PROPERTY

registered land never 1142)

prescribes.
Based on written 10 years
1. Action legal to
Imprescriptible contract
demand a right of
way Note: If contract is oral
2. To abate a or quasi, prescriptive
nuisance period is 6 years (NCC,
Action to quiet Art. 1145)
title if plaintiff in Imprescriptible Based on obligation 10 years from the time
possession created by law the right of action accrues
Applies to both action and
defense. 10 years from the day
judgment became final
Void contracts Note: However, an action to Based on judgment
and executory (NCC, Art.
annul a voidable contract 1144)
prescribes after 4 years
Action to demand As long as the co-ownership is Based upon an injury to 4 years
partition recognized expressly or the rights of plaintiff
impliedly (NCC, Art. 494)
Note: Based on quasi-delicts 4 years (NCC, Art. 1146)
Distinguished from
laches
Right of reversion or Forcible entry and 1 year
reconveyance to the State of the detainer
public properties registered and
which are not capable of private Defamation 1 year (NCC, Art. 1147)
appropriation or private
Property of acquisition does not prescribe
public dominion All other actions not 5 years (NCC, Art. 1149)
Note: In contrast, where private specified
property is taken by the
Government for public use
without first acquiring title INTERRUPTION
thereto either through
expropriation or negotiated
sale , the owner’s action to Q: What are the grounds for interruption of
recover the land or the value prescriptive period?
thereof does not prescribe.
A:
1. When they are filed before the court.
PRESCRIPTION OR LIMITATION OF ACTIONS 2. When there is a written extrajudicial demand by the
creditors
3. When there is any written acknowledgment of the
ACTIONS PRESCRIPTIVE PERIOD debt by the debtor (NCC, Art. 1155)
Recover Movables 8 years (good faith)or 4
years (bad faith) from the OBLIGATIONS
time the possession is lost
(NCC, Art. 1140, Pineda
Succession and
Prescription, p. 666, 2009) GENERAL PRINCIPLES

30 years (Recover
Recover Immovables
ownership) (NCC, Art.
An obligation is a juridical necessity to give, to do, or not
1141)
to do (NCC, Art. 1156).
10 years (Recover real
It is a juridical relation or a juridical necessity whereby a
right of possession) (NCC,
person (creditor) may demand from another (debtor) the
Art. 555 (4), Pineda
observance of a determinative conduct (giving, doing, or
Succession and
not doing), and in case of breach, may demand satisfaction
Prescription, p. 667, 2009)
from the assets of the latter (Makati Stock Exchange v.
Mortgage Action 10 years from default of Campos, G.R. No. 138814, April 16, 2009).
mortgagor (NCC, Art.

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 Civil Law
It is a juridical necessity because in case of non- Obligations arising from other sources (NCC, Art. 1157) do
compliance, the courts of justice may be called upon by not have any form at all (De Leon, 2010).
the aggrieved party to enforce its fulfillment or, in default
thereof, the economic value that it represents. ELEMENTS OF AN OBLIGATION

GR: The law does not require any form in obligations

The following are the elements of an obligation (JAPO):
arising from contracts for their validity or binding force
(NCC, Art. 1356).
1. Juridical tie or vinculum juris or efficient cause - The
efficient cause by virtue of which the debtor becomes
XPNs:
bound to perform the prestation (Pineda, 2000).
1) In relation to Art. 1356, when the form is essential to
the validity of the contract as required by law ( NCC,
NOTE: The vinculum juris is established by:
Art. 1346);
a. Law;
2) When the contract is unenforceable unless it is in a
b. Bilateral acts;
certain form, such as those under the Statute of
c. Unilateral acts (Tolentino, 2002).
Frauds as formulated in Art. 1403.

2. Active subject [creditor (CR) or obligee] - The person Negative

demanding the performance of the obligation. It is he Contract for
easement,
in whose favor the obligation is constituted, Sale, deposit, professional
restraining
established or created; pledge, services like
Examples order or
3. Passive subject [debtor (DR) or obligor] - The one donation, painting,
injunction
bound to perform the prestation to give, to do, or not antichresis modeling,
(Pineda,
to do (Pineda, 2000); and singing, etc.
2000)

NOTE: Every obligation has two aspects. From the

CLASSIFICATION OF OBLIGATIONS
standpoint of the active subject, the obligation is a
right. However, from the standpoint of the passive
From the viewpoint of:
subject, it is a debt (Rabuya, 2017).
1. Creation
a. Legal – imposed by law (NCC, Art. 1158).
4. Object or prestation - The subject matter of the
b. Conventional – established by the agreement of
obligation which has a corresponding economic
the parties.
value or susceptible of pecuniary substitution in case
e.g. contracts.
of noncompliance. It is a conduct that may consist of
2. Nature
giving, doing, or not doing something (Pineda, 2000).
a. Personal – to do; not to do
b. Real – to give
NOTE: In order to be valid, the object or prestation
3. Object
must be:
a. Determinate/specific - particularly designated
1. Licit or lawful;
or physically segregated from all others of the
2. Possible, physically & judicially;
same class
3. Determinate or determinable; and Pecuniary
b. Generic – designated merely by its class or genus
value or possible equivalent in money.
c. Limited generic – generic objects confined to a
particular class or source
Absence of any of the first three makes the object void.
e.g. an obligation to deliver one of my horses
(Tolentino, 2002).
NOTE: Some writers add a fifth one: the form in which the
4. Performance
obligation is manifested. This element, however, cannot
a. Positive - to give; to do
be considered as essential. There is no particular form
b. Negative – not to do
required to make obligations binding, except in certain
e.g. An obligation not to run for an elective post.
rare cases (Tolentino, 2002).
5. Person obliged
a. Unilateral – only one party is bound
DIFFERENT KINDS OF PRESTATION b. Bilateral – both parties are bound

Obligation Obligation Obligation NOTE: A bilateral obligation may be reciprocal

BASIS
to Give to Do Not to Do or non-reciprocal. Reciprocal obligations are
those which arise from the same cause, wherein
each party is a debtor and a creditor of the other,
Covers the
such that the performance of one is conditioned
As to what rendering of
Consists in upon the simultaneous fulfillment of the other.
the works or Refraining
the delivery 6. Existence of burden or condition
obligation services from doing
of a thing to a. Pure – not burdened with any condition or term.
consists of whether certain acts
the creditor It is immediately demandable. (Art. 1179)
physical or
b. Conditional – subject to a condition which may
mental
be suspensive (happening of which shall give

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 OBLIGATIONS AND CONTRACTS
rise to the obligation) or resolutory (happening d. Law – From the time designated by the law creating
of which terminates the obligation) (NCC, Art. or regulating them
1181). e. Contracts –From the time of the perfection of the
7. Character of responsibility or liability contract
a. Joint – each debtor is liable only for a part of the e.g. meeting of the minds);
whole liability and to each creditor shall belong
only a part of the correlative rights (8 Manresa XPNs:
194; NCC, Art. 1207). a. When the parties made stipulation on the right
b. Solidary – debtor is answerable for the whole of of the creditor to the fruits of the thing;
the obligation without prejudice to his right to b. When the obligation is subject to a suspensive
collect from his co-debtors the latter’s shares in condition, it arises upon fulfillment of the
the obligation (NCC, Art. 1207). condition;
8. Susceptibility of partial fulfillment c. When the obligation is with a period, there is
a. Divisible – obligation is susceptible of partial already an existing obligation but demandable
performance (NCC, Art. 1223; NCC, Art. 1224). only when the period expires or becomes due.
b. Indivisible – obligation is not susceptible of
partial performance (NCC, Art. 1225). f. Quasi Contracts, Delicts, Quasi-delict – From the time
9. Right to choose and substitution designated by the law creating or regulating them.
a. Alternative – obligor may choose to completely
perform one out of the several prestations (NCC, OBLIGATION EX LEGE
Art. 1199).
b. Facultative – only one prestation has been Obligations derived from law are not presumed. Only
agreed upon, but the obligor may render one in those expressly determined in the Code or in special laws
substitution of the first one (NCC, Art. 1206). are demandable and shall be regulated by the precepts of
10. Imposition of penalty the law which establishes them and as to what has not
a. Simple – there is no penalty imposed for been foreseen by the provisions of Book IV of NCC (NCC,
violation of the terms thereof (NCC, Art. 1226). Art. 1158).
b. Obligation with penalty – obligation which
imposes a penalty for violation of the terms NOTE: If there is conflict between the NCC and a special
thereof (NCC, Art. 1226; Pineda, 2000). law, the latter prevails unless the contrary has been
11. Sanction expressly stipulated in the NCC ( NCC, Art. 18; Paras,
a. Civil – gives a right of action to compel their 2008).
performance.
b. Natural – not based on positive law but on Characteristics of a legal obligation
equity and natural law; does not grant a right of
action to enforce their performance, but after 1. Does not need the consent of the obligor;
voluntary fulfillment by the obligor, they 2. Must be expressly set forth in the law creating it and not
authorize retention of what has been delivered merely presumed; and
rendered by reason thereof. 3. In order that the law may be a source of obligation, it
c. Moral – cannot be enforced by action but are should be the creator of the obligation itself (NCC, Art.
binding on the party who makes it in conscience 1158).
and natural law.
Determining whether an obligation arises from law or
from some other source
SOURCES OF OBLIGATIONS
1. Arises from law if it establishes obligation
2. Arises from the act itself if the law merely recognizes
1. Law the existence of an obligation generated by an act
2. Contracts (Manresa).
2. Quasi-contracts
e.g.
3. Delict
7. According to Art. 2014 of the NCC, a loser in a game
4. Quasi-delict
of chance may recover his loss from the winner, with
This enumeration is exclusive. No obligation exists if its legal interest from the time he paid the amount lost
source is not one of those enumerated in Article 1157 of (Leung Ben v. O’Brien, G.R. No. L-13602, April 6, 1918);
the New Civil Code (Navales v. Rias, G.R. No. L-3489, 8. The obligation of the spouses to support each other;
September 7, 1907). 9. The obligation of the employers under the Worker’s
Compensation Act;
Note: Actually, thre are only two sources (i.e., law and 10. The obligations of the owners of the dominant and
contracts) because obligations arising from quasi- servient estates in legal easements and others
contracts, delicts and quasi-delicts are imposed by law scattered in the NCC and in special laws (Jurado,
(Leung Ben v. O’Brien, 38 Phil. 182). 2009).
11. The obligation to pay taxes (Rabuya, 2017).
Time of perfection
GR: OBLIGATION EX CONTRACTU

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 Civil Law

Requisites of a contractual obligation Presumptive consent

1. It must contain all the essential requisites of a contract Since a quasi-contract is a unilateral contract created by
(NCC, Art. 1318); and the sole act(s) of the gestor, there is no express consent
2. It must not be contrary to law, morals, good customs, given by the other party. The consent needed in a contract
public order, and public policy (NCC, Art. 1306). is provided by law through presumption (Pineda, 2000).

Rules governing the obligations arising from Principal forms of quasi-contracts

contracts
1. Negotiorum gestio (inofficious manager)– Arises when a
GR: These obligations arising from contracts shall be person voluntarily takes charge of the management of the
governed primarily by the stipulations, clauses, terms and business or property of another without any power from
conditions of the parties’ agreements. the latter (NCC, Art. 2144).
2. Solutio indebiti (unjust enrichment) – Takes place when
XPN: Contracts with prestations that are unconscionable a person received something from another without any
or unreasonable (Pineda, 2009). right to demand for it, and the thing was unduly delivered
to him through mistake (NCC, Art. 2154).
Binding force of obligation ex contractu
NOTE: The delivery must not be through liberality or
Obligations arising from contracts have the force of law some other cause.
between the parties and should be complied with in good
faith (NCC, Art. 1159). This is known as the “principle of Solutio indebiti (SI) v. Accion in rem verso (AIRV)
obligatory force of contracts” (Rabuya, 2017).
1. Mistake is an essential element in SI which is not
Good faith is performance in accordance with the necessary in AIRV.
stipulation, clauses, terms and conditions of the contract 2. An AIRV is merely an auxilliary action, available only
(Pineda, 2000). when there is no other remedy on contract, quasi-
contract, crime or quasi-delict (Rabuya, 2017).
GR: Neither party may unilaterally evade his obligation in
the contract. Rule in case of excess of payment of interest

XPNs: Unilateral evasion is allowed when the: If the borrower pays interest when there has been no
1. Contract authorizes such evasion; or stipulation therefor, the provisions of the Code
2. Other party assents thereto. concerning solutio indebiti, or natural obligations, shall be
applied, as the case may be.
OBLIGATION EX QUASI – CONTRACTU
If the payment of interest is made out of mistake, solutio
Quasi-contract indebiti applies; hence, the amount must be returned to
the debtor. If the payment was made after the obligation
A juridical relation arising from lawful, voluntary and to pay interest has already prescribed, natural obligation
unilateral acts based on the principle that no one shall be applies; hence, the creditor is authorized to retain the
unjustly enriched or benefited at the expense of another amount paid.
(NCC, Art. 2142).
Contract v. Quasi contract
Distinguished from “implied contracts”
CONTRACT QUASI-CONTRACT
An implied contract, in the proper sense, is a contract
which arises when the intention of the parties is not There is a meeting of the
expressed, but an agreement in fact, creating an minds or consent; the parties There is no consent but the
obligation, is implied or presumed from their acts, or must have deliberately same is supplied by fiction of
where there are circumstances which show a mutual entered into a formal law; to prevent injustice
intent to contract. agreement

An implied contract requires consent while quasi-

*For further discussion on quasi contracts, please see the
contract, being a unilateral contract, does not. The basis of
discussion of quasi contract on Credit Transactions
an implied contract is the will of the parties while the
basis of a quasi-contract is law, to the end that there be no
unjust enrichment (Rabuya, 2017). OBLIGATIONS EX DELICTO

Characteristics of a quasi-contract (LUV) Delict

1. It must be Lawful; An act or omission punishable under the law.

2. It must be Unilateral; and
3. It must be Voluntary (Pineda, 2000). Basis

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 OBLIGATIONS AND CONTRACTS
GR: Art. 100 of the Revised Penal Code provides: “Every 2. Damage or injury caused to another;
person criminally liable for a felony is also civilly liable.” 3. Causal relation between such negligence or fault and
damage; and
XPNs: Crimes of treason, rebellion, espionage, contempt 4. No pre-exisitng contractual relationship between the
and others wherein no civil liability arises on the part of parties (NCC, Art. 2176).
the offender either because there are no damages to be
compensated or there is no private person injured by the Instances when Art. 2176 is inapplicable
crime (Reyes, 2008).
6. When there was a pre-existing contractual relation
Implied institution of the civil action in a criminal because the breach of contract is the source of the
case obligation (Robles v. Yap Wing, 41 SCRA 267, G.R. No.
L-20442, October 4, 1971).
GR: When a criminal action is instituted, the civil action
for the recovery of the civil liability arising from the NOTE: However, if the act that breaches the contract
offense charged shall be deemed instituted with the is tortuous, the pre-existing contractual relation will
criminal action (Sec. 1, Rule 111, Rules of Court). not bar the recovery of damages (Singson v. BPI, G.R.
No. L-24837, June 27, 1968);
XPNs: When the offended party:
1. When the fault or negligence is punished by law as a
1. Waives the civil action; crime, Art. 100 of RPC shall be applicable.
2. Reserves the right to institute it separately; and 2. If the action for quasi-delict is instituted after 4 years,
3. Institutes the civil action prior to the criminal action it is deemed prescribed (Afialda v. Hisole, G.R. No. L-
(Rule 111, Sec. 1, Rules of Court). 2075, November 29, 1949).

Scope of civil liability (IRR) 3. When the injury suffered by a person is the result of
a fortuitous event without human intervention.
1. Restitution;
2. Reparation for damage caused; and 4. If there is no damage or injury caused to another
3. Indemnity for consequential damages (Art. 104, (Walter A. Smith & Co. v. Cadwallader Gibson Lumber
RPC). Company, G.R. No. L-32640, December 29, 1930).

Acquittal in criminal case

Delict v. Quasi-delict
GR: The acquittal of the accused in criminal case on the
ground of reasonable doubt does not preclude the filing of BASIS DELICT QUASI-DELICT
a subsequent civil action and only preponderance of
evidence is required to prove the latter.
Presence of
XPNs: When the acquittal is on the basis that: As to the kind of criminal or
1. The accused did not commit the crime charged; or intent present malicious intent Only negligence
2. There is a declaration in the decision of acquittal that or criminal
no negligence can be attributed to the accused and negligence
that the fact from which the civil action might arise
did not exist (NCC, Art. 29). As to the whether
private or public Concerned with Concerned with
OBLIGATIONS EX QUASI – DELICTO interest is public interest private interest
concerned
Quasi-delict or tort
Generally, the act
An act or omission arising from fault or negligence which or omission gives The act or
causes damage to another, there being no pre-existing As to the kind of rise to two omission gives
contractual relations between the parties (NCC, Art. liability arises liabilities: rise only to a civil
2176). criminal and civil liability
liability
NOTE: A single act or omission may give rise to two or
more causes of action. Thus, an act or omission may give
rise to an action based on delict, quasi-delict or contract. As to availability Criminal liability The civil liability
of a compromise is not subject to a can be
In negligence cases, prior conduct should be examined, compromise compromised
that is, conduct prior to the injury that resulted, or in
proper case, the aggravation thereof. As to the Guilt may be
quantum of Guilt must be
proved by
Elements of a quasi-delict evidence is proved beyond
preponderance of
required reasonable doubt
evidence
1. Negligent or wrongful Act or omission;

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 Civil Law
NOTE: Inasmuch as civil liability co-exists with criminal
responsibility in negligence cases, the offended party has Pay damages in Pay damages in
the option between an action for enforcement of civil case of breach of case of breach of
liability based on culpa criminal under Article 100 of the obligation by obligation by
Revised Penal Code and an action for recovery of damages Effect of breach reason of delay, reason of delay,
based on culpa aquiliana under NCC, Article 2177. of obligation fraud, negligence, fraud, negligence,
contravention of contravention of
the tenor thereof the tenor thereof
NATURE AND EFFECTS OF OBLIGATIONS (NCC, Art. 1170). (NCC, Art. 1170).

Obligation is not
Types of real obligations Effect of Fortuitous event extinguished
fortuitous event extinguishes the (genus nun quam
1. Determinate/specific – particularly designated or obligation. peruit – genus
physically segregated from all others of the same never perishes).
class;
2. Indeterminate/Generic – is designated merely by its
Remedies of the creditor in case of failure to deliver
class or genus;
the thing due
3. Delimited generic – generic objects confined to a
particular class (Tolentino, 2002);
The following are the remedies of the creditor in case of
e.g. an obligation to deliver one of my horses.
failure to deliver the thing due (Pineda, 2000).
Obligations of a debtor in an obligation to deliver
SPECIFIC GENERIC
The obligations of the debtor (in an obligation to deliver)
depends upon the kind thing involved:
Specific performance
Specific performance. (delivery of anything
BASIS SPECIFIC GENERIC belonging to the same
species).
Deliver the thing
which is neither of Rescission (action to Ask that the obligation be
superior nor rescind under NCC, Art. complied with at the
What the inferior quality if 1380). debtor’s expense with a
Deliver the thing
obligation quality and right to recover damages.
agreed upon
consists of circumstances
(NCC, Art. 1165).
have not been
Resolution (action for Resolution or specific
stated by the
cancellation under performance, with damages
parties.
NCC, Art. 1191). in either case (NCC, Art.
(NCC, Art. 1246).
1191).

Take care of the Damages, in both cases (NCC, Art. 1170).

thing with the
If the object is NOTE: May be exclusive or in addition to the above-
proper diligence
generic, but the mentioned remedies
Required of a good father of
source is specified
diligence to be a family unless the
or delimited, the
observed law requires or NOTE: In an obligation to deliver a specific thing, the
obligation is to
parties stipulate creditor has the right to demand preservation of the thing,
preserve the
another standard its accessions, accessories, and the fruits. The creditor is
source.
of care (NCC, entitled to the fruits and interests from the time the
Art.1163). obligation to deliver the thing arise.

Delivery of Right of the creditor to the fruits

Deliver all another thing
accessions, within the same The creditor has a right to the fruits of the thing from the
accessories and genus as the thing time the obligation to deliver it arises. However, he shall
What delivery fruits of the thing promised if such acquire no real right over it until the same has been
comprises of even though they thing is damaged delivered to him (NCC, Art. 1164).
may not have due to lack of care
been mentioned or a general WHEN OBLIGATION
(NCC, Art. 1166). breach is SOURCE OF OBLIGATION
ARISES
committed.
Law, quasi-delict, quasi-
contract, or crime. Based on specific provisions

182
 OBLIGATIONS AND CONTRACTS
of applicable law.
1. Positive personal obligations
a. Not purely personal act – to have obligation
executed at debtor's expense plus damages.
Subject to a suspensive From the happening of the b. Purely personal act - Damages only.
condition. condition.
When positive personal oblugations considered
From the constitution, breached:
Subject to a supensive
creation or perfection of a. If the debtor fails to perform the obligation; or
term/period.
obligation. b. Even in case of performance but the same is done
either in a poor manner or in contravention of the
tenor of the obligation (NCC, Art. 1167).
From the constitution,
Pure creation or perfection of the 2. Negative personal obligation – To have the
obligation. prohibited thing undone at the expense of the
debtor plus damages. However, if thing cannot be
Nature of the right of the creditor with respect to physically or legally undone, only damages may be
fruits demanded (8 Manresa 58).

1. Before delivery – personal right Specific performance is not a remedy in positive

2. After delivery – real right personal obligations

Personal right v. Real right If specific performance will be allowed, it will amount to
involuntary servitude which is prohibited by the
Constitution (Pineda, 2000).
PERSONAL RIGHT REAL RIGHT
BREACHES OF OBLIGATIONS
The right or power of a The right or interest of a
person (creditor) to demand person over a specific thing Degree of diligence required
from another (debtor), as a (i.e. ownership, possession,
definite passive subject, the mortgage), without a 1. That agreed upon;
fulfillment of the latter’s definite subject against 2. In the absence of such, that which is required by the
obligation to give, to do, or whom the right may be law;
not to do. personally enforced. 3. GR: In the absence of the foregoing, diligence of a
good father of a family
There is a definite active There is only a definite
subject and a definite XPNs:
active
passive a. Common carriers requiring extraordinary diligence
subject without any passive
subject. (NCC, Arts. 1998-2002).
subject.
b. Banks require the highest degree of deligence, being
Binding and enforceable imbued with public interest.
only against a particular Directed against the whole ---
person. World. Q: On September 18, 1988, the M/V Princess of the
Orient, a passenger vessel owned by the petitioner,
sank near Fortune Island in Batangas. 150 of the 388
Principle of “balancing of equities” in actions for recorded passengers were lost. Napoleon Sesante, a
specific performance member of the Philippine National Police (PNP) and a
lawyer, was one of the passengers who survived the
In decreeing specific performance, equity requires not sinking. He sued the petitioner for breach of contract
only that the contract be just and equitable in its and damages. Is the petitioner is liable for breach of
provisions, but that the consequences of specific contract of carriage?
performance likewise be just and equitable. The general
rule is that this equitable relief will not be granted if, A: YES. Article 1759 of the Civil Code does not establish a
under the circumstances of the case, the result of the presumption of negligence because it explicitly makes the
specific performance of the contract would be harsh, common carrier liable in the event of death or injury to
inequitable, and oppressive or result in an passengers due to the negligence or fault of the common
unconscionable advantage to the plaintiff (Agcaoili v. GSIS, carrier's employees. This liability of the common carriers
G.R. No. 30056, August 30, 1988). does not cease upon proof that they exercised all the
diligence of a good father of a family in the selection and
Types of personal obligations supervision of their employees. On the other hand, Article
1756 of the Civil Code lays down the presumption of
1. Positive - to do negligence against the common carrier in the event of
2. Negative - not to do death or injury of its passenger. Clearly, the trial court is
not required to make an express finding of the common
Remedies in personal obligations carrier's fault or negligence. Even the mere proof of injury

183
 Civil Law
relieves the passengers from establishing the fault or c. Negligence (culpa)
negligence of the carrier or its employees.The d. Breach through contravention of the tenor
presumption of negligence applies so long as there is thereof (NCC, Art. 1170).
evidence showing that: (a) a contract exists between the 2. Involuntary – debtor is unable to perform the
passenger and the common carrier; and (b) the injury or obligation due to fortuitous event thus not liable for
death took place during the existence of such contract. In damages.
such event, the burden shifts to the common carrier to
prove its observance of extraordinary diligence, and that Effects of breach of obligation
an unforeseen event or force majeure had caused the
injury (Sulpicio Lines, Inc., v. Sesante, G.R. No. 172682, July If a person obliged to do something fails to do it, or if he
27, 2016 ) (Bersamin, J.). does it in contravention of the tenor of the obligation or
--- what has been poorly done be undone, the same shall be
Q: Desirous of building their own house on their lot, executed at his cost (NCC, Art. 1167).
the Spouses Capistrano executed a construction
contract with GCB Builders. To finance the When the obligation consists in not doing, and the obligor
construction, GCB Builders facilitated their loan does what has been forbidden him, it shall also be undone
application with Comsavings Bank, an NHFMC- at his expense (NCC, Art.1168).
accredited originator. The spouses executed in favor
of GCB Builders a deed of assignment of the amount of Instances where the remedy under Art. 1168 is not
the P300,000.00 proceeds of the loan from available
Comsavings Bank. Prior to the completion of the
construction, the Comsavings Bank had the spouses 1. Where the effects of the act which is forbidden are
signed a certificate of completion the purpose of definite in character – even if it is possible for the
which was to affirm that the house had been creditor to ask that the act be undone at the expense
completely constructed according to the approved of the debtor, consequences contrary to the object of
plans and specifications, and that respondents had the obligation will have been produced which are
thereby accepted the delivery of the complete house. permanent in character.
Unfortunately, the construction was left unfinished. 2. Where it would be physically or legally impossible to
The spouses eventually sued GCB Builders and undo what has been undone – because of:
Comsavings Bank for breach of contract and damages. 6. The very nature of the act itself;
Is Comsavings Bank liable with GCB Builders for 7. A provision of law; or
breach of obligation? 8. Conflicting rights of third persons.

