Obli 1 6

ANSWER OBLI CON
G-5
1. A valid contract that, because of some technical defect, cannot be fully enforced.
A. Rescissible Contracts
B. Voidable Contracts
C. Void and Inexistent Contracts
D. Unenforceable Contracts
2. Is descriptive of statutes which requires certain classes of contracts to be in writing
A. Absolute Simulation
B. Statute of Limitations
C. Statutes of Fraud
D. Prescription
3. An action to rescind is founded upon and presupposes the existence of a contract.
4. There is a colorable contract but without any substance, because the parties have no
intention to be bound by it.
D. Public Policy
5. Defined as that principle of the law which holds that no subject ir citizen can lawfully do
that which has a tendency to be injurious to the public against the public good.
D. Public Policy
6. Is one which has no force and effect from the very beginning.
7. Parties to void agreement cannot expect the aid of the law; the courts leave them as they
are.
A. Ratification
B. Annulment
C. In pari delicto
D. Rescission
8. The parties state a false cause in the contract to conceal their real agreement.
A. Relative Simulation
B. Absolute Simulation
C. Complete Simulation
D. Mixed Simulation
9. In equal fault means
A. Ratification
B. Annulment
C. In pari delicto
D. Rescission
10. May be defined as one which lacks, absolutely either in fact or in law, one some of the
elements which are essential for its validity.
True or False
1. An authorized contracts those who entered into in the name of another person by one who
has been given no authority or legal representation or who has acted beyond his powers.
FALSE
2. Statute of contacts is descriptive of statutes which require certain classes of contracts to be
in writing. FALSE
3. Statutes of Fraud only applies to executory to completed, executed or partially
consummated contracts. FALSE
4. Statutes of Fraud only applies to executory, not to completed, executed or partially
consummated contracts. TRUE
5. An unauthorized contracts those who entered into in the name of another person by one
who has been given no authority or legal representation or who has acted beyond his powers.
TRUE
6. Statute of Fraud is descriptive of statutes which require certain classes of contracts to be in
writing. TRUE
7. Stipulations authorizing the imposition of iniquitous or unconscionable interest are
contrary to morals. TRUE
8. Unenforceable contracts cannot be assailed by third persons. TRUE
9. Unenforceable contracts can be assailed by third persons. FALSE
10. The action for annulment must be brought within four years from the time the
intimidation, violence or undue influence ceases. TRUE
11. By its very nature, annulment contemplates a contract which is voidable, that is, valid
until annulled. TRUE
12. When both of the contracting parties is at fault, he cannot recover what he has given by
reason of the contract, or ask for the fulfillment of what has been promised him. FALSE
13. Where one of the parties to an illegal contract is incapable of giving consent, the courts
may, if the interest of justice so demands allow recovery of money or property delivered by
the incapacitated person. TRUE
14. Incase of a divisible contract, if the illegal terms can be separated from the legal ones, the
latter may be enforced. TRUE
15. An action for the declaration of nullity of contract is imprescriptible. TRUE
G-3
1. The rescission has the effect of abrogating the contract in all parts. – TRUE
2. Rescission of a contract will be permitted for a slight or casual breach, but only for
such substantial and fundamental breach – FALSE
3. Subsidiary Remedy doesn't defined as the "exhaustion of all remedies by the

prejudiced creditor to collect claims due him before rescission is resorted to." -FALSE
4. Article 1383 is inapplicable in New Civil Code of the Philippines – TRUE

5. Ratification requires the conformity of the contracting party who has no right to bring
the action for annulment – FALSE
6. Ratification cleanses the contract from all its defects from the moment it was
constituted – TRUE
7. the action for annulment of contract shall be extinguished when the thing which is the
object thereof is lost through the fraud or fault of the person who has a right to
institute the proceedings. FALSE
8. As long as one of the contracting parties restore what in virtue of the decree of
annulment he is bound to return, the other cannot be compelled to comply with what
is incumbent upon him. FALSE
9. 9.In Article 1394 Ratification may be effected by the guardian of the capacitated
person. TRUE
10. In article 1391 states that the action for annulment shall be brought within four years
1. A person, usually a minor, who is under a guardian's charge or protection.

A. Ward
B. Absentee
C. Debtor
D. Obligor
Answer: A. WARD
2. It is a subsidiary action based on injury to the plaintiff's economic interest as described in

Articles 1380 and 1381.
B. Rescind
C. Rescission
D. Insolvency
Answer: C. RESCISSION
3. Contracts validly agreed upon may be rescinded in the cases established by law.
A. Art. 1384
B. Art. 1380
C. Art. 1381
D. Art. 1383
Answer: B. ART. 1380
4. the act or means by virtue of which efficacy is given to a contract which suffers from a
vice of curable nullity.
A. Reformation
B. Interpretation
C. Ratification
D. Annulment
Anwers. RATIFICATION
5. Rescission shall be only to the extent necessary to cover the damages caused.
a. Article 1385
b. Article 1386
c. Article 1384
d. Article 1387
Answer - Article 1384
6. Rescission referred to a number 1 and 2 of article 1381 shall not take place with respect to
contracts approved by the court.
a. Article 1387
b. Article 1380
c. Article 1383
d. Article 1386
Answer- Article 1386
7. ARTICLE 1186. The condition shall be deemed fulfilled when the obligor ____ _____ its
______.
a. Voluntarily, Prevents, Fulfillment
b. Contemplated, Prevents, Obligation
c. Voluntarily, Fulfilled, Conditions
d. Contemplated, Fulfilled, Obligation
Answer - Voluntarily, Prevents, Fulfillment
8. A person who disappears from his domicile, his whereabouts being is unknown, and
without leaving an agent to administer his property.
A. Insolvency
B. Ward
C. Absentee
D. Debtor
Answer: C. ABSENTEE
9. Payments made in a state of insolvency for obligations to whose fulfillment the debtor
could not be compelled at the time they were effected, are also rescissible.
A. Art. 1399
B. Art. 1400
C. Art. 1390
D. Art. 1382
Answer: D. ART. 1382
10. It pertain to rescission where creditors or even third persons not privy to the contract can
file an action due to lesion or damage as a result of the contract.
A. Art. 1385 and Art. 1387
B. Art. 1390 and Art. 1391
C. Art. 1400 and Art. 1401
D. Art. 1381 and Art. 1383
Answer: D. ART. 1381 and ART. 1383

11. It means to declare a contract void at its inception and to put an end to it as though it
never was.
A. Rescission
B. To Rescind
C. Voidable
D. Void
Answer: B. TO RESCIND
12. Are existent, valid, and binding although they can be annulled because of want of
capacity or vitiated of one of the parties, but before annulment, they are effective and
obligatory between parties.
A. Voidable or Annullable Contracts
B. Rescissible Contracts
C. Void Contracts
D. None of the above
Answer: A. VOIDABLE OR ANNULLABLE CONTRACTS
13. The following are the meaning of Rescission, except;

A. The basis here is lesion (damage)
B. The defect here is external or extrinsic
C. The action is subsidiary
D. The action is principal
Answer: D. THE ACTION IS PRINCIPAL
14. The following are the meaning of Annulment, except;

A. The action is principal
B. The action is subsidiary
C. Here, the defect is presupposed
D. To prevent annulment, ratification is required
Answer: B. The action is subsidiary
15. Article 1337 defines the concept of what?

A. Due Influence
B. Undue Influence
C. All of the above
D. None of the above
Answer: B. UNDUE INFLUENCE
1. When the entire obligation is extinguished.

a. Mortis causa
b. Implied
c. Total
d. Partial
2. It refers to that which constituted by agreement of the obligee and the obligor.
a. Mortis causa
b. Partial
c. Express
d. Inter vivos
3. If the obligation is __ in the sense that the object thereof is designated merely by its class
or genus without any particular designation or physical segregation from all others of the
same class.
a. Specific
b. Generic
c. Partial
d. Delay
4. When the service has become so difficult as to be be manifestly beyond the contemplation
of the parties, the obligor may also be released therefrom, in whole or in part.
a. Art. 1265
b. Art. 1266
c. Art. 1267
d. Art. 1268
5. The debtor in obligations to do shall alao be released when the prestation becomes legally
or physically impossible without the fault of the obligor.
a. Art. 1265
b. Art. 1266
c. Art. 1267
d. Art. 1268
6. It is a normal business risk for those engaged in the repair of the motor vehicles.
a. Human trafficking
b. Carnapping
c. Money laundering
d. Drug trafficking
7. When it is made in accordance with the formalities prescribed by law for donations.
a. Implies
b. Express
c. Total
d. Partial
8. The obligation having been extinguished by the loss of the thing, the creditor shall have all
the rights of action which the debtor may have against third persons by reason of the loss.
a. Art. 1268
b. Art. 1269
c. Art. 1270
d. Art. 1271
9. The right to bring a specific case to court.
a. Condonation
b. Remission
c. Right of action
d. Total
10. It is the act of depositing the thing due with the court or judicial authorities.
a. Tender
b. Consignation
c. Tender of payment
d. Cession
TRUE/FALSE
1. Payment to a person who is incapacitated to administer his property shall be not valid
if he has kept the thing delivered, or insofar as the payment has been beneficial to
him. T
2. Extinguishment is the destruction of a right contract. T
3. The rule is that the creditor is bound to accept payment by a third person who has no
interest in the fulfillment of the obligation. F
4. The rule is that a receipt of payment is the best evidence of the fact of payment. T
5. Payment made in good faith to any person in possession of the credit shall release the
debtor. T
6. Payment means not only the delivery of money but also the performance, in any other
manner, of an obligation. T
7. The debtor is not bound to accept payment or performance by a third person who has
no interest in the fulfillment of the obligation, unless there is a stipulation to the
contrary. F
8. In subrogation, recourse can be had to the mortage or guaranty or penalty. T
9. The debtor's right to apply payment is mandatory. F
10. As a rule, payment by an incapacitated person is valid. T
11. The expenses of consignation when property made, shall be charge against the
creditor. T
12. The debt procedures interest, payment of the principal shall not be deemed to have
been made until the interests have been covered. T
13. Confusion does not extinguish a joint obligation except as regards the share
corresponding to the creditor or debtor in whom the two characters concur. T
14. The renunciation of the principal debt shall extinguish the accessory obligations but
the waiver of the latter shall leave the former in force. T
15. In an obligation to deliver a generic thing, the loss or destruction of anything of the
same kind does extinguish the obligation. F
G-6
1. The rule is that a construction that would render a provision inoperative should be avoided;
instead apparently inconsistent provisions should be reconciled whenever possible as parts of
a coordinated and harmonious whole - T
2. The usage or custom of the place shall be borne in mind in the interpretation of the
ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily
established. - T
3. The interpretation of abscure words or stipulations in a contract shall favor the party who
caused the obscurity. -F
4. In order to judge the intention of the contracting parties, only their preceding acts shall be
principally considered. - F
5.The denomination given by the parties in their contract is conclusive of the nature of the
contents. - F
6. The previsions of a contract should not be read in isolation from the rest of the instrument.
-T
7. It is a cardinal rule in contract interpretation that the ascertainment of the intention of the
contracting parties is to be discharged by looking to the words they used to project that
intention in their contract, that is, all the words, not just a particular word or two, and words
in context, not words standing alone. - T
8. When it is absolutely impossible to settle doubts, and the doubts refer to incidental
circumstances of a gratuitous contract, the least transmission of rights and interests shall
prevail. -T
9. A contract provision is ambiguous if it is susceptible of two reasonable alternative
interpretation. -T
10. It is a cardinal rule in the interpretation of the contracts that the intention of the parties
shall be accorded secondary consideration. -F
MULTIPLE CHOICES
1. Those contracts which are perfected by the mere agreement of the parties.
a. Formal
b. Real
c. Consensual
d. Principal
2. An instrument authenticated by a notary public or a competent public official with the
formalities required by law.
a. Private document
b. Memorandum of understanding
c. Public document
d. Written of agreement
3. Those contracts which require not only the consent of the parties for their perfection, but
also the delivery of the object by any one party to the other.
a. Formal
b. Real
c. Consensual
d. Principal
4.Is the act of making intelligible what was before not understood, ambiguous, or not
obvious.
a. Annulment
b. Reformation
c. Ratification
d. Interpretation
5. Is that remedy in equity by means of which a written instrument is made or construed so as
to express or conform to the real intention of the parties.
a. Annulment
b. Ratification
c. Reformation
d. Interpretation
6. Is a remedy in equity whereby a written instrument is made or construed so as to express or
conform to the real intention of the parties where some error or mistake has been committed.
a. Annulment
b. Reformation
c. Construction
d. Interpretation
7. There shall be no reformation in the following cases, except:
a. Memorandum of agreement
b. Wills
c. Simple donations inter vivos
d. When the real agreement is void
8. Is the determination of the meaning attached to the words written or spoken which make
the contract.
a. Annulment
b. Reformation
c. Interpretation
d. Ratification
9. The intent of the parties to an instrument is “embodied in the writing itself, and when the
words are clear and unambiguous the intent is to be discovered only from the express
language of the agreement.”
a. Four courners rule
b. Ambiguity rule
c. Reformation rule
d. Plain meaning rule
10. A principle which allows courts in some cases to search beneath the semantic surface for
clues to meaning.
a. Plain meaning
b. Four courners rule
c. Ambiguity rule
d. Reformation rule
11. An accessory contract must be read in its entirety and together with the principal
agreement.
a. No-segregation principle
b. No-ambiguity principle
c. Not clear principle
d. No-interpretation principle
12.It is the “why” of a contract, the essential reason which moves the contracting parties to
enter into the contract.
a. Consent
b. Object
c. Cause
d. None of the above
13.There shall be no reformation in the following cases:
a. Simple donation inter vivos where no condition is imposed
b. Wills
c. When the real agreement is void
d. All of the above
14. As to how contracts are perfected, it may be classified into:
a. Consensual contracts
b. Real contracts
c. Formal contracts
d. All of the above
15.The examples of this contract are loan, pledge, deposit and commodatum.
a. Consensual contracts
b. Real contract
c. Formal contracts
d. All of the above
G-2
TRUE OR FALSE
1. Compensation shall be proper when one of the debts arises from a depositum or from the
obligation of a depository or of a bailee in commdatum. -F
2. As a general rule, no form of words or writhing is necessary to give effect to a novation. -T
3. A debt is an amount actually ascertained. -T
4. Novation is never presumed, and the animus novandi, must appear by express agreement
of the parties, or by their acts that are too clear and unmistakable. -T
5. Compensation may be total or partial. When the two debts are of the same amount, there is
partial compensation. -F
6. In compensation, there must be two persons, who, in their own right, are creditors and
debtor of each other. -T
7. In confusion, there are two persons in who is merged the qualities of creditor and debtor.-F
8. Conventional compensation occurs when the parties agree to the mutual extinguishment of
their credits or to compensate their mutual obligations even in the absence of some of the
legal requisites. -T
9. Neither can compensate be set up against a creditor who has a claim for support due by
gratuitous title. -T
10. Debts can be compensated if one of the debts consists in civil liability arising from penal
offense. - F
MULTIPLE CHOICES
1. If one of the parties to suit over an obligation has a claim for damages against the other, the
former may set it off by proving his right to said damamges and the amount thereof.
a. Extrajudicial compensation
b. Judicial compensation
c. Conventional compensation
d. Voluntary compensation
2. The following debts cannot be compensated, except:
a. Contract arising from a contract of depositum
b. Contract arising from contract of commodatum
c. Contract arising from contract of support
d. Contract arising from contract mutuum
3. Is constituted from the moment a person receives a thing belongings to another, with the
obligation of safely keeping it and of returning the same.
a. Contract of deposit
b. Contract of surety
c. Contract of guaranty
d. Contract of loan
4. One of the parties delivers to another, either something not consumable so that the latter
may use the same for a certain time and return it.
a. Contract of deposit
b. Contract of guaranty
c. Contract of commodatum
d. Contract of loan
5. Obligations may be modified by:
a. Changing their object or principal conditions
b. Substituting the person of the debtor
c. Subrogating a third person in the rights of the creditor
6. Is the extinguishment of an obligation by the substitution or change of the obligation by
subsequent one which extinguishes or modifies the first, either by changing the object or
principal conditions, or by substituting another in place of the debtor, or by subrogatoring a
third person in the rights of the creditor.
a. Condonation
b. Novation
c. Merger of rights
d. Compensation
7. Is the meeting I the same person of the qualities of creditor and debtor with respect to one
and the obligation.
a. Condonation
b. Confusion
c. Compensation
d. Novation
8. Is a claim which has been formally passed upon by the highest authority.
a. Debt
b. Payable
c. Liability
d. Claim
9. Occurs when the parties agree to the mutual extinguishment of their credits or to
compensate their mutual obligations even in the absence of some of the legal requisites.
a. Conventional compensation]
b. Involuntary compensation
c. Legal compensation
d. Illegal compensation
10. In order that a novation can take place, the concurrence of the following requisites are
indispensable, except:
a. There must be a previous void obligation
b. There must be an agreement of the parties concerned to a new contract
c. There must be extinguishment of the old contract
d. There must be the validity of the new contract
11. Is made either by changing the object or the principal conditions?
a. Personal novation
b. Real novation
c. Subjective novation
d. Mixed novation
12. When the old obligation subsists to the extent that it remains compatible with the
amendatory agreement.
a. Total novation
b. Extinctive novation
c. Modificatory novatiom
d. Mixed novation
13. The debtors offers, and the creditor accepts, a third person who consents to the
substitution and assumes the obligation
a. Delegacion
b. Expromision
c. Subrogation
d. Delegatario
14. Means the original debtor.
a. Delegacion
b. Delegante
c. Delegatorio
15. Novation by substituting the person of the debtor or subrogating a third person to the
rights of the creditor.
a. Objective novation
b. Subjective novation
c. Real novation
d. Mixed novation
ALL ANSWERS ARE TRUE
1.Contracts are law between the parties, and they are bound by its stipulations. Answer:
2. The determination of the performance may be left to a third person whose decision shall not be
binding until it has been made known to one of the contracting parties. Answer:
3. Once the minds of the contracting parties meet, a valid contract exists, whether it is reduced to
writing or not. Answer:
4. Contracts agreed to in a state of drunkenness or during a hypnotic spell is voidable. Answer:
5. A contract of lease is generally transmissible to the heirs of the lessor or lease. Answer:
6. Contracts entered into during a lucid interval are valid. Answer:
7. When all the essential requisites are present, contract is obligatory in whatever form it may have
been entered into. Answer:
8. In order that mistake may invalidate consent, it should refer to the substance of the thing which is
the object of the contract. Answer:
9. A voidable contract produces no effect either against or in favor of anyone and cannot be ratified.
Answer:
10. A mere expression of an opinion does not signify fraud. Answer:
M-CHOICES
1.Those which are perfected by the mere agreement of the parties.
A. Formal
B. Real
C. Consensual
D. Principal
2. Is constituted from the moment a person receives a thing belonging to another with the obligation
of safely keeping it and of returning the same.
A. Pledge
B. Deposit
C. Formal contract
D. Commodatum
3.Any third person who induces another to violate his contract shall be liable for damages to the
other contracting party.
A. Quasi interference
B. Delict interference
C. Legal interference
D. Tort interference
4.Those which can subsist independently from other contracts and whose purpose can be fulfilled
by themselves.
A. Prepatory
B. Accessory
C. Formal
D. Principal
5. Those which have their own individuality and are regulated by special provisions of law.
A. Nominate
B. Unilateral
C. Innominate
D. Gratuitous
6. It is a meeting of minds between two persons whereby one hinds himself, with respect to the
other, to give something or to render some service.
A. Law
B. Contract
C. Obligation
D. Memorandum agreement
7. Those which are perfected by the mere agreement of the parties.
A. Consensual contract
B. Real contract
C. Formal contract
D. Unilateral contract
8. An imperfect promise which is merely an offer.
A. Consent
B. Policitacion
C. Acceptance
D. Option:
9.A deception used by one party prior to or simultaneous with the contract, in order to secure the
consent of the other. Needless to say, the deceit employed must be serious.
A. Fraud
B. Causal fraud
C. Incidental fraud
D. Malice
10. There is a colorable contract but it has no substance as the parties have no intention to be bound
by it.
A. Relative sumulation
B. Absolute simulation
C. Real contract
D. Personal contract
11. Is manifested by the meeting of the offer and the acceptance upon the thing and the cause
which are to constitute the contract.
A. Offer
B. Acceptance
C. Perfection
D. Consent:
12. A brief period during which an insane person regains sanity sufficient to have the legal capacity
to contract and act on his or her own behalf.
A. Insanity
B. Dementia
C. Lucid interval
D. Incapacity
13. When the contract lacks one of the essential elements, the contract is:
A. Viodable
B. Rescissible
C.Void
D. All of the above
14. Are those which are derived from the nature of the contract and ordinarily accompany the same.
A. Inherent element
B. Essential element
C. Natural element
D. Accidental element
15. The following are the so-called vices of consent, except:
A. Mistake
B. Fraud
C. Violence
D. Legal intimidation
TITLE II – CONTRACTS
Chapter 1
General Provisions
Article 1305: A contract is a meeting of minds between two persons whereby one
binds himself, with respect to the other, to give something or to render some service.
(1254a)
Once the minds of the contracting parties meet, a valid contract exists, whether it is reduced
to writing or not. When the terms of an agreement have been reduced to writing, it is
considered as containing all the terms agreed upon.
*Contract is entered by two persons not only one person should involve. But in a practical
scenario two or more persons are involve. And every time there is a contract, automatically
there are certain obligations exist.
Essential Elements of a Contract
1. Consent of the contracting parties;
2. Object certain which is the subject matter of the contract; and
3. Cause of the obligation which is established.
Classification of contracts
1. According to their relation to other contracts:
a. Preparatory
b. Principal
c. Accessory
2. According to their perfection:
a. Consensual
b. Real
3. According to their form:
a. Common or informal
b. Special or formal
4. According to their purpose:
a. Transfer of ownership
b. Conveyance of use
c. Rendition of services
5. According to their subject matter:
a. Things
b. Services
6. According to their vinculum which they produce:
a. Unilateral
b. Bilateral
7. According to their cause:
a. Onerous
b. Gratuitous
8. According to risks involved:
a. Commutative
b. Aleatory
9. According to their names or norms regulating them:
a. Nominate
b. Innominate
Article 1306: The contracting parties may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy. (1255a)
Autonomy of contracts or freedom of contract
- The above provision expresses the principle of autonomy of contracts.
General rule:
It is an elementary rule of contracts that the contracting parties are free to stipulate
the terms of their contract for as long as the terms are not contrary to law, morals, good
customs, public policy, public order, and national interests.
Contracts have the force of law between the parties, who are free to stipulate any matter not
contrary to law, morals, good customs, public order or public policy. Those are the human
limitations as stipulations.
Example: Vote buying (it is contrary to law and public policy).
Contracts are law between the parties, and they are bound by its stipulations.
Article 1307: Innominate contracts shall be regulated by the stipulations of the

