifetime. The holder of a usufruct,
TENDER CONSIGNATION
known as a usufructuary, has the right to use (usus) the
may be extrajudicial necessarily judicial
property and enjoy its fruits (fructus).
Privately settle the act of depositing the
obligation before thing due with the court
- a.k.a. DACION EN PAGO (ART. 1245)
undergoing the judicial or judicial authorities
o a contract of sale where CR
process of consignation whenever the creditor
buys DR’s property and
cannot accept or
payment for property is
refuses to accept
charges against DR’s debt.
payment and it
o must have 3 ESSENTIAL
generally requires a
ELEMENTS OF A CONTRACT
prior tender of payment
consent, object certain,
What renders consignation necessary is the refusal by the
cause or consideration.
creditor to accept the debtor’s payment without just
DACION – extinguishes the obligation to the extent of the
cause.
value of the thing delivered, either as agreed upon by the
parties or as may be proved, unless the parties by
FOR CONSIGNATION TO BE EFFECTIVE:
agreement, express or implied, or by their silence,
(debtor must be able to prove the following)
consider the thing as equivalent to the obligation, in
(1) There was debt due
which case the obligation is totally extinguished.
(2) The consignation of the obligation because
the CR to whom the tender of payment has
SAMPLE CASE:
been made:
DR owes CR P50,000. à DR offers to pay in cable wires
a. refused
worth P30,000, CR accepts and there is dation in payment
b. absent
up to the amount of P30,000 à DR still has to pay
c. incapacitated
P20,000.
d. several claimed to be
entitled to the amount due
NOTE:
e. lost title to obligation
- parties must come to an agreement on the
(3) previous notice of the consignation was
substitute in order for it to fulfil the
given to the person interested in the
obligation.
performance of the obligation.
- mere fact that the CR asked an appraiser to
(4) The amount due was placed at the disposal
appraise the DR’s property does not mean
of the court
that the CR has approved the DR’s proposal
(5) After the consignation had been made, the
to settle the obligation through dacion en
person interested was notified, thereof.
pago.
The debtor’s failure to comply with any of the
- Transfer of property to the CR was for the
requirements provides legal basis for the court to declare
purpose of the CR selling the property in
the consignation ineffective.
order to satisfy the debt, the it is not
dation in payment.

CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019 18


INSTANCES WHEN NO TENDER IS NECESSARY:
In the following instances tender is not necessary to
extinguish the obligation. The DR can directly go to court
to consign the amount to be paid in the following
instances.
1. WHEN THE CREDITOR IS ABSENT OR UNKNOWN,
OR DOES NOT APPEAR AT THE PLACE OF
PAYMENT.
- absence need not be declared juridically
- has no legal representative
- or if there is one, but debtor is unaware
(w/o fault)
2. WHEN THE CREDITOR IS INCAPACITATED TO
RECEIVE THE PAYMENT AT THE TIME IT IS DUE.
Comments on creditor’s absence also apply to
situations when the creditor is incapacitated.
3. WHEN. WITHOUT JUST CAUSE, THE CREDITOR
REFUSES TO GIVE A RECEIPT.
DR can immediately do consignation because the
cr may not be in good faith (receipt = proof of
payment).
4. WHEN TWO OR MORE PERSONS CLAIM THE SAME
RIGHT TO COLLECT.
REMEDY OF DR:
not to tender payment to any of the claimants but to
undertake consignation.
EXCEPTION: 2 OR MORE CLAIM TO COLLECT
If jointly bound and both claim the amount due, DR is
to pay the CR’s respective share in the credit.
5. WHEN THE TITLE OF THE OBLIGATION HAS BEEN
LOST.
ART. 1257. In order that the consignation of the
thing due may release the obligor, it must first be
announced to the persons interested in the
fulfilment of the obligation.
The consignation shall be ineffectual If it is not
made strictly in consonance with the provisions
which regulate payment.
SUMMARY
- For consignation to release the DR, must
first be announced to persons who are
interested in the fulfilment of the
obligation like the CR.
- Ineffective if not done in accordance with
the law.
- Absence of prior notice will make the
consignation void.
CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019
ART. 1258. Consignation shall be made by depositing
the things due at the disposal of judicial authority,
before whom the tender of payment shall be proved,
in a proper case, and the announcement of the
consignation in other cases.
The consignation having been made, the
interested parties shall also be notified thereof.
SUMMARY
After depositing what is due with the court, the DR will
notify the interested party of the consignation made.
Failure to deposit the amount due at the disposal of the
court invalidates the consignation.
ART. 1259. The expenses of consignation, when
properly made, shall be charged against the creditor.
SUMMARY
If CR refuses payment for no valid reason, DR will do
consignation with the costs shouldered by the CR.
ART. 1260. Once the consignation has been duly
made, the debtor may ask the judge to order the
cancellation of the obligation.
Before the creditor has accepted the
consignation, or before a judicial declaration that the
consignation has been properly made. The debtor
may withdraw the thing or the sum deposited,
allowing the obligation to remain in force.
SUMMARY
- DR is entitled to withdraw the deposit
made with the court before the
consignation is accepted by the CR or prior
to judicial approval (Art. 1260 of the Civil
Code).
- Withdrawal must be approved by the
court, because once made, remains under
the court’s jurisdiction and control; cannot
recover unless court expressly orders its
return.
ART. 1261. If, the consignation having been made,
the creditor should authorise the debtor to withdraw
the same, he shall lose every preference which he
may have over the thing. The co-debtors, guarantors
and sureties shall be released.
SUMMARY
If CR allows DR to withdraw consignation, debt which was
extinguished is revived.
EXCEPTION: REVIVAL OF OBLIGATION
Revival of obligation does not prejudice those who
have benefited from the earlier extinguishment.
19
 SECTION 2 – LOSS OF THE THING DUE ART. 1264. The court shall determine whether, under
the circumstances, the partial loss of the object of
ART. 1262. An obligation which consists in the the obligation is so important as to extinguish the
delivery of a determinate thing shall be extinguished obligation.
if it should be lost or destroyed without the fault of
the debtor, and before he has incurred in delay. SUMMARY
When by law or stipulation, the obligor is
- Object à determinate
liable even for fortuitous events, the loss of the thing
- If the partial loss is so great that the court
does not extinguish the obligation, and he shall be
decides it leads to extinguishment of the
responsible for damages. The same rule applies
obligation.
when the nature of the obligation requires the
assumption of risk.