A: YES. A banking institution like Comsavings Bank is NOTE: In either case, the remedy is to seek recovery for
obliged to exercise the highest degree of diligence as well damages (NCC, Art. 1168).
as high standards of integrity and performance in all its
transactions because its business is imbued with public DELAY (MORA) OR DEBTOR’S DEFAULT
interest. Comsavings Bank was grossly negligent in its
dealings with the spouses because it did not comply with Those obliged to deliver or to do something incur in delay
its legal obligation to exercise the required diligence and from the time the obligee (creditor) judicially or
integrity. Given the purpose of the certificate, it should extrajudicially demands from them the fulfillment of their
have desisted from presenting the certificate to the obligation.
spouses for their signature without such conditions
having been fulfilled. Yet, it made the spouses sign the In reciprocal obligations, neither party incurs in delay if
despite the construction of the house not yet even the other does not comply or is not ready to comply in a
starting. Capistrano spouses were prejudiced, proper manner with what is incumbent upon him. From
considering that the construction of the house was then the moment one of the parties fulfills his obligations,
still incomplete and was ultimately defective. Worse, the delay by the other begins (NCC, Art. 1169). (2002 BAR)
pre-signing of the certificate was fraudulent because it
was thereby enabled to gain in the process in the form of Kinds of delay
several deductions from the proceeds of the loan on top of
other benefits as an originator bank (Comsavings Bank v. 2. Ordinary delay – this is the mere failure to perform an
Spouses Capistrano, G.R. No. 170942, August 28, 2013) obligation at the stipulated time.
(Bersamin, J.). 3. Extraordinary delay or legal delay – this delay already
--- equates to non-fulfillment of the obligation and
Diligence of a good father of a family arises after the extrajudicial or judicial demand has
been made upon the debtor (Pineda, 2000).
That reasonable diligence which an ordinary prudent
person would have done under the same circumstances. Kinds of legal delay or default
Forms of breach of obligations
1 Mora solvendi – default on the part of the
3. Voluntary – debtor is liable for damages if he is guilty debtor/obligor
of: a. Ex re – default in real obligations (to give);
a. Default (mora) b. Ex personae – default in personal obligations (to
b. Fraud (dolo) do);

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 OBLIGATIONS AND CONTRACTS
XPNs: Demand by the creditor shall not be necessary in
2. Mora accipiendi – default on the part of the order that delay may exist when:
creditor/oblige;
4. Compensatio morae – default on the part of both the 1. The obligation or the law expressly so declares; or
debtor and creditor in reciprocal obligations. 2. From the nature and the circumstances of the
obligation it appears that the designation of time
Causes of cessation of the effects of mora when the thing is to be delivered or the service is to
be rendered was a controlling motive for the
1. Renunciation (express/implied); or establishment of the contract; or
2. Prescription. 3. Demand would be useless, as when the obligor has
--- rendered it beyond his power to perform [Art. 1169
Q: American Express Card (AMEX) failed to approve (2)].
Pantaleon’s credit card purchases which urged the ---
latter to commence a complaint for moral and Q: “A” borrowed P2,000 from “B” on December 1,
exemplary damages before the RTC against AMEX. He 1956. He executed a promissory note promising to
said that he and his family experienced pay the indebtedness on December 1, 1958. Upon the
inconvenience and humiliation due to the delays in arrival of the designated date for payment, is demand
credit authorization during his vacation trip in necessary in order that “A” shall incur in delay?
Amsterdam and in the United States. RTC rendered a
decision in favor of Pantaleon. CA reversed the award A: YES. In order that the first exception provided for in
of damages in favor of Pantaleon, holding that AMEX Art. 1169 of the NCC can be applied, it is indispensable
had not breached its obligations to him, as the that the obligation or the law should expressly add that
purchase deviated from his established charge the obligor shall incur in delay if he fails to fulfill the
purchase pattern. Did AMEX commit a breach of its obligation upon the arrival of the designated date or that
obligations to Pantaleon? upon the arrival of such date demand shall not be
necessary (Bayla v. Silang Traffic Co., G.R. Nos. L-48195 and
A: YES. Generally, the relationship between a credit card 48196, May 1, 1942).
provider and its cardholders is that of creditor-debtor, ---
with the card company as the creditor extending loans Effects of mora solvendi
and credit to the cardholder, who as debtor is obliged to
repay the creditor. One hour appears to be patently 1. Debtor may be liable for damages (NCC, Art. 1155) or
unreasonable length of time to approve or disapprove a interests; and
credit card purchase. The culpable failure of AmEx herein
is not the failure to timely approve petitioner’s purchase, NOTE: The interest begins to run from the filing of
but the more elemental failure to timely act on the same, the complaint when there is no extrajudicial demand.
whether favorably or unfavorably (Pantaleon v. American
Express, G.R. No. 174269, May 8, 2009). 2. When the obligation has for its object a determinate
thing, the debtor may bear the risk of loss of the thing
--- even if the loss is due to fortuitous event.
MORA SOLVENDI 1. Rescission or resolution

Requisites (PDF-MJ) Debtor’s liability may be mitigated even if he is guilty

of delay
1. Obligation Pertains to the debtor;
2. Obligation is Determinate, due and demandable, and If the debtor can prove that loss would nevertheless
liquidated; transpire even if he had not been in default, the court may
3. Obligation has not been performed on its Maturity equitably mitigate his liability [NCC, Art. 2215(4); Pineda,
date; 2000]
4. There is Judicial or extrajudicial demand by the
creditor; and MORA ACCIPIENDI
5. Failure of the debtor to comply with such demand.
Requisites
Non-applicability of mora solvendi
1. Offer of Performance by a capacitated debtor;
Mora solvendi does not apply in natural obligations 2. Offer must be to Comply with the prestation as it
because performance is optional or voluntary on the should be performed; and
debtor’s part. It does not grant a right of action to enforce 3. Refusal of the creditor without just cause (Pantaleon
their performance nor does it apply in negative v. Amex, supra).
obligations because one can never be late in not giving or
doing something. Effects of mora accipiendi

Instances when demand by the creditor is not 1 Responsibility of debtor is limited to fraud and gross
necessary in order that delay may exist negligence;
2 Debtor is exempted from risk of loss of thing; creditor
GR: No demand = no default [NCC, Art. 1169 (2)]. bears risk of loss;

185
 Civil Law
3 Expenses by debtor for preservation of thing after a. The obligation or
delay is chargeable to creditor; the law expressly so
4 If the obligation bears interest, debtor does not have dictates;
to pay it from time of delay;
5 Creditor liable for damages; and b. Time is of the
6 Debtor may relieve himself of obligation by essence;
consigning the thing.
When different dates
c. Demand would be for the performance of
COMPENSATIO MORAE XPNs
useless, as debtor obligation is fixed by
has rendered it the parties.
Reciprocal obligations beyond his power to
perform; or
Reciprocal obligations are those which arise from the
same cause, wherein each party is a debtor and a creditor d. Debtor has
of the other, such that performance of one is conditioned acknowledged that
upon the simultaneous fulfillment of the other from the he is in default.
moment one of the parties fulfills his obligation, delay by
the other party begins (ASJ Corporation v. Evangelista, G.R.
No. 158086, February 14, 2008). FRAUD (Deceit or Dolo)

Delay in reciprocal obligations It is an intentional evasion of the faithful performance of

the obligation (8 Manresa 72).
One party incurs in delay from the moment the other
party fulfills his obligation, while he himself does not Kinds of fraud
comply or is not ready to comply in a proper manner with
what is incumbent upon him. Basis Fraud in the Fraud in the
performance perfection
Demand is only necessary in order for a party to incur
delay when the respective obligations are to be
performed on separate dates. It occurs after the
valid execution of It occurs before
Effect of non-compliance of both parties in reciprocal Time of the contract. It is or simultaneous
obligations occurrence employed in the with the creation
performance of a or perfection of
If neither party complies with his prestation, default of pre-existing the obligation.
one compensates for the default of the other. obligation.

Rules on compensatio morae Consent is

vitiated by
Unilateral Reciprocal Consent Consent is free and serious
Obligations Obligations not vitiated. deception or
misrepresentatio
n.
Default or delay
begins from
extrajudicial or Delay by the other It is not a ground It is a ground for
Effect for annulment of annulment of the
Time of judicial demand – party begins from the
delay mere expiration of moment one of the the contract. contract.
the period fixed is parties fulfills his
not enough in order obligation. Action for
that debtor may Remedy Action for damages
annulment with
incur delay. only.
damages.

Dolo causante v. Dolo incidente

Basis Dolo causante Dolo incidente

(casual fraud) (incidental
fraud)

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 OBLIGATIONS AND CONTRACTS
Did the defendant in doing the alleged negligent act use
This is the kind the reasonable care and caution which an ordinarily
of fraud which is prudent person would have used in the same situation? If
not the efficient not, then he is guilty of negligence. The law here in effect
cause for the adopts the standard supposed to be supplied by the
This is the imaginary conduct of the discreet pater familias of the
giving of the
essential cause Roman Law (Picart v. Smith, G.R. No. L-12219, March 15,
consent to the
of the consent 1918).
contract, as it
without which
Nature refers merely to
the party would Fraud v. Negligence
an incident
not have agreed
therein and,
to enter into the
which even if not BASIS FRAUD NEGLIGENCE
contract
present, the
(NCC, Art. 1338).
contracting party
would have still There is no
agreed to the deliberate
As to the There is
contract. intention to
intention to deliberate
cause damage or
cause damage intention to
injury even if the
It renders the It does not affect cause damage.
Effect act was done
contract the validity of the voluntarily.
voidable. contract.
As to the
mitigation of Liability cannot Liability may be
Contract remains
liability be mitigated. mitigated.
Remedy Annulment with valid. Remedy is
damages. claim for
damages only. GR: Waiver for
future negligence
Fraud as mentioned in Article 1171 may be allowed
in certain cases.
It is incidental fraud or fraud in the performance of the As to the waiver
obligation and not the fraud in the execution of the Waiver for future XPN: Nature of
of future fraud fraud is void. the obligation or
contract or causal fraud. It is the intentional evasion of the
normal fulfillment of the obligation (Pineda, 2000). public policy
requires
Waiver of action arising from future fraud extraordinary
diligence (e.g.
With respect to fraud that has already been committed common carrier).
(past fraud), the law does not prohibit renunciation of the
action for damages based on the same since such can be NOTE: When negligence is so gross that it amounts to
deemed an act of generosity. What is renounced is the wanton attitude on the part of the debtor or such
effect of fraud, particularly the right to indemnity. negligence shows bad faith, the laws in case of fraud shall
However, the law prohibits any waiver of an action for apply.
future fraud since the same is contrary to law and public
policy. Waiver for future fraud is void (NCC, Art. 1171). Effect of good faith or bad faith of the obligor

Remedies of the defrauded party If the obligor acted in good faith, he is responsible for the
natural and probable consequences of the breach of
1. Specific performance (NCC, Art. 1233); or contract and which the parties have reasonably foreseen
2. Resolution of the contract (Art. 1191); and at the time of the constitution of the obligation.
3. Damages, in either case.
If the obligor is guilty of fraud, bad faith, malice or wanton
CULPA OR NEGLIGENCE attitude, he shall be responsible for all damages which
may be reasonably attributed to the non-performance of
The fault or negligence of the obligor consists in the the obligation.
omission of that diligence which is required by the nature
of the obligation and corresponds with the circumstances Contributory negligence of the creditor
of the persons, of the time and the place. When negligence
shows bad faith, the provisions of Art. 1171 and 2201, GR: It reduces or mitigates the damages which he can
paragraph 2, shall apply. If the law or contract does not recover.
state the diligence which is to be observed in the
performance, that which expected of a good father of a XPN: If the negligent act or omission of the creditor is the
family shall be required (NCC, Art. 1173). proximate cause of the event which led to the damage or
injury complained of, he cannot recover
Test of negligence

187
 Civil Law
Kinds of negligence or culpa another, there being no contractual relation between
the parties (NCC, Art. 2176);
1. Culpa contractual (contractual negligence) - 3. Culpa criminal (criminal negligence) – those which
negligence which results from the breach of contract; results in the commission of a crime or a delict.
2. Culpa aquiliana (civil negligence or tort or quasi-
delict) acts or omissions that cause damage to

BASIS CULPA CONTRACTUAL CULPA AQUILIANA/ CULPA CULPA CRIMINAL

(CONTRACT) EXTRA-CONTRACTUAL (DELICT)
(QUASI-DELICT)

Negligence is merely an Negligence is substantive Negligence is

Existence of negligence incident in the performance of and independent. substantive and
an obligation. independent.

Contractual relations There is always a pre- GR: There is no pre- There is no pre-
existing contractual relation. existing contractual relation. existing contractual relation.

The source of obligation of The source of obligation is The source of

Source of obligation defendant to pay damages is the defendant’s negligence itself. obligation is an act or
breach or non-fulfillment of the omission punishable by law.
contract.

Proof of the existence of The negligence of the Accused shall be

Proof of negligence the contract and of its breach or defendant must be proved. presumed innocent until the
non-fulfillment is sufficient contrary is proved beyond
prima facie to warrant recovery. reasonable doubt.

Defense of “good father of Defense of “good father of Defense of “good

a family” in the selection & a family” in the selection & father of a family” in the
supervision of the employees is supervision of the employees is selection & supervision of
not a proper complete defense a proper and complete defense. the employees is not a
Defense available though it may mitigate proper defense.
damages.
The employee’s guilt is
Respondeat superior or automatically the
command responsibility or the employer’s civil guilt, if the
master and servant rule. former is insolvent.

Proof needed Preponderance of Preponderance of Proof of guilt beyond

evidence. evidence. reasonable doubt.

CONTRAVENTION OF TENOR OF OBLIGATION An occurrence or happening which could not be foreseen,

(VIOLATIO) or even if foreseen, is inevitable (NCC, Art. 1174). (2002,
2008 BAR)
The act of contravening the tenor or terms or conditions
of the contract. It is also known as “violatio,” i.e. failure of Requisites: (CODE)
common carrier to take its passenger to their destination
safely (Pineda, 2000). 1. Cause of breach is independent of the will of the
debtor;
Under NCC, Art. 1170, the phrase “in any manner 2. The Event is unforeseeable or unavoidable;
contravene the tenor” of the obligation includes any illicit 3. Occurrence renders it absolutely impossible for the
act which impairs the strict and faithful fulfillment of the debtor to fulfill his obligation in a normal manner -
obligation, or every kind of defective performance. Such impossibility must be absolute not partial, otherwise
violation of the terms of contract is excused in proper not force majeure; and
cases by fortuitous events. 4. Debtor is free from any participation in the
aggravation of the injury to the creditor.
FORTUITOUS EVENT / CASO FORTUITO
NOTE: The fortuitous event must not only be the
proximate cause but it must also be the only and sole
cause. Contributory negligence of the debtor renders him
liable despite the fortuitous event (Pineda, 2000).

188
 OBLIGATIONS AND CONTRACTS
human participation - whether from active intervention
If the negligence was the proximate cause, the obligation or neglect - the whole occurrence was humanized and was
is not extinguished. It is converted into a monetary therefore outside the ambit of a caso fortuito.
obligation for damages.
First, processing claims against the government are
Difficulty to foresee certainly not only foreseeable and expectable, but also
dependent upon the human will. Second, the Christmas
The mere difficulty to foresee the happening is not season is not a caso fortuito, but a regularly occurring
impossibility to foresee the same (Republic v. Luzon event. Third, the occurrence of the Christmas season did
Stevedoring Corp., G.R. No. L-21749, September 29, 1967). not at all render impossible the normal fulfillment of the
obligation. Fourth, MIAA cannot argue that it is free from
Liability for loss due to fortuitous event any participation in the delay. It should have laid out on
the compromise table the problems that would be caused
GR: There is no liability for loss in case of fortuitous event. by a deadline falling during the Christmas season.
Furthermore, it should have explained to ALA the process
XPNs: (SLaP-BGC) involved for the payment of ALA’s claim (MIAA v. Ala
1. Law; Industries Corp., G.R. No. 147349, February 13, 2004).
2. Nature of the obligation requires the assumption of ---
risk; Effects of fortuitous events
3. Stipulation;
4. The debtor is guilty of dolo, malice or bad faith, has 1. On determinate obligation – The obligation is
Promised the same thing to two or more persons extinguished.
who does not have the same interest (NCC, Art. 1165); 2. On generic obligation – The obligation is not
5. The debtor Contributed to the loss (Tan v. Inchausti extinguished (genus nun quam peruit – genus never
& Co., G.R. No. L-6472, March 7, 1912); perishes).
6. The possessor is in Bad faith (NCC, Art. 552); or ---
7. The obligor is Guilty of fraud, negligence or delay or Q: Kristina brought her diamond ring to a jewelry
if he contravened the tenor of the obligation (Juan shop for cleaning. The jewelry shop undertook to
Nakpil v. United Construction Co., Inc. v. CA, G.R. No. L- return the ring by February 1, 1999. When the said
47851, April 15, 1988). date arrived, the jewelry shop informed Kristina that
the job was not yet finished. They asked her to return
Act of God v. Act of Man five days later. On February 6, 1999, Kristina went to
the shop to claim the ring, but she was informed that
ACT OF GOD ACT OF MAN the same was stolen by a thief who entered the shop
the night before. Kristina filed an action for damages
against the jewelry shop which put up the defense of
Fortuitous event Force majeure force majeure. Will the action prosper or not? (2000
BAR)
Event which is absolutely Event caused by the
legitimate or illegitimate A : YES. The action will prosper. Since the defendant was
independent of human
acts of persons other than already in default for not having delivered the ring when
intervention
the obligor delivery was demanded by plaintiff at due date, the
defendant is liable for the loss of the thing and even when
the loss was due to force majeure.
i.e. earthquakes, storms, i.e. armed invasion, robbery,
floods, epidemics war (Pineda, 2000). The defendant who is obliged to deliver incurred delay
from the time the plaintiff extrajudicially demands the
NOTE: There is no essential difference between fortuitous fulfillment of the obligation (NCC, Art. 1169). The
event and force majuere; they both refer to causes defendant shall be held liable for the loss of the thing even
independent of the will of the obligor (Tolentino, 2002). it was due to fortuitous event.
--- ---
Q: MIAA entered into a compromise agreement with Q: AB Corp. entered into a contract with XY Corp.
ALA. MIAA failed to pay within the period stipulated. whereby the former agreed to construct the research
Thus, ALA filed a motion for execution to enforce its and laboratory facilities of the latter. Under the terms
claim. MIAA filed a comment and attributed the of the contract, AB Corp. agreed to complete the
delays to its being a government agency and the facility in 18 months, at the total contract price of P10
Christmas rush. Is the delay of payment a fortuitous million. XY Corp. paid 50% of the total contract price,
event? the balance to be paid upon completion of the work.
The work started immediately, but AB Corp. later
A: NO. The act-of-God doctrine requires all human experienced work slippage because of labor unrest in
agencies to be excluded from creating the cause of the his company. AB Corp.’s employees claimed that they
mischief. Such doctrine cannot be invoked to protect a are not being paid on time; hence, the work slowed
person who has failed to take steps to forestall the down. As of the 17th month, work was only 45%
possible adverse consequences of loss or injury. Since the completed. AB Corp. asked for extension of time,
delay in payment in the present case was partly a result of claiming that its labor problems is a case of fortuitous

189
 Civil Law
event, but this was denied by XY Corp. When it became REMEDIES
certain that the construction could not be finished on
time, XY Corp. sent written notice cancelling the In case of breach of obligation, the following are the
contract and requiring AB Corp. to immediately remedies available:
vacate the premises.
5. Specific performance, or substituted performance by
Can the labor unrest be considered a fortuitous a third person in case of an obligation to deliver a
event? generic thing, and in obligations to do, unless it is a
purely personal act; or
(a) Can XY Corp. unilaterally and immediately 6. Rescission (or resolution in reciprocal obligations);
cancel the contract? 7. Damages, in any case;
(b) Must AB Corp. return the 50% down 8. Subsidiary remedies of creditors:
payment? (2008 BAR) a. Accion subrogatoria
b. Accion pauliana
A: NO. Labor unrest is not a fortuitous event that will c. Accion directa
excuse AB Corp. from complying with its obligation of
constructing the research and laboratory facilities of XY SPECIFIC PERFORMANCE
Corp. The labor unrest, which may even be attributed in
large part to AB Corp. itself, is not the direct cause of non- Remedies in connection with specific performance
compliance by AB Corp. It is independent of its obligation.
It is similar to the failure of a DBP borrower to pay her 1. Exhaustion of the properties of the debtor (not
loan just because her plantation suffered losses due to the exempt from attachment under the law)
cadang-cadang disease. It does not excuse compliance 2. Accion subrogatoria (subrogatory action) – An
with the obligation (DBP v. Vda. De Moll, G.R. No. L-25802, indirect action brought in the name of the debtor by
January 31, 1972). AB Corp. could have anticipated the the creditor to enforce the former’s rights except:
labor unrest which was caused by delays in paying the a. Personal rights of the debtor;
laborer’s wages. The company could have hired additional b. Rights inherent in the person of the debtor;
laborers to make up for the work slowdown. c. Properties exempt from execution.
e.g. family home
a) YES, XY Corp. may unilaterally cancel the obligation 3. Accion pauliana (rescissory action) – An action to
but this is subject to the risk that the cancellation of impugn or assail the acts done or contracts entered
the reciprocal obligation being challenged in court into by the debtor in fraud of his creditor.
and if AB Corp. succeeds, then XY Corp. will be
declared in default and be liable for damages. NOTE: Resort to the remedies must be in the order stated
above (NCC, Art. 1177).
b) NO, under the principle of quantum meruit, AB Corp. ---
had the right to retain payment corresponding to his Q: Sacramento Steel Corporation (SSC) is a business
percentage of accomplishment less the amount of entity manufacturing and producing steel and steel
damages suffered by XY Corp. because of the delay or products. It entered into a credit agreement with
default. respondent International Exchange Bank (IEB). As
--- security for its obligations, SSC executed 5 separate
Q: X, a dressmaker, accepted clothing materials from deeds of chattel mortgage constituted over various
Karla to make 2 dresses for her. On the day X was equipment found in its steel manufacturing plant.
supposed to deliver Karla’s dresses, X called up Karla
to say that she had an urgent matter to attend to and Subsequently, SSC defaulted in the payment of its
will deliver them the next day. That night, however, a obligations. IEB’s demand for payment went
robber broke into her shop and took everything unheeded. Meanwhile, Metropolitan Bank and Trust
including Karla’s dresses. X claims she is not liable to Company (Metro Bank) filed a motion for
deliver Karla’s dresses or to pay for the clothing intervention as a creditor of SSC. It contends that the
materials considering she herself was a victim of the mortgage contracts between IEB and SSC were
robbery which was a fortuitous event and over which entered into to defraud the latter’s creditors. Thus, it
she had no control. Do you agree? Why? (2015 BAR) prayed for the rescission of the chattel mortgaged
executed by SSC in favor of IEB. Will the action to
A: NO. The law provides that except when it is otherwise rescind the mortgage prosper?
declared by stipulation or when the law provides or the
nature of the obligation requires the assumption of risk, A: NO. Jurisprudence is clear that the following successive
no person shall be liable for those events which could not measures must be taken by a creditor before he may bring
be foreseen or which though foreseen were inevitable an action for rescission of an allegedly fraudulent
(NCC, Art. 1174). contract: (1) exhaust the properties of the debtor through
levying by attachment and execution upon all the
In this case, X cannot invoke fortuitous event as a defense property of the debtor, except such as are exempt by law
because she had already incurred delay at the time of the from execution; (2) exercise all the rights and actions of
occurrence of the loss (NCC, Art. 1165). the debtor, save those personal to him (acción
subrogatoria); and (3) seek rescission of the contracts
--- executed by the debtor in fraud of their rights

190
 OBLIGATIONS AND CONTRACTS
(acción pauliana). It is thus apparent that an action to or genus. The creditor may ask that the
rescind, or an acción pauliana, must be of last resort, obligation be complied with at the expense of
availed of only after the creditor has exhausted all the the debtor (NCC, Art. 1165).
properties of the debtor not exempt from execution or b. Specific thing – Specific performance may be
after all other legal remedies have been exhausted and demanded, that is, the creditor may compel the
have been proven futile (Metropolitan Bank and Trust debtor to make the delivery.
Company v. International Exchange Bank, G.R. No. 176008,
August 10, 2011). RESCISSION (RESOLUTION) (NCC, ART. 1191)
---
Q: While the case was pending, Felix donated his It refers to the cancellation of the contract or reciprocal
parcels of land in favor of his children. Judgment was obligation in case of breach on the part of one, which
rendered against Felix. When the sheriff, breach is violative of the reciprocity between the parties.
accompanied by counsel of Philam, sought to enforce This is properly called resolution. (2005, 2008 BAR)
the alias writ of execution, they discovered that Felix
no longer had any property and that he had conveyed NOTE: The rescission under Art. 1380 is rescission based
the subject properties to his children. Thus, Philam on lesion or fraud upon creditors.
filed an accion pauliana for rescission of the
donations. Felix countered that an action for Applicability
rescission of the donation had already prescribed
since the time of prescription has to run from the date Rescission or resolution is applicable in reciprocal
of registration. Has the action filed by Philam obligations, since it is implied therein.
prescribed?
Characteristics of the right to rescind
A: NO. Philam only learned about the unlawful
conveyances made by Felix more than four years after the 1. Can be demanded only if plaintiff is ready, willing and
donations were effected, when its counsel accompanied able to comply with his own obligation and
the sheriff to Butuan City to attach the properties. There defendant is not;
they found that he no longer had any properties in his 2. Not absolute;
name. It was only then that Philam's action for rescission 3. Needs judicial approval in the absence of a
of the deeds of donation accrued because then it could be stipulation allowing for extra-judicial rescission, in
said that Philam had exhausted all legal means to satisfy cases of non-reciprocal obligations;
the trial court's judgment in its favor. Since Philam filed 4. Subject to judicial review if availed of extra-
its complaint for accion pauliana against petitioners judicially;
barely a month from its discovery that Felix had no other 5. May be waived expressly or impliedly; and
property to satisfy the judgment award against him, its 6. Implied to exist in reciprocal obligations therefore
action for rescission of the subject deeds clearly had not need not be expressly stipulated upon.
yet prescribed (Khe Hong Cheng v. CA, G.R. No. 144169,
March 28, 2000). Fulfillment or rescission of the obligation
---
NOTE: The debtor is liable with all his property, present GR: The injured party can only choose either fulfillment
and future, for the fulfillment of his obligations, subject to or rescission of the obligation, and not both.
the exemptions provided by law (De Leon, 2003).
XPN: If fulfillment has become impossible, Article 1191
Substitute performance allows the injured party to seek rescission even after he
has chosen fulfillment (Ayson-Simon v. Adamos, G.R. No. L-
It is a remedy of the creditor in case of non-performance 39378, August 28, 1984).
by the debtor where another party performs the ---
obligation or the same is performed at the expense of the Q: Vermen and Seneca entered into an "offsetting
debtor. agreement", where Seneca is obliged to deliver
construction materials to Vermen, who is obliged to
Applicability of substitute performance pay Seneca and to deliver possession of 2
condominium units to Seneca upon its completion.
4. Positive personal obligation: Seneca filed a complaint for rescission of the
a. If not purely personal – Substitute performance; offsetting against Vermen alleging that the latter had
the obligation shall be executed at debtor’s cost stopped issuing purchase orders of construction
if he fails to do it (NCC, Art. 1167). materials without valid reason, thus resulting in the
b. Purely personal – No substitute performance stoppage of deliveries of construction materials on its
may be demanded because of the personal part, in violation of the Offsetting Agreement. Can the
qualifications taken into consideration. The only agreement be rescinded?
remedy is damages.
A: YES, because the provisions of the offsetting agreement
5. Real obligation: are reciprocal in nature. Article 1191 of the Civil Code
a. Generic thing – Substitute performance; delivery provides the remedy of rescission (more appropriately,
may be made by a person other than the debtor the term is "resolution") in case of reciprocal obligations,
since the object is merely designated by its class where one of the obligors fails to comply with that is

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incumbent upon him (Vermen Realty Development Corp. v. intervention is necessary not for purposes of obtaining a
CA and Seneca Hardware Co., Inc., G.R. No. 101762, July 6, judicial declaration rescinding a contract already deemed
1993). rescinded by virtue of an agreement providing for
--- rescission even without judicial intervention, but in order
Q: Ong and spouses Robles executed an "agreement of to determine whether or not the rescission was proper.
purchase and sale" of 2 parcels of land. Pursuant to Where such propriety is sustained, the decision of the
the contract they executed, Ong partially paid the court will be merely declaratory of the revocation, but it
spouses by depositing it with the bank. Subsequently, is not itself the revocatory act (Lina Calilap-Asmeron v.
Ong deposited sums of money with the BPI in DBP, G.R. No. 157330, November 23, 2011) (Bersamin, J.).
accordance with their stipulation that Ong pay the ---
loan of the spouse with BPI. To answer for Ong’s NOTE: In a contract to sell, the payment of the purchase
balance, he issued 4 post-dated checks which were price is a positive suspensive condition, the failure of
dishonored. Ong failed to replace the checks and to which is not a breach, casual or serious, but a situation
pay the loan in full. Can the contract entered into by that prevents the obligation of the vendor to convey title
Ong and the spouses be rescinded? from acquiring an obligatory force (Ong v. CA, G.R. No.
97347,
A: NO. The agreement of the parties in this case may be July 6, 1999).
set aside, but not because of a breach on the part of Ong ---
for failure to complete payment of the purchase price. Q: Can a contract be rescinded extra-judicially despite
Rather, his failure to do so brought about a situation the absence of a special contractual obligation
which prevented the obligation of the spouses to convey therefore?
title from acquiring an obligatory force.
A: YES. An extrajudicial rescission based on grounds not
The agreement of purchase and sale shows that it is in the specified in the contract would not preclude a party to
nature of a contract to sell. Ong’s failure to complete treat the same as rescinded. The rescinding party,
payment of the purchase price is a non-fulfillment of the however, by such course of action, subjects himself to the
condition of full payment which rendered the contract to risk of being held liable for damages when the
sell ineffective and without force and effect. The breach extrajudicial rescission is questioned by the opposing
contemplated in Article 1191 is the obligor’s failure to party in court. In other words, the party who deems the
comply with an obligation. In this case, Ong’s failure to pay contract violated may consider it resolved or rescinded,
is not even a breach but merely an event which prevents and accordingly, without previous court action, but it
the vendor’s obligation to convey title from acquiring proceeds at its own risk. For it is only the final judgment
binding force. of the corresponding court that will conclusively and
--- finally settle whether the action taken was or was not
Q: Lina constituted a real estate mortgage over two correct in law (Nissan Car Lease Phils, Inc., v. LICA
parcels of land covered by Transfer Certificate of Title Management and Proton, G.R. No. 176986, January 13,
(TCT) No.1 and TCT No. 2 to secure the performance 2016).
of their loan obligation with respondent ---
Development Bank of the Philippines (DBP). With the
principal obligation being ultimately unpaid, DBP DAMAGES
foreclosed the mortgage. Later on, Lina negotiated
with DBP to buy back the property covered by TCT No. Liability for damages
1 and signed the deed of conditional sale covering
both lots for the total consideration of P157, 000.00. Those liable under Art. 1170 shall pay damages only if
Then she requested the release of the property under aside from the breach of contract, prejudice or damage
TCT No. 1 after paying two quarterly amortizations, was caused (Berg v. Teus, G.R. No. L-6450, October 30,
but DBP did not approve the release and rescinded 1954).
the deed of conditional sale and the mortgaged
parcels of land were then sold to the highest bidder. NOTE: If action is brought for specific performance,
Lina now avers that DBP could not resort to rescission damages sought must be asked in the same action;
because her nonpayment of the amortizations was otherwise the damages are deemed waived (Daywalt v.
only a slight or casual breach; and that the sale made Augustinian Corp, G.R. No. L-13505, February 4, 1919).
by DBP to Cruz was tainted with bad faith. Is she
correct? Kinds of damages (MENTAL)

A: NO. Article 1191 of the Civil Code makes it available to 3. Moral

the injured party alternative remedies such as the power 4. Exemplary
to rescind or enforce fulfillment of the contract, with 5. Nominal
damages in either case if the obligor does not comply with 6. Temperate
what is incumbent upon him. There is nothing in this law 7. Actual
which prohibits the parties from entering into an 8. Liquidated
agreement that a violation of the terms of the contract
would cause its cancellation even without court SUBSIDIARY REMEDIES
intervention. The rationale for the foregoing is that in
contracts providing for automatic revocation, judicial
ACCION SUBROGATORIA

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 OBLIGATIONS AND CONTRACTS
e.g. Alienations of property, payment of debts which are
An action whereby the creditor, whose claim has not been not due, renunciation of rights such as the right of
fully satisfied, may go after thedebtor defendant debtor’s usufruct or an inheritance, assignment of credit, and
debtor (3rd person) (NCC, Art. 1177). remission of debts.