parties, by the provisions of Titles I and II of this Book, by the rules governing the
most analogous nominate contracts, and by the customs of the place. (n)
Nominate contract
- Those which have their own individuality and are regulated by special provisions of
law.
Innominate contract
- Those which lack individuality and are not regulated by special provisions of law.
Kinds of innominate contract
1. do ut des
- I give that you give
2. do ut facias
- I give that you do
3. facio ut des
- I do that you give
4. facio ut facias
- I do that you do
Article 1308: The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them. (1256)
*This is another characteristics of contracts, which is commonly referred as the principle of

mutuality of contract that actually simply put both parties are bound, meaning the principle is
based on the equality of the parties.
Article 1308 of the Civil Code expressed what is known in law as the principle of mutuality
of contracts.
It is a fundamental rule that contracts, once perfected, bind both contracting parties, and
obligations arising therefrom have the force of law between the parties and should be
complied with in good faith.
Example: Eunice agree to sell her car to Micah, Micah agree to pay 1 million pesos.
*The contract is binding upon both contracting parties if they agreed to each other.
*Eunice alone will determine for the price of the car which will actually bind also to Micah.
Micah doesn’t any have choice because the option is in with Eunice only. So that violates the
principle of mutuality of contracts.
Article 1309: The determination of the performance may be left to a third person,
whose decision shall not be binding until it has been made known to both contracting
parties. (n)
* The compliance of the contract should not be left or cannot be left to the wheel of one of
the contracting parties only.
Example: Joshua sell his land to Julia, this time they’ve been agreed to each other that the
person who will determine for the price of the land is Gerald, because he is a real estate
appraiser that is why he will be determine for the reasonable price of the land.
*but the decision or the determination of the third person will bind the parties only, if it was
made known to both contracting parties.
Article 1310: The determination shall not be obligatory if it is evidently inequitable. In

such case, the courts shall decide what is equitable under the circumstances. (n)
*So the decision or the determination of the third person is also not binding if his
determination is evidently inequitable, it is unjust may be because he act bad faith. Now, the
court shall decide what is equitable.
Article 1311: Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is not
liable beyond the value of the property he received from the decedent.
If a contract should contain some stipulation in favor of a third person, he may

demand its fulfillment provided he communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person. (1257a)
*This is called relativity of contracts, meaning the contracts are generally effective only
between the parties their assigns or heirs.
Assign or heirs (mga tagapagtalaga/tagapagmana)
General rule: Contracts take effect only between the parties, their assigns and heirs.
Example: Julia owes money to Joshua One million pesos, the contract will take effect
between them. But if later on Joshua died, now Julia’s payment will be given to the heirs of
Joshua.
*If Julia died, the heirs of Julia will pay Joshua One million pesos.
Exceptions:
1. Contracts are not transmissible by their nature; or
2. Contracts are not transmissible by stipulation; or
3. Contracts are not transmissible by provision of law.
Art. 1312. In contracts creating real rights, third persons who come into possession of
the object of the contract are bound thereby, subject to the provisions of the
Mortgage Law and the Land Registration Laws. (n)
This is an exception to the principle of relativity of contracts.
Example: J mortgage his land to A, as the parcel of land of J in favor of A as a security for
his death. That mortgage actually registered in the Registry of Property so since J is the
owner of land after his mortgage the land to A, since J doesn't have enough money to pay A.
J sold the same land to B, in this case B bought the land. Even A does not involve on the
party of contact of sell between J and B, because of the pre-existing contract of mortgage
which is actually a real rights. Then B will be bound by the contract between J and A. Even A
is not involved in that party B should respect the right of A. In the contract between J and A
the third person is B, while the contract between J and B the third person is A.
Art. 1313. Creditors are protected in cases of contracts intended to defraud them. (n)
This is also an exception to the principle of relativity of contracts.
This article refers to the right of creditor to impugn contracts intended to defraud them. It is
again another instance an outsider, a third person or a stranger that enter with another
contract.
Example: J has a debt to A worth 1,000,000 pesos, J has a land that named after him and
because J doesn't want to attach his property to A before the due date of his debt. Since J
doesn't have enough money to pay A and J knows that his property will be attach to A as
payment of J's debt. So J donated his only property to B to defraud A. In this case A actually
a defrauded creditor, A has a right to impugn the contract between J and B although she is
not a party on that contract. She is given by law the right to ask for recession or cancellation
of that donation or she may be paid.
Art. 1314. Any third person who induces another to violate his contract shall be liable
for damages to the other contracting party. (n)
What is tort interference?

This is an exception to the principle of relativity of contracts. The above article expresses the
principle of tort interference.
The tort recognized in that provision is known as interference with contractual relations. The
interference is penalized because it violates the property of a party in a contract to reap the
benefits that should result therefrom.
Elements of tort interference
1. Existence of a valid contact – as regards the first element, the existence of the valid
contract must be duly established.
2. Knowledge on the part of the third person of the existence of a contract – The second
element, on the other hand, requires that there be knowledge on the part of the interferer
that the contract exists.
3. Interference of the third person is without legal justification
The contracting parties are actually joined party; they have a right to claim for damages
against that person who induces to violate the contract. Being stranger to the contract could
be sued. Action can be filed against him in view of his unwarranted interference, so whoever
is injured may sue for damages.
Example: Supposedly, A is a movie actress she has a 1 year contract with 101 studios. So B
is a friend of A, B induces A without any justifiable cause to break the contract then the 101
studio can sue B for damages. The liability of B does not arise ex-contractor, actually there is
no contract between B and 101 studio but because in the art. 1314 the 101 studio can file a
case or claim damages against B because B actually induces A to violate her contract with
101 studios.
Art. 1315. Contracts are perfected by mere consent, and from that moment the parties
are bound not only to the fulfillment of what has been expressly stipulated but also to
all the consequences which, according to their nature, may be in keeping with good
faith, usage and law. (1258)
Another characteristic of contract is the Consensuality of Contact.
This article means perfection of contract by mere consent of the parties regarding the
subject matter or the object of the contract and the cause of the contract. The important here
is the meeting of minds not the signing of contract. It is not necessarily for a contract to be
written unless law requires it or to have some specific formalities.
Example: June 1, J barrowed from A worth 10,000 pesos with a promise that J will give his
diamond ring to A as a security on June 15, before June 15 A gave the 10,000 pesos to J.
The contract of pledge is not yet perfected because in the contract of pledge the perfection is
only upon the delivery of the object pledge. J has not yet given or delivers the diamond ring
to A. So in that case there is no Contract of pledge occurring but the contract of loan already
exists because A gave the money to J.
How contracts are perfected?
The general rule contracts are perfected by mere consent, by the meeting of minds by the
party's as to the subject matter and cause of the contract.
General rule: Principle of Consensuality of Contact
Exception:
Real contract (it requires delivery)
Formal contract (it requires specific form of documents)
Art. 1316. Real contracts, such as deposit, pledge and commodatum, are not
perfected until the delivery of the object of the obligation. (n)
Actually this article has a same consent of the Art. 1315 but it has an additional requirements
and that is the delivery. In real contracts delivery is required for the perfection of contract.
Stage in the life of contract
1. Preparation or Negotiation
Begins from the time the prospective contracting parties manifest their interest in the
contract and ends at the moment of agreement of the parties.
2. Perfection or birth of the contract
Takes place when the parties agree upon the essential elements of the contract.
3. Consummation of the contract
The parties fulfill or perform the terms agreed upon in the contract, culminating in its
extinguishments.
Classification of Contacts According to their Perfection:

a. Consensual contract
Those which are perfected by the mere agreement of the parties.

Example: sale, lease
b. Real contract
Those which require not only the consent of the parties for their perfection, but also the
delivery of the object by any one party to the other.
Example: Commodatum, Deposit, Pledge
What is Commodatum, Deposit, and Pledge?
Commodatum
One of the parties delivers to another, either something not consumable so that the latter
may use the same for a certain time and return it, in which case the contract is called a
Commodatum.
Deposit
A deposit is constituted from the moment a person receives a thing belonging to another,
with the obligation of safely keeping it and of returning the same.
Pledge
The creditor is given the right to retain his debtor's movable property in his possession, or in
that if a third person to whom it has been delivered, until the debt is paid.
c. Formal contract or Solemn contract
When the law requires that a contract be in some form in order that it may be valid or
enforceable or that a contract be proved in a certain way, that requirement is absolute and
indispensable.
Art. 1317. No one may Contract in the name of another without being authorized by
the latter, or unless he has by law a right to respect him. A contract entered into the
name of another by one who has no authority or legal representation, or who has
acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been executed, before it is revoked by
the other contracting party. (1259a)
This article said that unauthorized contract or contract entered into without the authority of
the principal is unenforceable contracts.
Example: A has a car, then J sold that car in the name of A without being authorized by A. J
sold the car to B. So in that case the sale being unauthorized is an unenforceable, which it's
not valid.
General rule: No one may contract in the name of another.

Requisites for a person to contract in the name of another
1. He must be authorized either (expressly or impliedly)
It can be written which is much better, it can also be impliedly through conduct of another
person which is the principal and then the seller is the agent.
2. He must have by law a right to respect him.
When the law has given the right to respect him like the guardian of the minor.
3. The contract must be subsequently ratified (expressly or impliedly)
Example: When J sold the car although it doesn't have authority from A, but latter on A
collect the payment of B so that is an implied ratification as when J sold the car because A
collect the benefits so ratification cleansed the contract from its effect.
4. He must act within his power.
If you are authorized to lease a land then don’t sell it because you are just authorized to
lease only so if you sell it then you acted beyond your power, it is also unenforceable.
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
General Provision
Art. 1318. There is no contract unless the following requisites concur:

1. Consent of the contracting parties;
2. Object certain which is the subject matter of the contract;
3. Cause of the obligation which is established. (1261)
Elements of a contract
1. Essential elements are those without there can be no contract.
a. Common (comunes) are those which are present in all contracts.
b. Special (especiales) are present only in certain contracts.
c.Extraordinary or peculiar (especialisimos) are those which are peculiar to a specific
contract.
Example: consent, object certain and cause

Example: Delivery in real contracts or form in solemn ones.
Example: price in a contract of sale.
2. Natural elements are those which are derived from the nature of the contract and
ordinarily accompany the same.
3. Accidental elements are those which exist only when the parties expressly provided for
them for the purpose of limiting or modifying the normal effects of the contract.
SECTION 1 - CONSENT
ART. 1319. Consent is manifested by the meeting of the offer and the acceptance
upon the thing and the cause which are to constitute the contract. The offer must be
certain and the acceptance absolute. A qualified acceptance constitutes a counter-
offer.
Acceptance made by letter or telegram does not bind the offerer except from the time
it came to his knowledge. The contract, in such a case, is presumed to have been
entered into in the place where the offer was made.
Consent is the agreement of one contracting party's will with another or others about the
contract's object and terms.
ART. 1320. An acceptance may be express or implied.
Express – when it can be made in writing or verbally.
Implied – when it can be deduced from the conduct of the party.
ART. 1321. The person making the offer may fix the time, place, and manner of
acceptance, all of which must be complied with.
The person making the offer may specify the time, location, and manner of acceptance, all of
which must be followed or the offer will be canceled. An offer is terminated when the offeree
rejects it.
ART. 1322. An offer made through an agent is accepted from the time acceptance is
communicated to him.
This article states that when an offeror appoints a third party to act as his representative, the
agent's offer is deemed approved by the offeree not from the knowledge of the offeror's
acceptance, but from the moment the agent receives the correspondence of acceptance.
ART. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or
insolvency of either party before acceptance is conveyed.
Civil interdiction - is a mandatory accessory punishment that is considered levied if the

sentence is between reclusion and death.
Insanity – legal term for mental disorder.
Insolvency – inability or the lack of means to pay one’s debt.
ART. 1324. When the offeror has allowed the offeree a certain period to accept, the
offer may be withdrawn at any time before acceptance by communicating such
withdrawal, except when the option is founded upon a consideration, something paid
or promised.
The article only applies if the offeror has given the offeree "a reasonable period of time to
agree." This gives the offeree the option to accept or reject the offer within a set time frame.
ART. 1325. Unless it appears otherwise, business advertisements of things for sale
are not definite offers, but mere invitations to make an offer.
Business Advertisements of things for sale may or may not constitute definite offer. They are
merely invitations to the reader to make an offer or only as proposals. However, if
advertisement contains all the necessary data needed in a contract, it can be considered as
a definite offer.
ART. 1326. Advertisements for bidders are simply invitations to make proposals, and
the advertiser is not bound to accept the highest or lowest bidder, unless the contrary
appears.
It is possible to infer from an advertisement that the best bid results in a legally binding
contract. In this case, each bid implies contract perfection as long as a better bid is
submitted.
ART. 1327. The following cannot give consent to a contract:
1. Unemancipated minors;
2. Insane or demented persons and deaf-mutes who do not know how to write.
Contracts entered into by the law's incapacitated individuals are not null and void. They are
only voidable if one of the parties is unable to agree. However, if both parties are unable to
agree, the contract would be unenforceable.
Art. 1328 “Contracts entered into during a lucid interval are valid. Contracts agreed to
in a state of drunkenness or during hypnotic spell are voidable.”
 If the court declares that the person is insane or the person enters the contract during
his/her lucid interval, the contract is valid.
What is Lucid Interval?
 A brief period during which an insane person regains sanity sufficient to have the
legal capacity to contract and act on his or her own behalf.
If the contracts are agreed or sign in a state of drunkenness or during a hypnotic

spell. The contract is/are voidable.
 Because the rationale if they are drunk or under a hypnotic spell, they are not
thinking properly.
Art. 1329 “The incapacity declared in Article 1327 is subject to the modifications
determined by law, and is understood to be without prejudice to special
disqualifications established in the laws.” (1264)
Art. 1330 “A contract where consent is given through mistake, violence, intimidation,
undue influence, or fraud is voidable.”
Vices of consent - these are the ones that should be avoided for the consent to be valid
1. Mistake
2. Violence
3. Intimidation
4. Undue influence
5. Fraud
Characteristics of consent
1. Intelligent - the party has the capacity to give or act to give that consent
2. Free and voluntary - he must have voluntarily given consent. No coercion
3. Spontaneous - no fraud occurred
Voidable or annullable contracts- binding and valid unless annulled, it is annullable

through proper action. It will only happen when there is a want of capacity or vitiated
Consent of one of the parties and of course with solid evidence or reason why you want to
avoid the contract.
Under compromise court agreement - in civil cases if there is some kind of compromise
agreement between the parties, the court can approve that the contract is void, but if a party
claims that his or her consent has been obtained through fraud or whatever of consent vices,
he will file a motion in court approving the compromise they agreed to then he can still be
reconsidered.
Art. 1331 In order that mistake may invalidate consent, it should refer to the
substance of the thing which is the object of the contract, or to those conditions
which have principally moved one or both parties to enter into the contract.
Mistake- misunderstanding of the meaning or implication of something, or a wrong action or

statement proceeding from a faulty judgment.
Example: A gave land to B, thinking that B will pay when she will have money; B agrees
knowing that it is donated to him by A.
1. Substance - quality of the object
2. Conditions - different insights
3. Identity or qualifications - identity of the person, example A gave the land to B knowing
that it was his brother, but it turns out that they are not really related.
Mistake of facts - they have different beliefs, there is a misunderstanding between the
parties, and as a general rule, mistake of fact will vitiate consent so the contract is voidable.
Mistake of law- they misunderstand or misinterpret the law or the legal affects none, as a
result. The contract is not voidable because the law says; ignorance of the law does not
excuse anyone.
Art. 1332 When one of the parties is unable to read, or if the contract is in a language
not understood by him, and mistake or fraud is alleged, the person enforcing the
contract must show that the terms thereof have been fully explained to the former.
This article is a protection for those with disadvantage
When they can't read or their eyes are blurred, or when the contract does not understand the
language used, especially when the language is used. There is a presumption
Example: B is blind and he believes that it is a contract of mortgage, but the truth is deed of
sale. So A claims there is mistake or fraud, B has the burden that he must prove that he did
not take advantage of A's condition.
Art. 1333 There is no mistake if the party alleging it knew the doubt, contingency, or
risk affecting the object of the contract.
If the party is willing to take a risk then there is no mistake. Example you bought a land, you
are actually informed that there is no definite owner, and you have rival buyers in that land.
Your seller loses to claim that land, there is no mistake, and you will never recover the land
because in the first place you're willing to take the risk.
Art.1334 Mutual error as to the legal effect of an agreement when the real purpose of
the parties is frustrated may vitiate consent.
REQUISITES
1. The error must be referred to the legal effect of agreement.
2. They must both have an error.
3. They should be frustrated, because they don't expect that to happen.
Example: A and B entered contract of mortgage, but they executed contract of sale, they
thought it has only same legal effect in mortgage, so there is mutual error, legal effect, and
purpose nila is frustrated..
Art.1335 There is violence when in order to wrest consent, serious or irresistible force
is employed. There is intimidation when one of the contracting parties is compelled
by a reasonable and well-grounded fear of an
Imminent and gave evil upon his person or property, or his spouse, descendants or
ascendants, to give his consent.
Violence in physical coercion, intimidation is moral or internal coercion. If the consent of a

party was obtained violence and intimidation, for example when a person was only forced
through violence or he was coerced through threats.
REQUISITES for VIOLENCE to vitiate consent:

1. The force employed to wrest consent must be serious or irresistible - if you don't have any
choice.
2. It must be the determining cause for the party upon whom it is employed in entering into
the contract - you're injured and can't defend yourself
REQUISITES for INTIMIDATION to vitiate consent:
1. That the intimidation must be the determining cause of the contract, or must have caused
the consent to be given. -consent or consent is due to intimidation.
2. That the threatened act must be unjust or unlawful-example is when his threat to you is
against the law like he will kill the family if you don't agree.
3. That the threat must be real and serious- his threat is real and he is serious about what he
will do to you.
4. That it produces a reasonable and well-grounded fear-you felt nervous and afraid of his
threat.
ELEMENTS to consider to determine the degree of intimidation:
1. Age
2. Sex
3. Condition
Art. 1336 Violence or intimidation shall annul the obligation although it may have
employed by a third person who did not take part in the contract.
Violence or intimidation shall annul the obligation, although it may have been employed by a
third person who did not take part in the contract.
If the person who exercised violence or intimidation is a third person who is not part of the
contract, the contract is voidable
Art. 1337 There is undue influence when a person takes improper advantage of his
power over the will of another, depriving the latter of a reasonable freedom of choice.
the following circumstances shall be considered; the confidential, family, a spiritual
and other relations between the parties, or the fact that the
Person alleged to have been unduly influenced was suffering from mental weakness, or was
ignorant, or in financial distress.
Undue influence - man's exploitation of his power over others.
Circumstances to be considered:
1. The confidential, family, spiritual, and other relations between the parties- when he
blackmails you because it's just confidential to you.
2. Mental weakness- if the person has mental weakness, psychological problems like
depression.
3. Ignorant- when the person is ignorant. You are brainwashed him
4. Financial distress- is the person is unable to meet or pay its financial obligation
Art. 1338 There is fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which, without them,
he would have agreed to.
There is fraud that took place; the party leading into the person agreeing to the contract was
deceived. Example is he says a lot that is good about the contract but the truth is that's not
why he agrees with you in the contract.
Kinds of fraud:
Dolo causante or causal fraud: obtaining consent,
Dolo incidente or incidental fraud: even if there is or there is no fraud, the party will agree.
REQUISITES FOR DOLO CAUSANTE: in order that fraud may vitiate consent.
1. Only one party is allowed.
2. You must agree to a contract
3. It's true or serious that what happened was only mandatory
4. When something bad happens, like an injury to the party who wants the contract to be
annulled.
Art. 1339 Failure to disclose facts, when there is a duty to reveal them, as when the
parties are bound by confidential relations constitutes fraud.
Fraud by concealment, you need to say the fact if nothing then that constitutes fraud.
Example is partnership you have the duty to disclose facts to your partner regarding
business matters, like land. You have land then you sell it without the consent of the other.
Then the consent is voidable.
ARTICLE 1340
The usual exaggeration in trade, when the other party had an opportunity to know the facts
are not in themselves fraudulent.
Example:
The Company A is selling a skincare products, they shouldn’t say that “Our products is okay
but the other is better’ Of course because it always the best and first class quality if they sell
it, that’s what we called exaggeration in trade not fraudulent.
ARTICLE1341
A mere expression of an opinion does not signify fraud, unless made by an expert and the
other party has relied on the formers special knowledge.
GENERAL RULE:
A mere expression of an opinion does not signify fraud.
EXEPTION:
Expression of an opinion signifies fraud. If made by an expert and the other party has relied
on the formers special knowledge.
How do we know in order to opinion turn into fraudulent?
1. Made by an expert
2. Other party has relied on the expert opinion
3. Opinion turns out to be false.
ARTICLE 1342
Misrepresentation by a third person does not vitiate consent, unless such misrepresentation
has created substantial mistake and the same is mutual.
GENERAL RULE:
Misrepresentation by a third person does not vitiate consent
EXEPTION:
Misrepresentation by a third person vitiates consent if the misrepresentation has created

substantial mistake and the same is mutual.
ARTICLE 1343
Misrepresentation made in good faith is not fraudulent but may constitute error.
RULE:
Misrepresentation made in good faith is not fraudulent but may constitute error.
EXAMPLE:
B is buying a diamond ring to A. she was expecting to be that real diamond but it’s only
made of glass. So in this scenario the seller didn’t know too that the ring was made of glass
in other words in good faith the seller didn’t know that it wasn’t diamond. So in this case
Misrepresentation is not fraudulent but it has a mistake so voidable contract on the reason of
mistake or error and not reason of fraud.
ARTICLE 1344
In order that fraud may make a contract voidable, it should be serious and should have been
employed by both contracting parties. In incidental fraud only obliges the person employing it
to pay damages. (1270)
FRAUD
- Refers to all kinds of deception whether through insidious machination, manipulation

concealment or misrepresentation that would lead an ordinary prudent person into
error after taking circumstances into account.
Kinds of Fraud
DOLO CAUSANTE (CAUSAL FRAUD)
- Is basically a deception used by one party prior to or simultaneous with the contract
in order to secure the consent of the other.
DOLO INCIDENTE (INCIDENTAL FRAUD)
- Is not serious in character and without which the other party would have entered into
the contract anyway.
ARTICLE 1345
Simulation of a contract may be absolute or relative. The former takes place when the
parties do not intend to be bound at all; the latter, when the parties conceal their true
agreement.
ARTICLE 1346
An absolutely simulated or fictitious contract is void. A relative Simulation, when it does not
prejudice a third person and is not intended for any purpose contrary to law, morals, good
customs, public order or public policy binds the parties to their real agreement.(n)
ABSOLUTE SIMULATION
- Is a colorable contract but it has no substance as the parties have no intention to be

bound by it.
RELATIVE SIMULATION
- If the parties state false cause in the contract to conceal their real agreement.
Two juridical acts involved in relative simulation
1. OSTENSIBLE ACT
- Is the contract that the parties pretend to have executed
2. HIDDEN ACT
- Is the true agreement between the parties
SECTION 2 – OBJECT OF CONTRACTS

ARTICLE 1347
All things which are not outside the commerce of men, including future things, maybe the
object of a contract
All rights which are not intransmissible may also be the object of contract.
No contract may be entered into upon future inheritance except in cases expressly
authorized by law.
All services which are not contrary to law, morals, good customs, public order, or public
policy may likewise be the object of a contract.
Kinds of Object of Contracts
1. Things
- All things which are not outside the commerce of men, including future things, maybe
the object of a contract
2. Rights
- All rights which are not intransmissible may also be the object of contract.
3. Services
- All services which are not contrary to law, morals, good customs, public order, or
public policy may likewise be the object of a contract.
Art. 1348 “Impossible things or services cannot be the object of contracts.” (1272)
 Objects of the contract/s must not be impossible.
Art. 1349 “The object of every contract must be determinate as to its kind. The fact
that the quantity is not determinate shall not be an obstacle to the existence of the
contract, provided it is possible to determine the same, without the need of a new
contract between the parties.” (1273)
 Object must be determinate or at least determinable without a new agreement.
For example:
 Hoshi promise Rie to deliver one of his book à Determinate

 Dino promise Joshua to deliver a thing à Undeterminable
The contract is void because the object is not

determinable
 Kb promised Nine to deliver his December 2020 harvest. à At least determinable
If the essential requisites are not complete in the contract, the contract is void or nonexistent.
SECTION III – CAUSE OF CONTRACTS

Art. 1350 “In onerous contracts the cause is the understood to be, for each
contracting party, the presentation or promise of a thing or service by the other; in
remuneratory ones, the service or benefit which is remunerated; and in contracts of
pre beneficence, the mere liberality of the benefactor.” (1274)
 Cause both parties

 The subject matter for one party will be the cause or the consideration to another
party.
What is Cause?
 In general, the cause is the why of the contract or the essential reason which moves
the contracting parties to enter into the contract. For the cause to be valid, it must be
lawful such that it is not contrary to law, morals, good customs, public order and
public policy.
 Cause is the essential reason which moves the contracting parties to enter to it. In
other words, the cause is the immediate, direct and proximate reason which justifies
the creation of an obligation through the will of the contracting parties.
Example:
 Lucas sells his land to Vernon.

 Lucas and Vernon enters the contract because both of them have a cause. Vernon
enters the contract because of the land of Lucas while Lucas enters the contract
because of the money that Vernon have.
ONEROUS CONTRACTS
 Both of them have obligations/Reciprocally obligated with each other.

 Best example: Contract of Sale
REMUNERATORY CONTRACTS
 The cause is the service or benefit which is remunerated.

 Example: Ravn has rendered a service as a defense counselor of Leedo, who
agreed to pay an amount of ₱200,000.00 for the said service.
 Rendered Service is the Cause while the ₱200,000.00 is the object.
GRATUITOUS CONTRACTS
 The word Gratuitous means it is given or done free of charge. Similar meaning:
Voluntary
 The cause is the liberality of the giver/benefactor and it is pure beneficence.
 Best example: Donation
Art. 1351 “The particular motives of the parties in entering into a contract are different
from the cause thereof.” (n)
 Motives = personal/private
Cause and Motive
 Cause which is the essential reason for the contract should be distinguished from
Motive, which is the particular reason of a contracting party which does not affect the
other party.
For example:
 Johnny buys a gun to kill Mark.

 The cause of the contract is the gun. à POV of Johnny
 While the money is the cause of the seller
 The motive is to kill Mark
Motive versus Cause
1. Motive may vary while cause is always the same.

 Maybe you want to kill someone today but maybe tomorrow you will just use the gun
for your safety.
2. Illegal cause makes the contract void, but illegal motive does not necessary render
the contract void.
Art. 1352 “Contracts without cause, or with unlawful cause, produce no effect
whatever. The cause is unlawful if it is contrary to law, morals, good customs, public
order or public policy.” (1275a)
 If there is no cause on the contract, that is not valid.
Requisites of Cause:
1. It must be present
2. It must be true
3. It must be lawful but if it’s not, it is contrary to law.
Art. 1353 “The statement of a false cause in contracts shall render them void; if it
should not be proved that they were founded upon another cause which is true and
lawful.” (1276)
 Effects of a false cause

 Need to be true or proved
For example:
 Executed Contract of Sale of Xion’s car for ₱300,000.00, when in truth Cya did not
pay any amount. à The cause is false
 But if the scenario is like this: However, if in the truth the car was delivered to Cya as
payment for her previous service.
 It has another cause and it is valid, truth, and lawful
Art. 1354 “Although the cause is not stated in the contract, it is presumed that it
exists and is lawful, unless the debtor proves the contrary.” (1277)
 Cause presumed to exist and lawful

 All the contracts have a corresponding cause which is lawful
 Possible to show a proof
 It is necessary that the cause must exist but, it is not necessary to state the cause in
the contract. Why? It is presumed that the cause exist and lawful.
Example: Promissory Note
 “Fifteen days after date, I promise to pay San or order the amount of ₱20,000.00”
Signed by: Rocky
Art. 1355 “Except in cases specified by law, lesion or inadequacy of cause shall not
invalidate a contract, unless there has been fraud, mistake or undue influence.” (n)
General Rule:
 Lesion or Inadequacy of cause shall not invalidate a contract.
Example:
 The land is sold cheap by the owner. à It doesn’t mean that the contract is not valid.
 Moonbin sold his million worth house to Eunwoo for only ₱100,000.00
 The sale is valid unless there is fraud, mistake or undue influence.
 It can be prove (Ex. Typo of the number, Mistake of putting the amount or the seller
doesn’t know that the buyer will deceive him and etc.)
The exception is:
1. Fraud
2. Mistake or;
3. Undue influence à and if it’s also specified by the law
 If these exceptions will be proved in the court, the contract is not valid.
SECTION 4. CONFUSION OR MERGER OF RIGHTS
Article 1275. The obligation is extinguished from the time the characters of creditor and
debtor are merged in the same person.
Article 1275. Speaks of confusion or merger of rights. Confusion or merger of rights is the
meeting in one person of the qualities of obligee and obligor with respect to the same
obligation. The characters of the creditor and the debtor are mixed in the same person. Since
iti si non-sensical for the said person to push and pursue a claim against his own self, the
merger results in the extinguishment of the obligation.
Example:
Cleopatra owes Ptolemy fifty thousand pesos. Before Ptolemy cxan collect he dies and the
credit passes on to his heir Mark Anthony. Sometime in 2018 Mark Anthony owed Cleopatra
the amount of fifty thousand arising from Mark Anthony’s puchase of a racing horse. In
satisfaction of his debt, Mark Anthony assigns to Cleopatra the credit he inherited from
Ptolemy. So there is now a merger of creditor and debtor in one person.
Article 1276. Merger which takes place in the person of the principal debtor or creditor
benefits the guarantors. Confusion which takes place in the person of any of the latter does
not extinguish the obligation.
Merger- It is the meeting of one person of the qualities of creditor and debtor with respect to
the same obligation.
Guarantor- is a person or an organization that promises to pay a debt owed by a second

person, if the latter fails to repay it.
Effect of Merger on Guarantors
“Accessory follows the principal” (the guaranty being considered as the accessory
obligation). The extinguishment of the accessory obligation (guaranty) does not carry with it
that of the principal obligation (debt).
Effect of Merger in the person of Principal Debtor or Creditor
Niomar owes Richard P300,000.00, guaranteed by Nizel. Richard assigns his right to Mariel
who assigns her right to Ernie, and Ernie assigns his right to Niomar.
Effect: Niomar’s obligation is extinguished. Nizel is released from her obligation. Nizel, the
guarantor, was benefitted.
Effect of Merger in the person of Guarantor
Niomar owes Richard P300,000.00, guaranteed by Nizel. Richard assigns his right to Mariel
who assigns her right to Ernie, and Ernie assigns his right to Nizel.
Effect: Niomar still have to pay Nizel. However, the contract of guaranty is extinguished, but
not Niomar’s obligation to pay the P300, 000.00. Nizel, as the new creditor can demand
payment from Niomar.
Article 1277. Confusion does not extinguish a joint obligation except as regards the share
corresponding to the creditor or debtor in whom the two characters concur.
Example:
AIDA, lORNA, AND FE OWE JOHNNY Php 30,000.00 pesos upon the death of Johnny he
made Fe his legatee for Php 10,000.00 confusion and merger happens in the share of fe to the
extent of Php 10,000.00 which actually is his whole share in the obligation. That is the only
part extinguished, so that Aida and Aorna must pay Johnny their respective share.
SECTION 5 – COMPENSATION
Article 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other.
Compensation is the extinguishment to the concurrent amount of the debts of two persons
who, in their own right, are debtors and creditors of each other.
Kinds of Compensation
By its effect or extent.
Total- when both obligations are of the same amount.
Partial- when the two obligations are of different amounts.
By its cause or origin:
Legal- when it takes place by operation of law even without the knowledge of the parties.
Voluntary- when it takes place by agreement of the parties.
Judicial- when it takes place by order from a court of litigation.
Facultative- when it can be set up only by one of the parties.
Example:
Chowqueen owes MacBonald 10M. MacBonald on another occasion owed Chowqueen 15M
pesos. MacBonald is liable to Chowqueen with 5M.
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
Art. 1280. Notwithstanding the provision of the preceding article, the guarantor may set up
compensation as a regards what the creditor may owe the principal debtor. (1197)
Guarantor - a person or organization that promises to pay back a loan/debt if the person or
organization cannot pay it.
This article benefits guarantor and the exception to the general rule that the only the principal
debtor can set up against his creditor, what latter owes him.
Guarantor is only subsidiarily, not principally bound; he is given the right to set up
compensation. The reason is that the extinguishment of the principal obligation as a
consequence of compensate carries with it the accessory obligation such as guaranty.
Example 1:
Junie owes Julie P1,000 with May as guarantor. Julie owes Junie P1,000. The obligation of
guarantor is extinguished by the compensation, but if the compensation is partial, May will be
liable for the balance.
Example 2:
Juan owes Pedro P5,000 secured by a guarantor Jose. Pedro owes Juan P1,000. When both
debts fall due and partial compensation should take place, with Juan paying Pedro P4,000,
which fail due to Juan insolvency. Pedro may sue Jose, should Pedro sue Jose for the whole
amount of Juan debt P5,000, Jose may set up partial compensation as a defense so that Jose
pay only P4,000.
Art. 1281. Compensation may be total or partial. When the two debts are of the same
amount, there is total compensation.
Compensation- is mode of extinguishment an obligation where by parties are mutually

debtors and creditors of each other. Compensation May total or partial.
Kinds of compensation as of effect
1. Total- when the two debts are of the same amount.
Example- Junie owes Julie the amount 1,000. Julie owes Junie amount 1,000.
Since both are debtors and creditors with same amount of debt, the compensation is Total.
2. Partial- when the two debts are not of the same amount.
Example- Juan owes Pedro amount 1,000. Pedro owes Juan amount 700.
both are debtor-creditor and the debt is unequal, the one who’s lacking shall be liable for
the unsettled debt. The balance 300 remains an obligation.
Art. 1282. The parties may agree upon the compensation of debts which are not yet due. (n)
The article pertains to conventional or voluntary compensation.
Compensation must be paid on due date except on those case where both parties agreed about
their mutual debts.
Conventional or voluntary compensation - which occurs when the parties agree to the
extinguishment of their credits or to compensate their mutual obligations even in the absence
of some of the legal requisites.
compensation
This provision of law is an exception to the general rule that only debts which are
due and demandable can be compensated. (Art. 1279[3, 4].)
The kind of compensation has no special requisites. It is sufficient that the

contract of the parties, which declares the compensation is valid. (Art. 1306.)
compensation



This provision of law is an exception to the
general rule that only debts which are due and
demandable can be compensated. (Art. 1279[3, 4].)

The provision of law is an exception to the general rule that owes debts which are due and
demandable can be compensated. (Art. 1279 (3,4))
This kind of compensation has no special requisites. It is sufficient that the contract of the
parties, which declares the compensation, is valid. (Art. 1386)
Thus the absence of mutual creditor-debtor relation cannot negate the conventional
compensation.
Example:
Jane bought grocery items worth 3,000 from Karing store under a line of credit with maturity
date of three months. Just after two months, both Jane and Karing agreed to settle the
obligation.
Requisites of conventional compensation
That each of the parties can be dispose of the credit he seeks to compensate, and
That they agreed mutual extinguishment of their credits.
Legal compensation vs. Conventional compensation
Legal compensation Conventional compensation
Take place by operation of law when all When the parties agree to compensate
the requisite are present, as opposed to their mutual obligations even if some
conventional compensation. requisites is lacking, such as that provided
in Article 1282. It is intended to eliminate
or overcome obstacle which prevent ipso
jure extinguishment of their obligations.
Art. 1283. If one of the parties to a suit over an obligation has a claim for damages against
the other, the former may set it off by proving his right to said damages and the amount
thereof. (n)
This refers to judicial compensation.
Judicial compensation – when it takes effect by judicial decree.
Compensation may also take place when so declared by final judgment of a court in a suit. A
party may set off his claim for damages against his obligation to the other party by proving
his right to said damages and the amount thereof.
Example- Mary owes Gab P10,000. When Gab demanded payment, Mary failed to pay. In
anger, Gab damaged the property of Mary to the extent of P9,000. May can set off the
obligation of Gab to pay her damages in the amount of P9,000 against her debt of P10,000.
ART. 1284. When one or both debts are rescissible or voidable, they may be compensated
against each other before they are judicially rescinded or avoided. (n)
Compensation of rescissible or voidable debts.
Rescissible (Art. 1381.) and voidable obligations (Art. 1390.) are valid until they are
judicially rescinded or avoided. Prior to rescission or annulment, the debts may be
compensated against each other.
EXAMPLE:
A owes B P10,000.00. Subsequently, A, through fraud was able to make B sign a promissory
note that B is indebted to A for the same amount.
The debt of A is valid but that of B is voidable. Before the debt of B is nullifi ed, both debts
may be compensated against each other if all the requisites for legal compensation are
present. (Art. 1279.)
Suppose B’s debt is later on annulled by the court, is A still liable considering that
compensation had already taken place? Yes. The effect of the annulment is retroactive. It is
the same as if there had been no compensation.
ART. 1285. The debtor who has consented to the assign-ment of rights made by a creditor in
favor of a third person, cannot set up against the assignee the compensation which would
pertain to him against the assignor, unless the assignor was notifi ed by the debtor at the time
he gave his consent, that he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the
latter may set up the compensation of debts previous to the cession, but not of subsequent
ones.
If the assignment is made without the knowledge of the debtor, he may set up the
compensation of all credits prior to the same and also later ones until he had knowledge of
the assignment.
Article 1285 speaks of three cases of compensation which take place after an assignment of
rights made by the creditor: one, where the assignment is made with the consent of the
debtor (par. 1.); another, in which the assignment is made without the consent but with the
knowledge of the debtor (par. 2.); and the third, is one in which the assignment is without the
knowledge of the debtor. (par. 3.)
(1) Assignment with the consent of debtor. —
EXAMPLE:
A owes B P3,000.00 due November 15.
B owes A P1,000.00 due November 15.
B assigned his right to C on November 1 with the consent of A.
On November 15, A cannot set up against C, the assignee, the compensation which would
pertain to him against B, the assignor. In other words, A is liable to C for P3,000.00 but he
can still collect the P1,000.00 debt of B.
However, if A, while consenting to the assignment, reserved his right to the compensation,
he would be liable only for P2,000.00 to C. (par. 1.)
(2) Assignment with the knowledge but without the consent of debtor. —
EXAMPLE:
B owes A P2,000.00 due November 10.
A assigned his right to C on November 12. A notifi ed B but the latter did not give his
consent to the assignment. How much can C collect from B?
B can set up the compensation of debts on November 10 which
was before the cession on November 12. (par. 2.) There being partial compensation, the
assignment is valid only up to the amount of P1,000.00. But B cannot raise the defense of
compensation with respect to the debt of A due on November 15 which has not yet matured.
So, on November 12, B is liable to C for P1,000.00. Come November 15, A will be liable
for his debt of P1,000.00 to B
(3) Assignment without the knowledge of the debtor. —
EXAMPLE:
In the preceding example, let us suppose that the assignment was made without the
knowledge of B who learned of the assignment only on November 16.
In this case, B can set up the compensation of credits before and after the assignment. The
crucial time is when B acquired knowledge of the assignment and not the date of the
assignment. If B learned of the assignment after the debts had already matured, he can raise
the defense of compensation; otherwise, he cannot.
ART. 1286. Compensation takes place by operation of law, even though the debts may be
payable at different places, but there shall be an indemnity for expenses of exchange or
transportation to the place of payment. (1199a)
Compensation where debts payable at different places. This article applies to legal
compensation. The indemnity contemplated above does not refer to the difference in the
value of the things in their respective places but to the expenses of monetary exchange (in
case of money debts) and expenses of transportation (in case of things to be delivered). Once
these expenses are liquidated, the debts also become compensable. The indemnity shall be
paid by the person who raises the defense of compensation.
ART. 1287. Compensation shall not be proper when one of the debts arises from a
depositum or from the obligations of a depositary or of a bailee in commodatum.
Neither can compensation be set up against a creditor who has a claim for support due by
gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301. (1200a)
Instances when legal compensation not allowed by law.
(1) Where one of the debts arises from a depositum. — A deposit is constituted from the
moment a person receives a thing belonging to another with the obligation of safely keeping
it and of returning the same. (Art. 1962.)
(2) Where one of the debts arises from a commodatum. — Commodatum is a gratuitous
contract whereby one of the parties delivers to another something not consumable so that the
latter may use the same for a certain time and return it. (Art. 1933.).
(3) Where one of the debts arises from a claim for support due by gratuitous title. —
“Support comprises everything that is indispensable for sustenance, dwelling, clothing,
medical attendance, education and transportation, in keeping with the fi nancial capacity of
the family.5 x x x.” (Art. 194, Family Code [Exec. Order No. 194].)
ARTICLE 1288. Neither shall there be compensation if one of the debts consists in civil
liability arising from the penal clause
Compensation of debt arising from penal offense is improper and inadvisable because the
satisfaction of such obligation is imperative.
The person with civil liability (Offender) arising from crime is the only party who cannot set
up the compensation. The offended party who is entitled to indemnity can set up his claim in
compensation of his debt.
ARTICLE 1289. If a person should have against him several debts which are susceptible of
compensation, the rules on the application of payments shall apply to the order of the
compensation.
VOLUNTARY COMPENSATION:
• According to the choice of the debtor.
• If he fails to do so, according to the choice of the creditor, if agreed to by the debtor.
LEGAL COMPENSATION
• The rules on the application of payment when the law makes the application shall
apply.
ARTICLE 1290. When all the requisites mentioned in Article 1279 are present, compensation
takes effect by operation of law, and extinguishes both debts to the concurrent amount, even
though the creditors and debtors are not aware of the compensation.
REQUISITES OF COMPENSATION (ARTICLE 1279)
• Both parties must be both creditors and debtors in their own rights as participants;
• Both debts must consists in sum of money or if consumable, of the same kind or
quality;
• Both debts are due;
• Both debts are liquidated and demandable;
• Neither debt must be retained in a controversy commenced by third person and