ART. 1265. Whenever the thing is lost in the

COMPLETE LOSS OF DETERMINATE THING
possession of the debtor, it shall be presumed that
GR.
the loss was due to his fault, unless there is proof to
Lost w/o DR’s fault and before she is in delay =
the contrary, and without prejudice to the provisions
obligation extinguished. No one is responsible for the
of ART. 116. This presumption does not apply in case
loss of a determinate thing if it lost due to fortuitous
of earthquake, flood, storm, or other natural
event.
calamity.

PARTIAL LOSS OF THE DETERMINATE THING

SUMMARY
ART. 1264 provides that debtor may also be released from
the obligation if the courts decide that the loss is so - provides a presumption that can be
important that it leads to extinguishment of the overturned if the DR presents contrary
obligation. evidence.

EXCEPTION: “LOSS OF THE THING” RULE
Even if a determinate thing is lost w/o the fault of the
DR and before she is in delay, the debtor may still be
liable in the following instances:
(1) Stipulated in the contract that the DR
will be liable for the fortuitous event.
(2) There is assumption of risk
(3) The law itself provides for the liability
of the debtor, such as:
a. ART. 1165, 3rd par.,
when the debtor is in
delay or has promised
the same thing to two
or more persons with
different interests.
b. ART. 1268 where the
obligation to give or
deliver a specific thing
arises from the
commission of a crime.
SAMPLE CASE: Providing Contrary Evidence
It is presumed that the furniture was lost due to the DR’s
fault, but he rebuts it by providing contrary evidence such
as affidavits executed by eyewitnesses.
AFFIDAVIT – a written statement confirmed by oath or
affirmation, for use as evidence in court.
ART. 1266. The debtor in obligations to do shall also
be released when the prestation becomes legally or
physically impossible without the fault of the obligor.
SUMMARY
- impossibility of performing, whether legal
or physical, is not due to the DR’s fault.
- applies only to obligation “to do”
IN RELATION TO:
- ART. 1262. For determinate things
- ART. 1263 For indeterminate things

ART. 1263. In an obligation to deliver a generic thing,

ART. 1267. When the service has become so difficult
the loss or destruction of anything of the same kind
as to be manifestly beyond the contemplation of the
does not extinguish the obligation.
parties, the obligor may also be released therefrom,
in whole or in part.
GR.
Loss of a generic thing, even without fault, does not SUMMARY
extinguish the obligation. The genus of a thing can
- service (understood as the performance of
never perish.
the obligation) has become so difficult.
- states in our law the doctrine of
GR.
unforeseen events
An obligation to pay money is generic.

CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019 20

REBUS SIC STANTIBUS – agreement is valid only if the SECTION 3 – CONDONATION OR REMISSION OF THE DEBT
same conditions prevailing at the time of contracting
continue to exist at the time of performance; obligor may ART. 1270. Condonation or remission is essentially
be released in whole or in part based on this ground. gratuitous, and requires the acceptance by the
REQUISITES: obligor. It may be made expressly or impliedly.
(1) the event or change could not have been One and the other kind shall be subject to the
foreseen at the time of the execution of rules which govern inofficious donations. Express
the contract condonation shall, furthermore, comply with the
(2) the performance is extremely difficult, but forms of donation.
not impossible (because if it is impossible,
it is extinguished by impossibility)
CONDONATION – gratuitous abandonment of debt; right
(3) the event was not due to the act of any of
to claim; donation; rules of donation apply/comply with
the parties
the dorms of donation; expressed or implied.
(4) the contract is for a future prestation
REQUISITES:
REMEDY OF PARTY PREJUDICED: (1) gratuitous; pure liberality on the part of
considering practical needs and the demands of the creditor.
equity and good faith, the party prejudiced has the (2) requires the acceptance of the
right to relief in the disappearance of the basis of obligor/debtor.
contract. (3) acceptance may be expressed or implied.
a. EXPRESS – often made by
creditor; acceptance is
ART. 1268. When the debt of a thing certain and manifested through a
determinate proceeds from a criminal offense, the document; must be in
debtor shall not be exempted from the payment of writing. If not, it will be
its price, whatever may be the cause for the loss, considered void.
unless the thing having been offered by him to the Ex. Memorandum of
person who should receive it, the latter refused Agreement (MOA)
without justification to accept it. (4) must not be inofficious
SAMPLE CASE: a. no effect on the legitame à
Robbed and murdered someone à Convicted and must inheritance
return what they have stolen. If they are unable to do so.
ART. 106 of the REVISED PENAL CODE GRATUITOUS – given or done, free of charge
If what was stolen can no longer be INOFFICIOUS
returned, they are obliged to make - of or relating to a disposition of property
reparation for the price of the pieces of that has the effect of depriving
jewellery, taking into account the price descendants of the shares of a succession
and the special sentimental value. to which they are entitled by law.
- Stems from laws of inheritance
ART. 1268 basically states
o Each person has compulsory
They are not exempt from paying the price of what was
or forced heirs or people
stolen even if they have been lost for whatever reasons.
who have the right to
EXCEPTION: OF PAYING FOR WHAT WAS STOLEN
inherit automatically unless
The things having been offered to the owners
lawfully disinherited.
thereof, and the owners refuse to receive the articles
o Portion allotted to them is
without any valid cause.
called LEGITIME
o Person cannot give it away
by donation or through last
ART. 1269. The obligation having been extinguished will, if done so the donation
by the loss of the thing, the creditor shall have all the would be deemed
rights of action which the debtor may have against inofficious.
third persons by reason of the loss.
SAMPLE CASE: ART. 748 of the CIVIL Code
A borrowed B’s car à A parked the car in her garage and The donations and acceptance of a
a truck wrecks the car à A’s obligation to return is movable property, whose value exceeds
extinguished à B can sue truck owner P5,000.00, must be made in writing;
otherwise, the donation will be void.

GR.
Obligation, actually referring to credits, are
considered movable property, thus an agreement to
condone a debt must be put in writing.

CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019 21


GR.
Is considered void if asked 10 years after the death of
the individual.
ART. 1271. The delivery of a private document
evidencing a credit, made voluntarily by the creditor
to the debtor, implies the renunciation of the action
which the former had against the latter.
If in order to nulligy this waiver it should be
claimed to be inofficious, the debtor and his heirs
may uphold it by proving that the delivery of the
document was made in virtue of payment of the
debt.
ART. 1272. Whenever the private document in which
the debt appears is found in the possession of the
debtor, it shall be presumed that the creditor
delivered it voluntarily, unless the contrary is proved.
DEBTS:
- usually proved by document, private or
public (notarised debts).
- used as evidence when the creditor
collects or demands payment.
WHEN PRIVATE DOCUMENT IS IN POSSESSION OF THE
DEBTOR, PRESUMPTIONS ARE:
(1) it was delivered voluntarily by the creditor;
and
(2) the creditor delivered the same because
she was renouncing or forgiving debt.
Ø Presumptions may be rebutted by the creditor by
showing contrary proof.
Ø Even if it was voluntarily delivered, the CR can
assert that it is not due to condonation.
UNDER:
ART. 1271
CR’s heirs can claim the condonation was
inofficious because it impairs their
legitime, but the DR’s heirs can rebut the
claim by showing that the delivery of the
note was by virtue of payment, in which
case the rule on inofficious condonation
would not apply.
PROOF OF PAYMENT THROUGH:
- O.R. or official receipt
- Promissory note
- Witnesses affidavit
ART. 1273. The renunciation of the principal debt
shall extinguish the accessory obligations; but the
waiver of the latter shall leave the former in force.
à accessory follows principal, but reverse is not true.
ART. 1274. It is presumed that the accessory
obligation of pledge has been remitted when the
thing pledged, after its delivery to the creditor, is
CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019
found in the possession of the debtor, or of a third
person who owns the thing.
PLEDGE – a contract wherein the debtor gives to the
possession of the creditor a property which the creditor
can hold as security for the debt until its paid, and which
the creditor can sell if the debtor is unable to pay the
debt.
- An accessory contract where upon
fulfilment of principal obligation, the thing
pledged will be returned.
- If the CR returns the thing pledged, the
pledge is presumed condoned (security is
no longer required)
- DEBT CONDONED = PLEDGE CONDONED
SAMPLE CASE: PAWN SHOPS
SECTION 4 – CONFUSION OR MERGER OF RIGHTS
ART. 1275. The obligation is extinguished from the
time the characters of creditor and debtor are
merged in the same person.
Ø has to be a negotiable instrument
ART. 1276. Merger which takes place in the person
od the principal debtor or creditor benefits the
guarantors. Confusion which takes places in the
person of any of the latter does not extinguish the
obligation.
CONFUSION OR MERGER OF RIGHTS – the debtor and
creditor become one and the same person with respect to
the same obligation.
REQUISITES:
(a.) It must take place between principal
debtor and principal creditor only.
(b.) Merger must be clear and definite.
(c.) The obligation involved must be the same
and identical – one obligation only.
(d.) Revocable, if reason for confusion ceases.
Ø cases wherein a third party takes part, as a
guarantor.
Ø when confusion arises in the person of the
principal debtor, debt will be extinguished, and the
guarantor is benefited in the sense that his
guaranty is also extinguished.
Ø If confusion takes place in the person of the
guarantor, only the guaranty is extinguished but
not the principal debt.
SAMPLE CASE: DR and CR BECOME ONE
A gives promissory note that is demandable by anyone
who holds it to B à B gives it to C when purchases goods
à C then gives it to D as payment à D obtains loan from
A, and as security for the debt, D endorses the note to A.
22
 ART. 1277. Confusion does not extinguish a joint KINDS OF COMPENSATIONS:
obligation except as regards the share corresponding Article
to the creditor or debtor in whom the two characters LEGAL ART. 1279
concur. ART. 1290
VOLUNTARY ART. 1282
Solidary Obligation Joint Obligation JUDICIAL ART. 1283
confusion will apply to only the debtor in FACULTATIVE ART. 1287
all principal debtors, whom merger or ART. 1288
even if it takes place in confusion takes place is
the person of one benefited.
debtor since the debt is ART. 1279. In order that compensation may be
considered as one. proper, it is necessary:
SAMPLE CASE: SAMPLE CASE: (1) That each one of the obligors be
C endorses to D the C endorses to D the bound principally, and that he be at
promissory note à promissory note and the same time a principal creditor of
Total extinguishment of asks for full payment of the other;
obligation and A owes D 50K à D then becomes (2) That both debts consist in a sum of
25K subject to the CR and A (in solidary money, or if the things due are
reimbursement. obligation with D) consumable, they be of the same
become DR and owes D kind, and also of the same quality if
25K. the latter has been stated;
EXTINGUSIHMENT: EXTINGUSIHMENT: (3) That the two debts be due;
total extinguishment partial extinguishment (4) That they be liquidated and
provisions related to ART. 1277 demandable;
solidary obligations (5) That over neither of them there be
any retention or controversy,
GR. commenced by third persons and
If you see the words: communicated in due time of the
Severely debtor.
Jointly
It is a SOLIDARY OBLIGATION LEGAL COMPENSATION
- occurs by operation of law even without
the knowledge of the parties, and need not
be pleaded or invoked as long as all the
SECTION 5 – COMPENSATION
requisites of ART. 1279 are present
- ALL REQUISITES = Compensation by
ART. 1278. Compensation shall take place when two
operation of law and extinguishment of
persons, in their own right, are creditors and debtors
both debts to the concurrent amount even
of each other.
though both parties are unaware of the
compensation.
COMPENSATION a.k.a. OFF-SET – set off; it is a mode of - two debts à same amount à
extinguishment to the concurrent amount the obligation compensation is total
of persons who are in their own right reciprocally debtors
or creditors; object of compensation is the prevention of
unnecessary suits and payments thru the mutual SAMPLE CASE:
extinction by operation of law of concurring debts. #1
REQUISITES: DJ ------------- M
a. Both parties must be mutually creditors DR P10K CR
and debtors – in their own right and as
principals (at least 2) #2
b. Both debts must consist in sum of money DJ ------------- M
or if consumable, of the same kind or CR P20K DR
quality
c. Both debts are due (at least 2) #1 is totally extinguished, whereas #2 is partially
d. Both debts are liquidated and demandable extinguished. This is a case of partial compensation since
(determined) DJ’s 10K debt is extinguished as M owes him 20K;
e. Neither debt must be retained in a cancelling out his debt.
controversy commenced by 3rd person and
communicated w/ debtor (neither debt is
garnished); no retention or controversy
à ART. 117 or 1243

CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019 23

NOTE:
- if the due dates are different à no
compensation as both must be due.
- If there is a court order for DR not to pay
CR, DR must comply and not pay, if she
does so, she will be made to pay again
(ART. 1243).
ELEMENTS:
1. THE TWO PARTIES ARE PRINCIPAL CREDITORS AND
PRINCIPAL DEBTORS OF EACH OTHER.
Requires that in two debts two parties are bound in both
and not in any other capacity.
SAMPLE CASE: PRINCIPAL DEBTORS & PRINCIPAL
CREDITORS
Scenario 1:
A owes B P500,000, B owes A P400,000. =
PRINCIPALLY BOUND
Scenario 2:
A represented by legal guardian G, owes B
P400,000. B owes G P500,000. = G IS NOT
PRINCIAPL DEBTOR
2. BOTH DEBTS CONSIST IN A SUM OF MONEY OR IF
THE THINGS DUE ARE CONSUMABLE THAT THEY
BE OF THE SAMKE KIND AND ALSO OF THE SAME
QUALITY.
CONSUMABLE à FUNGIBLE – things that can be
substituted for each other.
GR.
There can be no compensation if what are to be
delivered are determinate objects since they are not
substitutable.
3. TWO DEBTS ARE DUE.
SAMPLE CASE:
A to pay B three days from now + B will pay A if it rains 3
days from now. = if conditions are not met à no
compensation
4. THE TWO DEBTS ARE LIQUIDATED AND
DEMANDABLE.
DEBT IS LIQUIDATED WHEN:
- the amount is known or is determinable
through the terms and conditions of the
relevant promissory notes and related
documentation
- can be ascertained using a pre-designated
formula
5. THAT THERE BE NO RETENTION OR CONTROVERY
COMMENCED BY THIRD PERSONS INVOLING THE
TWO DEBTS
ART. 1280. Notwithstanding the provisions of the
preceding article, the guarantor may set up
compensation as regards what the creditor may owe
the principal debtor.
*GUARANTOR is a requirement
CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019
SAMPLE CASE:
A -------------------- DJ -------------------- M
GUARANTOR DR CR
If DJ cannot pay, REMEDY OF M is to go to A and say that
DJ is unable to pay so A must carry the obligation.
A can SET OFF COMPENSATION by bringing up a DEBT OF
M to DJ.
GR.
Guarantor can also set up compensation.
.
ART. 1281. Compensation may be total or partial.
When the two debts are of the same amount, there
is a total compensation.
ART. 1282. The parties may agree upon the
compensation of debts which are not yet due.
VOLUNTARY/CONVENTIONAL COMPENSATION
By stipulation of the parties; Parties can agree the mutual
extinguishment of their credits to compensate their
mutual obligations even in the absence of some of the
legal requisites:
REQUISITES: CONVENTIAL COMPENSATION:
(1) both parties can dispose of the credit they
seek to compensate, and
(2) they agree to the mutual extinguishment
of their credits
SAMPLE CASE:
DJ ------------- M
DR P50K CR
May 1, 2019
DJ ------------- M
CR P50K DR
May 4, 2019
M calls DJ and asks if there can be compensation à DJ
agree à no legal compensation
If it’s already May 1, 2019, one debt is due, there can be
voluntary compensation
ART. 1283. If one of the parties to a suit over an
obligation has a claim for damages against the other,
the former may set it off by providing his right to said
damages and the amount thereof.
JUDICIAL COMPENSATION
- through the court
- may also be referred to as a “set-off”
- In instances where one party sues a second
party over an obligation, and the second
party has a counter claim for damages or
something the first party owes her, then
the second party may raise the said
counterclaim in trial. If she proves the
24
 counter claim, then set-off or judicial ART. 1284. When one or both debts are rescissible or
compensation occurs. voidable, they may be compensated against each
other before they are judicially rescinded or voided.
Ø In court must have a document referred to as an
ANSWER. SUMMARY
o Respond to every allegation (i.e. I
was not negligent and here is proof - One or both the debts are rescissible or
as supporting evidence) voidable, they may be compensated
o Must have a counterclaim against each other before they are
rescinded or annulled by a court.
- Annulled/Rescinded = Compensation as
FACULTATIVE COMPENSATION not having occurred.
- only one of the parties has the right to
invoke compensation. SAMPLE CASE:
- Governed by: A, an adult, borrows P100 from B, a minor.
B asked A to lend her P500.
o ART. 1287
Both are voidable because B is not of legal age entering
o ART. 1288
o ART. 1289 the contract.

ONLY ONE PARTY HAS THE RIGHT TO INVOKE: GR.

a. Depositum Contract is voidable if the party entering is
b. Commodatum underaged.
c. Crime However, if within the prescriptive period
d. Support from gratuitous title. GR.
the time within which a minor can ask for the
DEPOSITUM a.k.a. FOR SAFEKEEPING annulment of the contract, which is four years from
- Cannot use it unless it is to maintain or the moment the minor attains the age of 18.
take care of the thing. B files case to have his contracts with A annulled, then the
Sample Case: previous compensation will be considered as not having
R --------------------M occurred at all.
CR P50K Book DR