Accion subrogatoria is different and distinct from active ACCION DIRECTA

subjective subrogation governed by Articles 1300 to
1304. In the latter, there is change of creditors whereas in Accion directa
the former there is no change of creditors; the creditor
merely acts in the name and for the account of the debtor The right of a person to go directly against another who is
after exhausting the assets of the latter but not enough to not a privy to the contract (NCC, Arts. 1652, 1608, 1729 &
satisfy the claims of the creditor. 1893).

Requisites (IPIN) NOTE:

1. Subsidiary liability of sublessee for the rent (NCC, Art.
1. The debtor’s assets must be Insufficient to satisfy 1652);
claims against him; 2. Right of sellers a retro to redeem property from
2. The creditor must have Pursued all properties of the persons other than the buyer a retro (NCC, Art. 1608);
debtor subject to execution; 3. Subsidiary liability of owners to laborers and
3. The right of action must Not be purely personal; and material men (NCC, Art. 1729);
4. The debtor whose right of action is exercised must be 4. The principal may sue the substitute of the agent
Indebted to the creditor. with respect to the obligations which the substitute
has contracted under the substitution (NCC, Art.
Effects of subrogatory action 1893).

1. The creditor may exercise the subrogatory action in

behalf of the debtor not only up to the amount of his KINDS OF CIVIL OBLIGATIONS
credit but in its totality.

NOTE: The excess (if any) must be returned to the

debtor. PURE AND CONDITIONAL OBLIGATION

2. The bringing of action does not entitle the creditor to Pure obligation
preference.
3. The defendant (the debtor of the debtor) may avail An obligation whose performance does not depend upon
himself of all defenses available against the creditor. a future or uncertain event, or upon a past event or upon
a past event unknown to the parties, demandable at once
NOTE: In order to exercise action subrogatoria, a previous (NCC, Art. 1179).
approval of the court is not necessary (Tolentino, 1991).
NOTE: Other obligations which are demandable at once
are:
ACCION PAULIANA 1. Obligations with a resolutory condition; and
2. Obligations with a resolutory term or period [NCC, Arts.
Accion pauliana 1179 (2) and 1193 (2)].
An action where the creditor files in court for the The most distinctive characteristic of a pure obligation is
rescission of acts or contracts entered into by the debtor its immediate demandability. This quality, however, must
designed to defraud the former (NCC, Art. 1177). not be understood in such a way as to lead to absurd
interpretations which would literally require the obligor
NOTE: When the creditor could not collect in any manner, or debtor to comply immediately with his obligation. A
accion pauliana may be resorted by him to rescind a distinction must be made between:
fraudulent alienation of property (Regalado, v. Luchsinger
and Co., 5 Phil 625, GR L-2250, February 17, 1906). 1. The immediate demandability of the obligation; and
2. Its performance or fulfillment by the obligor or
Requisites (PAPIL) debtor. Although the obligee or creditor can demand
the performance of the obligation immediately, the
1. Defendant must be Indebted to plaintiff; quality of immediate demandability is not infringed
2. The fraudulent act performed by the debtor or violated when a reasonable period is granted for
subsequent to the contract gives Advantage to performance (Jurado, 2009).
another;
3. The creditor is Prejudiced by such act; Conditional obligation
4. The creditor must have Pursued all properties of the
debtor subject to execution; and An obligation subject to a condition and the effectivity of
5. The creditor has no other Legal remedy. which is subordinated to the fulfillment or non-fulfillment
of a future and uncertain event, or upon a past event
unknown to the parties (Pineda, 2000).

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 Civil Law

Condition Futurity and Futurity and

Characteristic certainty. uncertainty.
A condition is an event which is future and uncertain,
upon which the efficacy or extinguishment of an
obligation depends.
No effect upon the May give rise to
It has two requisites: first, futurity; and second, existence of the an obligation
uncertainty. The effect of its obligation but (suspensive) or
happening to the only in its the cessation of
Uncertain but past event as a condition obligation demandability. one already
existing
An uncertain but past event itself can never constitute a (resolutory).
condition because in order to be classified as a condition,
the requisites of futurity and uncertainty are required.
Valid. But the Annul
Neither can it constitute a term or period because in order If fulfillment is court is
to be classified as a term or period, the requisites of dependent upon empowered to fix
futurity and certainty are required. But the proof or the sole will of the duration of
ascertainment of the fact or event, as distinguished from the debtor the period.
the fact or event itself may either constitute a condition or
a term depending upon the circumstances of each case
(Jurado, 2009).
No retroactivity. The moment
Constructive fulfillment of a condition the condition is
fulfilled, the
The condition shall be deemed fulfilled when the obligor effects will
Retroactivity
voluntarily prevents its fulfillment (NCC, Art. 1186). retroact on the
--- day of the
Q: Ramon, the judicial administrator of the estate of constitution of
Juan, found out that Rodriguez had enlarged the area the obligation.
of the land which he purchased from Juan before his
death. Thus, Ramon demanded Rodriguez to vacate Suspensive condition
the portion allegedly encroached by him. Rodriguez
refused and contested there was indeed a conditional A condition the fulfillment of which will give rise to the
sale with the balance of the purchase price payable acquisition of a right. While the condition has not arrived
within five years from the execution of the deed of yet, in the meantime, the rights and obligations of the
sale. Ramon then filed an action for recovery of parties are suspended.
possession of the disputed lot. Is the contract of sale a
conditional one? NOTE: In suspensive condition or condition precedent,
the efficacy or the obligatory force is subordinated to the
A: NO. The stipulation that the "payment of the full happening of a “future and uncertain event”; if the
consideration based on a survey shall be due and payable suspensive condition does not take place the parties
in 5 years from the execution of a formal deed of sale" is would stand as if the conditional obligation never existed
not a condition which affects the efficacy of the contract (Gaite v. Fonacier, GR L-11827, July 31, 1961; Cheng v.
of sale. It merely provides the manner by which the full Genato, 300 SCRA 722, GR 129760, December 29, 1998;
consideration is to be computed and the time within Pineda, 2000).
which the same is to be paid. But it does not affect in any
manner the effectivity of the contract (Heirs of San Andres Effects of fulfillment of the suspensive
v. Rodriguez, G.R. No. 135634, May 31, 2000). condition(1999 BAR)
---
Period v. Condition 1. Real obligations

BASIS PERIOD CONDITION GR: Retroacts to the day of the constitution of the
obligation.
Refers to the May refer to XPNs: There is no retroactive effect with respect to
As to time future. past event the fruits and interest:
unknown to the
parties. 4. In reciprocal obligations, the fruits and interests
shall be deemed to have been mutually
It will happen at May or may not compensated;
an exact date or at happen. 5. In unilateral obligations, the debtor
As to fulfillment an indefinite time, appropriates the fruits and interest received
but is definite to before the fulfillment of the condition unless
arrive.

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 OBLIGATIONS AND CONTRACTS
contrary to the intention of the parties (NCC, Art.
1187). Requisites for the application of Art.1189 (SuRF LIDS)

2. Personal obligations – the court determines the 1. Must be a Real obligation;

retroactive effect of the condition fulfilled (NCC, Art. 2. Object of the obligation is a Specific thing;
1187). 3. Obligation is subject to a SUspensive condition;
2. The condition is Fulfilled; and
Rights of the parties before the fulfillment of the 3. There is loss, Deterioration or improvement of the
condition thing during the pendency of the happening of the
condition.
1. Creditor – May bring the appropriate actions for the
preservation of his right (NCC, Art. 1188), such as: NOTE: The same conditions apply to an obligor in
obligations subject to a resolutory condition. In such
a. Action for prohibition/restraining the alienation cases, the third requisite must read, “subject to a
of the thing pending the happening of the resolutory condition.”
suspensive condition;
b. Petition for the annotation of the creditor’s right Positive suspensive condition
with the proper registry;
c. Action to demand security if the debtor has A condition which requires a positive act on the part of the
become insolvent; obligor that gives rise to the acquisition of rights.
d. Action to set aside alienations made by the
debtor in fraud of creditors; In case of a contract to sell, the obligation to deliver the
e. Action against adverse possessors to interrupt subject properties becomes demandable only upon the
the running of prescriptive period. happening of the positive suspensive condition (payment
of full purchase price). Without full payment, there can be
2. Debtor – May recover what, during the same time, he no breach of contract to speak of because the seller has no
has paid by mistake in case of a suspensive condition obligation yet to turn over the title (Reyes v. Tuparan, G.R.
(NCC, Art. 1188). No. 188064, June 1, 2011).

Effect of loss, deterioration and improvement in an Resolutory condition (1999 BAR)

obligation to deliver a determinate thing subject to a
suspensive condition A condition where the rights already acquired are lost
upon fulfillment of the condition. It is also known as
WITHOUT condition subsequent.
WITH DEBTOR’S
BASIS DEBTOR’S
FAULT Effects of fulfillment of resolutory condition
FAULT
3. Real obligations:
Obligation is not Obligation
extinguished. extinguished. a. The parties shall return to each other what they
Loss have received (mutual restitution).
b. Obligation is extinguished.
Debtor pays c. In case of loss, deterioration or improvement of
damages. the thing, NCC, Art. 1189, with respect to the
debtor, shall be applied to the party who is
bound to return (NCC, Art. 1190).
Creditor may Impairment borne
choose between by creditor.
ii. Personal obligations – the courts shall determine, in
rescission of
each case, the retroactive effect of the condition that
Deterioration obligation or
has been complied with. (NCC, Art. 1187; NCC, Art.
fulfillment (with
1190).
indemnity for
damages in either
Suspensive conditionv. Resolutory condition
case).

c. By the thing’s nature or through SUSPENSIVE RESOLUTORY

time – inure to the benefit of the BASIS
CONDITION CONDITION
creditor;
Improvement
d. At the debtor’s expense – debtor
Obligation Obligation is
shall have no right other than that Effect of arises or extinguished.
granted to a usufructuary. fulfilment becomes
effective.
NOTE: The abovementioned do not apply to
indeterminate or generic things on the basis of the maxim
“genus nun quam peruit” (genus never perishes). It will
only apply when the object or thing to be given is specific.

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 Civil Law
Effects of potestative conditions upon the obligation
If not fulfilled, If not fulfilled,
Effect of non- no juridical juridical relation If the condition is potestative in the sense that its
fulfillment relation is is consolidated. fulfillment depends exclusively upon the will of the
created. debtor, and the same is suspensive, both the condition
and obligation are VOID.
Rights are not Rights are However, if the condition is a pre-existing one or the
yet acquired, but already vested, condition is resolutory, only the condition is void, leaving
When rights are there is hope or but subject to the
acquired the obligation itself valid because what is left to the sole
expectancy that threat or danger will of the debtor is not the existence or the fulfillment of
they will soon of extinction. the obligation but merely its extinguishment.
be acquired.
If the condition is potestative in the sense that its
--- fulfillment depends exclusively upon the will of the
Q: The late Don Lopez, Sr., who was then a member of creditor, the obligation shall be valid. This is so because
the Board of Trustees of CPU, executed a deed of the provision of the first sentence of Art. 1182 extends
donation in favor of the latter involving a parcel of only to conditions which are potestative to the obligor or
land subject to the condition that it shall be utilized debtor. Besides, the creditor is naturally interested in the
for the establishment and use of a medical college. fulfillment of the condition since it is only by such
However, the heirs of Don Lopez, Sr., filed an action fulfillment that the obligation arises or becomes effective
for annulment of the donation, reconveyance and (Jurado, 2009 citing NCC, Art. 1181 and Manresa).
damages against CPU alleging that CPU did not comply
with the conditions of the donation. Are the Casual Condition
conditions imposed resolutory or suspensive?
It is the performance or the fulfillment of the condition
A: Under Art. 1181 of the Civil Code, on conditional which depends upon chance and/or the will of a third
obligations, the acquisition of rights, as well as the person.
extinguishment or loss of those already acquired, shall
depend upon the happening of the event which Mixed Condition
constitutes the condition. Thus, when a person donates
land to another on the condition that the latter would It is the performance or fulfillment of the condition which
build upon the land a school, the condition imposed was depends partly upon the will of a party to the obligation
not a condition precedent or a suspensive condition but and partly upon chance and or the will of a third person.
resolutory. It is not correct to say that the school house
(or the establishment and use of a medical college in this NOTE: Casual and mixed conditions are valid, unlike
case) had to be constructed before the donation became purely potestative conditions.
effective, that is, before the donee could become the ---
owner of the land, otherwise, it would be invading the Q: Suppose that the debtor executed a promissory
property rights of the donor. The donation had to be valid note promising to pay his obligation to the creditor as
before the fulfillment of the condition. If there was no soon as he has received funds derived from the sale of
fulfillment or compliance with the condition, the donation his property in a certain place, is the condition
may now be revoked and all rights which the donee may potestative or mixed?
have acquired under it shall be deemed lost and
extinguished (Central Philippine University v. CA, G.R. No. A: In the case of Hermosa v. Longara (93 Phil. 971, G.R. L-
112127, July 17, 1995). 5267, October 27, 1953), the condition is mixed because its
--- fulfillment depends not only upon the will of the debtor
Negative resolutory condition but also upon the concurrence of other factors, such as the
acceptability of the price and other conditions of the sale,
An act, which if not done, would give rise to a cause of as well as the presence of a buyer, ready, able and willing
action against the obligor. It contemplates a situation to purchase the property.
where rights are already acquired but subjectto an ---
obligation, the non-fulfillment of which does not affect the Impossible Conditions (1997, 2007 BAR)
rights already acquired but merely gives a cause of action
in favor of the other party. In a contract of sale, the buyer’s GR: Impossible conditions annul the obligation which
non-payment of the price is a negative resolutory depends upon the parties but not of a third person.
condition. In such case, the seller has lost and cannot
recover the ownership of the property unless he takes XPNs:
action to set aside the contract of sale (Heirs of Atienza v. 1. Pre-existing obligation;
Espidol, G.R. No. 180665, August 11, 2010). 2. Obligation is divisible;
--- 3. In simple or remuneratory donations;
Potestative Condition (1997, 2000, 2003 BAR) 4. In case of conditions not to do an impossible thing;
5. In testamentary dispositions.
A condition which depends upon the will of one of the
contracting parties (NCC, Art. 1182).

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 OBLIGATIONS AND CONTRACTS
NOTE: In the foregoing, the obligations remain valid, only e.g. “I will pay when my means permit me to do
the condition is void and deemed to have not been so.”
imposed. It is applicable only to obligations not to do and
gratuitous obligations. When the debtor binds himself to pay when his means
permit him to do so, the obligation is deemed with a
Other types of conditions period (NCC, Art. 1180). This is valid because it is not the
payment itself that is dependent upon the will of the
1. Positive – involves the doing of an act; debtor, but the moment of payment.
2. Negative – involves the omission of an act;
3. Divisible – is susceptible of partial performance; As the time of payment is not fixed, the court must fix the
4. Indivisible – is not susceptible of partial performance; same before any action for collection may be entertained,
5. Conjunctive – there are several conditions in an unless, the prior action of fixing the term or period will
obligation all of which must be performed; only be a formality and will serve no purpose but delay
6. Alternative – there are several conditions in an (Tiglao v. Manila RailroadCo., 98 Phil. 181, GR. L-7900,
obligation but only one must be performed; January 12, 1956).
7. Possible – is capable of fulfillment according to the
nature, law, public policy or good customs; Benefit of the period
8. Impossible – is not capable of fulfillment according to
nature, law, public policy or good customs (NCC, Art. GR: Whenever in an obligation a period is designated, it is
1183). presumed to have been established for the benefit of both
the creditor and the debtor
OBLIGATIONS WITH A PERIOD
XPN: When it appears from the tenor of the period or
Obligation with a period or a term other circumstances that it was established for the benefit
of one of the parties (NCC, Art.1196).
Obligations for whose fulfillment a day certain has been
fixed, shall be demandable only when that day comes Effect of the term/period
(NCC, Art. 1193).
1. When it is for the benefit of the creditor – Creditor may
Term or period demand the performance of the obligation at any
time but the debtor cannot compel him to accept
A certain length of time which determines the effectivity payment before the expiration of the period.
or the extinguishment of the obligations. e.g. “on demand”
2. When it is for the benefit of the debtor – Debtor may
Requisites of a valid period or term oppose any premature demand on the part of the
creditor for performance of the obligation, or if he so
1. Future; desires, he may renounce the benefit of the period by
2. Certain; performing his obligation in advance.
3. Possible, legally and physically (Paras, 2008).
Effect of a fortuitous event to an obligation with a
“Day certain” period

It is understood to be that which must necessarily come, It only relieves the contracting parties from the fulfillment
although it may not be known when. of their respective obligation during the term or period.

Kinds of terms or periods Instances where the court may fix the period (1991,
1997, 2003 BAR)
1. Ex die – this is a term or period with suspensive
effect. The obligation begins only from a day certain, 1. If the obligation does not fix a period, but from its
in other words upon the arrival of the period. nature and circumstances it can be inferred that a
2. In diem – a period or term with a resolutory effect. Up period was intended by the parties.
to a certain extent, the obligation remains valid, but 2. If the duration of the period depends upon the will of
upon the arrival of said period, the obligation the debtor (1997, 2003 BAR).
terminates. 2. In case of reciprocal obligations, when there is a just
3. Legal – a period granted under the provisions of the cause for fixing the period.
law. 3. If the debtor binds himself when his means permit
4. Conventional or voluntary – period agreed upon or him to do so.
stipulated by the parties.
5. Judicial – the period or term fixed by the courts for NOTE: Once fixed by the courts, the period cannot be
the performance of an obligation or for its changed by the parties (NCC, Art. 1197).
termination.
6. Definite – the exact date or time is known and given. Instances where the debtor loses his right to make
7. Indefinite – something that will surely happen but the use of the period
date of happening is unknown.

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 Civil Law
1. When after the obligation has been contracted he
becomes insolvent, unless he gives a guaranty or Alternative obligation
security for the debt;
2. When he does not furnish to the creditor the It is one where the debtor is alternatively bound by
guaranties or securities which he has promised; different prestations but the complete performance of
3. When by his own acts he has Impaired said one of them is sufficient to extinguish the obligation.
guaranties or securities after their establishment;
4. When through a fortuitous event they disappear, Facultative obligation
unless he immediately gives new ones or equally
satisfactory; It is one where the debtor, who has a reserved right to
5. When the debtor violates any undertaking, in choose another prestation or thing, is bound to perform
consideration of which the creditor agreed to the one of the several prestations due or to deliver a thing as
period; and substitute for the principal.
1. When the debtor attempts to abscond (NCC, Art.
1198). Conjunctive obligation

ALTERNATIVE /FACULTATIVE/ CONJUNCTIVE One where the debtor has to perform several prestations;
OBLIGATIONS it is extinguished only by the performance of all of them.

Facultative obligations v. Alternative obligations

BASIS FACULTATIVE OBLIGATIONS ALTERNATIVE OBLIGATIONS

Number of prestation Only one object is due Several objects are due

Manner of compliance May be complied with by substitution of one May be complied with by fulfilling any of those
that is due alternately due

Choice pertains only to debtor GR: Choice pertain to debtor

Right to choose
XPN: Expressly granted to creditor or third
person

Effect of fortuitous loss Fortuitous loss extinguishes the obligation Fortuitous loss of all prestations will
extinguish the obligation

Effect of culpable loss Culpable loss obliges the debtor to deliver Culpable loss of any object due will give rise to
substitute prestation without liability to debtor liability to debtor

When substitution has been made and The creditor shall have the right of indemnity
communicated to the creditor, the obligor is for damages when, through the fault of the
Liability of the debtor liable for the loss of the thing on account of debtor, all the things which are alternatively
delay, negligence or fraud the object of the obligation have been lost or
the compliance of the obligation has become
impossible.

If principal obligation is void, the creditor If one prestation is void, the others that are
Void prestation cannot compel delivery of the substitute free from any vices of consent preserve the
validity of the obligation

If there is impossibility to deliver the principal If some prestations are impossible to perform
Impossibility of prestation thing or prestation, the obligation is except one - this one must be delivered.
extinguished, even if the substitute obligation is If all prestations are impossible to perform,
valid the obligation is extinguished

Loss of the substitute before the substitution is Where the choice is given to the creditor, the
Loss of substitute made through the fault of the debtor doesn’t loss of the alternative through the fault of the
make him liable debtor renders him liable for damages

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 OBLIGATIONS AND CONTRACTS
Right to choose prestation in an alternative obligation upon him, but not as to the others. Thus, if A and B
solidarily bind themselves to deliver a horse or a carabao
GR: The right of choice belongs to the debtor to C, the selection of A of the horse, when communicated
to C will bind him and he cannot later on deliver the
XPN: Unless it has been expressly given to the creditor carabao. But it is not binding on B who may extinguish the
(NCC, Art. 1200). obligation by delivering the carabao (Tolentino, 2002).

Limitations on debtor’s right to choose Effects of loss of objects in alternative obligations

1. The debtor must absolutely perform the prestation

chosen. He cannot compel the creditor to receive part DUE TO FORTUITOUS DUE TO DEBTOR’S
of one and part of the other undertaking. EVENT FAULT
2. The debtor shall have no right to choose those
prestation which are impossible, unlawful or which Choice Belongs to Debtor
could not have been the object of the obligation (NCC,
Art. 1200).
Debtor released Creditor shall have a
3. The debtor shall lose the right to choice when among
from the obligation. right to be indemnified
the prestation whereby he is alternatively bound,
for damages based on
only one is practicable (NCC, Art. 1202). All are the value of the last
4. The selection made by the debtor (or the creditor lost thing which
when it has been expressly granted to him) cannot be
subjected by him to a condition or a term unless the disappeared/ last
creditor (or debtor in case the choice is with the service which became
creditor) consents thereto (Tolentino, 2002). impossible.

Effectivity of the choice in alternative obligations Debtor shall deliver Debtor shall deliver
Some but that which he shall that which he shall
The choice made takes effect only upon communication of not all choose from among choose from among the
the choice to the other party and from such time the are lost the remainder. remainder without
obligation ceases to be alternative (NCC, Art. 1201; NCC, damages.
Art. 1205).
Only one
remains Deliver that which remains.
NOTE: The notice of selection or choice may be in any
form provided it is sufficient to make the other party
know that the election has been made (Tolentino,2002). Choice Belongs to Creditor

When alternative obligation becomes a simple Debtor released Creditor may claim the
obligation All are from the obligation. price/value of any of
lost them with indemnity
1. When the debtor has communicated the choice to the for damages.
creditor.
2. When debtor loses the right of choice among the
prestations whereby the debtor is alternatively Creditor may choose Creditor may claim any
bound, only one is practicable (NCC, Art. 1202). from among the of those subsisting OR
Some but remainder or that he may choose any of
not all which remains if those were lost, but it is
NOTE: The choice made by the debtor does not require are lost
the concurrence of the creditor. Otherwise, it would only one subsists. the price/value of with
destroy the very nature of the right to select given to the right to damages that
debtor. can be claimed.

Impossibility of choice due to creditor’s acts Only one Deliver that which remains. In case of fault of
remains debtor, creditor has a right to indemnity for
When choice is rendered impossible through the damages.
creditor’s fault, the debtor may bring an action to rescind
the contract with damages (NCC, Art. 1203).
JOINT AND SOLIDARY OBLIGATIONS
Plurality of Parties (1992, 2001, 2008 BAR)

When there are various debtors or creditors and the Joint obligations
obligation is joint, the consent of all is necessary to make
the selection effective, because none of them can One where the credit or debt shall be presumed to be
extinguish the entire obligation. divided into as many equal shares as there are creditors
or debtors, the credit or debts being considered distinct
If the obligation is solidary and there is no stipulation to from one another (NCC, Art. 1208). Each debtor is liable
the contrary, the choice by one will binding personally only for a proportionate part of the debt and each creditor
to his proportionate share to the credit.

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 Civil Law
---
Other terms for joint obligations are: (a) joint simply; (b)
mancomunada; or (c) pro rata. Q: Chua bought and imported to the Philippines
dicalcium phosphate. When the cargo arrived at the
Solidary obligations Port of Manila, it was discovered that some were in
apparent bad condition. Thus, Chua filed with Smith
It is where each of the debtors obliges to pay the entire Bell, and Co., Inc. (claiming agent of First Insurance
obligation while each one of the creditors has the right to Co.) a formal statement of claim for the loss. No
demand from any of the debtors, the payment or settlement of the claim having been made, Chua then
fulfillment of the entire obligation (NCC, Art. 1207; Pineda, filed an action. Is Smith, Bell, and Co., solidarily liable
2000). upon a marine insurance policy with its disclosed
foreign principal?
Other terms for solidary obligations are:
(a) joint solidarily; A: NO. Article 1207 of the Civil Code clearly provides that
(b) jointly and severally; or "there is a solidary liability only when the obligation
(c) in solidum. expressly so states, or when the law or the nature of the
obligation requires solidarity." The well-entrenched rule
Joint obligation v. Solidary obligation is that solidary obligation cannot lightly be inferred. It
must be positively and clearly expressed (Smith, Bell & Co.,
JOINT SOLIDARY Inc. v. CA, G.R. No. 110668, February 6, 1997).
OBLIGATION OBLIGATION ---
Q: The labor arbiter rendered a decision, the fallo of
which states the following respondents as liable,
Presumed by law. Not presumed. Must namely: FCMC, Sicat, Gonzales, Chiu Chin Gin, Lo Kuan
(NCC, Art. 1208) be expressly Chin, and INIMACO. INIMACO questions the execution,
stipulated by the alleging that the alias writ of execution altered and
Presumption parties, or when the changed the tenor of the decision by changing their
by law law or the nature of liability from joint to solidary, by the insertion of the
the obligation words "AND/OR". Is the liability of INIMACO pursuant
requires solidarity to the decision of the labor arbiter solidary or not?
(NCC, Art. 1207).
A: INIMACO's liability is not solidary but merely joint.
Liability of Proportionate part Obliged to pay the Well-entrenched is the rule that solidary obligation
each debtor of the entire debt. entire obligation. cannot lightly be inferred. There is a solidary liability only
when the obligation expressly so states, when the law so
provides or when the nature of the obligation so requires.
Each creditor, if Each creditor has In the dispositive portion of the labor arbiter, the word
Right of the there are several, is the right to demand "solidary" does not appear. The said fallo expressly states
creditor to entitled only to a from any of the the following respondents therein as liable, namely:
the fulfillment proportionate part debtors, the Filipinas Carbon Mining Corporation, Sicat, Gonzales, Chiu
of the of the credit. payment or Chin Gin, Lo Kuan Chin, and INIMACO. Nor can it be
obligation fulfillment of the inferred therefrom that the liability of the six respondents
entire obligation in the case below is solidary, thus their liability should
(Tolentino, 1999). merely be joint (INIMACO v. NLRC, G.R. No. 101723, May
11, 2000).
---
Character of an obligation
Consequences of a joint obligation
GR: When two or more creditors or two or more debtors
1. Each debtor is liable only for a proportionate part of
concur in one and the same obligation, the presumption is
the entire debt.
that the obligation is joint.
2. Each creditor, if there are several, is entitled only to
a proportionate part of the credit.
XPNs:The obligation shall only be solidary when: (LEN-
2. The demand made by one creditor upon one debtor,
CJ)
produces effects of default only as between them.
3. Interruption of prescription caused by the demand
1. Law requires solidarity;
made by one creditor upon one debtor, will NOT
2. Expressly stipulated that there is solidarity;
benefit the co-creditors or the co-debtors.
3. Nature of the obligation requires solidarity;
4. Insolvency of a debtor will not increase the liability
e.g. Civil liability arising from crime.
of his co-debtor.
4. Charge or condition is imposed upon heirs or
5. Vices of each obligation emanating from a particular
legatees and the will expressly makes the charge or
debtor or creditor will not affect the others.
condition in solidum (Manresa); or
6. In indivisible or joint obligation, the defense of
5. Solidary responsibility is imputed by a final
res judicata of one does not extend to the others (8
Judgment upon several defendants (Gutierrez v.
Manresa, 200-201);
Gutierrez, 56 Phil 177, GR 34840, September 31, 1931).