communicated with debtor (neither debt is garnished); and
• Compensation must not be prohibited by law.
WHEN DOES COMPENSATION TAKES EFFECT?
• The very day on which all requisites concur
• Ipso Jure - by operation of law
• But must be alleged and proved by the debtor who claims its benefit
SECTION 6 – NOVATION
ARTICLE 1291. Obligations may be modified by:
• Changing their object or principal conditions;
• Substituting the person of the debtor;
• Subrogating a third person in the rights of the creditor.
CLASSES OF NOVATION
1. As to the subject
a. Subjective or Personal – by change of subject
b. Objective or Real – substituting the object with another or changing the physical condition
c. Mixed – combination of subjective or objective novation.

2. As to Constitution
a. Express – old obligation is extinguished and substituted by new obligation.
b. Implied – incompatibility between the old and new obligation that they cannot stand
together.
3. As to an extent or effect
a. Partial – modification or change in some principal condition on obligations.
b. Total – old obligation is completely extinguished.
FOUR REQUISITES OF NOVATION
• There must be a previous valid obligation;
• There must be an agreement of the parties to the new contract;
• There must be the extinguishment of the old contract; and
• There must be the validity of the new contract.
Article 1292. In order that an obligation may be extinguished by another which substitutes
the same, it is imperative that it be so declared in unequivocal terms, or that the old and the
new obligations be on every point incompatible with each other.
Express Novation – Binding parties must declare in their new executed contract that they
agreed to extinguish the old one and that the former is on every point incompatible with the
latter.
Example:
Joan owed Jenny P5,000 and P300 evidenced by two promissory notes. Later, a new loan of
P500 was obtained. By express agreement, the three debts were consolidated into one
promissory note for P5,800 (P500 plus P5,000 plus P300). That the last promissory note was
to take the place of the others was agreed upon.
Implied Novation – For an implied novation to arise, it is essential that there is an

incompatibility between the preceding and subsequent contracts.
Article 1293. Novation which consist in substitution a new debtor in the place of the original
one, may be made even without the knowledge or against the will of the latter,but not without
the consent of the creditor. Payment by the new debtor gives him the rights mentioned in
articles 1236 and 1237.
Two kinds of substitution:
Expromision – When a third person initiatively takes place the obligation even without the
consent or against the will of the original debtor but with the consent of the creditor.
Example:
X is indebted to Y in the amount of P10,000. Then Z, a third person, goes to Y and tells him
that he will be the one to pay the P10,000. If Y agrees, a novation by expromision takes place
even if X does not know or consent to it.
Delegacion – Is when the debtor offers and the creditor accept a third person to take place for
the satisfaction of the original debtors obligation.
In this agreement they are called as a Delegante (debtor) Delegatario (creditor) and Delegado
(third person).
Example:
In the same example, if X goes to Y bringing Z and proposes to Y that Z who is willing, will
pay the P10,000 and Y consents to it, the novation by delegacion extinguishes obligation.
Article 1294. If the substitution is without the knowledge or against the will of the debtor, the
new debtor’s insolvency or non-fulfillment of the obligation shall not give rise to any liability
on the part of the original debtor.
The substitution is without the consent or even just knowledge of the debtor, the inability of
the new debtor to pay the obligation he has shouldered shall not in any way make the old
debtor who is now freed from liability, much less must the original debtor be affected by
insolvency of the new debtor in whose choosing the former never participated.
Article 1295. The insolvency of the new debtor, who has been proposed by the original
debtor and accepted by the creditor, shall not revive the action of the latter against the
original obligor, except when said insolvency was already existing and of public knowledge,
or known to the debtor, when the delegated his debt.
This article applies only to delegacion – where the substitution of the old debtor is upon the
proposal of the old debtor himself (delegante) and the proposal was accepted by the new
debtor (delegado) and the creditor (delegatario)
If the new debtor who has been accepted by the creditor, happens to be insolvent and cannot
fulfill the obligation delegated to him, the original debtor is no longer liable anymore for the
payment of the obligation.
Example:
John is indebted to Maria with 1000.00. John proposed Mike to be the new debtor and
obtained the consent of Maria. If at the time of the delegacion Mike was already insolvent but
his insolvency was neither of public knowledge nor known to John, then John is not liable.
Neither is John liable if the insolvency of Mike took place after he delegated his debt.
Article 1297. If the new obligation is void, the original one shall subsist, unless the parties intended
that the former relation should be extinguished in any event.
In tagalog Artikulo 1297 - Kung ang bagong obligasyon ay walang bisa, ang orihinal obligasyon ang
syang magpapatuloy, maliban na lamang kung ang bawat partido ay ninais na ang naunang relasyon
ay tatapusin ng anumang kaganapan.
Article 1297 stresses one of the essential requirements of a novation, to wit: the new obligation
must be valid. The general rule is that there is no novation if the new obligation is void and,
therefore, the original one shall subsist for the reason that the second obligation being inexistent, it
cannot extinguish or modify the first.
ILLUSTRATION
Carlo is indebted to Shiela in the amount of Php 1, 000.00. Since Carlo cannot pay his debt, Carlo
and Shiela entered into a new contract whereby Carlo will kidnap and kill the enemy of Shiela and
the later will consider Carlo debt extinguished. In this case, the original obligation of Carlo and
Shiela shall subsist because the new obligation of Carlo to Shiela is void it being against the law.
Article 1298. The novation is void if the original obligation was void, except when annulment may be
claimed only by the debtor or when ratification validates acts which are voidable.
In tagalog, Ang panibagong obligasyon ay walang bisa kung ang orihinal na obligasyon ay walang
bisa, mailaban na lamang kung ito ay mapapawalang bisa lamang na kinalaunan ay nabigyan ng bisa.
Effect where the old obligation void or voidable. This article has its basis also on the requisites of a
valid novation. A void obligation cannot be novated because there is nothing to novate. However, if
the original obligation is only voidable or if the voidable obligation is validated by ratification, the
novation is valid.
Illustration
Noel Castro agreed to deliver prohibited drugs to vice-mayor Geld. Later on, it was agreed that Noel
Castro would pay vice-mayor Geld P100,000.00 instead of delivering the drugs. The novation is void
because the original obligation is void.
Suppose Noel was induced through fraud committed by vice-mayor Geld to sign a contract whereby
Noel Castro obliged himself to deliver a specific car to vice-mayor Geld. Subsequently, it was agreed
between Noel Castro and vice-mayor Geld that Noel Castro would give vice-mayor Geld P100,000.00
instead of the car. Here, the original obligation of Noel Castro is voidable. As it has not yet been
annulled at the instance of Noel Castro, the second contract is valid.
In the same example, if Noel Castro subsequently confirmed his obligation to deliver the car and the
right of vice-mayor Geld, his ratification cleanses the contract from all its defects and makes it valid
and, therefore, the novation is also valid.
Article 1299. If the original obligation was subject to a suspensive or resolutory condition, the new
obligation shall be under the same condition, unless it is otherwise stipulated.
In tagalig, Artikulo 1299. Kung ang orihinal na obligasyon ay sumasailalim sa isang suspensive o
resolutory na kondisyon, ang bagong obligasyon ay dapat na sa ilalim ng parehong kondisyon,
maliban kung ito ay nakasulat.
If the first obligation is subject to a suspensive or resolutory condition, the second obligation is
deemed subject to the same condition unless the contrary is stipulated by the parties in their
contract. The reason for the rule contained in Article 1299 is that the efficacy of the new obligation
depends upon whether the condition which affects the old obligation is complied with or not. If the
condition is suspensive, and it is not complied with, no obligation arises; and if it is resolutory and it
is complied with, the old obligation is extinguished.
Article 1300. Subrogation of a third person in the rights of the creditor is either legal or
conventional. The former is not presumed, except in cases expressly mentioned in this Code; the
latter must be clearly established in order that it may take effect. (1209a)
In tagalog Ang subrogation ng ikatlong tao sa mga karapatan ng nagpautang ay maaaring legal o
konbensyonal. Ang nauna ay hindi ipinapagpalagay, maliban sa mga kaso na malinaw na nabanggit
sa Code na ito; ang nahuli ay dapat na malinaw na itinatag upang ito ay magkabisa. (1209a)
Subrogation is the active subjective novation characterized by the transfer to a third person of all the
rights pertaining to the creditor in the transaction concerned including the right to proceed against
the guarantors or possessor of mortgages, and similar other subject to any applicable legal
provisions or any stipulation agreed upon by the parties in conventional subrogation.
Article 1301. Conventional subrogation of a third person requires the consent of the original parties
and of the third person.
In Tagalog, Ang conventional subrogation ng ikatlong tao ay nangangailangan ng pahintulot ng

orihinal na mga partido at ng ikatlong tao. (n)
For Conventional or Voluntary Subrogation, the consent of all the parties is required:
a) The debtor-because he becomes liable under the new obligation; and because his obligation
ends
b) The old creditor-because his credit is affected
c) The new creditor- because he becomes a party to the obligation
NOTE: Generally, the debtor loses the right to present against the new creditor any defense which
he, the debtor, could have set up against the old creditor.
Article 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even without the debtor’s knowledge;
(2) When a third person, not interested in the obligation, pays with the express or tacit approval of
the debtor;
(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of confusion as to the latter’s share. (1210a)
In Tagalog, Ipinapalagay na may legal na subgrogation:
(1) Kung ang nagpautang ay nagbayad sa isa pang nagpautang na mas gusto, kahit hindi alm ng may
utang;
(2) Kung ang ikatlong tao, na hindi interesado sa obligation, ay nagbayad na may aprobasyon ng may
utang;
(3) Kung, kahit hindi alam ng may utang, ay may isang tao na interesado sa kasatuparan ng
obligasyon ay nagbayad, nang walang pagkiling sa epekto ng pagkalito sa bahagi ng nahuli. (1210a)
Subrogation means the substitution of one claim for another, especially the transfer of the right to
receive payment of a debt to somebody other than the original. Based on article 1302 the third
person may pay the amount the obligation of a debtor to the creditor even without his knowledge,
in the Case of Gaysano vs. North American Insurance, Gaysano declined to pay his debt to Levis
International due to fortuitous event, but the Levis international supported his claim on the
obligation of Gaysano based on the legal subrogation aside from the Article 1302.
Illustration
1. When a creditor pays another creditor who is preferred.
Example:
A owes B P1,000 secured by the first mortgage on the land of A. A also owes C P2,000 This debt is
unsecured.
Under the law, B, who is a preferred creditor, has preference to payment with respect to the land as
against C who is merely an ordinary creditor.
2. When a third person without interest in the obligation pays with the approval of the debtor.
Example:
A owes B P1,000. C pays B with the express or implied consent of A.
In this case, C will be subrogated in the rights of B.
3. When a third person with the interest in the obligation pays even without the knowledge of the
debtor.
Example:
Suppose in the same example, C is the guarantor of A. C is a person interested in the fulfillment of
the obligation of A as he would ne benefited by its extinguishment.
If C pays B even without the knowledge of A, C is subrogated in the rights of B, Confusion takes place
in the person of C, Hence, the guaranty is extinguished but the principal obligation still subsists.
Article 1303. Subrogation transfers to the persons subrogated the credit with all the rights thereto
appertaining, either against the debtor or against third person, be they guarantors or possessors of
mortgages, subject to stipulation in a conventional subrogation. (1212a)
In Tagalog, ang subrogation ang naglilipat sa mga taong subrogated ang inutang kasama ang lahat ng
karapatan na ukol, alinman laban sa may utang o ikatlong tao, sila man ay mga guarantor o
possessor ng sanla, batay sa sinasaad ng kasunduan ng conventional subrogation. (1212a)
The effect of legal subrogation is to transfer to the new creditor the credit and all the rights and
actions that could have been exercised by the former creditor either against the debtor or against
third persons, be they guarantors or mortgagor. Simply stated, except only for the change in the
person of the creditor, the obligation subsists in all respects as before the novation.
If the credit transferred to the new creditor is subject to a suspensive condition, the credit cannot be
collected until after the fulfillment of the said condition.
Article 1304. A creditor, to whom partial payment has been made, may exercise his right for the
remainder, and he shall be preferred to the person who has been subrogated in his place in virtue of
the partial payment of the same credit.
In tagalog, Ang nagpautang, kung saan ang hindi pa na buong kabayaran ay ginawa, maaaring
isakatuparan ang kanyang karapatan para sa mga natira, at sya ay mas gusto para sa ibang tao para
sa kanyang lugar sa ngalan ng kahalagan ng hindi buong bayad ng parehong inutang.
Illustration
A Debtor) & B(Creditor) entered into a Contract of Sale which A promise to pay B in purchasing
goods for two installment which established a two surety bond for security of payments, upon
failure of the first installment B brought an action to A and 1st Surety for satisfaction of 1st
installment, A also failed in the 2nd installment so B brought again an action to A and 2nd surety for
satisfaction of whole obligation.
– The two sureties is subrogated the obligation of two installments of A which he failed to deliver.
Rescissible and Voidable Contracts
What is Rescissible Contracts?
A rescissible contract is one that was entered into legally by the contracting parties but
has resulted in economic damage to one of the parties or an outside party. The court can
therefore rescind, or set aside, the contract for equitable reasons. A voidable contract is a
formal agreement between two parties that may be rendered unenforceable for a number of
legal reasons.
Rescissible is a Valid contracts that can be legally rescinded under certain circumstances.
Types of contracts that are rescissible under Article 1381 like this example; Any contracts
entered into by guardians when their wards suffer lesion by more than one-fourth of the
items that are the object thereof. Under Article 1382, if one party is unable to pay debts
owed, the injured party can rescind the contract. Rescission is only necessary to the extent
that it is required to cover damages. The offending party must return the items that were the
subject of the contract, along with interest. Therefore, rescission can only occur if the person
can return what he or she is required to return.
Rescinding a contract creates something called mutual restitution. Mutual restitution is

not applicable if a creditor received nothing from the contract and the thing owed is already
in possession of a party in good faith. It is subject to indemnification only if two more
alienations of liability exist from the first party in violation.
Article 1380. Contracts validly agreed upon may be rescinded in the cases established
by law.
Binding force of Rescissible Contracts.
They are valid and enforceable although subject to rescission by the court when there is
damage or prejudice to one of the parties or to a third person. In a rescissible contract, there
is no defect at all but by reason of some external facts, its enforcement would cause
injustice.
Meaning of Rescission.
Rescission is an equitable remedy granted by law to the contracting parties and
sometimes even to third persons in order to secure reparation of damages caused them by a
valid contract, by means of the restoration of things to their condition prior to the celebration
of said contract.
This remedy should be distinguished from rescission under Article 119 in case of breach of
obligation (infra.), or rescission of a contract by mutual consent of the parties (infra.) which
shall be governed by their agreement or other legal provisions but not by Chapter 6.
Requisites of rescission.
The following are the requisites in order that the remedy of rescission under this Chapter
may be availed of:
(1) The contract must be validly agreed upon;
(2) There must be lesion or pecuniary prejudice or damage to one of the parties or to a third
person (Art. 1381.);
(3) The rescission must be based upon a case especially provided by law (Arts. 1380, 1381,
1382.);
(4) There must be no other legal remedy to obtain reparation for the damage (Art. 1383.);
(5) The party asking for rescission must be able to return what he is obliged to restore by
reason of the contract (Art. 1385, par. 1.);
(6) The object of the contract must not legally be in the possession of third persons who did
not act in bad faith (Ibid., par. 2.); and
(7) The period for filing the action for rescission must not have prescribed. (Art. 1389.)
Article 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they
represent suffer lesion by more than one fourth of the value of the things which are
the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion
stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due them;
(4) Those which refer to things under litigation if they have been entered into by the
defendant without the knowledge and approval of the litigants or of competent judicial
authority;
(5) All other contracts specially declared by law to be subject
to rescission.
CASES OF RESCISSBLE CONTRACTS

1. Contracts entered into in behalf of wards. — A ward is a person under guardianship by
reason of some incapacity. As a rule, the powers of the guardian with respect to the property
of the ward are limited to mere acts of administration.
2. Contracts agreed upon in representation of absentees. — An absentee is a person who
disappears from his domicile, his whereabouts being unknown, and without leaving an agent
to administer his property. Likewise, the absentee must suffer lesion by more than one-fourth
of the value of the property object of the contract to entitle him to the remedy of rescission.
It must be noted that paragraphs 1 and 2 refer only to transactions by guardians and
absentees’ representatives. Rescission cannot take place if the contracts have been
approved by the court. As a general rule, lesion does not invalidate a contract except only in
special cases specified by law.
3. Contracts undertaken in fraud of creditors. — The action to rescind in fraud of creditors is
known as accion pauliana. Here, as in No. (4), the remedy of rescission may be availed of by
a third person. Such contracts are usually made without the knowledge of the creditors. In
order that fraud of creditors may be a valid ground for rescission, the following requisites
must also be present:
(a) There must be an existing credit prior to the contract to be rescinded, although it is not
yet due or demandable later;
(b) The subsequent contract made by the debtor conveys a patrimonial benefit to a third
person;
(c) There must be fraud on the part of the debtor which may be presumed or proved;
(d) The creditor has no other legal remedy to satisfy his claim, that is, he cannot recover his
credit in any other manner, it not being required that the debtor be insolvent.
4. Contracts which refer to things under litigation. — In No. (3), the purpose of the remedy is
to secure the payment of an existing credit of a third person against a party to a contract
sought to be rescinded. Here, the purpose is to make effective the claim of a party litigant
over a thing under litigation which was the object of a contract entered into by the other party
with another person.
The right to file the action for rescission arises in favor of the plaintiff when the defendant
enters into a contract over the thing in litigation without the knowledge or approval of the
plaintiff or the court.
Article 1382. Payments made in a state of insolvency for obligations to whose
fulfillment the debtor could not be compelled at the time they were effected, are also
rescissible.
This article deals with rescission of payments. There are two conditions that must concur for
the article to be applicable.
1st – the debtor must be in a state of insolvency and insolvency need not be judicially
declared;
2nd- the payment exacted from him is for a debt not yet due and demandable.
Rescissible contracts are those validly agreed upon because all the essential elements exist
and therefore legally effective but in the cases establish by law, the remedy of rescission is
granted in the interest of equity.
A debtor is insolvent if he does not have sufficient properties to meet his obligations.
Article 1383. The action for rescission is subsidiary; it cannot be instituted except
when the party suffering damage has no other legal means to obtain reparation for the
same.
Rescission is not a principal remedy; it is only subsidiary and may only be availed of by the
injured party if has no other legal means of seeking redress or reparation for the damages
caused. If, therefore, it is found out that the debtor has no other property than that which is
the object of the resindable contract, rescision may merely be applied, provided that all the
essential requisites for rescission are present.
Article 1384. Rescission shall be only to the extent necessary to cover the damages
caused.
The entire contract need not be set aside by rescission if the damage can be repaired or
covered by partial rescission. The rescission shall only be to the extent of the creditor’s
unsatisfied credit. The policy of the law is to preserve or respect the contract, not to
extinguish it.
Article 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission can return
whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the
loss.
Rescission creates an obligation of mutual restitution.