R --------------------M ART. 1285. The debtor who has consented to the

DR P40K CR assignment of rights made by a creditor in favour of
a third person, cannot set up against the assignee
the compensation which would pertain to him
If M loses the book, R can make him pay P10K (to against the assignor, unless the assignor was notified
compensate for the P40K she owes M) plus damages. by the debtor at the time he gave his consent, that
Only R can invoke compensation since M was the one who he reserved his right to the compensation.
lost the book. If the creditor communicated the cession to
them but the debtor did not consent thereto, the
COMMODATUM a.k.a. BORROWING latter may set up the compensation of debts
- May use the thing precious to the cession, but not of subsequent ones.
If the assignment is made without the
Sample Case: LEGAL COMPENSATION knowledge of the debtor, he may set up the
R --------------------BPI Credit Card compensation of all credits prior to the same and
CR P5K DR also later ones until he had knowledge of the
assignment.
R --------------------BPI Savings Account
DR P20K CR EFFECTS OF ASSIGNMENT ON COMPENSATION:
Assignment made by the creditor in favour of a third
Since R wasn’t paying the P5K, BPI deducts it from her person with the consent of the debtor:
savings. They can do this because of ART. 1279. 1. IF A CREDITOR ASSIGNS A DEBT TO A THIRD
It is not a depositum because a bank is not required to PARTY WITH THE DEBTO’S CONSENT, THEN
give the exact money back (i.e. exact same bills with exact ANY RIGHT OF COMPENSATION WHTHER
same serial number). EFFECTIVE BEFORE OR AFTER THE
Both cases are a loan, thus it is legal compensation. ASSIGNMENT WILL BE CONSIDERED
WAIVED UNLESS THE DEBTOR RESERVED
NOTE: THE RIGHT TO INVOKE COMPENSATION.
Keep in mind that the value of money changes over time,
so take note if the due date differ in years.

CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019 25

Sample Case:
A owes B P1,000. à B borrowed P500 from A. à Both
debts are due.
A assigns B’s debt to C w/ consent. à B cannot raise the
defence of compensation against C when the debts are
due à B will have to pay P500 to C. à A will pay her debt
of P1,000 to B.
However,
If B reserved the right to raise compensation, and
communicated said reservation to A, then B can set up
compensation of his debt of P500 against the amount A
owes B.
This rule is applicable even if the debts become due after
the assignment is done.
ART. 1287. Compensation shall not be proper when
one of the debts arises from a depositum or form the
obligations of a depositary or of a bailee in
commondatum.
Neither can compensation be set up against a
creditor who has a claim for support due by
gratuitous title, without prejudice to the provisions
of paragraph 2 of article 301.
ART. 1288. Neither shall there be compensation if
one of the debts consists in civil liability arising from
a penal offense.

2. IF THE CREDITOR ASSIGNS TO THIRD PARTY WHEN COMPENSATION NOT PROPER:

A DEBT WITH THE KNOWLEDGE OF THE 1. WHERE ONE OF THE DEBTS ARISE FROM A
DEBTOR BUT WITHOUT HIS CONSENT SHE DEPOSITUM.
CAN RAISE THE DEFENSE OF DEPOSITUM:
COMPENSATION FOR DEBTS BEFORE - takes places when a person (depositary)
ASSIGNMENT. receives a thing belonging to another (the
Sample Case: depositor) with the obligation of safely
A owes B P1,000 due on 1 December and another payable keeping it and returning it the same;
on 15 December. - pertains to a specific/determinate thing
B owes A P5,000 due on 5 December. - only one party, the owner of the object,
6 December, A informs B that A will assign B’s debt to C can set-up compensation, but not the
and B objects. depository.
GR. Ø Bank deposit is NOT depositum à relation is that
B can raise compensation for the debt since It of a creditor and debtor. Thus, legal compensation
became due before assignment, but not for the debt can take place in the case of a bank deposit.
due at a later date.
GR.
3. IF A CREDITOR ASSIGNS THE SAID DEBT TO A depositor has every right to apply his
A THIRD PARTY WITHOUT THE credit…against the loans he had obtained from his
deposit. The same manner, a bank can even in the
KNOWLDEGE OF THE DEBTOR THEN SAID
absence of an expressed authority, set up
DEBTOR CAN RAISE THE DENSE OF
COMPENSATION FOR DEBTS BECOMING compensation, or offset the depositor’s outstanding
DUE BEFORE SHE BECAME AWARE OF THE loans with the amount in the depositor’s saving
ASSIGNMENT. THE KEY HERE IS account.
KNOWLEDGE OF THE ASSIGNMENT AND
NOT THE DATE THEREOF. 2. WHERE ONE OF THE DBETS ARISES FROM A
Sample Case: COMMODATUM
A does not inform B that she has assigned her debt to C. B COMMODATUM – a contract wherein one person
can set-up for compensation with B’s debt extinguished. gratuitously grants the use of a thing to another but
reserving ownership thereof. The person who is allowed
to use the thing is obliged to return the thing upon the
ART. 1286. Compensation takes place by operation
owner’s demand.
of law, even though the debts may be payable at
difference places, but there shall be an indemnity for
3. WHERE ONE OF THE DEBTS ARISES FROM A CLAIM
expenses of exchange or transportation to the place
OF SUPPORT BY GATUITOUS TITLE.
of payment.
SAMPLE: Child owes father, child can set up
compensation, because the father owes the child support.
GR.
As long as the elements of legal compensation are 4. WHEN ONE OF THE DEBTS CONSISTS IN CIVIL
present, compensation will take place by operation of LIABILITY ARISING FROM A PENAL OFFENSE.
law “even without consent or knowledge od parties If one of the debts is a civil liability arising from a penal
concerned. offense, said debt cannot be used to compensate another
Also stated in ART. 1290 debt. This rule applies to the criminal or offender but not
GR. the victim of the crime.
If the debts are fungible thing, and they are to be
delivered to different places, then payment shall be
made for transport expenses.

CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019 26

Sample Case:
A owes B P50,000, but B steals her pen amounting to DELEGACION; initiative of old debtor; all parties to
P5,000 and loses it. A can invoke compensation to reduce consent; full reimbursement; if insolvent new debtor –
her debt by the amount that B owes A. not responsible old debtor because obligation
extinguished by valid novation unless: insolvency already
existing and of public knowledge or know to him at time
ART. 1289. If a person should have against him of delegacion:
several debts which are susceptible of compensation, a. DELEGANTE – old debtor
the rules on the application of payments hsall apply b. DELEGATARIO – creditor
to the order of the compensation. c. DELEGRADO – new debtor