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 OBLIGATIONS AND CONTRACTS
7. The delay on the part of only one of the joint debtors 2. Active – solidarity on the part of the creditors
does not produce effects with respect to the others, 3. Mixed – solidarity on both sides.
and if the delay is produced through the acts of only
one of the joint creditors, the others cannot take JUDICIAL EFFECTS OF ACTIVE AND PASSIVE
advantage thereof. SOLIDARITY (TOLENTINO, 2002)
JOINT INDIVISIBLE OBLIGATIONS Active Solidarity

The obligation is joint because the parties are merely The essence of active solidarity consists in the authority
proportionately liable. It is indivisible because the object of each creditor to claim and enforce the rights of all, with
or subject matter is not physically divisible into different the resulting obligation of paying every one what belongs
parts. In other words, it is joint as to liabilities of the to him; there is no merger, much less a renunciation of
debtors or rights of the creditors but indivisible as to rights, but only mutual representation. It is thus
compliance (De Leon, 2010). essentially a mutual agency. Its juridical effects may be
summarized as follows:
A joint indivisible obligation gives rise to indemnity for
damages from the time anyone of the debtors does not 1. Since it is a reciprocal agency, the death of a solidary
comply with his undertaking. The debtors who may have creditor does not transmit the solidarity to each of
been ready to fulfill their promises shall not contribute to his heirs but to all of them taken together;
the indemnity beyond the corresponding portion of the 2. Each creditor represents the others in the act of
price of the thing or of the value of the service in which receiving payment, and in all other acts which tend to
the obligation consists (NCC, Art. 1224). secure the credit or make it more advantageous.
Hence, if he receives only a partial payment, he must
Effects of different permutations of joint indivisible divide it among the other creditors. He can interrupt
obligations the period of prescription or render the debtor in
default, for the benefit of all other creditors;
1. If there are two or more debtors, compliance with the 3. One creditor, however, does not represent the others
obligation requires the concurrence of all the in such acts as novation (even if the credit becomes
debtors, although each for his own share. The more advantageous), compensation and remission.
obligation can be enforced only by preceding against In these cases, even if the debtor is released, the
all of the debtors. other creditors can still enforce their rights against
2. If there are two or more creditors, the concurrence or the creditor who made the novation, compensation
collective act of all the creditors, although each of his or remission;
own share, is also necessary for the enforcement of 4. The creditor and its benefits are divided equally
the obligation. among the creditors, unless there is an agreement
3. Each credit is distinct from one another; therefore a among them to divide differently. Hence, once the
joint debtor cannot be required to pay for the share credit is collected, an accounting and a distribution of
of another with debtor, although he may pay if he the amount collected should follow;
wants to. 5. The debtor may pay to any solidary creditor, but if a
judicial demand is made on him, he must pay only to
In case of insolvency of one of the debtors, the others shall the plaintiff; and
not be liable for his shares. To hold otherwise would 6. Each creditor may renounce his right even against
destroy the joint character of the obligation (NCC, Art. the will of the debtor, and the latter need not
1209). thereafter pay the obligation to the former.

Effect of breach of a joint indivisible obligation by one Passive Solidarity

debtor
In passive solidarity, the essence is that each debtor can
If one of the joint debtors fails to comply with his be made to answer for the others, with the right on the
undertaking, and the obligation can no longer be fulfilled part of the debtor-payor to recover from the otehrs their
or performed, it will then be converted into one of respective shares. In so far as the payment is concerned,
indemnity for damages. Innocent joint debtor shall not this kind of solidarity is similar to a mutual guaranty. Its
contribute to the indemnity beyond his corresponding effects are as follows:
share of the obligation.
1. Each debtor can be required to pay the entire
SOLIDARY OBLIGATIONS obligation; but after the payment, he can recover
from the co-debtors their respective shares;
Each one of the debtors is obliged to pay the entire 2. The debtor who is required to pay may set up by way
obligation, and each one of the creditors has the right to of compensation his own claim against the creditor,
demand from any of the debtors the payment or in this cae, the effect is the same as that of payment;
fulfillment of the entire obligation. 3. The total remission of a debt in favor of a debtor
releases all the debtors ; but when this remission
Kinds of solidary obligation affects only the share of one debtor, the other debtors
are still liable for the balance of the obligation;
1. Passive – solidarity on the part of the debtors

201
 Civil Law
4. All the debtors are liable for the loss of the thing due, 2. Any of the solidary debtor may be required to pay the
even if such loss is caused by only one of them, or by whole obligation; there is mutual guaranty among
fortuitous event after one of the debtors has incurred solidary debtors (NCC, Arts. 1216, 1217 & 1222).
in delay; 3. Each one of solidary creditors may do whatever may
be useful to the others, but not anything prejudicial
5. The interruption of prescription as to one debtor to them (NCC, Art. 1212); however, any novation,
affects all the others; but the renunciation by one compensation, confusion or remission of debt made
debtor of the prescription already had does not by any solidary creditors or with any of the solidary
prejudices the others, because the extinguishment of debtors shall extinguish the obligation without
the obligation by prescription extinguishes also the prejudice to his liability for the shares of other
mutual representation among the solidary debtors; solidary creditors (NCC, Arts. 1215 & 1219).
and ---
6. The interest due by reason of the delay by one of the Q: Joey, Jovy and Jojo are solidary debtors under a
debtors are borne by all of them. loan obligation of P300,000.00 which has fallen due.
The creditor has, however, condoned Jojo's entire
NOTE: Example of words that connote solidary share in the debt. Since Jovy has become insolvent, the
obligation: a) joint and several; b) in solidum; c) creditor makes a demand on Joey to pay the debt.
individually and collectively; d) each will pay the whole
value; e) “I promise to pay” and there are two or more a. How much, if any, may Joey be compelled to pay?
signatures; and f) juntos o separadamente. b. To what extent, if at all, can Jojo be compelled by
Joey to contribute to such payment? (1998 BAR)
Solidarity v. Indivisibility
A:
a. Joey can be compelled to pay only the remaining
BASIS SOLIDARITY INDIVISIBILITY balance of P200,000, in view of the remission of
Jojo’s share by the creditor (NCC, Art. 1219).
Refers to the Refers to the
As to the kind of vinculum existing prestation or b. Jojo can be compelled by Joey to contribute P50,000.
unity it refers to between the object of the When one of the solidary debtors cannot, because of
subjects or parties. contract. his insolvency, reimburse his share to the debtor
paying the obligation, such share shall be borne by all
As to the his co-debtors, in proportion to the debt of each [NCC,
requirement of Requires the Does not require Art. 1217(3)].
plurality of plurality of plurality of
parties or parties or subjects or Since the insolvent debtor's share which Joey paid
subjects subjects. parties. was P100, 000, and there are only two remaining
debtors - namely Joey and Jojo - these two shall share
equally the burden of reimbursement. Jojo may thus
In case of breach, be compelled by Joey to contribute P50, 000.
In case of breach, it is converted to ---
the liability of the one of indemnity Q: Iya and Betty owed Jun P500,000 for advancing
solidary debtors for damages and their equity in a corporation they joined as
As to the effect of although the indivisibility incorporators. Iya and Betty bound themselves
breach converted into of the obligation is solidarily liable for the debt. Later, Iya and Jun
one of the terminated and so became sweethearts so Jun condoned the debt of
indemnity for each debtor is P500,000. May Iya demand from Betty P250,000 as
damages remains liable only for his her share in the debt? Explain with legal basis? (2015
solidary. part of the BAR)
indemnity.
A: NO. Iya may not demand the P250,000 from Betty
Death of solidary because the entire obligation has been condoned by the
debtor terminates Heirs of the creditor Jun. In a solidary obligation the remission of the
As to the effect of the solidarity, the debtor remain whole obligation obtained by one of the solidary debtors
death of a party tie or vinculum bound to perform does not entitle him to reimbursement from his co-
being the same debtors. (NCC, Art. 1220).
intransmissible to prestation. ---
the heirs. Q: Juancho, Don and Pedro borrowed P150,000 from
their friend Cita to put up an internet café orally
promising to pay her the full amount after one year.
Rules in solidary obligations (1998, 2003 BAR) Because of their lack of business know-how, their
business collapsed. Juancho and Don ended up
1. Anyone of the solidary creditors may collect or penniless but Pedro was able to borrow money and
demand payment of the whole obligation; there is put up a restaurant which did well. Can Cita demand
mutual agency among solidary debtors (NCC, Arts. that Pedro pay the entire obligation since he, together
1214 & 1215).

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 OBLIGATIONS AND CONTRACTS
with the two others, promised to pay the full amount DIVISIBLE INDIVISIBLE
after one year? Defend your answer (2015 BAR).
Susceptibility of an
A: NO. The obligation in this case is presumed to be joint. obligation to be performed Non-susceptibility to be
The concurrence of two or more creditors or two or more partially. performed partially
debtors in one and the same obligation does not imply Partial performance is
that each one of the former has the right to demand, or tantamount to non-
that each one of the latter is bound to render the entire performance.
compliance of the prestation (NCC, Art. 1207). In a joint
obligation, there is no mutual agency among the joint NOTE: The divisibility of the object does not necessarily
debtors such that if one of them is insolvent the others determine the divisibility of the obligation; while the
shall not be liable for his share. indivisibility of the object carries with it the indivisibility
--- of the obligation.
To whom payment should be made in a solidary
obligation Test of divisibility
GR: To any of the solidary creditors. Whether or not the prestation is susceptible of partial
performance, not in the sense of performance in separate
XPN: If demand, judicial or extra-judicial, has been made or divided parts, but in the sense of the possibility of
by one of the creditors, payment should be made to him realizing the purpose which the obligation seeks to
(NCC, Art. 1214). obtain. If a thing could be divided into parts and as
divided, its value is impaired disproportionately, that
In cases of solidary creditors, one may act for all thing is indivisible (Pineda, 2000).
Each one of the solidary creditors may execute acts which Obligations that are deemed indivisible
may be useful or beneficial to the others, but he may not
do anything which may be prejudicial to them (NCC, Art. 1. Obligations to give definite things;
1212). 2. Those which are not susceptible of partial
performance;
NOTE: Prejudicial acts may still have valid legal effects, 3. Even the object or service may be physically
but the performing creditor shall be liable to his co- divisible, an obligation is indivisible if so provided (i)
creditors (Pineda, 2000). by law or (i) intended by the parties (NCC, Art. 1225).
Effects of assignment of rights in a solidary obligation NOTE: A pledge or mortgage is one and indivisible by
provision of law, and the rules apply even if the obligation
GR: Solidary creditor cannot assign his right because it is is joint and not solidary (NCC, Art. 2089).
predicated upon mutual confidence, meaning personal
qualification of each creditor had been taken into Obligations that are deemed divisible
consideration when the obligation was constituted (NCC,
Art. 1213). When the object of the obligation involves:

XPNs: 1.Certain number of days of work;

1. Assignment to co-creditor; or
2.Accomplishment of work by metrical unit;
2. Assignment is with consent of co-creditor.
3.Analogous things which are by their nature susceptible
of partial performance (NCC, Art. 1225).
DIVISIBLE AND INDIVISIBLE OBLIGATIONS
Factors to determine whether an obligation is
Divisible obligations divisible of indivisible
Those which have as their object a prestation which is a) The will or intention of the parties (express or
susceptible of partial performance with the essence of the implied);
obligation being changed. b) The objective or purpose of the stipulated prestation;
c) The nature of the thing ; and
Indivisible obligations d) The provisions of law affecting the prestation.
Those which have as their object a prestation which is not
susceptible of partial performance, because otherwise the OBLIGATIONS TO GIVE OBLIGATIONS TO DO
essence of the obligation will be changed. The obligation
In obligations to give,
is clearly indivisible because the performance of the In obligations to do,
those for the delivery of
contract cannot be done in parts, otherwise, the value of indivisibility is also
certain objects such as an
what is transferred is diminished (Nazareno v. CA, G.R. No. presumed, and it is only
animal or a chair are
138842, October 18, 2000). when they are under the
indivisible [NCC, 1225 (1)].
exceptional cases
Divisible v. Indivisible obligations mentioned in NCC, Art.
1225 (2) that they are

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 Civil Law

divisible. b. Punitive - It is punitive when it is established for

the purpose of punishing the obligor or debtor
in case of breach of the obligation.
As to effect
a. Subsidiary - It is subsidiary when only the
penalty may be demanded in case of breach of
the obligation;
Effect of illegality of a part of a contract b. Joint - It is joint when the injured party may
demand the enforcement of both the penalty
1. Divisible contract – illegal part is void and and the principal obligation.
unenforceable. Legal part is valid and enforceable ---
(NCC, Art. 1420). Q: Can the debtor just choose penalty over
2. Indivisible contract – entire contract is indivisible and non-fulfillment?
unenforceable.
A: GR: The debtor cannot exempt himself from the
Partial performance in indivisible obligation performance of the obligation by paying the penalty (NCC,
Art. 1227).
GR : In indivisible obligations, partial performance is
equivalent to non-performance. XPN: When the right has been expressly reserved to the
debtor (NCC, Art. 1227).
XPNs : (See NCC, Articles 1234 & 1235).
1. Where the obligation has been substantially Creditor cannot demand both the fulfillment of the
performed in good faith, the debtor may recover as if principal obligation and the penalty
there had been complete performance, minus the
damages suffered by the creditor ; and GR: The creditor cannot demand the fulfillment of the
2. Where the creditor accepts performance knowing its obligation and the satisfaction of the penalty at the same
incompleteness and without protest, the obligation is time (NCC, Art. 1227).
deemed fully performed.
XPNs:
OBLIGATIONS WITH A PENAL CLAUSE 1. When the right has been clearly granted to him;
2. If the creditor has decided to require the fulfillment
An obligation with a penal clause is one with an accessory of the obligation, the performance thereof should
undertaking by virtue of which the obligor assumes a become impossible without his fault, the penalty may
greater liability in case of breach of the obligations be enforced (NCC, Art. 1227).
(Jurado, 2009).
NOTE: The creditor need not present proof of actual
Penal clause damages suffered by him in order that the penalty may be
demanded (NCC, Art. 1228). In this jurisdiction, there is no
A penal clause is an accessory undertaking to asume difference between a penalty and liquidated damages, so
greater liability in case of breach. It is attached to an far as the results are concerned. Whatever differences
obligation in order to insure performance. The penalty is exist between them as a matter of language, they are
generally a sum of money. But it can also be any othe thing treated the same legally (Rabuya, 2017).
stipulated by the parties, inlcuding an act or abstention.
Effect of incorporating a penal clause in an obligation
Double functions:
GR: The penalty fixed by the parties is a compensation or
1. To provide for liquidated damages; and substitute for damages in case of breach.
2. To strengthen the coercive force of the obligation by
the threat of greater responsibility in case of breach. XPNs: Damages shall still be paid even if there is a penal
clause if:
NOTE: Proof of actual damages suffered by the creditor is
not necessary in order that the penalty may be demanded 1. There is a stipulation to the contrary;
(NCC, Art. 1228). 2. The debtor refuses to pay the agreed penalty;
3. The debtor is guilty of fraud in the fulfillment of the
Kinds of penalties obligation (NCC, Art. 1126).

1. As to origin NOTE: The nullity of the penal clause does not carry with
a. Legal - It is legal when it is constituted by law. it that of the principal obligation. For example, the penal
b. Conventional - It is constituted by agreement of clause may be void because it is contrary to law, morals,
the parties. good custom, public order or public policy. In such case,
2. As to purpose the principal obligation subsists if valid.
a. Compensatory - It is compensatory when it is
established for the purpose of indemnifying the GR: The nullity of the principal obligation carries with it
damages suffered by the obligee or creditor in that of the penal clause (NCC, Art. 1230).
case of breach of the obligation.

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 OBLIGATIONS AND CONTRACTS
XPNs: The penal clause subsists even if the principal
obligation cannot be enforced: Mutual desistance as another mode of extinguishing
obligations
1. When the penalty if undertaken by a third person
precisely for an obligation which is unenforceable, It is a concept derived from the principle that since mutual
voidable, or natural, in which case it assumes the form agreement can create a contract, mutual disagreement by
of a guaranty which is valid under NCC, Art. 2052; and the parties can likewise cause its extinguishment (Saura
v. Development Bank of the Phils., G.R.No. 24968, April 27,
2. When the nullity of the principal obligation itself gives 1972).
rise to the liability of the debtor for damages.

Instances where penalty may be reduced by the PAYMENT OR PERFORMANCE

courts (PIU)

1. Partial performance of the obligation

Payment is the fulfillment of the obligation by the
2. Irregular performance of the obligation
realization of the purposes for which it was constituted
3. Penalty is Unconscionable even if there has been no
(Jurado, 2010). (1998, 2009 BAR)
performance.
--
Payment may consist not only in the delivery of money
Q: When can the creditor demand the enforcement of
but also the giving of a thing (other than money), the
the penalty?
doing of an act, or not doing of an act (NCC, Art. 1232).
A: Only when the non-performance is due to the fault or
Characteristics of payment
fraud of the debtor. But the creditor does not have to
prove that there was fault or fraud of the debtor. The non-
1. Integrity – the payment of the obligation must be
performance gives gives rise to the presumption of fault;
completely made.
and in order to avoid the payment of penalty, the debtor
2. Identity – the payment of the obligation must consist
has the burden of proving an excuse – either that the
the performance of the very thing due.
failure of the performance was due to force majeure or to
3. Indivisibility – the payment of the obligation must be
the acts of the creditor himself.
in its entirety.
---
NOTE: When there are several debtors in an obligation
Integrity
with a penal clause, the divisibility of the principal
obligation among the debtors does not necessarily carry
GR: Payment or Performance must be complete (NCC, Art.
with it the divisibility of the penalty among them.
1233).

XPNs:
EXTINGUISHMENT OF OBLIGATIONS 4. Substantial performance performed in good faith
(NCC, Art. 1234);
5. When the obligee accepts the performance, knowing
Modes of extinguishment of an obligation its incompleteness or irregularity and without
expressing any protest or objection; (NCC, Art. 1235);
Principal Modes (PaLoCo3N) 6. Debt is partly liquidated and partly unliquidated, but
1. Payment or performance the liquidated part of the debt must be paid in full.
2. Loss of the thing due
3. Condonation or remission of debt Substantial performance doctrine
4. Confusion or merger
5. Compensation It provides the rule that if a good-faith attempt to perform
6. Novation (NCC, Art. 1231). does not precisely meet the terms of an agreement or
statutory requirements, the performance will still be
Other Modes (PARF) considered complete if the essential purpose is
7. Annulment accomplished (Black’s Law Dictionary, 2009).
8. Rescission
9. Fulfillment of a resolutory condition Requisites for substantial performance doctrine
10. Prescription (NCC, Art. 1231).
1. Attempt in good-faith to comply with obligation;
NOTE: The enumeration is not exclusive. 2. Slight deviation from the obligation; and the
omission or defect of the performance is technical
Other Causes not expressly mentioned (Rabuya, 2017) and unimportant; and does not pervade the whole,
11. Death – in obligations which are of purely personal or is not material that the object which the parties
character intended to accomplish is not attained (Tolentino,
12. Arrival of resolutory period 2002).
13. Mutual dissent
14. Change of civil status Identity of the thing
15. Happening of unforseen events

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 Civil Law
GR: Thing paid must be the very thing due and cannot be 2. Abnormal - when he is forced by means of a judicial
another thing even if of the same or more quality and proceeding, either to comply with the prestation or to
value. pay the indemnity (Tolentino, 1991).

XPNs: Person who pays

1. Dation in payment;
2. Novation of the obligation; The following persons may effect payment and compel
3. Obligation is facultative. the creditor to accept the payment:

NOTE: In an obligation to do or not to do, an act or 1. Debtor himself;

forbearance cannot be substituted by another act or 2. His heirs and assigns;
forbearance against the obligee’s will. 3. His agents and representatives; or
4. Third persons who have a material interest in the
Indivisibility fulfilment of the obligation ([NCC, Art. 1236 (1)].

GR: Debtor cannot be compelled by the creditor to PAYMENT MADE BY THIRD PERSONS
perform obligation in parts and neither can the debtor
compel the creditor to accept obligation in parts. GR: The creditor is not bound to accept payment or
performance by a third person.
XPNs: When:
XPNs:
1. Partial performance has been agreed upon; 1. When made by a third person who has interest in the
2. Part of the obligation is liquidated and part is fulfillment of the obligation;
unliquidated; 2. Contrary stipulation (NCC, Art. 1236).
3. To require the debtor to perform in full is
impractical. NOTE: The rules on payment by a third person (NCC, Art.
1236 to 1238) cannot be applied to the case of a third
Acceptance by a creditor of a partial payment NOT an person who pays the redemption price in sales with right
abandonment of its demand for full payment of repurchase. This is so because the vendor a retro is not
a debtor within the meaning of the law (Jurado, 2010).
When creditors receive partial payment, they are not ipso
facto deemed to have abandoned their prior demand for Rights of a third person who made the payment
full payment.
1. If the payment was made with knowledge and consent
To imply that creditors accept partial payment as of the debtor:
complete performance of their obligation, their a. Can recover entire amount paid (absolute
acceptance must be made under circumstances that reimbursement);
indicate their intention to consider the performance b. Can be subrogated to all rights of the creditor.
complete and to renounce their claim arising from the 2. If the payment was made without knowledge or
defect. against the will of the debtor – can recover only
insofar as payment has been beneficial to the debtor
NOTE: While Article 1248 of the Civil Code states that (right of conditional reimbursement).
creditors cannot be compelled to accept partial payments,
it does not prohibit them from accepting such payments NOTE: Payment made by a third person who does not
(Selegna Management and Development Corp. v. UCPB, G.R. intend to be reimbursed by the debtor is deemed to be a
No. 165662, May 30, 2006). donation, which requires the debtor's consent. But the
payment is in any case valid as to the creditor who has
Requisites of a valid payment accepted it (NCC, Art. 1238).

The person who pays the debt must be thedebtor; Person to whom payment is made

1. The person to whom payment is made must be the Persons entitled to receive the payment:
creditor; 1. The person in whose favor the obligation has been
2. The thing to be paid or to be delivered must be the constituted;
precise thing or the thing required to be delivered by 2. His successor in interest; or
the creditor; 3. Any person authorized to receive it (NCC, Art. 1240).
3. The manner (if expreslly agreed upon), time, and
place of payment, etc.; NOTE: Payment made to one having apparent authority
4. Acceptance by the creditor. to receive the money will, as a rule, be treated as though
actual authority had been given for its receipt. Likewise, if
Kinds of Payment payment is made to one who by law is authorized to act
for the creditor, it will work a discharge (Sps. Miniano v.
1. Normal - when the debtor voluntarily performs the Concepcion, G.R. No. 172825, October 11, 2012).
prestation stipulated;
Payment to an unauthorized person

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 OBLIGATIONS AND CONTRACTS
(dacion en pago)
GR: Payment to an unauthorized person is not a valid
payment (NCC, Art. 1241). The delivery and transmission of ownership of a thing by
the debtor to the creditor as an accepted equivalent of the
XPNs: performance of the obligation. The property given may
1. Payment to an incapacitated person if: consist not only of a thing but also of a real right
a. He kept the thing delivered; or (Tolentino, 2002) (2009 BAR)
b. It has been beneficial to him (NCC, Art. 1241);
2. Payment to a third person insofar as it redounded NOTE: The undertaking partakes of the nature of sale,
to the benefit of the creditor; that is, the creditor is really buying the thing or property
of the debtor, payment for which is to be charged against
Benefit to the creditor need not be proved: (RRE) the debtor’s debt. As such, the essential elements of a
a. If after the payment, the third person acquires contract of sale, namely, consent, object certain, and cause
the creditor’s Rights; or consideration must be present.
b. If the creditor Ratifies the payment to the third
person; The requisites for dacion en pago are:
c. If by the creditor’s conduct, the debtor has
been led to believe that the third person had 1. There must be a performance of the prestation in lieu
authority to receive the payment (Estoppel) of payment (animo solvendi) which may consist in the
(NCC, Art. 1241). delivery of a corporeal thing or a real right or a credit
against the third person;
3. Payment in good faith to the possessor of credit 2. There must be some difference between the
(NCC, Art. 1242). prestation due and that which is given in substitution
(aliud pro alio); and
NOTE : Payment made to the creditor by the debtor 3. There must be an agreement between the creditor
after the latter has been judicially ordered to retain and debtor that the obligation is immediately
the debt shall not be valid. (NCC, Art. 1243). extinguished by reason of the performance of a
prestation different from that due (Caltex Philippines,
SPECIAL FORMS OF PAYMENT Inc. v. IAC, G.R. No. 72703, November 13, 1992).
---
Q: A real estate mortgage was executed by the Julians
Dation in Payment as a security for loan they obtained from the Spouses
Pen. When the loans became due and demandable,
Alienation by the debtor of a particular property in favor of the Julians failed to pay despite several demands,
his creditor, with the latter’s consent, for the satisfaction of which led the Pens to institute foreclosure
the former’s money obligation to the latter, with the effect of proceedings against the former. To avoid litigation
extinguishing the said money obligation. cost and public embarrassment, the Julians offered to
have their mortgaged property as a payment in kind.
The Pens thereafter required them sign an "undated,
Application of Payment unfilled, and unnotarized" Deed of Sale, containing no
consideration for the subject property. However,
Designation of the particular debt being paid by the debtor despite the transfer of the property in favor of the
who has two or more debts or obligations of the same kind Pens, the debt remained not fully extinguished. Did
in favor of the same creditor to whom the payment is made the sale constitute a valid dacion en pago?
.

Payment by Cession A: NO. Dacion en pago is in the nature of a sale because

property is alienated in favor of the creditor in
Debtor cedes his property to his creditors so the latter may satisfaction of a debt in money. For a valid dacion en
sell the same and the proceeds realized applied to the debts pago to transpire, however, the attendance of the
of the debtor. following elements must be established, namely: (a) the
existence of a money obligation; (b) the alienation to the
Tender of Payment creditor of a property by the debtor with the consent of
the former; and (c) the satisfaction of the money
Voluntary act of the debtor whereby he offers to the creditor obligation of the debtor. To have a valid dacion en
for acceptance the immediate performance of the former’s pago, therefore, the alienation of the property must fully
obligation to the latter. extinguish the debt. In the problem, however, the debt of
the respondents subsisted despite the transfer of the
Consignation property in favor of Spouses Pen (Spouses Pen v. Spouses
Act of depositing the object of the obligation with the court Julian, G.R. No. 160408, January 11, 2016) (Bersamin, J.).
---
or competent authority after the creditor has unjustifiably
Q: Lopez obtained a loan in the amount of P20,000.00
refused to accept the same or is not in a position to accept it
from the Prudential Bank. He executed a surety bond
due to certain reasons or circumstances.
in which he, as principal, and PHILAMGEN as surety,
bound themselves jointly and severally for the
DATION IN PAYMENT payment of the sum. He also executed a deed of

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 Civil Law
assignment of 4,000 shares of the Baguio Military the delivery and transmission of ownership of a thing (in
Institution in favor of PHILAMGEN. Is the stock this case, the credit due from a third person) by the debtor
assignment made by Lopez dation in payment or to the creditor is accepted as the equivalent of the
pledge? performance of the obligation.