When the court declares a contract rescinded, the parties must return to each other (1)
object of the contract with its fruits (2) the price thereof with legal interest.
Article 1386. Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place
with respect to contracts approved by the courts.
Contracts approved by the courts
• These are contracts entered into by the guardian OR representative where the ward OR
absentee suffers a lesion of more than 1/4 of the value of the property.
- If the contract is approved by the court, rescission CANNOT be availed of even if

lesion of more than 1/4 the value of the property be suffered by the ward OR
absentee.
• When a contract is entered into in behalf of a ward for an act of ownership, the approval of
the court is required.
- Absent this approval, the contract is unenforceable, whether there is lesion or NOT.
• As regards a contract dealing with an act of administration, court approval renders the
contract valid, lesion or NO lesion.
- Absent this approval, the contract is unenforceable, whether there is lesion or NOT.
Article 1387. All contracts by virtue of which the debtor alienates property by
gratuitous title are presumed to have been entered into in fraud of creditors, when the
donor did not reserve sufficient property to pay all debts contracted before the
donation.
Alienations by onerous title are also presumed fraudulent when made by persons
against whom some judgment has been issued. The decision or attachment need not
refer to the property alienated, and need not have been obtained by the party seeking
the rescission.
In addition to these presumptions, the design to defraud creditors may be proved in

any other manner recognized by the law of evidence.
The general rule is that fraud is not presumed. As fraud is criminal in nature, it must be
proved by clear and preponderance of evidence.
1. Instances not exclusive. — Article 1387 establishes presumptions of fraud in the case of
alienation by the debtor of his property. (pars. 1 and 2.) However, the instances mentioned
are not exclusive of others that may be proved in any other manner recognized by the law of
evidence. (par. 3; see Art. 1177.) The presumptions are disputable and may be rebutted by
contrary evidence. (infra.)
2. Presumption not applicable in the absence of transfer. — The presumption in Article 1387
applies only when there has in fact been an alienation or transfer, whether gratuitously or by
onerous title. The effect of the presumption is to shift the burden to the one who alienated to
prove that the transfer was not fraudulently made.
3. Only actual creditors can ask for rescission. — Under the Civil Code (Arts. 1381[3],
1387.), only actual creditors can ask for the rescission of the conveyance made by their
debtors in favor of strangers. The waiver and release made previously by the creditor of the
credit he held against the debtor operate to deprive the rescissory action of any legal basis.
4. Vendor, an indispensable party in action for rescission of sale. — An action for rescission
of sale under Article 1387 cannot be finally determined without the presence in court of the
vendor. For any decision on the action or claim for damage would affect him. He is entitled to
be heard.
Article 1388. Whoever acquires in bad faith the things alienated in fraud of creditors,
shall indemnify the latter for damages suffered by them on account of the alienation,
whenever, due to any cause, it should be impossible for him to return them.
If there are two or more alienations, the first acquirer shall be liable first, and so on
successively.
The purchaser in bad faith, who acquired the object of the contract alienated in fraud of
creditors, must return the same if the sale is rescinded (see Art. 1383.) and should it be
impossible for him to return it due to any cause, he must indemnify the former.
Should there be two or more alienations, the first acquirer shall be liable first, and so on
successively.
Article 1389. The action to claim rescission must be commenced within four years.
For persons under guardianship and for absentees, the period of four years shall not
begin until the termination of the former’s incapacity, or until the domicile of the latter
is known.
As a general rule, the prescriptive period within which to file a rescissory action is four years.
the reckoning time however may vary depending upon the circumstances:
(a) If the complaining party is a third person who has no participation in the contract the
prescriptive period is four years reckoned from the discovery of the fraudulent contract or
from the registration thereof if real property is involved;
(b) If the complaining party is a minor or people under guardianship the action to rescind
must be done within four years after attaining the age of majority;
(c) If the complaining party is an absentee he should file an action for rescission within four
years from the time his domicile has been known.
An absentee is one who has disappears from his domicile and his whereabouts are unknown
without leaving an agent to administer his properties. Consequently, when she appears in
his domicile he ceases to be an absentee as long as he informs the court of his presence.
What is a Voidable Contracts?
A voidable contract may start out being legally binding but become void. It's still
considered valid if an injured party doesn't take action. To enforce the legality of a voidable
contract, one of the parties has to use its option to enforce it. Either party has the legal
authority to perform or not perform to the contract. Typically, only one of the parties is bound
to the terms. The party that isn't bound may cancel the contract, making it void.
Voidable contracts have the following features like one or both parties has the option to
enforce it, a party that's been defrauded, coerced, or misled into signing the contract can
object to its validity, either party has the option to revoke consent, and contracts entered into
using undue influence, fraud, misrepresentation, or coercion are voidable contracts.
Article 1390. The following contracts are voidable or annullable, even though there
may have been no damage to the contracting parties:
(1) Those where one of the parties is incapable of giving consent to a contract;
(2) Those where the consent is vitiated by mistake, violence, intimidation, undue
influence or fraud.
These contracts are binding, unless they are annulled by a proper action in court.
They are susceptible of ratification.
Article 1391. The action for annulment shall be brought within four years.
This period shall begin:

In cases of intimidation, violence or undue influence, from the time the defect of the
consent ceases.
In case of mistake or fraud, from the time of the discovery of the same.
And when the action refers to contracts entered into by minors or other incapacitated
persons, from the time the guardianship ceases.
This article only applies to the parties in the contract. It does not apply to a third person
when the law allows them to question the validity of a contract.
Failure to pursue an action within the period prescribed by law will have the effect of
extinguishing the action.
With regard to fraudulent conveyances with the Registry of Property, the prescriptive period
is counted not from the actual knowledge of the fraud by the plaintiff but from the registration
of the public document with the said registry. The act of registration is a notice to the whole
world. It is the operative acts that binds registered lands under the Torrens System.
Article 1392. Ratification extinguishes the action to annul a voidable contract.
1. Confirmation – to cure a defect in a voidable contract.

2. Ratification– to cure the defect of lack of authority in an authorized contract (entered
into by another).
3. Acknowledgment– to remedy a deficiency of proof (thus, an oral loan may be put in
writing, or when a private instrument is made a public instrument).
Requisites of Ratification to be effective:
1. There must be a voidable or annullable contract.

2. Ratification is made with the knowledge of the cause of nullity.
3. At the time of ratification, the cause of nullity has already ceased.
4. The ratifying party is the injured party, or the prejudiced party.
5. The ratification is accomplished expressly or impliedly by a waiver of action to annul.
The right to ratify is transferrable to the heirs of the party who has the right to ratify.
Article 1393. Ratification may be effected expressly or tacitly. It is understood that

there is a tacit ratification if, with knowledge of the reason which renders the contract
voidable and such reason having ceased, the person who has a right to invoke it
should execute an act which necessarily implies an intention to waive his right.
Kinds of ratification
• Express ratification – when the ratification is manifested in words OR in writing

• Implied ratification – may take diff. forms: by silence or acquiescence, by acts showing
adoption or removal of the contract, by acceptance and retention of the benefits flowing
therefrom
• Requisites of implied ratification
- Knowledge of the reason which renders the contract voidable

- Such reason must have ceased
- The injured party must have executed an act which necessarily implies an intention
to waive his right
Article 1394. Ratification may be effected by the guardian of the incapacitated person.
Party who may ratify.

1. A contract entered into by an incapacitated person may be ratified by:
(a) the guardian; or
(b) the injured party himself, provided, he is already capacitated. As legal representatives of
their wards, guardians have the power to contract on their behalf. Hence, they may also
ratify contracts entered into by their wards.
2. In case the contract is voidable on the ground of mistake, etc., ratification can be made by
the party whose consent is vitiated.
Article 1395. Ratification does not require the conformity of the contracting party who
has the right to bring the action for annulment.
The ratification need not seek the consent of the contracting party who has no right to bring
action on the annulment. Conformity of the Party who has no right to bring an action for
annulment is not needed. – The innocent party has the prerogative to annul or not to annul a
voidable contract.
“He who comes to the court, must come with clean hands”
Further, it is also not necessary for the innocent party to require the compliance of the guilty
party before he can ratify the defective contract.
Example: Jacob is the owner of the famous hardware in Laguna. He rented an Athina
warehouse to be one of his warehouses. Jane bought the materials she needed for building
her own house to Jacob, because the other materials were in Athina's warehouse and it was
rented by Jacob therefore Athina's permission is not required for delivery of materials Jane
needs.
Article 1396. Ratification cleanses the contract from all is defects from the moment it
was constituted.
Ratification cleanses the contracts of all its defects at the time it is established. The cleaning
cleans the contract from all its defects from the moment it is formed. The cleaning cleans the
contract of all its defects from the moment it is executed. It kills the right to act to repeal. In
other words, the effect of ratification is to make the contract valid from its inception subject to
the prior rights of third parties.
What is the effect of ratification?
After the contract has been properly validated, no action to invalidate the same can be
retained to be granted on defects related to its original validity.
From what time shall the cleansing of the voidable contract retroacts?
The clearing of a void contract changes at the time of its constitution. Further, this
retroactivity does not prejudice the rights of a third persons acquired before the ratification.
Example: Dan forces Marlou to sell the horse of late. Later, the horse gave birth to a donkey.
If Marlou ratified the contract after the birth of the young donkey, who has the right to the
donkey? * Marlou, because ratification has a retroactive effect. It validates the contract from
the date of its execution. If the horse was sold by Dan to Matthew who acted in good faith,
Marlou’s subsequent confirmation of the sale to Dan could not have interfered with Matthew..
Art. 1397. The action for the annulment of contracts may be instituted by all who are
thereby obliged principally or subsidiarily. However, persons who are capable cannot
allege the incapacity of those with whom they contracted; nor can those who exerted
intimidation, violence, or undue influence, or employed fraud, or caused mistake base
their action upon these flaws of the contract.
PARTY ENTITLED TO BRING AN ACTION TO ANNUL
Two different requisites are required to confer the necessary capacity to bring an action for
annulment of a contract, to wit:
(1) The plaintiff must have an interest in the contract; and
(2) The victim and not the guilty party or the party responsible for the defect is the
person who must assert the same.
In an action for termination of contracts, the real interested parties are the parties to the
contract, or are bound either by the principal or subsidiary, or have a bias in their rights with
respect to one of the contracting parties. and may show damages that would positively result
to them from the contract even if they did not intervene in it, or that it is claimed to be right to
participate in a public bidding but is illegally excluded from it.
The offending party, together with his or her successors-in-interest, cannot request for
revocation. This rule is maintained by the principle he who comes to court must do so with
clean hands. Thus, a person engaged in fraud cannot base his action for termination of a
contract on such of aw of the contract.
Example: Glea is forced by Gerelle to sign a contract. Ellaine, a lender to Glea, wants to
annul the contract. Is Ellaine allowed to do this? * NO, Ellaine is not allowed to do this. If she
prejudices the contract, and Glea has no other property, Ellaine can ask for the contract to
be terminated, not its cancellation. Ellaine cannot request revocation because she is not
obligated by the terms of said contract, either by the principal or subsidiary.
Article 1398. An obligation having been annulled, the contracting parties shall restore
to each other the things which have been the subject matter of the contract, with their
fruits, and the price with its interest, except in cases provided by law.
In obligations to render service, the value thereof shall be the basis for damages.
Mutual Restitution upon annulment

If the contract is annulled, the parties, as a general rule, must restore to each other the
subject matter of the contract with its fruits and the price thereof with legal interest. Unless
there are fundamental reasons recognized by the law which will prevent such restitution.
Who may invoke Restitution
Only the between the parties who are privity with the contract. A stranger to the actual
contractual relation cannot invoke the benefit of this provision.
Contracts not covered
If one of the contracting parties received some benefit, and he has not given anything for it
to the other, it is only equitable that he should return the amount by which he unjustly
enriched.
If the parties had reciprocal prestations, which can compensate each other, the excess in
value can be paid to the party to whom it pertains.
Article 1399. When the defect of the contract consists in the incapacity of one of the
parties, the incapacitated person is not obliged to make any restitution except insofar
as he has been benefited by the thing or price received by him.
The incapacity mentioned in the above article is any form of incapacity or mental debility and
not merely minority.
This is an exception to the general rule of mutual restitution. The incapacitated person is
obliged to make restitution only to the extent that he was benefited by the thing or the price
received by him.
It results therefore, that if he was not benefited, he is not obliged to restore what he had
received but the other contracting party is still bound to return what he had received, whether
he has benefited or not.
If at the time the incapacity ceases and the thing received still exists, the presumption is that
he benefited, so that should he ask for annulment, he must return the same to the other
party. If he alienates or squanders the thing instead of annulling, he is deemed to have
ratified the contract.
Article 1400. Whenever the person obliged by the decree of annulment to return the
thing can not do so because it has been lost through his fault, he shall return the
fruits received and the value of the thing at the time of the loss, with interest from the
same date.
Effect of loss of thing to be returned

• If the thing to be returned is lost without the fault of the person obliged to make restitution,
- there is NO more obligation to return such thing.
- BUT in such case, the other CANNOT be compelled to restore what in virtue of the
decree of annulment he is bound to return.
• If it is lost through his fault, his obligation is NOT extinguished BUT is converted into an
indemnity for damages consisting of
- the value of the thing at the time of the loss with interest from the same date
- and the fruits received from the time the thing was given to him to the time of its loss.
Article 1401. The action for annulment of contracts shall be extinguished when the
thing which is the object thereof is lost through the fraud or fault of the person who
has a right to institute the proceedings.
If the right of action is based upon the incapacity of any one of the contracting
parties, the loss of the thing shall not be an obstacle to the success of the action,
unless said loss took place through the fraud or fault of the plaintiff.
Extinguishment of action for annulment.
1. If the person, who has a right to institute an action for annulment (Art. 1397.), will not
be able to restore the thing which he may be obliged to return in case the contract is
annulled because such thing is lost through his fraud or fault, his right to have the
contract annulled is extinguished. If the loss is not due to his fault or fraud, Article
1402 applies. The action for annulment shall be extinguished only if the loss is
through the fault or fraud of the plaintiff.
2. Under the second paragraph, the right of action is based upon the incapacity of any
one of the contracting parties. Whether the right of action is based upon incapacity or
not, the rule is the same. It is no longer necessary that the fraud or fault on the part of
the plaintiff (the incapacitated person) resulting in the loss must have occurred “after
having acquired capacity” as under the old Code. This qualification has been deleted
in the present article. The deletion has made the second paragraph redundant.
Article 1402. As long as one of the contracting parties does not restore what in
virtue of the decree of annulment he is bound to return, the other cannot be
compelled to comply with what is incumbent upon him.
When a contract is annulled, a reciprocal obligation of restitution is created. The return by

one party of what he is obliged to restore by the decree annulment may be regarded as a
condition to the fulfillment by the other of what is incumbent upon him.
In effect, there will be no annulment if the party cannot restore what he is bound to return.
This is true even if the loss is due to a fortuitous event.
However, if the party who lost the thing through a fortuitous event offers to pay its value with
the fruits received if any (there is no liability to pay interest since the loss is without his fault),
the other can be required to make restitution.
EXTINGUISHMENT OF OBLIGATION - PART 1
Article 1231. Obligations are extinguished:
1. By payment or performance:
2. By the loss of the thing due:
3. By the condonation or remission of the debt;
4. By the confusion or merger of the rights of creditor and debtor;
5. By compensation;
6. By novation.
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a