ii. Subrogating 3rd person to rights of

creditor (active)
ART. 1290. When all the requisites mentioned in
1. CONVENTIONAL – agreement and consent of all parties;
Article 1279 are present, compensation takes effect
clearly established
by operation of law, and extinguishes both debts to
2. LEGAL – takes place by operation of law; no need for
the concurrent amount even though the creditors
consent; not presumed except as provided for in law:
and debtors are not aware of the compensation.
PRESUMED WHEN:
See discussion on legal compensation under ART. 1279, a. Creditor pays another preferred creditor
1280 and 1286. even w/o debtor’s knowledge
b. 3rd person not interested in obligation pays
w/ approval of debtor
c. Person interested in fulfilment of
SECTION 6 – NOVATION obligation pays debt even w/o knowledge
of debtor
ART. 1291. Obligations may be modified by: NOVATION may also be both objective and subjective
(1) Changing their object or principal (mixed) at the same time. In both objective and subjective
conditions; novation, a dual purpose is achieved – an obligation is
(2) Substituting the person of the debtor; extinguished and a new one is created in lieu thereof.
(3) Subrogating a third person in the
rights of the creditor. Can be extinctive or modificatory.
NOVATION – the extinguishment of obligation by EXTINCTIVE– when an old obligation is extinguished by the
creating/substituting a new one in its place. creation of a new one that takes the place of the former.
§ Changing object or principal conditions
§ Substituting person of debtor MODIFICATORY – when the old obligation survives to the
§ Subrogating 3rd person in right of creditor extent that it remains compatible with the amendatory
REQUISITES: agreement.
1. Valid obligation
2. Intent to extinguish old obligation – expressed or ELEMENTS OF NOVATION:
implied: completely/substantially incompatible old (1) a previous valid obligation
and new obligation on every point (2) an agreement of all parties concerned to a
3. Capacity and consent of parties to the new new contract
obligation (3) the extinguishment of the old obligation;
4. Valid new obligation and
(4) the birth of a valid new obligation
KINDS OF NOVATION
Ø OBJECTIVE/REAL Sample Case:
done through a change of the object or principal L convince A to lend some of her jewellery to show to
conditions of an existing obligation buyers. à A demanded return of items and L was unable
to causing A to file a case for estafa à In L’s defence, L
Ø SUBJECTIVE/PERSONAL claims that her and A have done business before and that:
The change of either the person of the debtor or of the L sold A’s jewellery to M:
creditor when doing novation - marques worth P16K
i. Substituting person of debtor - ring valued P4K
(passive) But M wasn’t able to pay full, leaving P13K left. M was
EXPROMISION; initiative is from 3rd person or new debtor; brought to A à A agreed M will pay in instalments.
new debtor and creditor to consent; old debtor released AND
from obligation; subject to full reimbursement and L sold A’s jewellery to R:
subrogation if made w/ consent of old debtor; if w/o - diamond ring worth P17K
consent or against will, only beneficial reimbursement; if
new debtor is insolvent, not responsible since w/o his But R wasn’t able to pay full.
consent. - R gave L a ring worth P3K as initial payment
CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019 27
 - P5K as subsequent payment
- L gave P2K
COURT said NO NOVATION.
Changes referred to by L were only a manner of payment.
No substitution of debtors since A merely acquiesced to
the payment but did not give her consent to enter into a
new contract.
ACQUIESCE – accept something reluctantly without
protest
ART. 1292. In order that an obligation may be
extinguished by another which substitutes the same,
it is imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be
one every point incompatible with each other.
GR.
Novation cannot be presumed
The intention to cause novation whether partial or total,
must appear by the express agreement of the parties, or
by their acts that are too clear and unequivocal to be
mistaken.
Ø Novation is EXPRESSLY done when the parties
clearly state that the old obligation is extinguished.
Ø Novation is IMPLIED if the new obligation is
incompatible with the old one on every point.
Ø New obligation is created after a prior obligation
was created between two parties does not mean
that the old one is automatically extinguished.
Ø The two obligations must be incompatible with
each other.
Ø The test of incompatibility is whether the two
obligations can stand together, each one with its
own independent existence.
ART. 1293. Novation which consists in substituting a
new debtor in the place of the original one, may be
made even without the knowledge or against the will
of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the
rights mentioned in Articles 1236 and 1237.
ART. 1294. If the substitution is without the
knowledge or against the will of the debtor, the new
debtor; the new debtor’s insolvency or non-
fulfilment of the obligations shall not give rise to any
liability on the part of the original debtor.
ART. 1295. The insolvency of the new debtor, who
has been proposed by the original debtor and
accepted by the creditor, shall not revive the action
of the latter against the original obligor, except when
said insolvency was already existing and of public
CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019
knowledge, or known to the debtor, when he
delegated his debt.
SUBSTITUTING THE DEBTOR
There are 2 forms of novation through substitution of the
debtor, it would depend on whose initiative the
substation is:
EXPROMISION – the initiative for the change does not
come from the debtor and may even be made without his
knowledge. Since a third person would substitute for the
original debtor and assume the obligation, the consent of
the third person and that of the creditor would be
required.
- Upon payment of the obligation by the
new debtor, the new debtor can demand
reimbursement from the old debtor to the
amount the old debtor was benefited.
DELEGACION – the debtor offers, and the creditor
accepts, a third person who consents to the substitution
and assumes the obligation, thereby releasing the original
debtor from the obligation.
- The new debtor can demand full
reimbursement from the old debtor.
IF THE NEW DEBTOR IS INSOLVENT OR DOES NOT FULFILL
THE OBLIGATION:
If novation is by EXPROMISION
The insolvency or inability of the new
debtor to fulfil the obligation will not revive the old
debtor’s liability.
If novation is by DELEGACION,
GR.
Insolvency or inability of the new debtor to fulfil the
obligation will not make the old debtor liable.
EXCEPTION: INSOLVENCY OF NEW DEBTOR
The old debtor will be liable if the reason for the new
debtor’s inability to fulfil the obligation is because of
the new debtor’s insolvency, and:
a. the insolvency was existing at the time
of substitution and was of public
knowledge (although not known by
the old debtor) or;
b. the insolvency was existing at the of
the substitution, and known by the old
debtor (although said insolvency was
not of public knowledge)
ART. 1296. When the principal obligation is
extinguished in consequence of a novation,
accessory obligations may subsist only insofar as they
may benefit third persons who did not give their
consent.
ACCESSORY OBLIGATION – that attached to a principal
obligation in order to complete the same or take its place
in the case of a breach and is dependent for its existence
on the existence of a principal obligation.
EXCEPTION: ART. 1296
28
 ART. 1296 is an exception to the general rule. ART. 1301. Conventional subrogation of a third
The accessory obligation is benefit to the third persons person requires the consent of the original parties
who did not consent to the novation. AN example of this and of the third person.
is if the original obligation contains a stipulation pour
autrui.
ART. 1302. It is presumed that there is legal
STIPULATION POUR AUTRUI – a contract provision in a
subrogation:
contract that confers a benefit on a third-party beneficiary
(1) When a creditor pays another creditor
Note:
who is preferred, even without the
A stipulation pour autrui gives the third party beneficiary a
debtor’s knowledge;
cause of action against the promisor for specific
(2) When a third person, not interested
performance.
in the obligation, pays with the
express or tacit approval of the
debtor;
ART. 1297. If the new obligation is void, the original (3) When, even without the knowledge of
one shall subsist, unless the parties intended that the the obligation pays, without prejudice
former relation should be extinguished in any event. to the effects of confusion as to the
The original obligation remains valid and unaffected if the latter’s share.
new obligation is void, unless it is shown that the parties
want to really do away with the original one.
ART. 1303. Subrogation transfers to the persons
ART. 1298. The novation is void if the original subrogated the credit with all the rights thereto
obligation was void, except when annulment may be appertaining, either against the debtor or against
claimed only by the debtor or when ratification third person, be they guarantors or possessors of
validates acts which are voidable. mortgages, subject to stipulation in a conventional
If the old obligation is null and void, then no new subrogation.
obligation can arise because there is nothing to novate.