A: The stock assignment constitutes a pledge and not a FORM OF PAYMENT

dacion en pago. Dation in payment is the delivery and
transmission of ownership of a thing by the debtor to the 1. Payment in cash – all monetary obligations shall be
creditor as an accepted equivalent of the performance of settled in Philippine currency. However, the parties
the obligation. Lopez’s loan has not yet matured when he may agree that the obligation be settled in another
"alienated" his 4,000 shares of stock to Philamgen. currency at the time of payment (Sec. 1, RA 8183).
Lopez's obligation would arise only when he would
default in the payment of the principal obligation which is 2. Payment in check or other negotiable instrument – not
the loan and Philamgen had to pay for it. Since it is considered payment, they are not considered legal
contrary to the nature and concept of dation in payment, tender and may be refused by the creditor except
the same could not have been constituted when the stock when:
assignment was executed. In case of doubt as to whether a. the document has been encashed; or
a transaction is a pledge or a dation in payment, the b. it has been impaired through the fault of the
presumption is in favor of pledge, the latter being the creditor (NCC, Art. 1249).
lesser transmission of rights and interests (Lopez v. CA,
G.R. No. L-33157, June 29, 1982). PAYMENT IN CASH (2008 BAR)
---
Q: Cebu Asiancars Inc., with the conformity of the Legal Tender
lessor, used the leased premises as a collateral to
secure payment of a loan which Asiancars may obtain Legal tender means such currency which in a given
from any bank, provided that the proceeds of the loan jurisdiction can be used for the payment of debts, public
shall be used solely for the construction of a building and private, and which cannot be refused by the creditor
which, upon the termination of the lease or the (Tolentino, 2002).
voluntary surrender of the leased premises before
the expiration of the contract, shall automatically The legal tender covers all notes and coins issued by the
become the property of the lessor. Meeting financial Bangko Sentral ng Pilipinas and guaranteed by the
difficulties and incurring an outstanding balance on Republic of the Philippines. The amount of coins that may
the loan, Asiancars conveyed ownership of the be accepted as legal tender are:
building on the leased premises to MBTC, by way of
"dacion en pago."Is the dacion en pago by Asiancars in 1. 1-Peso, 5-Pesos, 10-Pesos coins in amount not
favor of MBTC valid? exceeding P1,000.00
2. 25 centavos or less – in amount not exceeding P100.
A: YES. MBTC was a purchaser in good faith. MBTC had no 00 (BSP Circular No. 537, Series of 2006, July 18, 2005).
knowledge of the stipulation in the lease contract. ---
Although the same lease was registered and duly Q: Northwest Airlines, through its Japan Branch,
annotated, MBTC was charged with constructive entered into an International Passenger Sales Agency
knowledge only of the fact of lease of the land and not of Agreement with CF Sharp, authorizing the latter to
the specific provision stipulating transfer of ownership of sell its air transport tickets. CF Sharp failed to remit
the building to the Jaymes upon termination of the lease. the proceeds of the ticket sales, thus, Northwest
While the alienation was in violation of the stipulation in Airlines filed a collection suit before the Tokyo
the lease contract between the Jaymes and Asiancars, District Court which rendered judgment ordering CF
MBTC’s own rights could not be prejudiced by Asiancars’ Sharp to pay 83,158,195 Yen and damages for the
actions unknown to MBTC. Thus, the transfer of the delay at the rate of 6% per annum. Unable to execute
building in favor of MBTC was valid and binding (Jayme v. the decision in Japan, Northwest Airlines filed a case
CA, G.R. No. 128669, October 4, 2002). to enforce said foreign judgment with the RTC of
--- Manila. What is the rate of exchange that should be
Assignment of credit applied for the payment of the amount?

An agreement by virtue of which the owner of a credit, A: The repeal of RA529 by RA 8183 has the effect of
known as the assignor, by a legal cause, such as sale, removing the prohibition on the stipulation of currency
dation in payment, exchange or donation, and without the other than Philippine currency, such that obligations or
consent of the debtor, transfers his credit and accessory transactions may now be paid in the currency agreed
rights to another, known as the assignee, who acquires upon by the parties. Just like RA 529, however, the new
the power to enforce it to the same extent as the assignor law does not provide for the applicable rate of exchange
could enforce it against the debtor. It may be in the form for the conversion of foreign currency-incurred
of sale, but at times it may constitute a dation in payment, obligations in their peso equivalent. It follows, therefore,
such as when a debtor, in order to obtain a release from that the jurisprudence established in RA 529 regarding
his debt, assigns to his creditor a credit he has against a the rate of conversion remains applicable. Thus, in Asia
third person. As a dation in payment, the assignment of World Recruitment, Inc. v. National Labor Relations
credit operates as a mode of extinguishing the obligation; Commission(GR 113363, August 24, 1999), the SC, applying

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 OBLIGATIONS AND CONTRACTS
RA 8183, sustained the ruling of the NLRC that obligations and the discretion of refusing or accepting it (FEBTC v.
in foreign currency may be discharged in Philippine Diaz Realty Inc., G.R. No. 138588, August 23, 2001).
currency based on the prevailing rate at the time of
payment. It is just and fair to preserve the real value of the Burden of proving payment in an action for sum of
foreign exchange-incurred obligation to the date of its money
payment (C.F. Sharp v. Northwest Airlines, G.R. No. 133498,
April 18, 2002). The party who pleads payment as a defense has the
--- burden of proving that such payment has, in fact, been
PAYMENT BY NEGOTIABLE INSTRUMENT (2008 BAR) made.

Rule on tender payment as to checks EXTRAORDINARY INFLATION OR DEFLATION

--- (2001 BAR)
Q: When does payment by a negotiable instrument
produce the effect of payment? Extraordinary Inflation

A: (1) Only when it is cashed, or (2) When through the Exists when there is a decrease or increase in the
fault of the creditor, they have been impaired [NCC, Art. purchasing power of the Philippine currency which is
1249 (2)]. unusual or beyond the common fluctuiation iin the value
of said currency and such decrease or increase could not
A check does not constitute a legal tender, thus a creditor have been reasonably foreseen or was manifestly beyond
may validly refuse it. However, this does not prevent a the contemplation of the parties at the time of the
creditor from accepting a check as payment – the creditor establishment of the obligation (Tolentino, 2002).
has the option and the discretion of refusing or accepting
it (Far East Bank & Trust Company v. Diaz Realty, Inc, In case an extraordinary inflation or deflation of the
G.R. No. 138588, August 23, 2001). currency stipulated should supervene, the value of the
--- currency at the time of the establishment of the obligation
NOTE: While it is true that the delivery of a check shall be the basis of payment, unless there is an
produces the effect of payment only when it is cashed, agreement to the contrary (NCC, Art. 1250).
pursuant to Art. 1249 of the Civil Code, the rule is
otherwise if the debtor is prejudiced by the creditor's When the currency is devaluated in terms beyond what
unreasonable delay in presentment. The payee of a check could have been reasonably forseen by the parties, the
would be a creditor under this provision and if its non- doctrine of unforseen risks can be applied, and the effects
payment is caused by his negligence, payment will be of the devaluation should not be borne by the creditor
deemed effected and the obligation for which the check alone. The revaluation of the credit in such cases must be
was given as conditional payment will be discharged made according to the principles of good faith and in view
(Papa v. Valencia, G.R. No. 105188, January 23, 1998). of the circumstances of each particular case, recognizing
--- the real value of the credit as in consonance with the
Q: Diaz & Company obtained a loan from Pacific intent of the parties.
Banking Corp which was secured by a real estate
mortgage over two parcels of land owned by the NOTE: Requisites for application of Art. 1250, NCC
plaintiff Diaz Realty. ABC rented an office space in the (Rabuya, 2017).
building constructed on the properties covered by the 1. That there was an official declaration of extra-ordinary
mortgage contract. The parties then agreed that the inflation or deflation from the BSP;
monthly rentals shall be paid directly to the 2. That the obligation was contractual in nature; and
mortgagee for the lessor's account, either to partly or 3. That the parties expressly agreed to consider the effects
fully pay off the aforesaid mortgage indebtedness. of the extraordinary inflation or deflation.
Thereafter, FEBTC purchased the credit of Diaz &
Company in favor of PaBC, but it was only after 2 years PLACE OF PAYMENT
that Diaz was informed about it. Diaz asked the FEBTC
to make an accounting of the monthly rental GR: Payment must be made in the place designated in the
payments made by Allied Bank. Diaz tendered to obligation (NCC, Art. 1251).
FEBTC the amount of P1,450,000.00 through an
Interbank check, in order to prevent the imposition of XPN: If there is no express designation or stipulation in
additional interests, penalties and surcharges on its the obligation:
loan but FEBTC did not accept it as payment, instead,
Diaz was asked to deposit the amount with the 1. At the place where the thing might be at the time the
FEBTC’s Davao City Branch Office. Was there a valid obligation was constituted – if the obligation is to
tender of payment? deliver a determinate thing;
2. At the domicile of the debtor – in any other case (NCC,
A: YES. True, jurisprudence holds that, in general, a check Art. 1251).
does not constitute legal tender, and that a creditor may
validly refuse it. It must be emphasized, however, that this NOTE: Governs only unilateral obligations since
dictum does not prevent a creditor from accepting a check reciprocal obligations are governed by special rules
as payment. In other words, the creditor has the option (Jurado, 2010).

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 Civil Law
Moreover, if the debtor changes his domicile in bad faith If both the creditor and the debtor failed to exercise the
or after he has incurred in delay, the additional expenses right of application of payment, legal application (the law
shall be borne by him. makes the application) of payment will be now govern.

The foregoing are without prejudice, however, to the Rules on legal application of payment
venue under the Rules of Court.
The payment should be applied to the more onerous
APPLICATION OF PAYMENTS debts:
1. When a person is bound as principal in one
It is the designation of the debt to which the payment obligation and as surety in another, the former is
must be applied when the debtor has several obligations more onerous.
of the same kind in favor of the same creditor (NCC, Art. 2. When there are various debts, the oldest ones are
1252). more burdensome.
3. Where one bears interest and the other does not,
Requisites: even if the latter is the older obligation, the former is
1. There is only one debtor and creditor; considered more onerous.
2. The debtor owes the creditor two or more debts; 4. Where there is an encumbrance, the debt with a
3. Debts are of the same kind or identical nature; guaranty is more onerous than that without security.
e.g. both debts are money obligations obtained on 5. With respect to indemnity for damages, the debt
different dates. which is subject to the general rules on damages is
4. All debts are due and demandable, except: less burdensome than that in which there is a penal
a. When there is mutual agreement between the clause.
parties (Tolentino, 2002); 6. The liquidated debt is more burdensome than the
b. The application is made by the party for whose unliquidated one.
benefit the term has been constituted [NCC, Art. 7. An obligation in which the debtor is in default is more
1252(1]). onerous than one in which he is not (Tolentino, 2002).
5. The payment made is not sufficient to cover all
obligations. NOTE: If the debts happen to be of same nature and
burden, the payment shall be applied
Right of the debtor in the application of payments proportionately.

GR: The law grants to the debtor a preferential right to Effect of creditor’s refusal
choose the debt to which his payment is to be applied. But
the right of the debtor is not absolute; he cannot impair If the debtor makes a proper application of payment, but
the rights granted by law to the creditor (Tolentino, 2002). the creditor refuses to accept it because he wants to apply
it to another debt, such creditor will incur in delay
XPN: Debtor’s failure to ascertain which debt his payment (Tolentino, 1991).
is to be applied. – The right of the debtor to choose to
which debt his payment will be applied against may be PAYMENT BY CESSION
transferred to the creditor when he fails to make the
application and subsequently he accepts a receipt from Cession
the creditor evidencing the latter’s choice of application.
Under this circumstance, the debtor cannot complain of The assignment or cession contemplated here is the
the application made by the creditor unless there be a abandonment of the universality of the property of the
cause for invalidating such act. debtor for the benefit of his creditors. In order that such
property may be applied to the payment of the credits.
As far as the debtor is concerned, the right to make an
application of payment must be exercised at the time The initiative comes from the debtor, but it must be
payment is made (Bachrach v. Golingco, G.R. No. 13761, accepted by the creditors in order to become effective. A
July 12, 1919). voluntary assignment cannot be imposed upon a creditor
who is not willing to accept it.
Limitation upon right to apply payment
If the offer is not accepted by the creditors, the same end
If the debt produces interests, payment of the principal may be attained by a proceeding in insolvency instituted
shall not be deemed to have been made until the interest in accordance with Insolvency Law.
have been covered (NCC, Art. 1253).
Circumstances evidencing payment by cession
NOTE: This applies only in the absence of a verbal or
written agreement to the contrary; in other words, it is Debtor abandons all of his property for the benefit of his
merely directory, and not mandatory (Magdalena Estate, creditors in order that from the proceeds thereof, the
Inc. v. Rodriguez, G.R. No. L18411, December 17, 1966). latter may obtain payment of credits.

Legal application of payment Requisites:

1. Plurality of debts;

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 OBLIGATIONS AND CONTRACTS
2. Partial or relative insolvency of the debtor; and There must be a fusion of intent, ability and capability to
3. Acceptance of the cession by the creditors make good such offer, which must be absolute and must
cover the amount due (FEBTC v. Diaz RealtyInc., G.R. No.
Dation in payment v. Payment in cession 138588, August 23, 2001).

DATION IN PAYMENT PAYMENT IN CESSION Tender of payment is a preparatory act which precedes
consignation. The tender of payment by itself does not
Number of creditors cause the extinguishment of the obligation unless
completed by consignation. (Tolentino, 1991).
Maybe one creditor.
Plurality of creditors. Consignation

Financial condition of the debtor Act of depositing the object of the obligation with the
court or competent authority after the creditor has
Not necessarily in state of
Debtor must be partially or unjustifiably refused to accept the same or is not in a
financial difficulty.
relatively insolvent. position to accept it due to certain reasons or
circumstances (Pineda, 2000).
Object
NOTE: Once the consignation has been duly made, the
Thing delivered is debtor may ask the judge to order the cancellation of the
considered as equivalent of Universality or property of obligation (NCC, Art. 1260).
performance. debtor is what is ceded.
Requisites of consignation (VP-CPAS)
Extent of the extinguishment 1. There was a debt due;
2. The consignation of due obligation was made
Payment extinguishes
Merely releases debtor for because of some legal cause provided under NCC, Art.
obligation to the extent of
net proceeds of things ceded 1256;
the value of the thing
or assigned, unless there is 3. The previous notice of the consignation had been
delivered as agreed upon,
contrary intention. given to the person interested in the performance of
proved or implied from the
the obligation;
conduct of the creditor.
4. The amount or thing due was placed at the disposal
of the court; and
Ownership 5. That after the consignation had been made the
persons interested were notified thereof.
Ownership is transferred to
CR upon delivery. Ownership is not
transferred. NOTE: Requirement No. 5 may be complied with by
the service of summons upon the defendant creditor
Novation together with a copy of teh complaint.

An act of novation. After this notice, the creditor may:

Not an act of novation. (a) Accept the thing or amount deposited, in which
case the matter of the payment is terminated;
Presumption of insolvency
(b) Refuse to accept the thing or amount, in which
Does not presuppose case a trial must be held to determine the validity of
insolvency. Presupposes insolvency.
consignation;
TENDER OF PAYMENT AND CONSIGNATION
Tender of Payment The creditor may neither accept nor refuse in which
case the debtor may ask the court to cancel the
The definitive act of offering to the creditor what is due obligation after showing that the requisites of
him together with the demand that the creditor accept the consignation have been complied with (NCC, Art.
same (FEBTC v. Diaz Realty Inc., G.R. No. 138588, August 1260).
23, 2001).
NOTE: Tender of payment must be valid and
Tender of payment is the manifestation by debtors of unconditional (Sps. Rayos v. Reyes, G.R. No. 150913,
their desire to comply with or to pay their obligation (Sps. February 20, 2003).
Benos v. Sps. Lawilao, G.R. No. 172259, December 5, 2006).
Substantial compliance is not enough. The giving of
NOTE: If the creditor refuses the tender of payment notice to the persons interested in the performance
without just cause, the debtors are discharged from the of the obligation is mandatory. Failure to notify the
obligation by the consignation of the sum due (Sps. Benos persons interested in the performance of the
v. Sps. Lawilao, G.R. No. 172259, December 5, 2006). obligation will render the consignation void (Dalton
v. FGR Realty and Development Corp., G.R. No. 172577,
January 19, 2011).

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 Civil Law
Consignation is necessarily judicial. Article 1258 of
the Civil Code specifically provides that consignation NOTE: If, the consignation having been made, the creditor
shall be made by depositing the thing or things due should authorize the debtor to withdraw the same, he
at the disposal of judicial authority. The said shall lose every preference which he may have over the
provision clearly precludes consignation in venues thing. The co-debtors, guarantors and sureties shall be
other than the courts (Spouses Oscar and Thelma released (NCC, Art. 1261).
Cacayorin v. Armed Forces and Police Mutual Benefit
Association, Inc., G.R. No. 171298, April 15, 2013). Tender of Payment v. Consignation

Consignation and tender of payment must not be

TENDER OF PAYMENT CONSIGNATION
encumbered by conditions (Sps. Rayos v. Reyes,G.R.
No. 150913, February 20, 2003). Nature
---
Q: Dorotea leased portions of her 2,000 sq. m. lot to
Monet, Kathy, Celia and Ruth for five (5) years. Two Antecedent of consignation Principal or consummating
(2) years before the expiration of the lease contract, or preliminary act to act for the extinguishment
Dorotea sold the property to PM Realty and consignation. of the obligation.
Development Corp. The following month, Dorotea and
PM Realty stopped accepting rental payments from all Effect
the lessees because they wanted to terminate the
lease contracts. Due to the refusal to accept rental
It does not by itself It extinguishes the
payments, the lessees, Ruth, et al., filed a complaint
extinguish the obligation. obligation when declared
for consignation of the rentals before the RTC of
valid.
Manila without notifying Dorotea. Is the consignation
valid? (2014 BAR) Character
A: NO. Art. 1257 of the Civil Code provides that in order
that the consignation of the thing due may release the Extrajudicial. Judicial for it requires the
obligor, it must first be announced to the persons filing of a complaint in
interested in the fulfillment of the obligation. Moreover, court (Pineda, 2000).
Art. 1258 of the same code provides that consignation
having been made, the interested parties shall also be ---
notified thereof. In this case Dorotea, an interested party, Q: In an ejectment case, X refused to vacate the land
was not notified of the consignation. The consignation is alleging that Y had sold to him the additional area, the
therefore not valid for non-compliance with NCC, Art. payment of which would be effected five years after
1257. the execution of a formal deed of sale. However, the
--- parties failed to execute a deed of sale. During the
Effectivity of consignation as payment pendency of the action, X deposited the payment for
the additional area with the court. Is there a valid
GR: Consignation shall produce effects of payment only if consignation?
there is a valid tender of payment.
A: NO. Under Art. 1257 of the Civil Code, consignation is
XPNs: It shall, however, not produce the same effect in the proper only in cases where an existing obligation is due.
following cases. When: (ARTIT) In this case, the contracting parties agreed that full
1. Creditor is Absent or unknown, or doesn’t appear at payment of purchase price shall be due and payable
place of payment; within 5 years from the execution of a formal deed of sale.
2. Creditor Refuses to issue a receipt without just At the time Rodriguez deposited the amount in court, no
cause; formal deed of sale had yet been executed by the parties,
3. Title of the obligation has been lost; and, therefore, the 5-year period during which the
4. Creditor is Incapacitated to receive payment at the purchase price should be paid had not commenced. In
time it is due; short, the purchase price was not yet due and payable
5. Two or more persons claim the right to collect (NCC, (Heirs of San Andres v. Rodriguez, G.R. No. 135634, May 31,
Art. 1256). 2000).
---
NOTE: The expenses of consignation, when properly Q: Under a pacto de retro sale, X sold to Y his lot and
made, shall be charged against the creditor (NCC, Art. the building erected thereon. They agreed that half of
1259). the consideration shall be paid to the bank to pay off
the loan of X. After paying the first installment, Y,
Right of the debtor to withdraw the thing deposited instead of paying the loan to the bank, restructured it
twice. Eventually, the loan became due and
Before the creditor has accepted the consignation, or demandable. Thus, X paid the bank. On the same day,
before a judicial declaration that the consignation has Y also went to the bank and offered to pay the loan,
been properly made, the debtor may withdraw the thing but the bank refused to accept the payment. Y then
or the sum deposited, allowing the obligation to remain in filed an action for consignation without notifying X. Is
force (NCC, Art.1260).

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 OBLIGATIONS AND CONTRACTS
there a valid consignation by Y of the balance of the g. When the debt of a certain and determinate
contract price? thing proceeds from a Criminal offense (NCC,
Art. 1268);
A: NO. Y filed the petition for consignation against the h. When the obligation is Generic (NCC, Art. 1263).
bank without notifying X, resulting to the former’s failure
to prove the payment of the balance of the purchase price 2. Generic obligation to give:
and consignation. In fact, even before the filing of the GR: The obligation is not extinguished because a
consignation case, Y never notified X of their offer to pay generic thing never perishes (genus nun guam perit
(Sps. Benos v. Sps.Lawilao, G.R. No. 172259, December 5, (NCC, Art. 1263).
2006).
--- XPNs:
a. In case of generic obligations whose object is a
particular class or group with specific or
LOSS OF THE THING DUE determinate qualities (delimited generic
obligation);
b. In case the generic thing has already been
segregated or set aside, in which case, it has
Loss here is not contemplated in its strict and legal
become specific.
meaning and is not limited to obligations to give, but
extends to those which are personal, embracing therefore
3. An obligation to do – the obligation is extinguished
all causes which may render impossible the performance
when the prestation becomes legally or physically
of the prestation. In some Codes, this is designated as
impossible without the fault of the obligor (NCC, Art.
impossibility of performance.
1266).
NOTE: The impossibility of performance must be
Types of impossibility to perform an obligation to do
subsequent to the execution of the contract in order to
extinguish the obligation; if the impossibility already
1. Legal impossibility – act stipulated to be performed is
existed when the contract was made, the result is not
subsequently prohibited by law.
extinguishment but inefficacy of the obligation under NCC,
2. Physical impossibility – act stipulated could not be
Articles 1348 & 1493.
physically performed by the obligor due to reasons
subsequent to the execution of the contract (Pineda,
When a thing is considered lost (DOPE)
2000).
1. It Disappears in such a way that its existence is
NOTE: The impossibility must be after the
unknown;
constitution of the obligation. If it was before, there
2. It goes Out of commerce;
is nothing to extinguish.
3. It Perishes; or
4. Its Existence is unknown or if known, it cannot be
Effect of partial loss
recovered.
1. Due to the fault or negligence of the debtor – Creditor
Effect of loss of the thing/object of the obligation
has the right to demand the rescission of the
obligation or to demand specific performance, plus
If the obligation is a:
damages, in either case.
2. Due to fortuitous event:
1. Determinate obligation to give:
a. Substantial loss – obligation is extinguished.
b. Unsubstantial loss – the debtor shall deliver the
Requisites
thing promised in its impaired condition (NCC,
a. The thing lost must be determinate;
Art. 1264).
b. The thing lost is without fault of the debtor;
c. The thing is lost before the debtor has incurred
Effect when the thing is lost in the possession of the
delay (NCC, Art. 1262).
debtor
GR:The obligation is extinguished when the object of
GR: It is presumed that loss is due to debtor’s fault. The
the obligation is lost or destroyed (NCC, Art. 1262).
obligation is not extinguished.
XPNs: (LAS-CD-PCG)
XPN: Presumption shall not apply in case loss is due to
a. Law provides otherwise (NCC, Art. 1262);
earthquake, flood, storm or other natural calamity (NCC,
b. Nature of the obligation requires the
Art. 1262).
Assumption of risk;
c. Stipulation to the contrary;
XPN to the XPN: Debtor still liable even if loss is due
d. Debtor Contributed to the loss;
to fortuitous event when:
e. Loss the of the thing occurs after the debtor
incurred in Delay;
1. Debtor incurred in delay; or
f. When debtor Promised to deliver the same thing
to two or more persons who do not have the
same interest (NCC, Art. 1165);

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 Civil Law
2. Debtor promised to deliver the thing to two or which has been rendered difficult by unforeseen
more persons with different interests [NCC, Art. subsequent events as to be manifestly beyond the
1165(3)]. contemplation of the parties. Additionally, the Asian
Currency Crisis befell from July 1997 and for some time
Effect of unforeseen difficulty of fulfilment thereafter, but Comglasco cannot be permitted to blame
its difficulties on the said regional economic phenomenon
When the service has become so difficult as to be because it entered into the subject lease only on August
manifestly beyond the contemplation of the parties, the 2000, more than three years after it began, and by then
obligor may also be released therefrom, in whole or in Comglasco had known what business risks it assumed
part (NCC, Art. 1267). The impossibility of performance of when it opened a new shop in Iloilo City (Comglasco Corp.
an obligation to do shall release the obligor. v. Santos Car Check Center Corp., G.R. No. 202989, March
25, 2015).
Rebus sic stantibus ---
Q: Gacutan entered into a contract to sell with
A principle in international law which means that an Tagaytay Realty for the purchase on installment of a
agreement is valid only if the same conditions prevailing residential lot in a subdivision being developed by the
at the time of contracting continues to exist at the time of latter. Despite receipt of the respondent's other
performance. It is the basis of the principle of unforeseen communications requesting updates on the progress
difficulty of service (NCC, Art. 1267). of the construction of the amenities so that he could
resume his amortization, Tagaytay Realty did not
NOTE: Principle of unforeseen events applies when the reply. Gacutan sued for specific performance.
service has become so difficult as to be manifestly beyond Tagaytay Realty, however, contended that they
the contemplation of the parties, the obligor may also be should excused from performing its obligations
released therefrom in whole or in part (NCC, Art. 1267). under the contract, invoking Article 1267 of the Civil
However, this principle cannot be applied absolutely in Code as its basis. It contended that the depreciation of
contractual relations since parties are presumed to have the Philippine Peso since the time of the execution of
assumed the risk of unfavorable developments (Pineda, the contract, the increase in the cost of labor and
2000). This rule also does not apply to obligations for the construction materials, and the increase in the value
payment of a sum of money when there is a change in the of the lot in question were valid justifications for its
value of the stipulated currency. In such case, Art. 1250 release from the obligation to construct the
will apply (Tolentino, 2002). amenities. Should the petitioner be excused in
performing its obligation under the contract because
Requisites in order to relieve the debtor from his of difficulty in the performance of the service, which
obligation, in whole or in part, based on unforeseen is beyond the contemplation of the parties?
difficulty of fulfilment
A: NO. Considering that the petitioner's unilateral
1. Event or change in circumstance could not have been suspension of the construction of the amenities was
foreseen at the time of the execution of the contract; intended to save itself from costs, its plea for relief from
2. Such event makes the performance extremely its contractual obligations was properly rejected because
difficult but not impossible; it would thereby gain a position of advantage at the
3. The event must not be due to the act of any of the expense of the lot owners like the respondent. Its
parties; invocation of Article 1267 of the Civil Code, which
4. The contract is for a future prestation (Tolentino, provides that "(w)hen the service has become so difficult
2002). as to be manifestly beyond the contemplation of the
--- parties, the obligor may also be released therefrom in
Q: The parties entered into a lease agreement whole or in part, was factually unfounded. For Article
whereby Santos Car Check Center agreed to lease a 1267 to apply, the following conditions should concur,
property to Comglasco Corp. for five (5) years. namely: (a) the event or change in circumstances could
However, a year after, Comglasco advised Santos Car not have been foreseen at the time of the execution of the
Check Center that it will be pre-terminating the contract; (b) it makes the performance of the contract
contract, to which the latter refused. Despite refusal, extremely difficult but not impossible; (c) it must not be
Comglasco vacated the property and stopped paying due to the act of any of the parties; and (d) the contract is
rentals. Santos Car Check then filed a suit for breach for a future prestation. The requisites did not concur
of contract. Comglasco rely on the provision of the herein because the difficulty of performance under Article
lease contract whereby pre-termination is allowed 1267 of the Civil Code should be such that one party would
with cause in the first three years. Citing business be placed at a disadvantage by the unforeseen event. Mere
reverses which it ascribed to the 1997 Asian Financial inconvenience, or unexpected impediments, or increased
Crisis, Comglasco insists that under Article 1267 of expenses did not suffice to relieve the debtor from a bad
the NCC, it is exempted from its obligation, because its bargain (Tagaytay Realty Co., v. Arturo Gacutan, G.R. No.
business setback is the “cause” contemplated in their 160033, July 1, 2015) (Bersamin, J.).
lease. Is Comglasco correct? ---
Debt which proceeds from a criminal offense
A: NO. The payment of lease rentals does not involve a
prestation “to do” envisaged in Articles 1266 and 1267. GR: Debtor shall not be exempted from the payment of his
Article 1267 speaks of a prestation involving service obligation regardless of the cause of the loss.