resolutory condition, and prescription, are governed elsewhere in this Code.
SECTION 1. – PAYMENT OR PERFORMANCE
Article 1232
Payment means not only the delivery of money but also the performance, in any other manner, of
an obligation. (Ang pagbabayad ay hindi lamang sa pagdadala ng pera kundi din sa pagtupad ng
obligasyon sa maayos na pamamaraan sa obligasyon.)
Example:
If D is obligated to give E a specific car, payment is made by delivering the car.
Article 1233
A debt shall not be understood to have been paid unless the thing or service in which the
obligation consists has been completely delivered or rendered, as the case may be.
(Ang isang utang ay hindi uunawain na bayad maliban kung ang bagay o serbisyo kung saan ang
obligasyon ay ganap ng naihatid o naisagawa sa kung alinman).
Example:
C promised to pay P1,500.00 to D for a Ukulele. C is only giving P1,000.00 to D. D can refuse to
accept the P1,000.00 because the fulfillment is not complete.
Article 1234
If the obligation has been substantially performed in good faith, the obligor may recover as though
there had been a strict and complete fulfillment, less damages suffered by the obligee.
(Kapag ang obligasyon ay malapit nang matupad sa magandang loob, ang may obligasyon ay
maaring maka kolekta na parang may mahigpit at kumpletong pagtupad, ibabawas ang pinsala
na natamo ng taong pinaguukolan ng obligasyon.)
Example:
A obliged himself to sell one thousand (1,000) bags of cement to B for a certain price. However,
despite diligent effort on his part, A was able to deliver only nine hundred fifty bags (950) because of
the cement shortage. A wants to comply with his obligation to deliver the entire obligation but he
could not do so for reasons beyond his control.
Under the law, A can recover as though there had been complete delivery less the price of the fifty
bags. B cannot require A to deliver first the remaining fifty bags as a condition to his liability for the
price. He must pay for the 950 bags and enforce his right for damages for failure of A to deliver the
difference. It is incumbent upon A however to explain satisfactorily his failure to make complete delivery.
Article 1235.
When the obligee accepts the performance, knowing its incompleteness or irregularity, and
without expressing any protest or objection, the obligation is deemed fully complied with.
(Kapag tinanggap ng obligee ang pagganap, samantalang nalalaman nito na ito ay di kumpleto o
iregular, at nang walang pagpapahayag ng anumang protesta o pagtutol, ang obligasyon ay
ituturing na lubos na nasunod.)
Requisites:
The obligee knows that the performance is incomplete or irregular.
NOTE: If payment is incomplete/irregular, the creditor may properly reject it.
He accepts the performance without expressing any protest or objection.
NOTE: Mere receipt of partial payment is NOT equivalent to acceptance of performance by the
creditor.
Example:
A availed of C’s services to renovate his house for the purpose of making it soundproof. B
renovated the house but the soundproofing was NOT effective. A texted B that he is NOT satisfied
with the latter’s work. Obligation is NOT fully extinguished
Article 1236.
The creditor is not bound to accept payment or performance by a third person who has no interest
in the fulfillment of the obligation, unless there is a stipulation to the contrary. Whoever pays for
another may demand from the debtor what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover only insofar as the payment has been
beneficial to the debtor.
Article 1237
Whoever pays on behalf of the debtor without the knowledge or against the will of the latter,
cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage,
guaranty, or penalty.
( Kung sino man ang nagbayad para sa kapakanan ng debtor na walang kaalaman o pahintulot
ng debtor ay hindi maaring pwersahin ang creditor na akuin ang kanyang karapatan, katulad ng
sangla, garantiya, o parusa.)
Article 1238.
Payment made by a third person who does not intend to be reimbursed by the debtor is deemed
to be a donation, which requires the debtor’s consent. But the payment is in any case valid as to
the creditor who has accepted it.
(Ang bayad na ibinigay ng ikatlong tao para sa inutang ng isang tao na hindi na inaasahang
maibalik ang kabayaran sa kanya ay kinokonsidera na isang donasyon, na nangangailangan ng
kaalaman ng nagpautang. Ito ay may bisa kung sakalit tinanggap ito ng nagpautang.)
1) If the debtor consent payment, it is deemed to be a donation
Example:
Cardo owes Alyana P1,000.00. Without the intention of being reimbursed, Nena paid Cardos’s
obligation. Cardo had previously accepted Nenas’s generosity. In this case, Cardo is not liable to
Nena and his obligation to Alyana is extinguished.
2) If the debtor does not consent payment
Article 1238 “embodies the idea that no one should be compelled to accept the generosity of
another.” If the paying third person does not intend to be reimbursed the payment is deemed a
donation which requires the debtor’s consent to be valid. However, if the creditor accepts the
payment, it shall be valid as to him and the payor although the debtor did not give his consent to the
donation.
Example:
Cardo did not consent to the donation, Nena may recover from Cardo since there has been no
donation, although originally Cardo did not intend to be reimbursed. Nevertheless, the obligation of
Cardo to Alyana is extinguished because the payment is valid as to Alyana who has accepted it.
Article 1239.
In obligations to give, payment made by one who does not have the free disposal of the thing due
and capacity to alienate it shall not be valid, without prejudice to the provisions of Article 1427
under the Title on “Natural Obligations.”
(Sa obligasyon ng pagbibigay, walang bisa ang pagbabayad na ginawa ng isang tao na walang
kalayaan sa pagbabayad ng bagay na may palugit, at may kakayahan na ilipat ang pagmamay-
ari nito ng walang pagkiling sa probisyon ng artikulo 1427 na sumasailalim sa titulo ng Natural na
Obligasyon.)
 The 1st Provision is the Free disposal of the thing due means that the thing to be delivered
must not be subject to any claim or lien or encumbrance of a third person (e.g. mortgage,
pledge)
Example:
Joana agreed to sell to Cardo a car. If the car set to be delivered by cardo by Joana owned by Lola
Kap without any agreement and authority to the Joana to sell the car , the same can be recovered by
Lola Kap the payment is not valid, Joana does not have free disposal of the car the thing to be
delivered must not be subject to any claim or lien or encumbrance of a third person
 The 2nd Provision is the Capacity to alienate means that the person is not incapacitated to
enter into contracts and for that matter, to make a disposition of the thing due.
Example:
Suppose Ernesto a forty year old insane transfer the title of his land to Tomas, his creditor for the
satisfaction of his debt. Such transfer is not valid since the insane has no legal capacity. However,
further reading of the law will tell us that not all the transactions of an insane person are invalid.
transactions done during the lucid intervals are valid.
Article 1240
Payment shall be made to the person in whose favor the obligation has been constituted, or his su
lang gawin sa taong kung saan ay may pabor ang obligasyon na kung anong nilalaman, o sa
kanccessor in interest, or any person authorized to receive it.
(Ang pagbabayad ay maaaringyang tagapagmana na may interes, o kahit kaninong tao na

pinahihintulutan na tumanggap.)
To Whom payment Must Be made
a. To the person in whose favor the obligation has been constituted (the creditor);
b. to the successor-in-interest (like the heirs); or
c. to any person authorized to receive it.
Article 1241
Payment to a person who is incapacitated to administer his property shall be valid if he has kept
the thing delivered, or insofar as the payment has been beneficial to him.
(Ang kabayaran sa isang taong walang kakayahang pangasiwaan ang kanyang ari-arian ay
balido kapag nabigay nya ang bagay na hinihingi sa kanya, o hangga’t ang kabayaran ay naging
benepisyal sa kanya.)
 Payment made to the Incapacitated Creditor, Effects
If the payment made to the incapacitated creditor who cannot administer his property did not
benefit him or he has not kept the thing delivered, the debtor may be compelled by the creditor to
pay a new when he regains capacity, or by the latter’s representative during the time of the
incapacity of the creditor.
Example:
If A owes B, then the obligation matures, suddenly B got involved in a car accident that caused
him to suffer coma. Either A can choose to pay B by paying his medical expenses or consign his
payment to the court. A’s payment will be valid as long as the payment he made will be beneficial to
the incapacitated creditor.
 Effects of payment to a third person may still be valid as long the creditor is being benefited.
Therefore, the validity of the payment is co-extensive to the benefit the creditor receives.
The payment made to a third person shall also be valid insofar as it has redounded to the benefit of
the creditor. Such benefit to the creditor need not be proved in the following cases:
1.) If after the payment, the third person acquires the creditor’s rights;
2.) If the creditor ratifies the payment to the third person;
3.) If by the creditor’s conduct, the debtor has been led to believe that the third person had
authority to receive the payment. (1163a)
Article 1242
Payment made in good faith to any person in possession of the credit shall release the debtor.
(Ang pagbabayad ng may utang na ginawa nang walang daya o malisya sa tao na may hawak ng
utang ay magpapalaya sa nangutang sa kaniyang obligasyon.)
Possession of credit does not refer to the real creditor or his heirs, or the person authorized by him
or by law under Article 1240. It refers to the person who has the appearance of the creditor but who
actually is not.
 Document evidencing the credit is not the credit itself.
For Example: Nicco owes Hezekiah P100.00. Hezekiah lost the promissory note given by Nicco.
Nanay found the promissory note and demanded payment from Nicco.
Article 1243
Payment made to the creditor by the debtor after the latter has been judicially ordered to retain
the debt shall not be valid.
(Ang pagbayad ng nangutang sa nagpautang pagkatapos ang nangutang ay nauatusan ng

hukuman na ipapanatili ang utang ay walang bisa.)
Instances
Garnishment- The proceeding by which a debtor’s creditor is subjected to the payment of his own
debt to another.
Example:
Janine owes Richard P1,000, 000.00. Richard, in turn, owes Leo P100,000.00. Leo brings an action
against Richard, who claims insolvency but admits the credit which he has over Janine. Before Janine
pays Richard, Janine is summoned into the proceeding, and asked to retain the debt in the
meantime. Thus, the debt is “garnished”. The reason is Janine should not pay Richard, and instead
she should pay Leo, should Leo really be adjudged the creditor of Richard in the meantime is
considered invalid under the law.
Article 1244
The debtor of a thing cannot compel the creditor to receive a different one, although the latter
may be of the same value as, or more valuable than that which is due.
(Ang nangutang ng isang bagay ay hindi maaaring pumilit sa nagpautang na tumanggap ng

ibang bagay, bagaman ang huli ay maaaring kapareho ng halaga, o mas mahalaga kaysa sa kung
ano ang nararapat.)
In obligations to do or not to do, an act or forbearance cannot be substituted by another act or
forbearance against the obligee’s will.
 Forbearance is the action of refraining from exercising a legal right, esp. enforcing the
payment of debt.
 Substitution of prestation
 Debtor CANNOT compel creditor to receive a diff. one.
 Upon agreement/consent of creditor, debtor may deliver a diff. thing or perform a diff.
prestation.
Article 1245
Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in

money, shall be governed by the law of sales.
Explanation:
There is dation in payment when property is alienated to the creditor in satisfaction of a debt in
money. Indeed, pursuant to Article 1232 of the Civil Code, an obligation is extinguished by payment
or performance. There is payment when there is delivery of money or performance of an obligation.
Article 1245 of the Civil Code provides for a special mode of payment called dation in payment.
There is dation in payment when property is alienated to the creditor in satisfaction of a debt in
money. Here, the debtor delivers and transmits to the creditor the former’s ownership over a thing
as an accepted equivalent of the payment or performance of an outstanding debt. In such cases,
Article 1245 provides that the law on sales shall apply, since the undertaking really partakes –in
one sense of the nature of sale; that is, the creditor is really buying the thing or property of the
debtor, the payment for which is to be charged against the debtor’s obligation. Dation in payment
extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon
by the parties or as may be proved, unless the parties by agreement – express or implied, or by their
silence – consider the thing as equivalent to the obligation, in which case the obligation is totally
extinguished.
Article 1246
When the obligation consists in the delivery of an indeterminate or generic thing, whose
quality and circumstances have not been stated, the creditor cannot demand a thing of superior
quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation
and other circumstances shall be taken into consideration.
The debtor who is obliged to deliver a generic thing cannot be compelled to deliver a thing of
superior quality. Neither can he compel the creditor to accept a thing of inferior quality. Delivery
of an average or medium quality will be sufficient taking into account the purpose of the
obligation.
Explanation:
A promised to deliver to B a horse. B cannot compel A to deliver a price-winning race horse.

Neither can A required to accept an old sickly horse.
Article 1247
Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for
the account of the debtor. With regard to judicial costs, the Rules of Court shall govern.
Explanation:
If the parties have made a stipulation as to who will bear the expenses, then their stipulation
shall be followed. Art. 1247 does not apply to expenses incurred by the creditor in going to the
debtor’s domicile to collect (Art. 1251)
Losing Party party generally pays judicial cost generally pays judicial cost. These are the
statutory amounts allowed to party to an action. Under Rules of Court Sec. 1, Rule 142 , the costs of
an action shall, as a rule be paid by the loMsing party. The court may, however, for special reasons,
adjudge that either party shall pay the costs or that the same be divided as may be equitable.
Article 1248
Unless there is an express stipulation to that effect, the creditor cannot be compelled partially
to receive the prestations in which the obligation consists. Neither may the debtor be required to
make partial payments.
However, when the debt is in part liquidated and in part unliquidated, the creditor may
demand and the debtor may effect the payment of the former without waiting for the liquidation
of the latter.
Explanation:
Since the creditor is not compelled to accept partial performance of an obligation, they cannot
be considered to incur delay (mora accipiendi) if he refuses to accept partial prestations.
Exception:
1. If there is abuse of right.

2. If good faith requires acceptance.
PLURALITY OF SUBJECTS AND TIES
This article does not apply to obligations with several subjects and parties who are bound under
different terms and conditions.
Thus, in a joint obligation, the creditor cannot refuse the partial fulfillment given by the debtor
who is only entitled to pay the portion of his share of the obligation. In solidary obligation where
debtors are bound under different terms and conditions, any of the debtor may offer to pay only
that portion of the obligation not suspended by the terms or conditions.
Article 1249
[The payment of debts in money shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency to which is legal tender in the Philippines.]
The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
Explanation:
The rule is different when there is extraordinary inflation or deflation under Article 1250,
wherein the value of the currency at the time the obligation was established shall be the basis of
payment, if there is an official pronouncement or declaration of an extraordinary inflation or
deflation.
Article 1250
In case an extraordinary inflation or deflation of the currency stipulated should supervene, the
value of the currency at the time of the establishment of the obligation shall be the basis of
payment, unless there is an agreement to the contrary.
Explanation:
The inflation or deflation in this case must be extraordinary, meaning it is not a universal trend
which did not spare the country.
Extraordinary inflation exists when there is a decrease or increase in the purchasing power of the
Philippine currency which is unusual of beyond the common fluctuation on the valued of said
currency, and such increase or decrease could not have been reasonably foreseen or was manifestly
beyond the contemplation of the parties at the time of the establishment of the obligation.
Article 1251
Payment shall be made in the place designated in the obligation.
There being no express stipulation and if the undertaking is to deliver a determinate thing, the
payment shall be made wherever the thing might be at the moment the obligation was
constituted.
In any other case the place of payment shall be the domicile of the debtor.
If the debtor changes his domiciles in bad faith or after he has incurred in delay, the additional
expenses shall be borne by him.
These provisions are without prejudice to venue under the Rules of Court.
Explanation:
Specific place designated where payment shall be made.
If there is no agreement, the following rule shall apply:
a. Delivery of determinate thing – on the place where the thing might be at the time the
obligation was constituted.
b. Other cases (delivery of money, generic thing or to perform a personal obligation) – at the
domicile of the debtor.
SUBSECTION 1. - APPLICATION OF PAYMENTS
Article 1252
He who has various debts of the same kind in favor of one and the same creditor, may declare
at the time of making the payment, to which of them the same must be applied.Unless the parties
so stipulate, or when the application of payment is made by the party for whose benefit the term
has been constituted, application shall not be made as to debts which are not due.
If the debtor accepts from the creditor a receipt in which an application of payment is made, the
former cannot complain the same, unless there is a cause for invalidating the contract.
Definition of application of payments.

It is the designation of the particular debt being paid by e debtor who has two or more debts or
obligations of the same kind in favor of the same creditor to whom the payment is made.
Right to make application of payments primarily to the debtor .

The debtor has the right to choose which of the several due shall be paid. The right belongs
primarily to the debtor. But, there is a proper time for the designation of the payment. It must be
made at the moment of payment.
The creditor may have the right to apply to which of the several debts the payment was made by
issuing receipts, if the debtor failed to exercise his right. The payment is deemed applied to the
specific indebtedness mentioned in the receipt, if the debtor has accepted the receipt without
objection.
Requisites for a valid application of payments by the debtor.

There is only one debtor and one creditor;
The debtor owes the creditor two or more debts which are of the same kind or identical specie;
All the debts are due and demandable;
The payment made by the debtor is not sufficient to cover or settle all the debts.
Requisites for a valid application of payments by the creditor.
Article 1253
If the debt produces interest, payment of the principal shall not be deemed to have been made
until the interests have been covered.
Explanation:
Interest must be paid first – obligatory (2) Effect if payment is credited to the principal –
reduction of principal (3) What interest is supposed to be paid (a) interest by way of compensation
(b) interest by way of damages due to default
Article 1254
When the payment cannot be applied in accordance with the preceding rules, or if application
can not be inferred from other circumstances, the debt which is most onerous to the debtor,
among those due, shall be deemed to have been satisfied.
If the debts due are of the same nature and burden, the payment shall be applied to all of
them proportionately.
In cases of multiple debts, to determine the onerous of the same, the following may be stated as
bases for such determination, to wit;
1. In the event that one obligation is principal in nature and the other was incurred as surety to
another, the former is more onerous.
2. Where there are various debts, the oldest ones are more burdensome, and payments should
be applied to them before the most recent ones.
3. The debt that earns interest is onerous than the debt that does not.
4. The debt with security is onerous than that of having none.
SUBSECTION 2. - PAYMENT OF CESSION
Article 1255
The debtor may cede or assign his property to his creditors in payment of his debts. This cession,
unless there is stipulation to the contrary, shall only release the debtor from responsibility for the
net proceeds of the thing assigned. The agreements which, on the effect of the cession, are made
between the debtor and his creditors shall be governed by special laws.
Explanation:
Payment by Cession is another special form of payment. It is assignment and abandonment of all
the properties of the debtor for the benefit of his creditors in order that the latter may sell the same
and apply the proceeds thereof to the satisfaction of their credits.
Classes of Cession or Assignment:
Voluntary or Contractual – cession or assignment by agreement of the parties
Involuntary or legal – cession or assignment which is governed by the insolvency law (Act 1956)
Requisites:
1. There is plurality of debts;

2. Debtor must be partial or completely insolvent;
3. There are at least 2 creditors;
4. There is acceptance of the cession or assignment by the creditors;
5. The property ceded or assigned must not exempt from execution.
SUBSECTION 3. - TENDER OF PAYMENT AND CONSIGNATION
Article 1256.
If the creditor to whom tender of payment has been made refuses without just cause to accept It,
the debtor shall released from responsibility by the consignation of the thing or sum due.
DEFINITION
Tender of payment is the act, on the part of the debtor, of offering to the creditor the thing or
amount due. The debtor must show that he has in his possession the thing or money to be delivered
at the time of the offer. It is an act preparatory to consignation, which is the principal, and from
which are derived the immediate consequences which the debtor desires or seeks to obtain.
Consignation is the act of depositing the thing or amount due with the proper court when the
creditor does not desire, or refuses to accept payment, or cannot receive it, after complying with the
formalities required by law. It is always judicial and it generally requires a prior tender of payment
which is by its very nature extrajudicial.
Example:
Doctor Strange borrowed Php 10, 000 from Captain America. On the due date of the obligation,
Doctor Strange offers to pay the obligation but Captain America refuses to accept the payment
without any justifiable reason.
In this case, Doctor Strange’s obligation will not be extinguished until he has made a valid
consignation. The refusal by Captain America to accept the offer to pay without just cause will not
have the effect of payment but Doctor Strange will be relieved from payment of any interest from
the date of tender.
In the same example, upon Captain America’s refusal, Doctor Stranger then notified Captain
America, thus: “I will file a complaint against you and deposit the money in the proper court of
Manila on May 25, 2019 at 10:00 o’clock a.m., if before that time you do not accept my payment.”
Captain America having refused payment, Doctor Strange went to the proper court, proved to the
clerk of court’s satisfaction that there was valid tender of payment, that Doctor Strange, the creditor
unjustly refused to accept the payment and that, there was a previous notice of consignation. The
clerk accepted the deposit. Thereafter, Doctor Strange gave notice to Captain America that amount
had been deposited in court.
Article 1257
In order that the consignation of the thing due may release the obligor, it must first be
announced to the persons interested in the fulfillment of the obligation.
The consignation shall be ineffectual if it is not made strictly in consonance with the provisions
which regulate payment.
Explanation:
The purpose of the announcement if to give the creditor the chance to accept the tender of
payment and avoid unnecessary litigation.
The article emphasises on the fact that consignation must be strictly made in consonance with
the provisions of the law in order for it to be effectual or valid.
Article 1258
Consignation shall be made by depositing the things due at the disposal of judicial authority,
before whom the tender of payment shall be proved, in a proper case, and the announcement of
the consignation in other cases.
The consignation having been made, the interested parties shall also be notified thereof.
Article 1259
The expenses of consignation, when properly made, shall be charged against the creditor.
Explanation:
If the consignation is properly made the filling of the suit must bear the expenses of
consignation like storage fees, filling fees, attorney’s fees and other related expenses.
Article 1260
Once the consignation has been duly made, the debtor may ask the judge to order the
cancellation of the obligation
Before the creditor has accepted the consignation, or before the judicial declaration that the
consignation has been properly made, the debtor may withdraw the thing or the sum deposited,
allowing the obligation to remain in force.
Explanation:
Effect of valid consignation. When the consignation is properly effected, the court will order the
cancellation of the obligation upon motion duly filed by the debtor. When the validity of the
consignation has been affirmed by the court, the consignation shall have a retroactive effect. The
obligation is deemed paid from the moment the amount or the thing due has been actually placed at
the disposal of the court. The running of interest if stipulated is also deemed suspended at the same
time.
Article 1261
If the consignation having been made, the creditor should authorize the debtor to withdraw the
same, he shall lose every preference which he may have over the thing. The co-debtors,
guarantors and sureties shall be released.
Example:
Ursula has a debt to Cherry amounting to 15,000 pesos the Lannie is the guarantor, on the due
date of the obligation ursula offer a money to cherry but she refuse to accept it because cherry
refuse to take it ursula made an consignation and after the court concealed the obligation ursula
can now withdraw the money before she had the consent from cherry, then later on ursula becomes
an insolvent, therefore cherry will go to guarantor because If, the consignation having been made,
the creditor should authorize the debtor to withdraw the same, he shall lose every preference which
he may have over the thing The co-debtors, guarantors and sureties shall be released so sabi dito sa
article 1261 cherry as creditor shall lost every preference she may have over the amount and the
guarantor shall be realeased.
Article 1262.
An obligation which consists in the delivery of a determinate thing shall be extinguished if it