VOIDABLE OBLIGATION:
ART. 1304. A creditor, to whom partial payment has
a. If the old obligation is voidable then the
been made, may exercise his right for the remainder,
new obligation will also be voidable, except
and he shall be preferred to the person who has
that if the old one is not annulled, then the
been subrogated in his place in virtue of the partial
new obligation will be permanently valid.
payment of the same credit.
b. If the original obligation, which is voidable,
Subrogation involves transferring all the rights of the
is ratified then the new one is also
creditor to a third person, who substitutes the former in
permanently valid.
all his/her rights.
c. If the new obligation is voidable, and it is
not annulled, then it remains permanently
There are two types of subrogation:
valid.
a. CONVENTIONAL SUBROGATION - takes
d. Should the new obligation be annulled,
place when all parties consent to the
then the previous rule will apply.
subrogation.
b. LEGAL SUBROGATION – by operation of
law, and is exemplified by the situations
ART. 1299. If the original obligation was subject to a
enumerated in ART. 1302; occurs even
suspensive or resolutory condition, the new
without consent of the parties.
obligation shall be under the same condition, unless
it is otherwise stipulated.
EFFECTS OF SUBROGATION:
a. In subrogation, accessory obligations, like
mortgage and guarantee, subsist and
SUBROGATION remain and are transferred to the new
creditor.
ART. 1300. Subrogation of a third person in the rights b. As long as the old creditor is not fully paid,
of the creditor is either legal or conventional. The she will remain to have a greater or
former is not presumed, except in cases expressly preferred right over the new creditor
mentioned In this code Code; the latter must be insofar as the unpaid balance is concerned.
clearly established in order that it may take effect.

CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019 29

TITLE II
CONTRACTS
CHAPTER 1: GENERAL PROVISIONS
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.
CONTRACT – an agreement whereby one person binds
herself to fulfil and obligation in favour of another.
§ are obligatory in whatever form as long as
all the essential requisites for their validity
are present
o object
o consent
o clause
THREE DISTINCT STAGES OF A CONTRACT:
a.) preparation or negotiation
b.) perfection
c.) consummation
NEGOTIATION – begins when would-be contracting
parties express their interest in the contract and ends the
moment of their agreement.
PERFECTION a.k.a. BIRTH OF THE CONTRACT – when
parties agree upon the essential elements of the contract.
CONSUMATION – terms agreed upon in contract are
fulfilled or performed = its extinguishment.
ART. 1306. The contracting parties may establish
such stipulation clauses, terms and conditions as
they may deem convenient, provided they are not
contrary to law, morals, good customs, public order,
or public policy.
SUMMARY
Contracting parties are given the liberty and freedom to
agree on:
- stipulations
- clauses
- terms and conditions
However, these cannot be contrary to law, morals, good
custom, public order or public policy.
AUTONOMY OF CONTRACTS – the principle that the
contracting parties are free to enter into a contract and to
establish such stipulations, clauses, conditions as they
may deem convenient save those that are contrary to law,
public policy, morals, good customs and public order.
INVALID TERMS AND CONDITIONS:
EMPLOYMENT CONTRACTS
A provision in a service contract which is used by the
employer to circumvent the compulsory coverage of the
employees under the Social Security Law must be struck
down for being contrary to law and public policy.
CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019
CIRCUMVENT – find a way around; avoid (ex. The sale of
shares by the director without telling the company is an
attempt to circumvent the law)
Sample Cases
#1
Between Employee and a Bank
• Parties agreed to include a post-retirement
competitive employment ban à employee is
banned to work for a competitor bank for a certain
period of time.
• Court said period of one year may appear
reasonable, but issue of restriction cannot be
ascertained with finality solely from the terms and
condition of the contract.
GROUNDS FOR DETERMINING THE RESONABILITY OF THE
CONTRACT:
(a) Protection of the employer’s legitimate
business interest.
(b) Imposition of an undue burden on the
employee
(c) Injury to the public welfare
(d) Reasonability of time and territorial
limitations
(e) Reasonability of the restraint.
IMPOSITION – the act of forcing someone or something
on another, or a burden that is put on someone.
#2
An employee purportedly entered into a compromise
agreement/quitclaim with the company, and was given a
settlement of P20,000. Later when the employee filed a
case alleging illegal dismissal and other benefits, the
Labour Arbiter awarded the employee P174,379.52. The
company argued that by signing the compromise
agreement, the employee had already agreed to receive
P20,000 only. The Court declared the compromise
agreement was unconscionable and contrary to public
policy.
PURPORTEDLY – as appear or is stated to be true, though
not necessarily so; allegedly.
QUITCLAIM – formal renunciation or relinquishing of a
claim.
UNCONSCIONABLE – not right; unreasonable.
CREDIT CARDS
In a case involving credit cards, a stipulation in the
contract reads:
“In the event that a credit card is lost or stolen, the
cardholder agrees to immediately report its loss or theft in
writing to BECC…purchases made/incurred arising from
the use of the lost/stolen card shall be for the exclusive
account of the cardholder and the cardholder continues
to be liable for the purchases made through the use of the
lost/stolen BPI Express Card until after such notice has
been given to BECC and the latter has communicate such
loss/theft to its member establishment.”
30
COURT ruled:
• Prompt reporting of the cardholder to the credit
card company should be enough to relieve him of
any liability arising from the unauthorised use of
his card.
• Stipulation in question – requires cardholder to
wait until the company has notified all its member
establishments; cardholder is in mercy of the
credit card company which may delay indefinitely
the notification of its members to minimise if not
eliminate the possibility of incurring any loss from
unauthorised purchases.
• Company may still promptly fail to notify all its
members w/o cardholder’s fault.
• It is unfair and unjust to make the cardholder pay
for any unauthorised purchases even after he has
notified the credit card company.
• Stipulation in question is against public policy.
ART. 1307. Innominate contracts shall be regulated
by the stipulation of the parties, by the provisions of
Title I and II of this Book, by the rules governing the
most analogous nominate contracts, and by the
customs of the place.
INNOMINATE CONTRACT – contract which is not
classifiable under any particular name; the law supplies
nothing in addition to the express agreement of the
parties.
NOMINATE CONTRACT – a standardised contractual
relationship that has a special designation attached to it
(e.g., purchase and sale, lease, loan, insurance)
ART. 1308. The contract must be bind both
contracting parties its validity or compliance cannot
be left to the will of one of them.
BINDING EFFECT OF ANY CONTRACT AS BETWEEN THE
PARTIES IS PREMISED ON TWO SETTLED PRINCIPLES:
(1) obligations arising from contract have the
force of law between the contracting
parties
(2) there must be mutuality between the
parties based on their essential equality.
MUTUALITY PRINCIPLE – equality between parties; will
nullify a contract containing a condition which makes its
fulfilment or pre-termination dependent exclusively upon
the will on one of the contracting parties.
§ Termination of contract by one party alone
violates the principle of mutuality of
contracts.
§ Parties’ mutual agreement is necessary to
end a contract.
Ø Not lawful for one party to be bound by a contract
with the other party being free from its terms and
conditions.
Ø Any stipulation regarding the validity or
compliance of the contract which is left solely on
the will of one of the parties is invalid.
CORNELIA MARQUEZ | LLAW 113: OBLIGATIONS AND CONTRACTS | Y1 – S2; 2019
EXCEPTION:
When there is essential equality between the parties
to the contracts, thus preventing the perpetration of
injustice on the weaker party.
Sample Cases:
(1) LEASE CONTRACTS
Ø Fact that only the lessee has the sole option to
renew the lease does not render the lease
contract void for lack of mutuality.
Ø Lessor is free to give or not the option to the lesee.
Ø If lessee opts to continue the lease and lessor
accepts, both parties are bound by the new lease
agreement; their rights and obligations become
mutually fixed.
“Mutuality is present in such a contract and equality exists
between the lessor and the lessee.”
(2) BANK RATES AND CHARGES
Ø Loan agreements – contain escalation clauses
which gives the bank the right to increase the
interest rate in certain circumstances.
Ø Clauses are valid, but if the escalation clause gives
the bank unbridled right to adjust the interest
independently and upwardly, this takes away the
right of the borrower to agree/disagree with
important modification and negate the element of
mutuality.
o ESCALATION – guarantees a change
in agreement price once a
particular factor beyond control of
either party affecting the value has
been determined.
Ø One sided impositions have NO force of law
between the parties, because such impositions are
not based on the parties’ essential equality.
Ø Pro forma promissory notes have the character of
a CONTRACT OF ADHESION, where the parties do
not bargain on equal footing, the weaker party’s
[the debtor’s] participation being reduced to the
alternative to take it or leave it.
(3) BASKETBALL COACHING
Ø Cant give training coach a lower salary because he
isn’t performing well.
ART. 1309. The determination of the performance
may be left to a third person, whose decision shall
not be binding until it has been made known to both
contracting parties.
Ø When parties to a contract of sale agree that the
determination of the price of a property is to be
left to a third party such as an assessor. The
determination of the third party may be nullified
though by the parties’ mutual agreement.
31
 ART. 1310. The determination shall not be obligatory
if it is evidently inequitable. In such case, the courts
shall decide what is equitable under the
circumstances.
Courts have used ART. 1310 as basis either to reduce or
increase interest rates equitably, such as in the following
situations:
- when a bank unilaterally raised the interest
rate on a loan from:
o 18%
o 32%
o 41%
o 48%
- where the interest rate was increased from
21% to as high as 68% per annum over the
borrower’s vehement protests.
- the stipulated interest on a loan of
P500,000 was pegged at 5.5% per month
or 66% per annum.
- the interest rate of 6% per month or 72%
per annum was agreed upon by the parties
but was reduced to 12% per annum which
was deemed fair and reasonable.

ART. 1311. Contracts take effects only between the

parties, their assigns and heirs, except in case where
the rights and obligations arising from the contract
are not transmissible by their nature, or by
stipulation or by provision of law. The heir is not
liable beyond the value of the property he received
from the decedent.
If a contract should contain some stipulation in
favour of a third person, he may demand its
fulfilment provided he communicated his acceptance
to the obligor before its revocation. A mere
incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly
and deliberately conferred a favour upon a third
person.
ONLY CONTRACTING PARTIES ARE BOUND TO CONTRACTS
BASIC RULE a.k.a. RELATIVITY PRINCIPLE
A contract is the law between the parties; only the
contracting parties are bound by the stipulations in
the contract.
Ø Parties could benefit from and could violate the
contract.
GR.
One who is not a party to a contract cannot enforce it
in court. This rule applies even if the contract would
incidentally benefit a non-party.
*the reason for the exclusion of non-parties to an
agreement is the absence of a juridical tie that creates an
obligation.

TRANSMISSION OF RIGHTS AND OBLIGATIONS TO HEIRS

Contracting parties are bound by all the contracts they
enter into.

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