214
 OBLIGATIONS AND CONTRACTS
4. Mortis causa - effective upon death of the creditor. In
XPN: The thing having been offered by debtor to the this case, the remission must be contained in a will or
person who should receive it, the latter refused without testament (Tolentino, 1991);
justification to accept it (NCC, Art. 1268). 5. Express – when it is made formally, it should be in
accordance with the forms of ordinary donations
NOTE: Offer referred in Art. 1268 is different from with regard to acceptance, amount and revocation;
consignation; the former refers to extinguishment of 6. Implied – when it can be inferred from the acts of the
obligation through loss while the latter refers to the parties
payment of the obligation.
Effect of delivery of evidence of credit to debtor
Creditor’s right of action
If the creditor voluntarily delivers the private document
The obligation, having been extinguished by the loss of the evidencing the credit to the debtor, there is a presumption
thing, the creditor shall have all the rights of action which that he renounces his right of action against the latter for
the debtor may have against third persons by reason of the collection of the said credit (Jurado, 2010).
the loss (NCC, Art. 1269).
NOTE: The presumption here is only prima facie and may
This refers not only the rights and actions which the be overcome by contrary evidence (Tolentino, 1991).
debtor may have against third persons, but also to any
indemnity which the debtor may have already received. Requisites

1. The document evidencing the credit must have been

CONDONATION OR REMISSION OF DEBT (BAR 2000) delivered by the creditor to the debtor;
(BAR 2000) 2. The document must be a private document;
3. The delivery must be voluntary (NCC, Art. 1271).
An act of liberality by virtue of which the creditor, without
NOTE: If the document is public, the presumption does
receiving any price or equivalent, renounces the
not arise considering the fact that the public character
enforcement of the obligation, as a result of which it is
of the document would always protect the interest of
extinguished in its entirety or in that part or aspect of the
the creditor (Jurado, 2010).
same to which the condonation or remission refers
(Pineda, 2000).
Effect of remission in general
Requisites of condonation (GAIDE)
It extinguishes the obligation in its entirety or in the part
or aspect thereof to which the remission refers (Jurado,
1. Must be Gratuitous;
2010).
2. Acceptance by the debtor;
3. Must not be Inofficious;
Effect of the remission of the principal debt with
4. Formalities provided by law on Donations must be
respect to the accessory obligation and vice versa
complied with if condonation is express; and
5. An Existing demandable debt at the time the
The renunciation of the principal debt shall extinguish the
remission is made.
accessory but the waiver of the latter shall leave the
former in force (NCC, Art. 1273).
NOTE: Remission or condonation of a debt is in reality a
donation (Jurado, 2010).
NOTE: It is presumed that the accessory obligation of
pledge has been remitted when the thing pledged, after its
Form of express remission
delivery to the creditor, is found in the possession of the
debtor, or of a third person who owns the thing (NCC, Art.
It must comply with the forms of donation (NCC, Art.
1274).
1270).
Effect of inofficious condonation
Form of implied remission
The Code is silent with respect to the form of implied
It may be totally revoked or reduced depending on
remission. There must be acceptance by the obligor or
whether or not it is totally or only partly inofficious
debtor (Jurado, 2010).
(Pineda, 2000).
Manner and kinds of remission:
The obligation remitted is considered inofficious if it
impairs the legitime of the compulsory heirs (NCC, Art.
1. Total – refers to the remission of the whole of the
752).
obligation;
2. Partial – remission of the part of the obligation: to the
Acceptance by the debtor
amount of indebtedness or to an accessory obligation
only (such as pledge or interest) or to some other
The acceptance by the debtor is required. There can be no
aspect of the obligation (such as solidary);
unilateral condonation. This is because condonation or
3. Inter vivos - effective during the lifetime of the
remission is an act of liberality. It is a donation of an
creditor;

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 Civil Law
existing credit, considered a property right, in favor of the his solidary co-debtors for the latter’s individual
debtor, it is required that the debtor gives his consent contribution or liability (NCC, Art. 1215).
thereto by making an acceptance. If there is no
acceptance, there is no condonation (Pineda, 2009). Revocation of confusion or merger of rights

If the act which created the confusion is revoked for some

CONFUSION OR MERGER OF RIGHTS causes such as rescission of contracts, or nullity of the will
or contract, the confusion or merger is also revoked. The
subject obligation is revived in the same condition as it
was before the confusion.
There is a confusion when there is a meeting in one
person of the qualities of a creditor and debtor of the same
NOTE: During such interregnum, the running of the
obligation (4 Sanchez Roman 421).
period of prescription of the obligation is suspended.
(Pineda, 2000)
Requisites of confusion or merger of rights

1. It must take place between the creditor and the

principal debtor (NCC, Art. 1276); COMPENSATION
2. The very same obligation must be involved (for if the
debtor acquires rights from the creditor, but not the
particular obligation in question, there will be no It is a mode of extinguishing obligations that take place
merger); when two persons, in their own right, are creditors and
3. The confusion must be total or as regards the entire debtors of each other (NCC, Art. 1278).
obligation.
It is the offsetting of the respective obligation of two
Effect of confusion or merger of rights persons who stand as principal creditors and debtors of
each other, with the effect of extinguishing their
The creditor and debtor becomes the same person obligations to their concurrent amount.
involving the same obligation. Hence, the obligation is
extinguished (NCC, Art. 1275). Requisites of compensation (1998, 2002, 2008, 2009
BAR)
There can be partial confusion
In order that compensation may be proper, it is necessary
It will be definite and complete up to the extent of the that (NCC, Art. 1279):
concurrent amount or value, but the remaining obligation
subsists (Pineda, 2000). 1. Each one of the obligors must be bound principally,
and that he be at the same time a principal creditor
Effect of confusion or merger in relation to the of the other except guarantor who may set up
guarantors compensation as regards what the creditor may owe
the principal (NCC, Arts. 1279-1280);
1. Merger which takes place in the person of the 2. Both debts consist in sum of money, or if the things
principal debtor or principal creditor benefits the due are consumable, they be of the same kind and
guarantors. The contract of guaranty is extinguished. also of the same quality if the latter has been stated;
2. Confusion which takes place in the person of any of 3. Both debts are due;
the guarantors does not extinguish the obligation 4. Both debts are liquidated and demandable;
(NCC, Art. 1276). 5. Neither debt must be retained in a controversy
commenced by third person and communicated in
Effect of confusion or merger in one debtor or due time to the debtor (neither debt is garnished)
creditor in a joint obligation (NCC, Art. 1279); and
6. Compensation must not be prohibited by law. (NCC,
GR: Joint obligation is not extinguished since confusion is Art. 1290).
not definite and complete with regard to the entire
obligation. A part of the obligation still remains NOTE: When all the requisites mentioned in Art. 1279 of
outstanding. the Civil Code are present, compensation takes effect by
operation of law, and extinguishes both debts to the
XPN: Obligation is extinguished with respect only to the concurrent amount, even though the creditors and
share corresponding to the debtor or creditor concerned. debtors are not aware of the compensation (NCC, Art.
In effect, there is only partial extinguishment of the entire 1290).
obligation (NCC, Art. 1277; Pineda, 2000).
Effects of Compensation:
Effect of confusion or merger in one debtor or
creditor in a solidary obligation 1. Both debts are extinguished;
2. Interests stop accruing on the extinguished
If a solidary debtor had paid the entire obligation, the obligation or the part extinguished;
obligation is totally extinguished without prejudice to the 3. The period of prescription stops with respect to the
rights of the solidary debtor who paid, to proceed against obligation or part extinguished;

216
 OBLIGATIONS AND CONTRACTS
4. All accessory obligations of the principal obligation Compensation v. Payment
which has been extinguished are alsoextinguished (4
Salvat 353). BASIS
--- COMPENSATION PAYMENT
Q: X, who has a savings deposit with Y Bank in the sum
of P1,000,000.00, incurs a loan obligation with the
said bank in the sum of P800,000.00 which has A mode of Payment means
become due. When X tried to withdraw his deposit, Y extinguishing to not only delivery
Bank allowed only P200,000.00 to be withdrawn, less the concurrent of money but also
service charges, claiming that compensation has amount, the performance of an
extinguished its obligation under the savings account obligations of obligation.
to the concurrent amount of X's debt. X contends that Definition those persons
compensation is improper when one of the debts, as who in their own
here, arises from a contract of deposit. Assuming that right are
the promissory note signed by X to evidence the loan reciprocally
does not provide for compensation between said loan debtors and
and his savings deposit, who is correct? (1998 BAR) creditors of each
other.
A: Y bank is correct. All the requisites of Art. 1279, Civil
Code are present. Compensation shall take place when Capacity of Debtor must have
two persons are reciprocally creditor and debtor of each parties not capacity to
other. In this connection, it has been held that the relation As to the necessary dispose of the
existing between a depositor and a bank is that of creditor necessity of the Reason: thing paid;
and debtor. As a general rule, a bank has a right of set off capacity of the Compensation creditor must
of the deposits in its hands for the payment of any parties operates by law, have capacity to
indebtedness to it on the part of a depositor (Gullas v. PNB, not by the act of receive payment.
G.R. No. L-43191, November 13, 1935). Hence, the parties.
compensation took place between the mutual obligations
of X and Y bank.
--- As the There can be The performance
Q: May the parties agree upon the compensation of susceptibility of partial must be complete
debts which are not due ? partial extinguishment of and indivisible
extinguishment the obligation. unless waived by
A: Yes. Under Art. 1282, conventional or voluntary the creditor.
compensation is not limited to obligations which are not
yet due. The parties may compensate by agreement any Legal Takes effect by
obligations, in which the objective requisites provided for compensation the act of the
As to the
legal compensation are not present. It is necessary, takes place by parties and
operation of
however, that the parties should have the capacity to operation of law involves delivery
extinguishing the
dispose of credits which they compensate, because the without or action.
obligation
extinguishment of teh obligations in this case arises from simultaneous
their wills and not from law. delivery.
---
Q: Can rescissible or voidable debts be compensated
against each other? Parties must be It is not necessary
As to the mutually debtors that the parties be
relationship of and creditors of mutually debtors
A: Yes. Under Art. 1284, when one or both debts are the parties
rescissible or voidable, they may be compensated against each other. and creditors of
each other before they are judicially rescinded or avoided. each other.
---
Q: May rescissible or voidable debts which are Compensation v. Confusion
already compensated be rescinded or annulled? What
are its effects?
COMPENSATION CONFUSION
A: Yes. Although a rescissible or voidable debt can be (NCC, Arts. 1278-1279) (NCC, Arts. 1275-1277)
compensated before it is rescinded or annulled, the
Two persons who are
degree of rescission or annulment is retroactive, and the One person where qualities
mutual debtors and
compensation must be considered as cancelled. And as of debtor and creditor are
creditors of each other.
rescission or annulment requires mutual restitution, the merged.
party whose obligation is annulled or rescinded can thus
recover to the extent that his credit was extinguished by At least two obligations.
the compensation; because to that extent, he is deemed to One obligation.
have made a payment.
--- Compensation v. Counterclaim or Set-off

217
 Civil Law

COUNTERCLAIM / Neither shall there be compensation if one of the debts

COMPENSATION consists in civil liability arising from a penal offense.
SET-OFF

Need not to be pleaded; NOTE: The person who has the civil liability arising from
takes place by operation of It must be pleaded to be crime is the only party who cannot set up the
law and extinguishes effectual. compensation; but the offended party is entitled to
reciprocally the two debts as indemnity can set up his claim in compensation of his
soon as they exist debt.
simultaneously, to the
amount of their respective KINDS OF COMPENSATION
sums.
1. Legal compensation – by operation of law;
Generally, both debts must 2. Conventional – by agreement of the parties;
be liquidated. Does not require that debts
3. Judicial (set-off) – by judgment of the court when
are liquidated.
there is a counterclaim duly pleaded, and the
Legal or conventional compensation decreed;
compensation governed by Judicial compensation 4. Facultative – may be claimed or opposed by one of
the Civil Code. provided that the the parties.
requirements of Rules of ---
Court, particularly on Q: De Leon sold and delivered to Silahis various
Counterclaims and/or merchandise. Due to Silahis' default, De Leon filed a
Cross-claims are observed. complaint for the collection of said accounts. Silahis
asserts, as affirmative defense, a debit memo as
Debts or obligations not subject to compensation unrealized profit for a supposed commission that
Silahis should have received from De Leon from the
1. Debts or obligations arising from contracts of sale made directly to DOLE Philippines, Inc. (DOLE).
depositum (NCC, Art. 1287); Was there legal compensation?
2. Debts arising from obligations of a depositary;
3. Debts arising from obligations of a bailee in A: NONE. Silahis admits the validity of his outstanding
commodatum; accounts with De Leon. But whether De Leon is liable to
4. Claims for support due by gratuitous title; pay Silahis a commission on the subject sale to DOLE is
5. Obligations arising from criminal offenses (NCC, Art. disputed. This circumstance prevents legal compensation
1288); from taking place (Silahis Marketing Corp. v. IAC, G. R. No.
6. Certain obligations in favor of government. L-74027, December 7, 1989).
e.g. taxes, fees, duties, and others of a similar nature.
NOTE: Compensation is not proper where the claim of the
There can be no off-setting of taxes against the claims that person asserting the set-off against the other is not clear
the taxpayer may have against the government. A person or liquidated; compensation cannot extend to
cannot refuse to pay a tax on the ground that the unliquidated, disputed claim existing from breach of
government owes him an amount equal to or greater than contract (Silahis Marketing Corp. v. IAC, G.R. No. L-74027,
the tax being collected. Internal revenue taxes cannot be December 7, 1989).
the subject of compensation because government and ---
taxpayer are not mutually creditors and debtors of each Q: Atty. Laquihon, in behalf of Pacweld, filed a
other. Taxes are not in the nature of contracts between pleading addressed to MPCC titled “motion to direct
parties (Francia v. IAC, G.R. No. L-67649, June 28, 1988). payment of attorney's fee”, invoking a decision
wherein MPCC was adjudged to pay Pacweld the sum
NOTE: Compensation takes place by operation of law, of P10,000.00 as attorney's fees. MPCC filed an
even though the debts may be payable at different places, opposition stating that the said amount is set-off by a
but there shall be an indemnity for expenses of exchange like sum of P10,000.00, collectible in its favor from
or transportation to the place of payment (NCC, Art. 1286). Pacweld also by way of attorney's fees which MPCC
--- recovered from the same CFI of Manila in another civil
Q: When is compensation not proper? case. Was there legal compensation?

A: Under Art. 1287, compensation shall not be proper A: YES. MPCC and Pacweld were creditors and debtors of
when one of the debts arises from a depositum or from each other, their debts to each other consisting in final
the obligations of a depositary or of a bailee in and executory judgments of the CFI in two separate cases.
commodatum. Neither can compensatin be set up against The two obligations, therefore, respectively offset each
a creditor who has a claim for support due by gratuitous other, compensation having taken effect by operation of
title without prejudice to the provisions of Art. 301 (2). law and extinguished both debts to the concurrent
--- amount of P10,000.00, pursuant to the provisions of Arts.
NOTE: Only the depositary and the borrower in 1278, 1279 and 1290 of the Civil Code, since all the
commodatum cannot set up compensation. The depositor requisites provided in Art. 1279 of the said Code for
can set up his deposit against the depositary, and the automatic compensation "even though the creditors and
lender can set up his loan against a credit of the borrower. debtors are not aware of the compensation" were present

218
 OBLIGATIONS AND CONTRACTS
(Mindanao Portland Cement Corp. v. CA, G.R. No. L-62169, favor of the bank, with his friend Ricardo as
February 28, 1983). cosignatory. In the PN, they both acknowledged that
--- they are “individually and collectively” liable and
Conventional compensation waived the need for prior demand. To secure the PN,
Ricardo executed a real estate mortgage on his own
It is one that takes place by agreement of the parties. property. When Eduardo defaulted on the PN, XYZ
stopped payment of rentals on the building on the
Effectivity of conventional compensation ground that legal compensation had set in. Since there
was still a balance due on the PN after applying the
For compensation to become effective: rentals, XYZ foreclosed the real estate mortgage over
Ricardo’s property. Ricardo opposed the foreclosure
GR: The mutual debts must be both due (NCC, Art. 1279). on the ground that he is only a co-signatory; that no
demand was made upon him for payment, and
XPN:The parties may agree that their mutual debts be assuming he is liable, his liability should not go
compensated even if the same are not yet due. (NCC, Art. beyond half of the balance of the loan. Further,
1282). Ricardo said that when the bank invoked
compensation between the rentals and the amount of
Judicial compensation the loan, it amounted to a new contract or novation,
and had the effect of extinguishing the security since
If one of the parties to a suit over an obligation has a claim he did not give his consent (as owner of the property
for damages against the other, the former may set it off by under the real estate mortgage) thereto.
proving his right to said damages and the amount thereof
(NCC, Art. 1283). a. Can XYZ Bank validly assert legal
compensation?
All the requisites mentioned in Art. 1279 must be present, b. Can Ricardo’s property be foreclosed to pay the
except that at the time of filing the pleading, the claim
full balance of the loan?
need not be liquidated. The liquidation must be made in
the proceedings. c. Does Ricardo have basis under the Civil Code
for claiming that the original contract was
Facultative compensation novated? (2008 BAR)

One of the parties has a choice of claiming or opposing the A:

compensation but waives his objection thereto such as an a. NO. XYZ Bank may validly assert the partial
obligation of such party is with a period for his benefit compensation of both debts, but it should be
alone and he renounces the period to make the obligation facultative compensation because not all of the five
become due. requisites of legal compensation are present (NCC,
Art. 1279). The payment of the rentals by XYZ Bank is
Facultative compensation is unilateral and does not not yet due, but the principal obligation of loan
require mutual agreement; voluntary or conventional where both Eduardo and Ricardo are bound
compensation requires mutual consent. solidarily and therefore any of them is bound
principally to pay the entire loan, is due and
e.g. X owes Y P100,000 demandable and due on demandable without need of demand. XYZ Bank may
Apr. 1, 2012. Y owes X P100, 000 demandable and due on declare its obligation to pay rentals as already due
or before Apr. 15, 2012. Y, who was given the benefit of and demand payment from any of the two debtors.
the term, may claim compensation on Apr. 1, 2012. On the
other hand, X, who demands compensation, can be b. NO, because there was no prior demand on Ricardo,
properly opposed by Y because Y could not be made to depriving him of the right to reasonably block the
pay until Apr. 15, 2012. foreclosure by payment. The waiver of prior demand
in the PN is against public policy and violates the
NOTE: Compensation can be renounced either at the time right to due process. Without demand, there is no
an obligation is contracted or afterwards (Tolentino, default and the foreclosure is null and void. Since the
1991). It can be renounced expressly or impliedly. mortgage, insofar as Ricardo is concerned is not
violated, a requirement under Act 3135 for a valid
Examples of implied renunciation: foreclosure of real estate mortgage is absent.

1. by not setting it up in the litigation; In the case of DBP v. Licuanan (G.R. No. 150097,
2. by consenting to the assignment of credit under February 26, 2007), it was held that: “the issue of
NCC,Art. 1285; whether demand was made before the foreclosure
3. by paying debt voluntarily, with knowledge that it was effected is essential. If demand was made and
has been extinguished by compensation (Tolentino, duly received by the respondents and the latter still
1991). did not pay, then they were already in default and
--- foreclosure was proper. However, if demand was not
Q: Eduardo was granted a loan by XYZ Bank for the made, then the loans had not yet become due and
purpose of improving a building which XYZ leased demandable. This meant that the respondents had
from him. Eduardo executed the promissory note in

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 Civil Law
not defaulted in their payment and the foreclosure a. With the consent of the debtor – compensation
was premature.” cannot be set up except when the right to
compensation is reserved.
c. NO. Since none of the three kinds of novation is b. With the knowledge but without consent of the
applicable. There is no objective novation, whether debtor – compensation can be set up regarding
express or implied, because there is no change in the debts previous to the cession or assignment but
object or principal conditions of the obligation. There not subsequent ones.
is no substitution of debtors, either. Compensation is c. Without the knowledge of debtor - can set up
considered as abbreviated or simplified payment and compensation as a defense for all debts
since Ricardo bound himself solidarily with Eduardo, maturing prior to his knowledge of the
any facultative compensation which occurs does not assignment.
result in partial legal subrogation. Neither Eduardo
nor Ricardo is a third person interested in the Renunciation of compensation
obligation under NCC, Art. 1302.
--- Compensation can be renounced expressly or impliedly. It
Obligations subject to facultative compensation can also be renounced either at the time an obligation is
contracted or afterwards. It rests upon a potestative right,
When one of the debts arises from: and a unilateral declaration of the debtor would be
1. Depositum; sufficient renunciation.
2. Obligations of a depositary;
3. Obligations in commudatum;
4. Support; NOVATION (1994, 2008 BAR)
GR: Claim of support due to gratuitous title
XPN: Future support.
It is the substitution or change of an obligation by another,
5. Civil liability from a crime. resulting in its extinguishment or modification, either by
changing the object or principal conditions, or by
NOTE: NCC, Art. 1288 prohibits compensation if one of substituting another in the place of the debtor or by
the debts consists in civil liability arising from a penal subrogating a third person to the rights of the creditor
offense. However, the victim is allowed to claim (Pineda, 2000).
compensation.
Requisites of novation (OIC –SN)
If one or both debts are rescissible or voidable
1. Valid Old obligation;
When one or both debts are rescissible or voidable, they XPNs:
may be compensated against each other before they are a. When the annulment may be claimed only by the
judicially rescinded or avoided (NCC, Art. 1284). debtor and he consented to the novation; and
b. When ratification validates acts which are
If the prescriptive period had already lapsed, there is voidable.
automatic compensation and the same will not be
disturbed anymore. Whereas, if the debt is rescinded or 2. Intent to extinguish or to modify the old obligation;
annulled, compensation shall be restitution of what each 3. Capacity and consent of all the parties to the new
party had received before the rescission or annulment. obligation (except in case of expromission where the
old debtor does not participate);
Effects of assignment on compensation of debts 4. Substantial difference of the old and new obligation
– on every point incompatible with each other
1. After the compensation took place (implied novation); and
5. Valid New obligation.
GR: ineffectual; useless act since there is nothing
more to assign NOTE: If the new obligation is void, the original one
shall subsist as there is no novation. However, even
XPN: when the assignment was made with the if the new obligation turns out to be void, the original
consent of the debtor. obligation does not subsist if the parties clearly
intended that the former relation should be
NOTE: Such consent operates as a waiver of the extinguished in any event (NCC, Art. 1297).
rights to compensation.
Presumption of Novation
XPN TO THE XPN: At the time he gave his
consent, he reserved his right to the Novation is never presumed; it must be proven as a fact
compensation. either by:
1. Explicit declaration – if it be so declared in
2. Before compensation took place unequivocal terms; or
2. Material incompatibility – that the old and the new
obligations be on every point incompatible with each
other (NCC, Art. 1292).

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 OBLIGATIONS AND CONTRACTS
the initiative or proposal of a third
Express novation person (1996, 2001 BAR).

Takes place only when the intention to effect a novation NOTE: If it is the creditor who initiated the
clearly results from the terms of the agreement or is change of debtor, it is considered
shown by a full discharge of the original debt (Jurado, expromission
2010).
ii. Subrogating a third person to the rights of
Implied novation the creditor (active novation)

It is imperative that the old and new obligations must be c. Mixed – combination of the objective and
incompatible with each other. subjective novation.

The test of incompatibility between the old and the new 3. As to form of their constitution
obligations is to determine whether or not both of them a. Express – the parties declared in unequivocal
can stand together, each having its own independence. If terms that the obligation is extinguished by the
they can stand together, there is no incompatibility; new obligation.
consequently, there is no novation. If they cannot stand b. Implied – no express declaration that the old
together, there is incompatibility; consequently, there is obligation is extinguished by the new one. The
novation (Borja v. Mariano, G.R. No. L-44041, old and new obligation is incompatible on every
October 28, 1938). material point (NCC, Art. 1292).