should be lost or destroyed without the fault of the debtor, and before he has incurred in delay.
When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing
does not extinguish the obligation, and he shall be responsible for damages. The same rule applies
when the nature of the obligation requires the assumption of risk.
Example:
X promise to deliver to Y a particular bicycle on december 31,2020, But the said bicycle was lost
on december 25,2020 because of a typhoon. Take note the lost was without the fault of X and that
he is not in delay. The obligation of X is extinguished.
Article 1263
In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind
does not extinguish the obligation.
Example:
X bound himself to give 50 chairs to Y. However, all of these were lost through an earthquake. Is
X still liable? Yes, because the object of the obligation are generic things.
Article 1264
The courts shall determine whether, under the circumstances, the partial loss of the object of the
obligation is so important as to extinguish the obligation.
Example:
X obliged himself to deliver to Y a motorcycle with plate number ABC123. Subsequently, its two
tires and its engine were lost through a typhoon In this case, the court shall determine if the loss of
the two tires and its engine is so important as to extinguished the obligation.
Article 1265
Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was
due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of
Article 1165. This presumption does not apply in case of earthquake, flood, storm, or other natural
calamity.
Explanation:
The presumption that the debtor is at fault if he is in the possession of the thing which got lost is
rebuttable. Thus , the debtor may prove that he was not at fault, but if he incurred delain in the
process or he had promised to deliver the thing to two or more persons with different interests, he
will be liable even if the loss is due to fortuitous events.
Article 1266
The debtor in obligation to do shall also be released when the prestation become legally or
physically impossible without the fault of the obligor.
Example:
Jay obliged himself to build Ann a commercial building, but due to the unexpected circumstances
Jay died so he was released from his obligation because it is physically imposible to jay to build the
said building.
Another example Jay is not dead or he wasn’t in any accident, but then government refuses to
give Ann building permit because the location is declared by law as residential zone then in that case
Jay was released from his obligation because it is legally impossible.
ARTICLE 1267
When the service has become so difficult as to be manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom, in whole or in part.
Explanation:
This article refers to difficulties of service to other parties. The general rule is that the
impossibility of performance release the obligor, however, when service becomes difficult the court
will release the obligor on those part.
Example:
Victor together with other construction workers, agreed to construct a road near a mountain.
A hurricane caused landslide making the construction of the road dangerous to human lives.
In this case, Victor may be released, in whole or in part, from his obligation to continue with
the construction.
ARTICLE 1268
When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor
shall not be exempted from the payment of its price, whatever may be the cause for the loss,
unless the thing having been offered by him to the person who should receive it, the latter refused
without justification to accept it.
Explanation:
The article applies only to an obligation to deliver a certain thing which is determinate, and which
the obligation arose out of the commission of a criminal offense committed by the debtor. If the
thing is lost for whatever reason the debtor shall pay for the value of the thing.
If the obligor had offered or tendered the delivery of the thing to the obligee, but the latter had
unjustifiably refused to accept it, and the thing got lost, the former is not liable anymore because the
latter is in mora accipiendi.
Example:
D stole C’s car, D has the obligation to return it to C. the obligation of D arises from an act
punishable by law.
Even if the car is destroyed without the fault of D, he shall be liable for the payment of its price.
The exception to the rule is when is C in mora accipiendi. In either case, D is liable if the loss is due to
his fault.
ARTICLE 1269
The obligation having been extinguished by the loss of the thing, the creditor shall have all the
rights of action which the debtor may have against third persons by reason of the loss.
Explantion:
Although the obligation is extinguished by loss of a thing without the debtor’s fault,
nevertheless, whatever action the debtor may have against the third person by reason of the loss is
transferred to the creditor in order to safeguard the interest of the latter. The right of action includes
the insurance indemnity that may have been received from the third person.
Example:
X promised to deliver a specific thing to Y. Subsequently, said thing was lost through the
negligence of Z, a third person. In this case, y, the creditor, has a right of action against Z.
SECTION 3. - CONDONATION OR REMISSION OF THE DEBT
ARTICLE 1270
Condonation or remission is essentially gratuitous, and requires the acceptance by the

obligor. It may be made expressly or impliedly.
One and the other kind shall be subject to the rules which govern inofficious donations.
Express condonation shall, furthermore, comply with the forms of donation.
Requisites of Condonation or remission
1. It must be gratuitous
2. It must be accepted be the debtor
3. The obligation must be demandable
4. The parties must have capacity
5. The condonation must not be inofficious
6. The condonation must comply with forms of donation, if it is an express condonation.
Kinds of Remission or Condonation
1. As to form
 Express
 Implied
2. As to extent
 Total
 Partial
3. As to constitution
 Inter vivos
 Mortis causa
ARTICLE 1271
The delivery of a private document evidencing a credit, made voluntarily by the creditor to
the debtor, implies the renunciation of the action which the former had against the latter.
If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his
heirs may uphold it by proving that the delivery of the document was made in virtue of payment
of the debt.
Explanation:
Article 1271 speaks of a private document. The legal presumption of remission does not apply
in the case of a public document because it is easy to obtain a copy of the same, being a public
record.
Under second paragraph of Article 1271, the renunciation of the action which the creditor had
against the debtor maybe nullified or invalidate by showing that the waiver is inofficious. In other
words the remission becomes null and void upon proof that it is inofficious.
Example:
X delivers the contract to Y (debtor), if it is a private document with the intention of renouncing
his right, then the obligation shall be extinguished.
ARTICLE 1272
Whenever the private document in which the debt appears is found in the possession of the
debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is
proved.
Explanation:
The presumption of remission of the obligation in favor of the debtor will always rule over in
the case when the instrument of credit is found with the debtor. However this doctrine could be
reversed upon establishing material evidence that the debt or the obligation still exists.
In cases of joint creditors and debtors, only the part of the creditor who has given remission in
favor of the debtor shall be extinguished. In the same manner, only the debtor who has been the
beneficiary of remission will be exempted from the obligation.Further, in cases of Solidary
obligation, even if the instrument of credit is found in the possession of even one debtor, the whole
obligation is extinguished.
Example:
X owe Y the amount of 30,000 evidenced by a promisory note which was not notarized; thus, a
private document. Subsequently, the promissory note was found in the possession of X. Hence, the
disputable presumption is that it was delivered voluntarily by Y so as to condone the obligation.
ARTICLE 1273
The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of
the latter shall leave the former in force.
Explanation:
The above provision follows the rule thatthe accessory follows the principal. While the
accessory obligations cannot exist without the principal obligation, the latter may exist
without the former.
Example:
Remission of principal debt, effect on accessory obligation:
Pedro borrowed money from Juan, Maria guaranteed the payment of the loan. Juan remitted the
entire obligation of Pedro. THis remission extinguishes the whole obligation.
Remission of the accessory Obligation:
Pedro borrowed money from Juan. To secure the loan, Maria was convinced to mortgage his
property to Juan. If Juan released the mortgage by remission, Maria’s property is freed from the
obligation. But the principal obligation of Pedro which is the loan, shalll remain without any
collateral or security.
ARTICLE 1274
It is presumed that the accessory obligation of pledge has been remitted when the thing pledged,
after its delivery to the creditor, is found in the possession of the debtor, or of a third person who
owns the thing.
Explanation:
In a contract of pledge, it is necessary that the thing pledged be placed in the possession of the
creditor, or of a third person by common agreement. A third person who is not a party to the
principal obligation may secure the latter by pledging his own property.
If the thing pledged is later found in the hands of the debtor or the third person, only the
accessory obligation of pledge is presumed remitted, not the obligation itself. The debtor shall
continue to be indebted but he does not have to return the thing pledged. The presumption yields to
contrary evidence.
Example:
Harry delivers to Hermione his diamond ring in pledge to guarantee the payment of a loan. If
later on the ring is found in the possession of Harry, the presumption is that Hermione agreed to the
loan without the pledge. Hermione may prove that he returned the ring to Harry upon the latter’s
request to be delivered back to him.
Chapter 8
Unenforceable Contracts (n)
Article 1403. The following contracts are unenforceable, unless they are ratified:
1. Those entered into in the name of another person by one who has been given no
authority or legal representation, or who has acted beyond his powers;
2. These that do not comply with the Statute of Frauds as set forth in this number. In
the following cases, an agreement hereafter made shall be unenforceable by action,
unless the same, or some note or memorandum thereof, be in writing, and subscribed
by the party charged, or by his agent; evidence, therefore, of the agreement cannot be
received without the writing, or a secondary evidence of its contents:
a) An agreement that by its terms is not to be performed within a year from the
making thereof;
b) A special promise to answer for the debt, default, or miscarriage of another;
c) An agreement made in consideration of marriage, other than mutual promise to
marry;
d) An agreement for the sale of goods, chattels or things in action, at a price not
less than five hundred pesos, unless the buyer accept and receive part of such
goods and chattels, or the evidence, or some of them of such things in action,
or pay at the time some part of the purchase money; but when the sale is made
by auction and entry is made by the auctioneer in his sales book, at the time of
the sale, of the amount and kind of property sold, terms of sale, price, names
of the purchasers and person on whose account the sale is made, it is a
sufficient memorandum;
e) An agreement for the leasing for a longer period than one year, or for the sale
of real property or of an interest therein;
f) A presentation as to the credit of a third person.
3. Those where both parties are incapable of giving consent to a contract.
Unenforceable contracts – cannot be sued upon or enforced unless ratified, it has no effect
yet while voidable and rescissible contracts produced legal effects until they are annulled or
rescinded.
Statute of Frauds- Statute design to prevent the commission of fraud by requiring certain
contracts to be in writing.
Kinds of unenforceable contracts:
a. Unauthorized contracts;
b. Those that fail to comply with the statute of frauds;
c. Those where both parties are incapable of giving consent to a contract.
Example for no. 1: Without my authority, my sister sold my parcel of land in my name, to
Bekka. The said contract is unauthorized and cannot affect me unless I ratify the contract
expressly or impliedly as by accepting the proceeds of sale.
Example for letter a.: C and B are neighbors, they orally agreed that C would sell and B
would buy C’s car for 150,000 in 3 years from the date of agreement. At the end of 3 years C
refused to hand over the said car although B was willing to pay. In this case the agreement
is not enforceable under the statute of frauds, it should be made in writing and apparently
only 1 year is the limit, if the agreement let’s say within 5 months, the agreement even if oral
would have been enforceable.
Article 1404. Unauthorized contracts are governed by Article 1317 and the principles
of agency in Title X of this Book.
Article 1317, NCC states:
No one may contract in the name of another without being authorized by the latter, or
unless he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless
it is ratified, expressly or impliedly, by the person on whose behalf it has been
executed, before it is revoked by the other contracting party. (1259a)
This article said that unauthorized contract or contract entered into without the authority of
the principal is unenforceable contracts.
General Rule: No one may contract in the name of another.
Example: In Marga’s name, but without her authorization, Cassie sold Marga’s car to
Hector. So, in that case the sale being unauthorized is an unenforceable, which it is not
valid.
Requisites for a person to contract in the name of another.
1. He must be authorized either (expressly or impliedly)
It can be written which is much better, it can also be impliedly through conduct of another
person which is the principal and then the seller is the agent.
2. He must have by law a right to respect him.

When the law has given the right to respect him like the guardian of the minor.
3. The contract must be subsequently ratified (expressly or impliedly)
Example: When Jolo sold the car although it doesn't have authority from Anna, but latter on
Anna collect the payment of Badie so that is an implied ratification as when Jolo sold the car
because Anna collects the benefits so ratification cleansed the contract from its effect.
4. He must act within his power.
If you are authorized to lease a land then don’t sell it because you are just authorized to
lease only so if you sell it then you acted beyond your power, it is also unenforceable.
Article 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of article
1403, are ratified by the failure to object to the presentation of oral evidence to prove
the same, or by the acceptance of benefit under them.
Unenforceable contracts (paragraph 2, Article 1403: Statute of Frauds) may be ratified

in two ways:
1. Failure to object to the presentation of oral evidence. This is tantamount to a waiver.

Contracts that are infringed in the Statute of Frauds are ratified by the failure to
object to the presentation of parol evidence and are enforceable
Example: Z and Y entered into an oral contract of sale where X sold his land to Y.
When Y sued X to enforce the contract, Y presented the testimony of witnesses to
prove that the contract existed. X did not object. Binding upon the parties as if it had
been reduced to writing.
2. Acceptance of Benefits under these contacts is equivalent to waiver or estoppel;

only applies to executor contracts. If the oral contract was reduced into writing by the
party charged, this exercise is called recognition. It is the express ratification of the
contract.
When a party to a contract receives the benefits from the contract, the Statute of
Fraud is no longer applies.
The acceptance or partial performance already serves as evidence of the existence

of the contract.
Article 1406. When a contract is enforceable under the Statute of Frauds, and a public
document is necessary for its registration in the Registry of Deeds, the parties may
avail themselves of the right under Article 1357. *Art. 1357.
 If the law requires a document or other special form, as in the acts and contracts
enumerated in the following article, the contracting parties may compel each other to
observe that form, once the contract has been perfected. This right may be
exercised simultaneously with the action upon the contract. *The right of one party to
have the other execute the public document needed for convenience in registration,
is given only when the contract is both valid and enforceable.
Article 1407. In a contract where both parties are incapable of giving consent, express
or implied ratification by the parent, or guardian, as the case may be, of one of the
contracting parties shall give the contract the same effect As if only one of them were
incapacitated. If ratification is made by the parents or guardians, as the case may be,
of both contracting parties, the contract shall be validated from the inception.
 The contract is unenforceable when both parties to purported contract are not
incapacitated to give consent and cannot be enforced in court. It may be ratified if:
 If ratification is only of one side of the contracting parties. That is, by the parent or
guardian, the contract is transformed into a voidable contract on the part of the party
wo did not ratify, meaning, it is now valid and binding unless annulled by the court.
 If ratification is made by both sides by the parents or guardians, the contract is
validated from its inception. The validation is retroactive.
 If the parties ground for incapacity like minority attained majority age, or if the
capacity is due to insanity and regained their insanity, they can ratify their previous
acts. There is no need for the law to include this expressly because it is deemed
understood.
Article 1408. Unenforceable contracts cannot be assailed by third persons. Strangers

Cannot Assail Unenforceable Contracts
 Just as strangers cannot attack the validity of voidable contracts, so also they cannot
attack a contract because of its unenforceability. Indeed, the Statute of Frauds
cannot be set up as a defense by strangers to the transaction.
Article 1409. The following contracts are inexistent and void from the beginning:
 Those whose cause, object or purpose is contrary to law, morals, good customs,
public order or public policy;
 Those which are absolutely simulated or fictitious
 Those whose cause or object did not exist at the time of the transaction;
 Those whose object is outside the commerce of men;
 Those which contemplate an impossible service;
 Those where the intention of the parties relative to the principal object of the contract
cannot be ascertained;
 Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the defense of illegality be
waived.
Explanation:
1. Contrary to Law
 An agreement whereby Anna is to render service as a servant to Ben without
compensation as long as Anna has not paid his debt is reprehensible and
censurable. Contrary to Morals a contract, whereby Anna promised to live as the
common-law wife of Ben without the benefit of marriage in consideration of
P50,000.00, is immoral and, therefore, void. Contrary to Good Customs Anna
entered into a contract whereby Anna binds herself to slap his father. This contract is
void because it is against the good custom of showing respect to our parents
Contrary to Public Order A stipulation in a contract of lease whereby the landlord
can use force to eject the tenant in case of failure of the latter to pay the rent agreed
upon is void as being against public order. Contrary to Public Policy a condition in
a contract of sale states: “In case of sale, the buyer shall not sell to others the land
sold but only to the seller, or to his heirs or successors for the same price of
P5,600.00 when the latter shall be able to pay it.’’ The condition is contrary to public
policy, because it virtually amounts to a perpetual restriction on the right of
ownership, specifically the owner’s right to freely dispose of his property. Such a
prohibition indefinite and unlimited as to time, so much so that it shall continue to be
applicable even beyond the lifetime of the original parties to the contract is a nullity.
2. Anna is indebted to Ben. Upon learning that Ben is going to enforce her credit, Anna
pretended to sell her land to Felimon, his father-in-law. Anna did not receive a single
centavo for the deed of sale she executed and she continued in possession of the
land as the contract was merely simulated or fictitious.
There is no contract of sale in this case as the parties do not intend to be bound at
all. The sale is but a sham.
3. Sandra sells to Ben a parcel of land. In the deed of sale, P100,000.00 is stated as
the price of the land. If this statement is false, then there is no contract of sale.
4. If the object is outside the commerce of man, such as sidewalks or public plazas or
public bridges, they cannot be the object of contracts of alienation (but may be the
object, for example, of a contract for repair).
5. If a blind man enters into a contract which requires the use of his eyesight, the
contract is void although in this particular case, we have only a relative impossibility.
This is because here, the relative impossibility is not merely temporary.
6. Anna sold his land to Ben. Anna has many lands. It cannot be determined which
land was intended by the parties to be the subject of the sale. Therefore, the contract
shall be null and void and it is as if the parties have not entered into any contract at
all.
7. Contracts upon future inheritance except in cases expressly authorized by law.
Art. 1410. The action or defense for the declaration of the inexistence of a contract
does not prescribe.
 If a contract is null and void, the action to declare it existence does not prescribe. The
action can be filed anytime. The mere laps of time does not validate a void contract
unlike voidable contracts if not assailed within the specific period provided by law
shall remain valid.
 A valid contract remains void even if no court has declared its in-existence or
illegality. However, there are certain contracts the nullity of which is not apparent on
their faces. (e.g.) Declaration for Nullity of marriage. It must be declared by the court
as null and void otherwise if you contract a subsequent marriage you will be liable for
bigamy.
 In his complaint against B to annul a deed of sale, S alleged that he was surprised to
find that the deed was a sale for the document had been represented by B to be for a
different purpose. The action of S based upon the grounds that there is fraud in
securing his signature in said deed. There was no consideration given at the of the
transaction.
 B raised the defense of prescription, contending that since the action was based of
fraud it should have been brought within four years from the time the discovery of the
document.
Article 1411. When the nullity proceeds from the illegality of the cause or object of the
contract, and the act constitutes a criminal offense, both parties being in pari delicto,
they shall have no action against each other, and both shall be prosecuted. Moreover,
the provisions of the Penal Code relative to the disposal of effects or instruments of a
crime shall be applicable to the things or the price of the contract.
 This rule shall be applicable when only one of the parties is guilty; but the innocent
one may claim what he has given, and shall not be bound to comply with his promise.
In Pari Delicto-in equal fault; a universal doctrine which holds that no action arises, in
equity or at law, from an illegal contract. The rule that parties to an illegal contract will
not be aided by law.
“This rule adopts the principle of “One who seeks equity and justice
must come to court with clean hands”.
Example: If the two parties complain to a judge of the non-performance of a contract

by the other, the judge could refuse to provide remedy to either of them because of in
pari delicto: a finding that they were equally at fault in causing the contract’s breach.
This rule adopts the principle of “One who seeks equity and justice must come to
court with clean hands”.
Article 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed:
 When the fault is on the part of both contracting parties, neither may recover what he
has given by virtue of the contract, or demand the performance of the other’s
undertaking;
 When only one of the contracting parties is at fault, he cannot recover what he has
given by reason of the contract, or ask for the fulfillment of what has been promised
him. The other, who is not at fault, may demand the return of what he has given
without any obligation to comply his promise. (1306)
 The Rules were contracts is illegal but the act does not constitute a criminal offense.
 When the parties are both in pari delicto and the cause of contract is unlawful or
forbidden but no criminal offense
 When only one party is guilty, Rules;
 The guilty party loses what he has given by reason of the contract;
 The guilty party cannot ask for the fulfilment of the other’s undertaking;
 The innocent party cannot be compelled to comply with his promise.
Article 1413. Interest paid in excess of the interest allowed by the usury laws may be
recovered by the debtor, with interest thereon from the date of the payment.
 Recovery of Usurious Interest. Under section 6 of Act no 2655 “Usury Law” - the
person who paid usurious interest “may recover the whole interest, commissions,
premiums, penalties and surcharges paid or delivered” if the action to recover is
brought within two years after such payment or delivery.
Article 1414. When money is paid or property delivered for an illegal purpose, the
contract may be repudiated by one of the parties before the purpose has been
accomplished, or before any damage has been caused to a third person. In such case,
the courts may, if the public interest will thus be subserved, allow the party
repudiating the contract to recover the money or property.
 In Cases when money used in the performance of obligation is illegally or unlawfully

gained, the courts may, for the public interest allow the other party to recover the
money from the party who unlawfully performed the obligation.
Art. 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts
may, if the interest of justice so demands, allow recovery of money or property delivered by the
incapacitated person.
 The party who entered into an illegal contract is not capacitated to give his consent (minor
or insane), he may be allowed to recover the money or property delivered, however may
only be allowed only in the interest of justice so demands. The matter being left in the
discretion of the court, in a case to case basis, there being no criteria provided by the law.
 The contract is unenforceable when both parties to purported contract are not incapacitated
to give consent and cannot be enforced in court. It may be ratified if:
 If ratification is only of one side of the contracting parties. That is, by the parent or guardian,
the contract is transformed into a voidable contract on the part of the party wo did not
ratify, meaning, it is now valid and binding unless annulled by the court.
 If ratification is made by both sides by the parents or guardians, the contract is validated
from its inception. The validation is retroactive.
 If the parties ground for incapacity like minority attained majority age, or if the capacity is
due to insanity and regained their insanity, they can ratify their previous acts. There is no
need for the law to include this expressly because it is deemed understood.
Article 1416. When the agreement is not illegal per se but is merely prohibited, and the
prohibition by the law is designed for the protection of the plaintiff, he may, if public policy is
thereby enhanced, recover what he has paid or delivered.
 Article 1416 is another exception to the rule that where both parties are in pari delicto, they
will be left where they are without relief.
Recovery is permitted provided:
 The agreement is not illegal per se but is merely prohibited;