NOTE: Novation is never presumed and the animus 4. As to extent of their effects
novandi (intent to make a new obligation) whether totally a. Total or extinctive – obligation is originally
or partially, must appear by express agreement of the extinguished.
parties or by their acts that are too clear and unequivocal
to be mistaken. NOTE: Four requisites of extinctive novation:
(1) A previous valid obligation;
Two-fold functions of novation (2) An agreement of all parties concerned to
a new contract;
1. It extinguishes the old obligation; and (3) The extinguishment of the old obligation;
2. Creates a new obligation in lieu of the old one. and
(4) The birth of a valid new obligation (Iloilo
Kinds of novation Traders v. Heirs of Soriano,
G.R. No. 149683, June 16, 2003).
1. As to essence
a. Objective or real novation – changing the object The extinctive novation would thus have the
or principal conditions of the obligation (NCC, twin effects of first, extinguishing an existing
Art. 1291). obligation and second, creating a new one in its
stead.
NOTE: In payment of sum of money, the first b. Partial or modificatory – original obligation is
obligation is not novated by a second obligation not extinguished but merely modified.
that:
(1) Expressly recognizes the first obligation; 5. As to their origin
(2) Changes only the terms of payment; a. Legal novation – by operation of law (NCC, Art.
(3) Adds other obligation not incompatible 1300 & 1302).
with the old ones; or b. Conventional novation – by agreement of the
(4) Merely supplements the first one. parties (NCC, Arts. 1300-1301).

b. Subjective or personal novation – change of the 6. As to presence of absence of condition

parties. a. Pure – new obligation is not subject to a
i. Substituting the person of the debtor condition.
(passive novation) – may be made without b. Conditional – when the creation of the new
the knowledge of or against the will of the obligation is subject to a condition.
latter, but not without the consent of the
creditor. Rights of the new debtor
e) Delegacion – the substitution is
initiated by the old debtor himself 1. With the debtor’s consent – right of reimbursement
(delegante) by convincing another and subrogation.
person (delegado) to take his place
and to pay his obligation to the 2. Without the consent of the old debtor or against his
creditor (1996, 2001 BAR). will – right to beneficial reimbursement.
f) Expromission – the substitution of the
old debtor by a new debtor is upon Novation by substitution of debtor

221
 Civil Law
The consent of the creditor is mandatory both in Person who
delegacion and expromission (NCC, Art. 1293). It may be initiated the
express or implied from his acts but not from his mere Old debtor Third person
substitution
acceptance of payment by a third party, for there is no
true transfer of debt.
Consent of the It may be express or implied from his
NOTE: Creditor’s consent or acceptance of the creditor acts but not from his mere acceptance of
substitution of the old debtor by a new one may be given payment by a third party.
at anytime and in any form while the agreement of the
debtor subsists (Asia Banking Corp. v. Elser, G.R. No. L- With or without
30266, March 25, 1929). With the consent of
Consent of the the knowledge of
the old debtor
old debtor the debtor or
Requisites of delegacion (since he initiated
against the will of
the substitution).
the old debtor.
1. Substitution is upon the initiative or proposal of the
old debtor himself by proposing to the creditor the
entry of another (third person) as the new debtor Consent is needed
Consent of third but it need not be Consent is
who will replace him in payment of the obligation;
person given needed.
2. The creditor accepts and the new debtor agrees to
the proposal of the old debtor; simultaneously.
3. The old debtor is released from the obligation with
the consent of the creditor. Intention of Released from the obligation with the
substitution consent of the creditor.
Insolvency of the new debtor in delegacion

GR: Insolvency of the new debtor (delegado), who has With the debtor’s
been proposed by the original debtor (delegante) and consent – right of
accepted by the creditor (delegatario), shall not revive the reimbursement
action of the latter against the original obligor (NCC, Art. and subrogation.
With the debtor’s
1295). Rights of the consent – right of
new debtor Without the
reimbursement and
XPNs: Original debtor shall be held liable: consent of the old
subrogation.
1. Insolvency was already existing and of public debtor or against
knowledge, or known to the debtor; (NCC, Art. 1295) his will – right to
2. Insolvency of the new debtor was already existing beneficial
and known to the original debtor at the time of the reimbursement.
delegation of the debt to the new debtor (NCC, Art.
1295). With the debtor’s
Shall not revive the consent - If the old
Requisites of expromission action of the latter debtor gave his
against the original consent and the
1. Substitution is upon the initiative or proposal of a obligor. new debtor could
third person who will step into the shoes of the not fulfill the
debtor; Original debtor obligation, the old
2. Creditor must give his consent to the proposal of the shall be held liable: debtor should be
third person; 1. Insolvency was liable for the
3. Old debtor must be released from the obligation with already existing payment of his
the consent of the creditor. Insolvency or and of public original
nonfulfillment knowledge, or obligation.
Insolvency of the new debtor in expromission of the known to the
obligation of debtor. Without the
If substitution is without the knowledge or against the the new debtor 2. Insolvency of consent of the old
will of the debtor, the new debtor’s insolvency or non- the new debtor debtor or against
fulfillment of the obligation shall not give rise to any was already his will – the new
liability on the part of the original debtor. (NCC, Art. 1294). existing and debtor’s
known to the insolvency or non-
NOTE: If the old debtor gave his consent and the new original debtor fulfillment of the
debtor could not fulfill the obligation, the old debtor at the time of obligation shall
should be liable for the payment of his original obligation. the delegation not give rise to any
of the debt to liability on the
SUMMARY the new debtor. part of the original
debtor.
DELEGACION EXPROMISSION
---

222
 OBLIGATIONS AND CONTRACTS
Q: SDIC issued to Danilo a Diners Card (credit card) Effects of novation
with Jeannete as his surety. Danilo used this card and
initially paid his obligations to SDIC. Thereafter, 1. Extinguishment of principal also extinguishes the
Danilo wrote SDIC a letter requesting it to upgrade his accessory, except:
Regular Diners Club Card to a Diamond (Edition) one. a. Mortgagor, pledgor, surety or guarantor agrees
As a requirement of SDIC, Danilo secured from to be bound by the new obligation (Tolentino,
Jeanette her approval and the latter obliged. Danilo's 1999);
request was granted and he was issued a Diamond b. Stipulation made in favor of a third person such
(Edition) Diners Club Card. Danilo had incurred credit as stipulation pour atrui (NCC, Art. 1311) unless
charged plus appropriate interest and service charge. beneficiary consents to the novation (NCC, Art.
However, he defaulted in the payment of this 1296).
obligation. Was the upgrading a novation of the
original agreement governing the use of Danilo Alto's 2. If old obligation is:
first credit card, as to extinguish that obligation? a. Void – novation is void (NCC, Art. 1298)
b. Voidable – novation is valid provided that the
A: YES. Novation, as a mode of extinguishing obligations, annulment may be claimed only by the debtor or
may be done in two ways: by explicit declaration, or by when ratification validates acts (NCC, Art. 1298).
material incompatibility. c. If the old obligation was subject to a suspensive
or resolutory condition, the new obligation shall
There is no doubt that the upgrading was a novation of the be under the same condition, unless it is
original agreement covering the first credit card issued to otherwise stipulated. (NCC, Art. 1299).
Danilo Alto, basically since it was committed with the
intent of cancelling and replacing the said card. However, 3. If old obligation is conditional and the new obligation
the novation did not serve to release Jeanette from her is pure:
surety obligations because in the surety undertaking she a. If resolutory and it occurred – old obligation
expressly waived discharge in case of change or novation already extinguished; no new obligation since
in the agreement governing the use of the first credit card nothing to novate.
(Molino v. Security Diners International Corp., G.R. No. b. If suspensive and it did not occur – it is as if there
136780, August 16, 2001). is no obligation; thus, there is nothing to novate.
---
Q: J. C. Construction bought steel bars from Matibay 4. If the new obligation is:
Steel Industries (MSI) which is owned by Buddy a. Void – original one shall subsist, unless the
Batungbacal. J.C. failed to pay the purchased parties intended that the former relation should
materials worth P500,000 on due date. J.C. persuaded be extinguished in any event (NCC, Art. 1297).
its client Amoroso with whom it had receivables to b. Voidable – novation can take place, except when
pay its obligation to MSI. Amoroso agreed and paid such new obligation is annulled. In such case, old
MSI the amount of P50,000. After 2 other payments, obligation shall subsist.
Amoroso stopped making further payments. c. Pure obligation – conditions of old obligation
deemed attached to the new, unless otherwise
Buddy filed a complaint for collection of the balance stipulated (Tolentino, 1999).
of the obligation and damages against J.C. JC denied d. Conditional obligation:
any liability claiming that its obligation was i. If resolutory– valid until the happening of
extinguished by reason of novation which took place the condition (NCC, Art. 1181).
when MSI accepted partial payments from Amoroso ii. If suspensive and did not materialize – no
on its behalf. novation, old obligation is enforced.
Was the obligation of JC to MSI extinguished by (NCC, Art. 1181).
novation? Why? (2014 BAR)
NOTE: Novation does not extinguish criminal liability
A: NO. Under Art. 1292 of the NCC, in order that an (PNB v. Soriano, G.R. No. 164051, October 3, 2012).
obligation may be extinguished by another which ---
substitute the same, it is imperative that it be so declared Q: Will a contract of suretyship, which is secondary to
in unequivocal terms, or that the old and the new a principal obligation, be extinguished when novation
obligations be on every point be incompatible with each occurs?
other. Novation by substitution of the debtor requires the
consent of the creditor as provided in Art. 1293. This A: It depends. A surety is released from its obligation
requirement is not present in this case. when there is a material alteration of the principal
contract in connection with which the bond is given, such
In Magdalena Estates Inc., vs. Rodriguez (G.R. No. L-18411, as a change which imposes a new obligation on the
December 17, 1966) it was ruled that the mere fact that the promising party, or which takes away some obligation
creditor received payment from a third person does not already imposed, or one which changes the legal effect of
constitute novation and does not extinguish the the original contract and not merely its form (Philippine
obligation of the original debtor. Thus, the obligation of JC Charter Insurance Corporation v. Petroleum Distributors &
to MSI subsists. Service Corporation, G.R. No. 180898, April 18, 2012).
--- Furthermore, a surety is not released by a change in the
contract, which does not have the effect of making its

223
 Civil Law
obligation more onerous (Stronghold Insurance Company, Conventional subrogation v. Assignment of credit
Inc. v. Tokyu Construction Company, G.R. Nos. 158820-21,
June 5, 2009). As such, a contract is only extinguished by ASSIGNMENT
novation when there is a material alteration in the CONVENTIONAL
BASIS OF CREDITS OR
principal contract or if it has the effect of making the SUBROGATION
RIGHTS
obligation more onerous.
---
Subrogation Governing law Art. 1300-1304 Art. 1624-1627

It is the active subjective novation characterized by the It extinguishes The transfer of

transfer to a third person of all rights appertaining to the the original the credit or
creditor in the transaction concerned including the right obligation and right does not
to proceed against the guarantors or possessors of creates a new extinguish or
mortgages and similar others subject to any applicable one modify the
Effect
legal provision or any stipulation agreed upon by the obligation. The
parties in conventional subrogation. transferee
becomes the new
NOTE: Whoever pays on behalf of the debtor without the creditor for the
knowledge or against the will of the latter cannot compel same obligation.
the creditor to subrogate him in his rights, such as those
arising from a mortgage, guaranty, or penalty (NCC, Art.
1237). The consent of The consent of
the debtor is the debtor is not
Kinds of subrogation necessary (NCC, necessary.
Need for consent Art. 1301). Notification is
of debtor enough for the
1. As to their creation
a. Legal subrogation – constituted by virtue of a validity of the
law (NCC, Art. 1300; NCC, Art. 1302); assignment
b. Voluntary or conventional subrogation – created (NCC, Art. 1626).
by the parties by their voluntary agreement
(NCC, Art. 1300); Begins from the Begins from
Effectivity moment of notification of
NOTE: Conventional subrogation of a third person
subrogation. the debtor.
requires the consent of the original parties and of
the third person (NCC, Art. 1301);
The defect in the The defect in the
2. As to their extent old obligation credit or rights is
a. Total subrogation – credits or rights of the Curability of may be cured not cured by its
defect or vice such that the mere assignment
creditor in the transaction are totally
transferred to the third person. new obligation to a third person.
b. Partial subrogation – only part of the credit or becomes valid.
rights of the creditor in the transaction are
transferred to the third person. Debtor cannot The debtor can
set up a defense still set up the
NOTE: A creditor, to whom partial payment has against the new defense
been made, may exercise his right for the remainder creditor which (available
Defense
and he shall be preferred to the person who has he could have against the old
been subrogated in his place in virtue of the partial availed himself creditor) against
payment of the same credit (NCC, Art. 1304). of against the old the new creditor.
creditor.
Presumption of legal subrogation

GR: Legal subrogation is not presumed (NCC, Art. 1300). NOTE: In the law of subrogation, active subjective
novation is stricter than passive subjective novation. In
XPN: In cases expressly mentioned in the law: the latter, the consent of the old debtor is not even
required in expromission.
1. When a creditor pays another creditor who is
preferred, even without the debtor’s knowledge; CONTRACTS
2. When a third person, not interested in the obligation,
pays with the express or tacit approval of the debtor;
3. When, even without the knowledge of the debtor, a
person interested in the fulfillment of the obligation GENERAL PRINCIPLES
pays, without prejudice to the effects of confusion as
to the latter’s share. (NCC, Art. 1302).

224
 OBLIGATIONS AND CONTRACTS
A contract is a meeting of minds between two persons NOTE: With respect to the heir, he shall not be liable
whereby one binds himself, with respect to the other, to beyond the value of the property he received from the
give something or to render some service (NCC, Art. 1305). decedent (NCC, Art. 1311).

Meeting of minds XPNs:

1. Rights and obligations that are not transmissible
Speaks of the intention of the parties in entering into the by their nature, or by the stipulation or by
contract respecting the subject matter and the provisions of law (NCC, Art. 1311);
consideration thereof. As a rule therefore, a contract is 2. Stipulation pour autrui (stipulation in favor of a
perfected by mere consent. It does not require any special third person) – benefits clearly and deliberately
form, as a rule, and is binding from the moment that the conferred by parties to a contract upon third
essential requisites are present. Thus, the meeting of the persons (NCC, Art. 1311) and which stipulation
minds between the parties rise to the binding contract is merely part of a contract entered into by the
althought they have not affixed their signature to its parties, neither of whom acted as agents of the
written form (Rabuya, 2017). third person and which favor can be demanded
by the third person if duly accepted by him
Obligation v. Contract before it could be revoked;

While a contract is one of the sources of obligations, an Requisites of stipulation pour atrui:
obligation is the legal tie or relations itself that exists after a. Stipulation in favor of a third person;
a contract has been entered into. b. Stipulation is just part and not the whole
obligations of the contract;
Hence, there can be no contract if there is no obligation. c. Contracting parties must have clearly and
But an obligation may exist without a contract (De Leon, deliberately conferred a favor upon third
2010). person;
d. Third person must have communicated his
Duty of courts in interpreting contracts acceptance; and
e. Neither of the contracting parties bears the
It is not the province of the court to alter a contract by legal representation of the third person
construction or to make a new contract for the parties. Its (Young v. Court of Appeals, G.R. No. 79518,
duty is confined to the interpretation of the one which January 13, 1989).
they have made for themselves without regard to its
wisdom or folly as the court cannot supply material NOTE: The fairest test to determine whether the
stipulations or red into the contract words which it does interest of third person in a contract is a stipulation
not contain (Cuizon v. CA, G.R. No. 102096, August 22, pour autrui or merely an incidental interest, is to rely
1996). upon th intention of the parties as disclosed by their
contract. In applying this test, it matters not whether
CHARACTERISTICS OF A CONTRACT the stipulation is in the nature of a gift or whether
there is an obligation owing from the promise to the
The following are the characteristics of a contract third person (Rabuya, 2017).
(AMOR):
3. Third persons coming into possession of the object of
1. Autonomy (NCC, Art. 1306); the contract creating real rights subject to the
2. Mutuality (NCC, Art. 1308); provisions of Mortgage Law and the Land
3. Obligatoriness and consensuality (NCC, Art. 1315); Registration Law (NCC, Art. 1312);
4. Relativity (NCC, Art. 1311) 4. Contracts entered into in fraud of creditors; (NCC,
Art. 1313);
5. When a third person induces a party to violate the
RELATIVITY OF CONTRACTS contract (NCC, Art. 1314). (1991, 1998 BAR)
(1991, 1996, 2002 BAR)
NOTE: This tort or wrongful conduct is known as
Principle of relativity or Principle of limited “interference with contractual relations.”
effectivity of contracts (2011 BAR)
Requisites:
GR: Contracts take effect only between the parties or their
assigns and heirs. a. Existence of a valid contract;
b. Third person has knowledge of such contract;
Res inter alios acta aliis neque nocet prodest (a thing done c. Third person interferes without justification (De
between others does not harm or benefit others) – a Leon, 2010).
contract can only obligate the parties who entered into it,
or their successors who assumed their personalities, and Thus, third person is liable for damages. The basis of
that, concomitantly, a contract can neither favor nor his liability is Quasi-delict.
prejudice third persons (Vitug, 2006).
NOTE: A third person can be held liable for tort
intereference even if he does not know the identity of

225
 Civil Law
one of the contracting parties. The interference with A: Carlito’s parents who, admittedly, are his sole heirs
lawful contracts by strangers thereto gives rise to an have a direct cause of action against the Company.
action for damage in favor of the injured person. The This is so because pursuant to the stipulations, the
law does not require that the responsible person Company will also indemnify third parties. The policy
shall have known the identity of the injured person under consideration is typical of contracts pour autrui,
(Rabuya, 2017). this character being made more manifest by the fact that
--- the deceased driver paid 50% of the premiums (Coquia v.
Q: PCGG filed a complaint for reconveyance, Fieldmen’s Insurance Co., Inc.,G.R. No. L-23276,
reversion, accounting, restitution, and damages November 29, 1968).
before the Sandigan Bayan against Ferdinand and ---
Imelda Marcos, and several of their cronies including OBLIGATORY FORCE OF CONTRACTS
Benedicto and Africa. PCGG, through its Chairman,
David M. Castro, entered into a Compromise Contracts shall be obligatory, in whatever form they may
Agreement with Benedicto where the latter have been entered into, provided all the essential
undertook to cede to the government properties requisites for validity are present (NCC, Art. 1356).
listed in the agreement and transfer to the
government whatever rights he may have in the The parties are bound from the moment the contracts are
assets of the corporations listed in the same perfected by mere consent not only from the fulfillment of
agreement. The SB dismissed the case against Africa what has been expressly stipulated but also to all the
and ruled that since that act being complained of consequences which, according to their nature, may be in
constituted a quasi-delict or tort and the obligation of keeping with good faith, usage and law (NCC, Art. 1315).
the defendants were solidary therefore the obligation
of Africa has been extinguished by the Compromise NOTE: Obligations arising from contracts have the force
Agreement. Did the Compromise Agreement between of law between the contracting parties and should be
PCGG and Benedicto extinguish the liability of Africa? complied with in good faith (NCC, Art. 1159).

A: NO. A stipulation pour autrui to be appreciated, it is Requisites for the application of the principle
indispensable that there be a stipulation deliberately
conferring a benefit or favor to a third person.The Before a contract may be considered obligatory, it is
requisites of a stipulation pour autrui are the following: necessary that:
1. There is a stipulation in favor of a third person; 1. It is perfected;
2. The stipulation is a part, not the whole, of the 2. It is valid; and
contract; 3. It is enforceable (Rabuya, 2017).
3. The contracting parties clearly and deliberately ---
conferred a favor to the third person — the favor is Q: Villamor borrowed a large amount from Borromeo,
not an incidental benefit; for which he mortgaged his property but
4. The favor is unconditional and uncompensated; subsequently defaulted. Borromeo pressed him for
5. The third person communicated his or her settlement. The latter instead offered to execute a
acceptance of the favor before its revocation; and promissory note containing a promise to pay his debt
6. The contracting parties do not represent, or are not as soon as he is able, even after 10 years and that he
authorized by, the third party. waives his right to prescription. What are the effects
of said the stipulation to the action for collection filed
The Compromise Agreement executed between by Borromeo?
Benedicto and PCGG do not contain any express
stipulation that confers the benefit of absolute immunity A: NONE. The rule is that a lawful promise made for a
to Africa. Absent any express stipulation in favor of a third lawful consideration is not invalid merely because an
person, the rule on relativity of contract must be applied unlawful promise was made at the same time and for the
i.e., that the contract only takes effect between the parties, same consideration. This rule applies although the
their assigns or heirs (Republic of the Philippines v. Legal invalidity is due to violation of a statutory provision,
Heirs of Jose L. Africa, G.R. No. 205722, August 19, 2015). unless the statute expressly or by necessary implication
--- declares the entire contract void. Thus, even with such
Q: Fieldmen's Insurance issued, in favor of MYT, a waiver of prescription, considering that it was the intent
common carrier, accident insurance policy. 50% of of the parties to effectuate the terms of the promissory
the premium was paid by the driver. The policy note, there is no legal obstacle to the action for collection
indicated that the Company will indemnify the driver filed by Borromeo (Borromeo v. CA, G.R. No. L-22962,
of the vehicle or his representatives upon his death. September 28, 1972).
While the policy was in force, the taxicab driven by ---
Carlito, met with an accident. Carlito died. MYT and NOTE: Where an agreement founded on a legal
Carlito's parents filed a complaint against the consideration contains several promises, or a promise to
company to collect the proceeds of the policy. do several things, and a part only of the things to be done
Fieldmen’s admitted the existence thereof, but are illegal, the promises which can be separated, or the
pleaded lack of cause of action on the part of the promise, so far as it can be separated, from the illegality,
parents. Decide. may be valid (Borromeo v. CA, G.R. No. L-22962,
September 28, 1972).

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 OBLIGATIONS AND CONTRACTS
MUTUALITY OF CONTRACTS not be obligatory if it is evidently inequitable. In such case,
the courts shall decide what is equitable under the
The contract must bind both contracting parties and its circumstances (NCC, Art. 1310).
validity or compliance cannot be left to the will of one of
them (NCC, Art. 1308). (2001, 2004, 2008 BAR) Unilateral increase of interest rate

NOTE: A contract containing a condition whose efficacy Even assuming that the loan agreement between the
or fulfillment is dependent solely on the uncontrolled will creditor and the debtor gave the former a license to
of one of the parties is void (Garcia v. Rita, G.R. No. L- increase the interest rate a twill during the term of the
20175, October 30, 1967; PNB v. CA, G.R. No. 88880, April loan, that license would have been null and void for being
30, 1991). violative of the principle of mutuality essential in
contracts (Rabuya, 2017).
However, the termination of the contract does not
necessarily require mutuality, and it can even be validly AUTONOMY OF CONTRACTS / LIBERTY OF
left to one party by agreement or under a resolutory CONTRACTS (1996, 2004 BAR)
facultative condition (Vitug, 2006; see also PNB v. CA,
1994). It is the freedom of the parties to contract and to stipulate
provided the stipulations are not contrary to law, morals,
Contract of Adhesion good customs, public order or public policy (NCC, Art.
1306).
It is a contract in which one of the parties prepares the
stipulations in the form of a ready-made contract, which NOTE: Courts cannot make for the parties better or more
the other party must accept or reject, but not modify, by equitable agreements than they themselves have been
affixing his signature or his “adhesion” thereto; leaving no satisfied to make, or rewrite contracts because they
room for negotiation and depriving the latter of the operate harshly or inequitably as to one of the parties, or
opportunity to bargain on equal footing (Norton alter them for the benefit of one party and to the
Resources and Development Corporation v. All Asia Bank detriment of the other, or by construction, relieve one of
Corporation, G.R. No. 162523, November 25, 2009). the parties from terms which he voluntarily consented to,
or impose on him those which he did not (Angel Bautista
Validity of contract of adhesion v. Court of Appeals, G.R. No. 123655, January 19, 2000).

It is not entirely prohibited since the one who adheres to

the contract is, in reality, free to reject it entirely, and if he ESSENTIAL REQUISITES OF A CONTRACT
adheres, he gives his consent (Premiere Development
Bank v. Central Surety & Insurance Company, Inc., G.R. No.
176246, February 13, 2009). However, it is void when the
weaker party is imposed upon in dealing with the ELEMENTS OF A CONTRACT
dominant bargaining party, and its option is reduced to
the alternative of “taking or leaving it,” completely 1. Natural Elements – Those which are derived from the
depriving such party of the opportunity to bargain on very nature of the contract, and as a consequence,
equal footing (Keppel Cebu Shipyard, Inc. v. Pioneer ordinarily accompany the same.
Insurance and Surety Corporation, G.R. Nos. 180880-81, 2. Essential Elements – Those without which there can
September 25, 2009). be no contract.
3. Accidental Elements – those which exist only when
Interpretation of contract of adhesion the contracting parties expressly provide for them
(De Leon, 2010).
In interpreting such contracts, however, courts are
expected to observe greater vigilance in order to shield ESSENTIAL REQUISITES OF A CONTRACT (2005
the unwary or weaker party from deceptive schemes BAR)
contained in ready-made covenants (Premiere
Development Bank v. Central Surety Insurance Company, The following are the essential requisites of contracts
Inc., G.R. No. 176246, February 13, 2009). In case of doubt (COC):
which will cause a great imbalance of rights against one of
the parties, the contract shall be construed against the 1. Consent;
party who drafted the same (Magis Young Achiever’s 2. Object or subject matter; and
Learning Center v. Manalo, G.R. No. 178835, February 13, 3. Cause or consideration (NCC, Art 1318). (See Cathay
2009). Pacific v. Vasquez, 2003)

Third person may determine the performance of a NOTE: These three requisites are, therefore, the essential
contract elements of a consensual contract. In real contracts,
however, in addition to the above, the delivery of the
The determination of the performance may be left to a object of the contract is required as a further requisite.
third person. However, his decision shall not be binding
until it has been known to both the contracting parties CONSENT (2005 BAR)
(NCC, Art. 1309). Moreover, the determination made shall

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 Civil Law
It is the concurrence of the wills of the contracting parties ---
with respect to the object and cause, which shall Q: The husband assumed sole administration of the
constitute the contract (De Leon, 2010). family’s mango plantation since his wife worked
abroad. Subsequently, without his wife’s knowledge,
NOTE: Consent is essential to the existence of a contract; the husband entered into an antichretic transaction
and where it is wanting, the contract is non-existent. with a company, giving it possession and
management of the plantation with power to harvest
Requisites of consent (LM-CR) and sell the fruits and to apply the proceeds to the
payment of a loan he got. What is the standing of the
1. Legal capacity of the contracting parties; contract? (2011 BAR)

NOTE: Hence, if any one party to a supposed contract A: It is considered a continuing offer by the parties;
was already dead at the time of its execution, such perfected only upon the wife’s acceptance or the court’s
contract is undoubtedly simulated and false and, authorization.
therefore, null and void by reason of its having been ---
made after the death of the party who appears as one NOTE: The person making the offer may fix the time, place
of the contracting parties therein. The death of a and manner of acceptance, all of which must be complied
person terminates contractual capacity (Milagros De with (NCC, Art. 1321).
Belen Vda. De Cabalu, et. al. v. Sps. Renato Dolores
Tabu and Laxamana, G.R. No. 188417, September 24, Rules on complex offer
2012).
1. Offers are interrelated – contract is perfected if all
2. Manifestation of the conformity of the contracting the offers are accepted
parties; 2. Offers are not interrelated – single acceptance of
each offer results in a perfected contract unless the
3. Parties’ Conformity to the object, cause, terms and offeror has made it clear that one is dependent upon
condition of the contract must be intelligent, the other and acceptance of both is necessary.
spontaneous and free from all vices of consent; and
Rules on advertisements as offers
NOTE: Intelligence in consent is vitiated by error;
freedom by violence, intimidation or undue 1. Business advertisements – not a definite offer, but
influence; and spontaneity by fraud. mere invitation to make an offer, unless it appears
otherwise (NCC, Art. 1325).
4. The conformity must be Real. 2. Advertisement for bidders – simply invitation to make
proposals and advertiser is not bound to accept the
Offer highest or lowest bidder, unless the contrary appears
(NCC, Art. 1326).
An offer is defined as an expression of willingness to
contract on certain terms, made with the intention that it Grounds that would render the offer ineffective
shall become binding as soon as it is accepted by the
person to whom it is addressed (Rabuya, 2017 citing G. H. 1. Death, civil interdiction, insanity or insolvency of
Treitel, The Law of Contract, 10th Ed., p.8). either party before acceptance is conveyed;
2. Express or implied revocation of the offer by the
Elements of a valid offer and acceptance offeree;
3. Qualified or conditional acceptance of the offer,
1. Definite – unequivocal which becomes counter-offer;
2. Intentional 4. Subject matter becomes illegal or impossible before
3. Complete – unconditional acceptance is communicated;
5. Period given to the offeree to signify his acceptance
NOTE: We follow the cognitive theory and NOT the has already lapsed.
mailbox theory. Under our Civil Law, the offer and
acceptance concur only when the acceptance has reached Requisites of a valid acceptance
the knowledge of the offeror (actual knowledge), and not
at the time of sending the acceptance. 1. Must be absolute; a qualified acceptance constitutes
a counter-offer (NCC, Art. 1319).
Requisites of an effective offer 2. No specified form but when the offeror specifies a
particular form, such must be complied with.
1. The one offering must have a serious intention to
become bound by his offer; NOTE: Offer or acceptance, or both, expressed in
2. The terms of the offer must be reasonably certain, electronic form, is valid, unless otherwise agreed by the
definite and complete, so that the parties and the parties (electronic contracts).
court can ascertain the terms of the offer; and
3. The offer must be communicated by the offeror to the An acceptance may be express or implied (NCC, Art. 1320).
offeree, resulting in the offeree’s knowledge of the
offer (Rabuya, 2017). Mirror Image Rule in law on contracts

228
 OBLIGATIONS AND CONTRACTS
e. Upon reaching age of majority – they ratify the
This is a common law concept which states that in order same.
for there to be an acceptance, the offeree must accept the
terms as stated in the offer. Our courts also adhere to the NOTE: Because the law incapacitates them to give their
“mirror-image rule.” Thus, it has been ruled that consent to a contract, the only way by which any one of
acceptance must be identical in all respects with that of those enumerated above can enter into a contract is to act
the offer so as to produce consent of meeting of the minds through a parent or guardian. If this requirement is not
(Rabuya, 2017 citing ABS-CBN v. CA. 301 SCRA 592-593, complied with, the result is a defective contract. If only
1999). one of the contracting parties is incapacitated to give his
consent, the contract is voidable. If both of them are
Period for acceptance incapacitated to give their consent, the contract is
unenforceable [NCC, Art. 1390(1), NCC, Art. 1403(3)].
1. Stated fixed period in the offer
a. Must be made within the period given by the Vices of consent (MI-VUF)
offeror.
b. As to withdrawal of the offer: 1. Mistake
2. IntimidationViolence
GR: It can be made by communicating such 3. Undue influence
withdrawal at any time before the acceptance is 4. Fraud
made
NOTE: A threat to enforce a just or legal claim through a
XPN: When the option is founded upon a competent authority does not amount to intimidation nor
consideration (something paid or promised vitiate consent (NCC, Art. 1335).
since partial payment of the purchase price is
considered as proof of the perfection of the Mistake
contract).
GR: Mistake as a vice of consent refers to mistake of facts
2. No stated period and not of law, thus rendering the contract voidable
a. Offer is made to a person present – acceptance (Jurado, 2010).
must be made immediately.
b. Offer is made to a person absent – acceptance XPN: When mistake of law involves mutual error as to the
may be made within such time that, under legal effect of an agreement when the real purpose of the
normal circumstances, an answer can be parties is frustrate (NCC, Art. 1334).
expected from him.
Requisites:
Persons incapacitated to give consent (DIM)
1. Mistake must be with respect to the legal effect of the
1. Deaf-mutes who do not know how to read and write agreement;
(illiterates); 2. It must be mutual; and
2. Insane or demented persons, unless the contract 3. Real purpose of the parties must have been frustrated.
was entered into during a lucid interval;
3. Minors (NCC, Art. 1327) except: Kinds of mistakes of fact which vitiate consent

a. Contracts for necessaries (NCC, Art. 1489); 1. Error in Re (mistake as to object) [NCC, Art. 1313 (1)].
b. Contracts by guardians or legal representatives a. Error in Corpore (mistake as to the identity of
and the court having jurisdiction had approved the thing)
the same; b. Error in Substantia (mistake as to the substance
c. When there is active misrepresentation on the of the thing)
part of the minor (minor is estopped); c. Error in Quantitae (mistake as to the quantity of
the thing)
NOTE: It is now well settled that d. Mistake as to the conditions of the thing,
misrepresentation by unemancipated minors provided such conditions have principally
with regard to their age when entering into a moved one or both parties to enter into the
contract shall bind them in the sense that they contract
are estopped subsequently from impugning the 2. Error in Persona (mistake as to person) [NCC,Art.
validity of the contract on the ground of 1313(2)].
minority. It is, however, necessary that the
misrepresentation must be active, not merely Mistake as to the identity or qualifications of one of the
constructive (Braganza v. Abrille, 105Phil456, parties will vitiate consent only when such identity or
GR L-12471, April 13, 1959). qualifications have been the principal cause of the
contract. For mistake (as to the qualification of one of the
d. Contracts of deposit with the Postal Savings parties) to vitiate consent, two requisites must concur:
Bank provided that the minor is over 7 years of
age; a. The mistake must be either with regard to the
identity or with regard to the qualification of one of

229
 Civil Law
the contracting parties; and Violence
b. The identity or qualification must have been the
principal consideration for the celebration of the There is violence when in order to wrest consent, serious
contract (The Roman Catholic Church v. Regino or irresistible force is employed. (Art. 1335)
Pante, G.R. No. 174118, April 11, 2012).
--- Requisites of violence
Q: Leonardo is the only legitimate child of the late
spouses Tomasina and Balbino. She only finished 1. Physical force employed must be serious or
Grade three and did not understand English. The irresistible; and
Sebastians, on the other hand, are illegitimate 2. The determining cause for the party upon whom it is
children. She filed an action to declare the nullity of employed in entering into the contract.
the extrajudicial settlement of the estate of her
parents, which she was made to sign without the NOTE: Violence or intimidation shall annul the obligation,
contents thereof, which were in English, explained to although it may have been employed by a third person
her. She claims that her consent was vitiated because who did not take part in the contract (NCC, Art. 1336).
she was deceived into signing the extrajudicial
settlement. Is the extra-judicial settlement of estate of Undue influence
Tomasina valid?
There is undue influence when a person takes improper
A: NO. When one of the parties is unable to read, or if the advantage of his power over the will of another, depriving
contract is in a language not understood by him, and the latter of a reasonable freedom of choice (NCC, Art.
mistake or fraud is alleged, the person enforcing the 1337).
contract must show that the terms thereof have been fully
explained to the former (Art. 1332). Leonardo was not in Circumstances to be considered for the existence of
a position to give her free, voluntary and spontaneous undue influence
consent without having the document, which was in
English, explained to her. Therefore, the consent of 1. Confidential, family, spiritual and other relations
Leonardo was invalidated by a substantial mistake or between the parties;
error, rendering the agreement voidable. The 2. Mental weakness;
extrajudicial partition between the Sebastians and 3. Ignorance;
Leonardo should be annulled and set aside on the ground 4. Financial distress (NCC, Art. 1337).
of mistake (Leonardo v. CA, G.R. No. 125485, September 13,
2004). NOTE: The enumeration is NOT exclusive. Moral
--- dependence, indigence, mental weakness, tender age or
Intimidation other handicap are some of the circumstances to consider
undue influence.
There is intimidation when one of the contracting parties
is compelled by a reasonable and well-grounded fear of an Determination of undue influence
imminent and grave evil upon his person or property, or
upon the person or property of his spouse, descendants The test to determine whether or not there is undue
or ascendants, to give his consent [NCC, Art. 1335(2)]. influence which will invalidate a contract is to determine
whether or not the influence exerted has so overpowered
Requisites of intimidation (CICU) and subjugated the mind of the contracting party as to
destroy his free agency, making him express the will of
1. One of the parties is compelled to give his Consent by another rather than his own (Jurado, 2011).
a reasonable and well-grounded fear of an evil;
2. The evil must be Imminent and grave;
3. It must be Unjust; and Fraud
4. The evil must be the determining Cause for the party There is fraud when through the insidious words or
upon whom it is employed in entering into the machinations of one of the contracting parties the other is
contract (NCC, Art. 1335). induce to enter into a contract which, without them, he
would not have agreed to (NCC, Art. 1338).
NOTE: To determine the degree of the intimidation, the
age, sex and condition of the person shall be borne in mind NOTE: Insidious words refers to a deceitful scheme or
(NCC, Art. 1335). plot with an evil design, or a fraudulent purpose (Pineda,
2000).
Validity of a contract if consent is reluctant
Failure to disclose facts, when there is a duty to reveal
A contract is valid even though one of the parties entered them, as when the parties are bound by confidential
into it against his wishes and desires or even against his relations, constitutes fraud (NCC, Art. 1339).
better judgment. Contracts are also valid even though
they are entered into by one of the parties without hope Requisites of Fraud to vitiate consent
of advantage or profit (Martinez v. Hongkong and 1. Serious fraud; and
Shanghai Banking Corp., G.R. No. L-5496, February 19, 2. Parties must not be in pari delicto. Otherwise, neither
1910). party may ask for annulment (Paras, 2008).

230
 OBLIGATIONS AND CONTRACTS
Kinds of Fraud Santos to believe and conclude that his lease contract was
impliedly renewed and that formal renewal thereof would
1. Fraud in the perfection of the contract be made upon the arrival of Tanya Madrigal. Thus, from
a. Causal fraud (dolo causante) the start, it was known to both parties that, insofar as the
b. Incidental fraud (dolo incidente) agreement regarding the transfer of Santos’ leasehold
right to Samson was concerned, the object thereof relates
2. Fraud in the performance of an obligation (NCC, Art. to a future right. It is a conditional contract, the efficacy of
1170). which depends upon an expectancy the formal renewal of
Requisites: the lease contract between Santos and lessor. The efficacy
a. Fraud, insidious words or machinations must of the contract between the parties was thus made
have been employed by one of the contracting dependent upon the happening of this suspensive
parties; condition (Samson v. CA, G.R. No. 108245, November 25,
b. It must have been material and serious; 1994).
c. It induced the other party to enter into a ---
contract; Acts considered not fraudulent
d. It must be a deliberate intent to deceive or and
induce; 1. The usual exaggerations in trade and the other party
e. Should not have been employed by both had an opportunity to know the facts are not
contracting parties or by third persons; themselves fraudulent (NCC, Art. 1340);
f. The victim suffered damage or injury. 2. A mere expression of an opinion does not signify
fraud, unless made by an expert and the other party
Dolo Causante v. Dolo Incidente had relied on the former’s special knowledge (NCC,
Art. 1341);
DOLO 3. Misrepresentation by a third person does not vitiate
DOLO CAUSANTE
BASIS INCIDENTE consent, unless such misrepresentation has created
(ART. 1338)
(ART. 1344) substantial mistake and the same is mutual (NCC, Art.
1342);
Gravity of 4. Misrepresentation made in good faith is not
Serious in Not serious
Fraud fraudulent but may constitute error (NCC, Art. 1343).
character
Simulation of contract
Efficient cause Not the efficient
Efficient which induces the cause It is the declaration of a fictitious will, deliberately made
Cause party to enter into by agreement of the parties, in order to produce, for the
a contract purposes of deception, the appearance of a juridical act
which does not exist or is different from that which was
Effect on the executed (Tolentino, 2002).
Renders the Does not affect
Status of the contract voidable the validity of the
Contract Kinds of simulation of contract
contract
1. Absolute (simulados) – The contracting parties do not
Annulment with Contract remains intend to be bound by the contract at all, thus the
Remedies damages valid. Remedy is contract is void (NCC, Arts. 1345-1346). In absolute
claim for simulation, there is a colorable contract but it has no
damages substance as the parties have no intention to be
bound by it. The main characteristic of an absolute
--- simulation is that the apparent contract is not really
Q: Santos’ lease contract was about to expire but it desired or intended to produce legal effect or in any
was extended and he continued to occupy the leased way alter the juridical situation of the parties. As a
premises beyond the extended term. Samson offered result, an absolutely simulated or fictitious contract
to buy Santos’ store and his right to the lease. Santos is void, and the parties may recover from each other
stated that the lease contract between him and the what they may have given under the contract (Heirs
lessor was impliedly renewed and that formal of Dr. Mario S. Intac and Angelina Mendoza-Intac v.
renewal thereof would be made upon the arrival of a CA, G.R. No. 173211, October 11, 2012).
certain Tanya Madrigal, based on the letter to him
given by the lessor. When Samson occupied the 2. Relative (disimulados) – The contracting parties
premises, he was forced to vacate for Santos’ failure conceal their true agreement (NCC, Art. 1345); binds
to renew his lease. He filed an action for damages the parties to their real agreement when it does not
against Santos for fraud and bad faith claiming that prejudice third persons or is not intended for any
the misrepresentation induced him to purchase the purpose contrary to law, morals, good customs,
store and the leasehold right. Decide. public order or public policy (NCC, Art. 1346). If the
concealed contract is lawful, it is absolutely
A: NO, Santos was not guilty of fraud nor bad faith in enforceable, provided it has all the essential
claiming that there was implied renewal of his contract of requisites: consent, object, and cause (NCC, Arts.
lease with his lessor. The letter given by the lessor led 1345-1346).

231
 Civil Law
As to third persons without notice, the apparent agreement, we pay P10,000.00 every after (sic) shipment.
contract is valid for purposes beneficial to them. As We had only 2 shipments’; and
to third persons with notice of the simulation, they
acquire no better right to the simulated contract than 5. Petitioners entered into a Forest Consolidation
the original parties to the same. Agreement with other holders of forest concessions on
the strength of the questioned deed of assignment.
The primary consideration in determining the true nature
of a contract is the intention of the parties. Such intention The contemporaneous and subsequent acts of Tiro and
is determined from the express terms of their agreement the Javiers reveal that the cause stated in the first deed of
as well as from their contemporaneous and subsequent assignment is false. It is settled that the previous and
acts (Tating v. Tating Marcella, et al., G.R. No. 155208, simultaneous and subsequent acts of the parties are
March 27, 2007). properly cognizable indicia of their true intention. Where
the parties to a contract have given it a practical
NOTE: If the parties state a false cause in the contract to construction by their conduct as by acts in partial
conceal their real agreement, the contract is only performance, such construction may be considered by the
relatively simulated and the parties are still bound by court in construing the contract, determining its meaning
their real agreement. Hence, where the essential and ascertaining the mutual intention of the parties at the
requisites of a contract are present and the simulation time of contracting. The first deed of assignment is a
refers only to the content or terms of the contract, the relatively simulated contract which states a false cause or
agreement is absolutely binding and enforceable between consideration, or one where the parties conceal their true
the parties and their successors in interest. agreement. A contract with a false consideration is not
--- null and void per se. Under Article 1346 of the Civil Code,
Q: Tiro is a holder of an ordinary timber license a relatively simulated contract, when it does not prejudice
issued by the Bureau of Forestry. He executed a deed a third person and is not intended for any purpose
of assignment in favor of the Javiers. At the time the contrary to law, morals, good customs, public order or
said deed of assignment was executed, Tiro had a public policy binds the parties to their real agreement
pending application for an additional forest (Javier v. CA, G.R. No. L-48194, March 15, 1990).
concession. Hence, they entered into another ---
agreement. Q: On 02 July 1990, by virtue of an Order of Branch 62
of the RTC of Makati City, notice of levy on attachment
Afterwards, the Javiers, now acting as timber license of real property and writ of attachment were
holders by virtue of the deed of assignment entered inscribed on TCTs No. 31444 (452448) and No. 45926
into a forest consolidation agreement with other (452452). Edmundo alleged that as early as 11
ordinary timber license holders. For failure of the September 1989, the properties, subject matter of the
Javiers to pay the balance due under the two deeds of case, were already sold to him by Ricardo, Sr. As such,
assignment, Tiro filed an action against them. Are the these properties could not be levied upon on 02 July
deeds of assignment null and void for total absence of 1990 to answer for the debt of Ricardo, Sr. who was
consideration and non-fulfillment of the conditions? no longer the owner thereof. TMBC alleged, among
other things, that the sale in favor of Edmundo was
A: NO, they are not null and void per se. The parties are to void for being an absolutely simulated contract,
be bound by their real agreement. The true cause or therefore, the properties levied upon were still
consideration of said deed was the transfer of the forest owned by Ricardo, Sr. Discuss the nature of an
concession of private respondent to petitioners for absolutely simulated contract.
P120,000.00. This finding is supported by the following
considerations, viz: A: An absolutely simulated contract, under Article 1346 of
the Civil Code, is void. It takes place when the parties do
1. Both parties, at the time of the execution of the deed of not intend to be bound at all. The characteristic of
assignment knew that the Timberwealth Corporation simulation is the fact that the apparent contract is not
stated therein was non-existent; really desired or intended to produce legal effects or in
any way alter the juridical situation of the parties. Thus,
2. In their subsequent agreement, private respondent where a person, in order to place his property beyond the
conveyed to petitioners his inchoate right over a forest reach of his creditors, simulates a transfer of it to another,
concession covering an additional area for his existing he does not really intend to divest himself of his title and
forest concession, which area he had applied for, and his control of the property; hence, the deed of transfer is but
application was then pending in the Bureau of Forestry a sham. Lacking, therefore, in a fictitious and simulated
for approval; contract is consent which is essential to a valid and
enforceable contract (The Manila Banking Corporation v.
3. Petitioners, after the execution of the deed of Edmundo Silverio, G.R. No. 132887, August 11, 2005).
assignment, assumed the operation of the logging ---
concessions of private respondent ;

4. The statement of advances to respondent prepared by OBJECTS, CAUSE AND FORM OF CONTRACTS
petitioners stated: "P55,186.39 advances to L.A. Tiro be
applied to succeeding shipments. Based on the
OBJECT

232
 OBLIGATIONS AND CONTRACTS
1. Exist;
It is the subject matter of the contract. It can be a thing, 2. Be true; and
right or service arising from a contract. 3. Be licit.

Requisites of an object (DELiCT) NOTE: Every contract is presumed to have a cause and
such cause is lawful.
1. Determinate as to kind (even if not determinate,
provided it is possible to determine the same without Kinds of cause
the need of a new contract);
2. Existing or the potentiality to exist subsequent to the 1. Cause of onerous contracts – the prestation or
contract; promise of a thing or service by the other.
3. Must be LIcit; e. g. Contract of Sale.
4. Within the Commerce of man; and 2. Cause of remuneratory contracts– the service or
5. Transmissible. benefit remunerated.
e. g. Donation in consideration of a past service
NOTE: The most evident and fundamental requisite in which does not constitute a demandable debt.
order that a thing, right or service may be the object of a 3. Cause of gratuitous contracts – the mere liberality of
contract, is that it should be in existence at the moment of the donor or benefactor.
the celebration of the contract, or at least, it can exist 4. Accessory – identical with cause of principal
subsequently or in the future (De Leon, 2010). contract, the loan which it derived its life and
existence
Object of contracts e.g. mortgage or pledge.

GR: All things or services may be the object of contracts. Complementary contracts construed together
doctrine
XPNs:
1. Things outside the commerce of men (NCC, Art. An accessory contract must be interpreted with its
1347); principal contract. The provisions must be construed
2. Intransmissible rights; together to arrive at their true meaning. Certain
3. Future inheritance, except in cases expressly stipulations cannot be segregated and then made to
authorized by law; control. This doctrine closely adheres to the spirit of Art.
4. Services which are contrary to law, morals, good 1374 of the Civil Code which states that the various
customs, public order or public policy; stipulations of a contract shall be interpreted together,
5. Impossible things or services; and attributing to the doubtful ones that sense which may
6. Objects which are not possible of determination as result from all of them taken jointly (Spouses Rigor v.
to their kind. Consolidated Orix Leasing and Finance Corporation, G.R.
No. 136423, August 20, 2002).
Exceptions to the rule that no person can enter into a
contract with regard to future inheritance Cause v. Motive

1. Under Art. 130 of the Family Code, which allows the

BASIS CAUSE MOTIVE
future spouses to give or donate to each other in their
marriage settlement their future property to take
As to proximate Direct and most Indirect or remote
effect upon the death of the donor and to the extent
reason in a proximate reason reasons.
laid down by the provisions of the NCC relating to
contract of a contract.
testamentary succession; and
2. Under Art. 1080 of the Code, which allows a person
to make a partition of his estate among his heirs by As to the kind of Objective and Psychological or
an act inter vivos, provided that the legitime of the reason in the juridical reason of purely personal
compulsory heirs is not prejudiced (Jurado,2009; De contract contract. reason.
Leon 2010).

NOTE: Except in cases authorized by law, future Legality or Legality or

inheritance cannot be an object of contract because its As to the legal illegality of cause illegality of motive
extent, amount or quantity is not determinable (Sta. effect to the affects the does not affect the
Maria, 2003). contract existence or existence or
validity of the validity of
CAUSE contract. contract.

It is the essential and impelling reason why a party Cause is always Motive differs for
assumes an obligation. As to the parties the same for each each contracting
contracting party. party.
Requisites of a cause

It must:

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 Civil Law
a. Personal property – if value exceeds 5,000, the
As to its Always known May be known to donation and acceptance must both be written
knowability the other (NCC, Art. 748).
b. Real property:
i. Donation must be in a public instrument,
NOTE: The motive may be regarded as the cause when the specifying therein the property donated and
realization of such motive or particular purpose has been value of charges which donee must satisfy.
made a condition upon which the contract is made to ii. Acceptance must be written, either in the
depend (Phil. National Construction Corp. v. CA, 272 SCRA same deed of donation or in a separate
183, 1997). instrument.
iii. If acceptance is in a separate instrument, the
Rules relating to cause on contracts donor shall be notified thereof in authentic
form, and this step shall be noted in both
1. Absence of cause – confers no right and produces no instruments (NCC, Art. 749).
legal effect.
2. Failure of cause – does not render the contract void. 2. Partnership where real property contributed
3. Illegality of cause – contract is null and void. a. There must be a public instrument regarding the
4. Falsity of cause – contract is void; unless the parties partnership;
show that there is another cause which is true and b. The inventory of the realty must be made, signed
lawful. by the parties and attached to the public
5. Lesion or inadequacy of cause – does not instrument (NCC, Art. 1773).
invalidate the contract, unless:
a. there is fraud, mistake, or undue influence; Antichresis - the amount of the principal and
b. when the parties intended a donation or some interest must be in writing (NCC, Art. 2134).
other contract; or
c. in cases specified by law 3. Agency to sell real property or an interest therein
e.g. contracts entered by guardian when ward - authority of the agent must be in writing (NCC, Art.
suffers lesion of more than 25% and with court 1874).
approval, otherwise, if there is no approval, the 4. Stipulation to charge interest - interest must be
contract is void regardless of the amount of stipulated in writing (NCC, Art. 1956).
lesion. 5. Stipulation limiting common carrier's duty of
--- extraordinary diligence to ordinary diligence:
Q: May a moral obligation constitute a sufficient cause a. Must be in writing, signed by shipper or owner;
to support an onerous contract? b. Supported by valuable consideration other than
the service rendered by the common carrier;
A: Where the moral obligation arises wholly from ethical c. Reasonable, just and not contrary to public
considerations, unconnected with any civil obligation, policy (NCC, Art. 1744).
and as such is demandable only in conscience, and not in 6. Chattel mortgage - personal property must be
law, it cannot constitute a cause to support an onerous recorded in the Chattel Mortgage Register. (NCC, Art.
contract, but where such moral obligation is based upon a 2140).
previous civil obligation which has already been barred
by the statute of limitations at the time when the contract Contracts which must be in writing to be valid
is entered into, it constitutes a sufficient cause or
consideration to support said contract (Villaroel v. 1. Donation of personal property whose value exceeds
Estrada, 71 Phil. 14, GR L-47362, December 19, 1940). five thousand pesos (NCC, Art. 748). – the donation
--- and acceptance must be in writing.
FORMALITY 2. Sale of a piece of land or any interest therein through
an agent (NCC, Art. 1874). – the authority of the agent
Rules on the form of contracts shall appear in writing.
3. Agreements regarding payment of interest in
GR: Form is not required in consensual contracts. contracts of loan (NCC, Art. 1956).
4. Antichresis – the amount of the principal and the
XPNs: When the law requires a contract be in writing for interest shall be specified in writing (NCC, Art. 2134;
its: Jurado, 2011).
1. Validity (formal contracts);
2. Enforceability (under Statute of Frauds); or Contracts which must appear in a public document
3. For the convenience of the parties
1. Donation of real properties (NCC, Art. 719);
NOTE: The parties may compel each other to reduce the 2. Partnership where immovable property or real
verbal agreement into writing (2006 BAR). rights are contributed to the common fund (NCC,
Arts. 1171 & 1773);
Formalities required in specific contracts 3. Acts and contracts which have for their object the
creation, transmission, modification or
1. Donations extinguishment of real rights over immovable
property; sale of real property or of an interest

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 OBLIGATIONS AND CONTRACTS
therein is governed by Arts. 1403, No. 2, and 1405 when it was fi rst generated in its final form;
[NCC, Art. 1358(1)]; and
4. The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal That document is capable of being displayed to the person
partnership of gains [NCC, Art. 1358(2)]; to whom it is to be presented. It is expressly provided, that
5. The power to administer property or any other no provision of the Act shall apply to vary any and all
power which has for its object an act appearing or requirements of existing laws on formalities required in
which should appear in a public document or should the execution of documents for their validity.
prejudice a third person; [NCC, Art. 1358(3)];
6. The cession of actions or rights proceeding from an
act appearing in a public document [NCC, Art. KINDS OF CONTRACTS
1358(4)].

Contracts that must be registered According to perfection or formation:

1. Consensual contracts which are perfected by the
1. Chattel mortgages (NCC, Art. 2140). mere meeting of the minds of the parties (NCC, Art.
1305). (2005 BAR)
NOTE: In accordance with Article 2125 of the Civil e.g. Sale, Lease.
Code, an unregistered chattel mortgage is binding 2. Real contracts are those which require for their
between the parties because registration is perfection both the consent of the parties and the
necessary only for the purpose of binding third delivery of the object by one party to the other.
persons (Filipinas Marble Corporation v. Intermediate
e.g. creation of real rights over immovable property
Appellate Court, G.R. No. L-68010, May 30, 1986). must be written, deposit and pledge.
3. Solemn contracts – contracts which must appear in
2. Sale or transfer of large cattle (Cattle Registration writing, such as:
Act).
a. Donations of real estate or of movables if the
ELECTRONIC COMMERCE ACT of 2000 value exceeds P5,000;
(RA No. 8792) b. Partnership to which immovables are
contributed;
Legal Recognition of Electronic Documents c. Contract of antichresis – requires the amount
of principal and interest be specified;
Under Section 7 of the Act, electronic documents shall d. Sale of piece of land or interest therein is
have the legal effect, validity or enforceability as any other through an agent;
document or legal writing, and — e. Stipulation to charge interest;
f. Stipulation limiting common carrier's duty of
(a) Where the law requires a document to be in writing, extraordinary diligence to ordinary diligence;
that requirement is met by an electronic document if g. Chattel mortgage; or
the said electronic document maintains its integrity h. Transfer of large cattle (Sec. 22,
and reliability and can be authenticated so as to be Act No. 1147; NCC, Art. 1581).
usable for subsequent reference, in that
According to the degree of dependence:
1. Principal – that which can exist independently of ther
(i) The electronic document has remained contracts;
complete and unaltered, apart from the e. g. contract of loan.
addition of any endorsement and any 2. Accessory – that which cannot exist without a valid
authorized change, or any change which principal contract;
arises in the normal course of e. g. guaranty, surety, pledge, mortgage.
communication, storage and display; and 3. Preparatory – that which is not an end by itself but
only a means for the execution of another contract.
(ii) The electronic document is reliable in the e. g. contract of agency as agency does not stop with
light of the purpose for which it was the agency because the purpose is to enter into other
generated and in the light of all relevant contracts (Rabuya, 2017).
circumstances.
According to their relation to other contracts:
(b) Paragraph (a) applies whether the requirement 1. Preparatory Contracts – are those which have for
therein is in the form of an obligation or whether the their object the establishment of a condition in law
law simply provides consequences for the document which is necessary as a preliminary step towards the
not being presented or retained in its original form. celebration of another subsequent contract.
e.g. Partnership, Agency.
(c) Where the law requires that a document be 2. Principal Contracts – are those which can subsist
presented or retained in its original form, that independently from other contracts.
requirement is met by an electronic document if — e.g. Sale, Lease.
(i) There exists a reliable assurance as to the
integrity of the document from the time

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 Civil Law
3. Accessory Contracts – those which can exist only as a Requisites in reformation of instruments
consequence of, or in relation with, another prior
contract. 1. Meeting of the minds to the contract;
e.g. Pledge, Mortgage. 2. True intention is not expressed in the instrument;
3. By reason of: (MARFI)
According to their form: a. Mistake;
1. Common or Informal Contracts – are those which b. Accident;
require no particular form. c. Relative simulation;
e.g. Loan. d. Fraud; or
2. Special or Formal Contracts – are those which require e. Inequitable conduct
a particular form.
e.g. Donations, Chattel Mortgage. 4. Clear and convincing proof of MARFI.

According to their purpose: NOTE: When there is no meeting of the minds, the proper
1. Transfer of Ownership remedy is annulment and not reformation (Pineda, 2000).
e.g. Sale. The fundamental distinction between reformation of an
2. Conveyance of Use instrument and annulment of a contract is that the first
e.g. Usufruct, Commodatum. presupposes a perfectly valid contract in which there has
3. Rendition of Services been a valid meeting of the minds of the contracting
e.g. Agency. parties while the second is based on a defective contract
in which there has been no meeting of the minds because
According to the nature of the vinculum which they the consent is vitiated (Jurado, 2010).
produce:
1. Unilateral Contracts – are those which give rise to an Compromise Agreements
obligation only to one of the parties.
e.g. Commodatum. Q: The respondent-heirs inherited from their parents
2. Bilateral Contracts – are those which give rise to two parcels of land. The properties became subject to
reciprocal obligations for both parties. Operation Land Transfer (OLT) and were valued by
e.g. Sale. the Land Bank and the Department of Agrarian
Reform (DAR) at P10,000.00/hectare. The heirs
According to their cause: asked that a final valuation of the properties be
1. Onerous pegged at P1, 800, 000.00, based on Administrative
e. g. Sale. Order No. 61, Series of 1992 and Republic Act No.
2. Gratuitous 6657. While the case was pending before the Court, a
e. g. commodatum so-called Joint Manifestation and Motion was
3. Remuneratory submitted by Land Bank containing the approval of
the revaluation of the properties pursuant to DAR
According to the risks involved: A.O. No. 1 which was communicated to the
1. Commutative Contracts – are those where each of the respondent-heirs for their unconditional acceptance.
parties acquire an equivalent of his prestation and Subsequently, Land Bank submitted a Manifestation,
such equivalent is pecuniarily appreciable and informing the Court that the parties had filed by
already determined from the moment of the registered mail their Joint Motion to Approve the
perfection of the contract. Attached Agreement, submitting their agreement. Is
e.g. Lease. the agreement executed by the parties a judicial
2. Aleatory Contracts – are those which are dependent compromise? Distinguish judicial from extrajudicial
upon the happening of an uncertain event, thus, compromise.
charging the parties with the risk of loss or gain.
e.g. Insurance. A: YES. Under Article 2028 of the Civil Code, a
compromise is a contract whereby the parties, by making
According to their names or norms regulating them: reciprocal concessions, avoid litigation or put an end to
1. Nominate Contracts – are those which have their own one already commenced. Accordingly, a compromise is
name and individuality, and are regulated by either judicial, if the objective is to put an end to a pending
provisions of law. litigation, or extrajudicial, if the objective is to avoid a
e.g. Sale (2003 BAR). litigation. As a contract, a compromise is perfected by
2. Innominate Contracts – are those which lack name or mutual consent. However, a judicial compromise, while
individuality, and are not regulated by special immediately binding between the parties upon its
provisions of law. execution, is not executory until it is approved by the
court and reduced to a judgment. The validity of a
compromise is dependent upon its compliance with the
REFORMATION OF INSTRUMENTS requisites and principles of contracts dictated by law.
Also, the terms and conditions of a compromise must not
be contrary to law, morals, good customs, public policy
and public order. A review of the terms of the agreement
It is a remedy to conform to the real intention of the
indicates that it is a judicial compromise because the
parties due to mistake, fraud, inequitable conduct,
parties intended it to terminate their pending litigation by
accident (NCC, Art. 1359).

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