 The prohibition is designed for the protection of the plaintiff; and
 Public policy would be enhanced by allowing the plaintiff to recover what he has paid or
delivered.
Example: Paul donated to Peter everything that he Paul possessed and owned, leaving nothing for
himself. This is prohibited but not illegal per se. Since public policy is hereby enhanced, Black Widow
will be allowed to recover, at least that necessary for her own support and the support of his
relatives.
Art. 1417. When the price of any article or commodity is determined by statute, or by authority or
law, any person paying any amount in excess of the maximum price allowed may recover such
excess.
 Article 1417 applies to articles or commodities over which there is a law or regulation issued
by competent authority fixing their maximum price. This law aims to prevent profiteering
which is inimical to the interest of the people, therefore, any excess payment made must be
recoverable.
Example: A regulation was promulgated by the government fixing the maximum price of a
particular brand of rice grain at P120.00 per kilo. If the buyer paid P250.00 per kilo, whether
or not he knew the regulation, must be allowed to recover the P130.00 excess from his
payment.
Art. 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of labor,
and a contract is entered into whereby a laborer undertakes to work longer than the maximum
thus fixed, he may demand additional compensation for service rendered beyond the time limit.
Example: Rafaela works on Argus Company in Manila. She works from Monday to Sunday
from 8 am to 5 as the maximum working hours. However she works on Monday,
Wednesday, and Sunday from 8 am to 7 pm exceeding 2hours beyond the maximum
working hours.
Employees are entitled for an additional compensation for services rendered beyond the 8-
hour labor work under the Eight-Hour Labor Law. Social legislations and labor laws will
govern the rights and obligations of employees and laborers. The basis of the minimum
wage rate is not more than 8 hours daily labor in the case of employees working on a non-
agricultural enterprises. (art. 1, sec. 3 Code of Rules and Regulation to implement Minimum
Wage law, as amended.
Art. 1419. When the law sets, or authorizes the setting of a minimum wage for laborers, and a
contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover
the deficiency.
 If the laborer has agreed to receive a wage lower than the minimum wage fixed by law he is
not barred from recovering the deficiency. Such contract or agreement is void under the
minimum wage law.
Example: Selena the owner of a candy factory in Manila executed a contract with Karina as a
laborer. When the pay day comes Karina reacted for the sum of money that he received because the
amount that he received is only P380.00/day instead of P481.00, therefore Karina can recover for
the deficiency that he received from Selena which stated on this art. that “When the law sets, or
authorizes the setting of a minimum wage for laborers, and a contract is agreed upon by which a
laborer accepts a lower wage, he shall be entitled to recover the deficiency.
Article 1420. In case of a divisible contract, if the illegal terms can be separated from
the legal ones, the latter may be enforced.
The Article applies only if there are several stipulations, terms or conditions in the contract. If
some of the stipulations are illegal and others are valid, the latter if separable from the
former shall be effective and enforceable. The rule of divisibility or separability cannot apply
in two situations:
When the contract by its nature required indivisibility;
When the parties intended the contract to be entire or indivisible.
“A” agreed to sell and deliver to “B” certain amount of illegally cut logs including the towing
vessel to be used. The sale of the illegal logs may be avoided leaving the transaction on the
towing vessel enforceable.
However, if the parties intended the transaction to be entire, that is, without the logs the
vessel would not be purchased, the entire transaction is void.
In a contract of loan, the borrower as security for the payment executed a real state
mortgage using a fake title. The mortgage is void but the loan remains valid.
Invalid stipulations on the compromise which are independent of the rest of the agreement
and which could easily be separated therefrom without violating the manifest intention of the
parties do not make the entire agreement void. The legal stipulations can be enforced.
 In case of doubt on whether the terms of a contract are indivisible or divisible, the
same will be presumed as divisible. The decision in a contract if it is partly legal and
partly illegal, will render the entire contract void is deemed abandoned.
Article 1421. The defense of illegality of contracts is not available to third persons
whose interests are not directly affected.
 Persons entitled to raise defense of illegality or nullity.

 In voidable and unenforceable contracts, third persons are not allowed to bring an
action to annul or to assail, as the case may be, said contracts. If the contract is
illegal or void, however, even a third person may avail of the defense of illegality or
set up its illegality as long as his interest is directly affected by the contract.
Article 1422. A contract which is the direct result of a previous illegal contract, is also
void and inexistent.
 This provision is based on the requisites of a valid novation. An illegal contract is void
and inexistent and cannot, therefore, give rise to a valid contract.
 From the previous contract, the illegally acquired title is Void, until the new contract
was made such new contract is still void.
CHAPTER 3
FORM OF CONTRACT
Article 1356. Contracts shall be obligatory, in whatever form they may have
been entered into, provided all the essential requisites for their validity are
present. However, when the law requires that a contract be in some form in
order that it may be valid or enforceable, or that a contract be proved in a
certain way, that requirement is absolute and indispensable. In such cases, the
right of the parties stated in the following article cannot be exercised.
Contracts are binding upon the contacting parties in whatever form they may have
been entered into as long as all the essential requisites for their validity are present.
Form of a contract-refers to a manner in which a contract is executed or

manifested.
When form is Essential:
1. When the law requires a form for the validity of the contract.
2. When the law requires certain agreements to be in writing to be enforceable,

or that contracts must be proven in a certain way.
3. When the law requires a special form.
Examples:
Beth left a note in the store of Nathy offering Php 1,000.00 for a table Nathy is
selling. The following day Nathy called Beth by phone accepting the offer of Beth
who promised to pay the next day.
The note and the oral acceptance constitute a legally enforceable contact and both
Beth and Nathy are fully bound.
Article 1357. If the law requires a document or other special form, as in the
acts and contracts enumerated in the following article, the contracting parties
may compel each other to observe that form, once the contract has been
perfected. This right may be exercised simultaneously with the action upon the
contract.
Example:
Kristia donated a real property to Bryan in a private instrument. The donation is void.
Donation of real property is required to be in a public instrument to be valid.
Sale of Real property orally executed is valid but unenforceable because the law
requires it to be in writing. While exchange of land is valid although not in writing.
Article 1358. The following must appear in a public document:

(1) Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property; sales of
real property or of an interest therein a governed by Articles 1403, No. 2, and
1405;
(2) The cession, repudiation or renunciation of hereditary rights or of those of the

conjugal partnership of gains;
(3) The power to administer property, or any other power which has for its object
an act appearing or which should appear in a public document, or should
prejudice a third person;
(4) The cession of actions or rights proceeding from an act appearing in a public
document.
All other contracts where the amount involved exceeds five hundred pesos must
appear in writing, even a private one. But sales of goods, chattels or things in action
are governed by Articles, 1403, No. 2 and 1405.
Contracts which must appear in a public document
The law does NOT require the accomplishment of certain acts OR contracts in a
public instrument in order to validate the act OR contract
BUT ONLY to ensure its efficacy so that after the existence of the act OR contract
has been admitted/established, the party bound may be compelled to execute the
document.
Formal requirements are for the benefit of third parties
For the purpose of informing as well as binding them.
Non-compliance does NOT adversely affect the validity of the contract NOR the
contractual rights and obligations of the parties.
Public document/instrument
One which is acknowledged before a notary public OR any official authorized to
administer oath, by the person who executed the same;
Any other instrument is private, UNLESS it becomes part of an official record and is
certified by a public officer duly authorized by law
Article 1358 NCC | example:

As security for his debt, Ryan mortgaged his land to Elsa.
The mortgage must appear in a public document.
The extinguishment of the mortgage, upon payment of the debt by Ryan, must
likewise appear in a public document.
CHAPTER 4
REFORMATION OF INSTRUMENTS
ARTICLE 1359.
When, there having been a meeting of the minds of the parties to contract,
their true intention is not expressed in the instrument purporting to embody
the agreement, by reason of mistake, fraud, inequitable conduct or accident,
one of the parties may ask for the reformation of the instrument to the end that
such true intention may be expressed.
ARTICLE 1360.
The principles of the general law on the reformation of instruments are hereby
adopted insofar as they are not in conflict with the provisions of this Code.
Rationale:
The rationale of the doctrine is that it would be unjust and inequitable to allow the
enforcement of a written instrument which does not reflect or disclose the real
meeting of the minds of the parties.
What is Reformation?
Reformation is a remedy in equity whereby a written instrument is made or construed
so as to express or conform to the real intention of the parties where some error or
mistake has been committed.
Requisites of reformation:
1. There must have been a meeting of the minds of the parties to the contract.
2. The instruments do not express the true intention of the parties.
3. The failure of the instrument to express the true intention of the parties is due
to mistake, fraud, inequitable, conduct or accident.
ARTICLE 1361
When a mutual mistake of the parties causes the failure of the instrument to
disclose their real agreement, said instrument may be reformed.
ARTICLE 1362
If one party was mistaken and the other acted fraudulently or inequitably in
such a way that the instrument does not show their true intention, the former
may ask for the reformation of the instrument.
ARTICLE 1363
When one party was mistaken and the other knew or believed that the
instrument did not state their real agreement, but concealed that fact from the
former, the instrument may be formed.
ARTICLE 1364
When through the ignorance, lack of skill, negligence or bad faith on the part
of the person drafting the instrument or of the clerk or typist, the instrument
does not express the true intention of the parties, the courts may order that
the instrument be reformed.
ARTICLE 1365
If two parties agree upon the mortgage or pledge of real personal property, but
the instrument states that the property is sold absolutely or with a right of
repurchase, reformation of the instrument is proper.
ARTICLE 1366
There shall be no reformation in the following cases:
1. Simple donations inter vivos wherein no condition is imposed;
2. Wills;
3. When the real agreement is void.
Instruments that cannot be reformed
1. Simple donations inter vivos wherein no condition is imposed; Donations
are essentially act of pure liberality.
2. Wills; A will may be revoked at any time
3. When the real agreement is void. A void agreement, in essense, is an

agreement that did not exist from the very beginning. Hence, there is nothing
to be reformed.
ARTICLE 1367
When one of the parties has brought an action to enforce the instrument, he
cannot subsequently ask for its reformation.
ARTICLE 1368
Reformation may be ordered at the instance of either party or his successors
in interest, if the mistake was mutual; otherwise, upon petition of the injured
party, or his heirs and assigns.
ARTICLE 1369
The procedure for the reformation of instrument shall be governed by rules of
court to be promulgated by the Supreme Court.
CHAPTER 5
INTERPRETATION OF CONTRACTS
Article 1370- If the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations shall
control.
If the words appear to be contrary to the evident intention of the parties, the
latter shall prevail over the former. (1281)
Kung ang mga napagkasunduan sa kontrata ay malinaw at hindi nang-iiwan ng

pagdududa sa intensyon ng mga partido, ang literal na ibig sabihin ng mga
napagkusunduan ang mananaig.
Interpretation of a contract is the determination of the meaning of the terms or words

used by the parties in their contract.
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulation shall control. The Court must not read into any other
intention of the contracting parties contradictory to the plain meaning.
Example:
A contract was executed between Shiela and Bon. The contract recites that it is a
sale of parcel of land belonging to Shiela for Php100,000.00. In the contract Shiela
described as the vendor and Bon, the vendee. The terms of the contract are clear
and it does not appear from the circumstances that the intention of the parties is
contrary to the literal meaning of said terms.
Article 1371. In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered.
Upang hatulan ang intensyon ng mga nagkasundo, ang kaalinsabay at

kasunod na kilos ang syang pangunahing ikonsidera.
Example:
Kristia and Bryan entered into a contract entitled Contract of Lease. Although the
contract refers to Kristia as lessor and to Bryan as Lessee, it states that possession
and ownership of the land are transferred to Bryan. The title to the land was given by
Kristia to Bryan who registered the land in his name. Before the date of the contract,
Bryan wrote a letter to Kristia offering to buy the land.
By their acts, the party clearly indicate that their evident intention is to make Bryan
the owner of the land. Hence, the contract should be interpreted as one of sale.
Article 1372. However general the terms of a contract may be, they shall not be
understood to comprehend things that are distinct and cases that are different
from those upon which the parties intended to agree.
Gaanuman ka-pangkalahatan ang mga tuntunin ng isang kontrata, hindi sila
dapat intindihin upang unawain ang mga bagay na naiiba at mga kaso na iba
mula sa mga pinagkasunduan ng mga partido.
Special intent over general intent
 Even if the terms used in the contract/agreement may be general, the

interpretation should NOT ever be far from the intention of the parties;
 that intention to be determined accd. to circumstances.
 GENERAL RULE | Where in a contract there are general and special
provisions covering the same subject matter that are inconsistent,
 special provisions prevail over general provisions when the two CANNOT
stand together.
 Charlie is building a house on a 350 sqm. lot with an existing structure that
was less than 350 sqm. in area.
 Ben protested alleging that Charlie could occupy ONLY the space where the
existing structure lies.
 Charlie, however, argued that accd. to their agreement, he could occupy the
lot.
 Ben’s interpretation is erroneous because if that was the intention, they could
have used the words “portion” or “part” and not the word “lot”.
Article 1373. If some stipulation of any contract should admit of several

meanings, it shall be understood as bearing that import which is most
adequate to render it effectual.
Kung ang kasunduan ay merong kahulugan maliban sa isa, ang kahulugan na

magbibigay silbi dito ang masusunod.
Interpretation of stipulation with several meanings.
When an agreement is susceptible of several meanings, one of which would render it

effectual, it should be given that interpretation. Thus, if one interpretation makes a
contract valid or effective and the other makes it illegal or meaningless, the former
interpretation is one which is warranted by the rule stated in Article 1373.
Illustration:
Sabit Singson owns two lands, one he owns exclusively and one he co-owns with
Irap Estrada. Without specifying, Sabit sells “his parcel of land” to Ate Glow. Irap did
not give his consent to the sale.
In this case, the sale should refer to the land owned by Sabit Singson alone as this
would make the contract effectual.
Article 1374. The various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result from all
of them taken jointly.
Artikulo 1374. Ang iba’t ibang kasunduan ng isang kontrata ay dapat bigyang-
kahulugan ng magkasama, dahil sa mga hindi tiyak sa diwa na maaaring
magresulta mula sa lahat ng mga ito na kinuha magkasama.
INTERPRETATIONS OF VARIOUS STIPULATIONS OF A CONTRACT
A contract must be interpreted as a whole and the intention of the parties is to be

gathered from the entire instrument and not from particular words, phrases, or
clauses. All provisions should, if possible, be so interpreted as to harmonize with
each other.
CASE
THE BANK OF THE PHILIPPINE ISLANDS vs TY CAMCO SOBRINO, ET AL.
G.R. No. L-36524. February 6, 1933.
HULL, J.
Facts
Ty Camco Sobrino is the registered owner of two parcels of land situated in the
municipality of Rosario, Province of Pangasinan, described in Transfer Certificates of
Title Nos. 1803 and 1804.
On April 12, 1924 Ty Camco Sobrino executed a deed of first mortgage on these
parcels of land in favor of the Philippine National Bank, and the mortgage was noted
on the back of the transfer certificates of title.
On February 21, 1930, Ty Camco Sobrino executed a deed of second mortgage on

the same properties in favor of Cu Yeg Keng and Simon A. Chan Bona, without
having secured the written consent of the Philippine National Bank. The mortgagor
obtained the certificates of title from this bank. The register of deeds for Pangasinan
registered and noted on the Transfer Certificate of Title Nos. 1803 ad 1804 the
second mortgage.
On April 14, 1931, the Philippine National Bank filed in the Court of First Instance of
Pangasinan, a petition praying that the annotation or inscription of the second
mortgage be declared null and void, and ordered cancelled.
Issue
Whether or not that the 2nd mortgage is valid in favor of the appellees.
Ruling
The mortgage contract should be read in its entirely. If so read, it is at once seen that
while the making of the 2nd mortgage except with the written consent of the
mortgage is prohibited, the contract continues and states the penalty for such
violation namely, it gives to the mortgage the right immediately foreclose mortgage. It
does not give the mortgages the right to treat the second mortgage as null and void.
The orders of CFI of Pangasinan are affirmed with cost against the appellant.
Article 1375. Words which may have different significations shall be

understood in that which is most in keeping with the nature and object of the
contract.
Ang mga salitang may ibat-ibang pakahulugan ay uunawain sa paraan na kung

saan pinakamalapit sa pinagmulat at bagay ng kontrata.
Comment:
Words used in a contract which are susceptible to two or more meanings shall be
understood to follow that meaning which is most in keeping with the nature and
object of the agreement.
Illustration:
Romeo leased to Elena a roof for the purpose of erecting and advertising sign. The
contract provides for the termination of the lease by Elena if a building should be
constructed on an adjoining property of such height ans to obscure the view of
Elena’s sign. There was erected on the roof of an adjoining building a sign which
obstructed the view of Elena’s sign. In this case, the term building as the term used
in the contract may be interpreted as to include the obstructing sign having in mind
the nature and object of the contract.
Article 1376. The usage or custom of the place shall be borne in mind in the
interpretation of the ambiguities of a contract, and shall fill the omission of
stipulations which are ordinarily established.
Ang dating kinasanayan o kinaugalian ng lugar ay maaaring gamitin sa
pagbibigay kahulugan sa mga hindi malinaw sa kontrata, at papalitan nito ang
mga naalis sa kasunduan na napagkasunduan.
COMMENT:
1) Effect of Usage or Custom of the Place
Examples:
a) Rona made a contract with Ferdy regarding “pesetas”. In the place where the
contract was made, Mexican pesetas were more commonly used than Spanish
pesetas. The Supreme Court held that the term “pesetas” should be construed to
mean Mexican pesetas.
b) If a contract for a lease of services does not state how much compensation should
be given, the custom of the place where the services were rendered should
determine the amount. (Arroyo versus Azur)
2) Pleading and Proof of Customs and Usages
Should customs and usages be pleaded (alleged in the pleading)?
Answer: Distinguish:
If the customs and usages are general, they need not be pleaded. Hence,
even without previously being alleged, they may be proved in court.
Article 1377. The interpretation of obscure words or stipulations in a contract

shall not favor the party who caused the obscurity.
Ang interpretasyon ng mga malabong salita o nakasaad sa kontrata ay hindi

papaburan ang partido na responsable sa kalabuan nito.
The ambiguity is in the application for insurance.

Facts: A provision in the application for insurance with the GSIS states this condition:
“That any policy shall be made effective on the first day of the month next following
the month the first premium is paid.” Another provision states: “That failure to deduct
from my salary the monthly premiums shall not make that policy lapse,” and that,
“the premium account shall be considered as indebtedness which I bind myself to
pay the System.”
Elsa, an employee of the Bureau of Public Works died in an airplane crash. It

appears, however, that the Bureau had not remitted to GSIS even a single premium.
Issue: Has the insurance taken effect?
Held: Yes. The ambiguity created by the operation of the conditions stated in the
application should be interpreted adversely against the GSIS. (Landicho vs. GSIS,
44 SCRA 7 [1972].)
Article 1378. When it is absolutely impossible to settle doubts by the rules

established in the preceding articles, and the doubts refer to incidental
circumstances of a gratuitous contract, the least transmission of rights and
interests shall prevail. If the contract is onerous, the doubt shall be settled in
favor of the greatest reciprocity of interests.
If the doubts are cast upon the principal object of the contract in such a way
that it cannot be known what may have been the intention or will of the parties,
the
Kung talagang imposibleng pagkasunduan ang pagdududa gamit ang mga

probisyon sa nakaraang artikulo, at ang pagdududa ay napapatungkol sa mga
incidental na pangyayari sa gratuitous na kontrata, ang may pinakakukonti ang
paglilipat ng karapatan at interes ang masusunod. Kung ang kontrata ay
onerous, ang pagdududa ay isasaayos na ang pabor ay sa dalawang may
interes.
Kung may pagdududa sa mga principal na dahilan ng kontrata sa pamamaraan

na hindi na maaring malaman kung ano ang intensyon at lakas ng loob ng mga
partido, ang kontrata ay magiging labag sa batas.
Doubts in contract refer only to incidental circumstances but cannot be settled in

accordance with previous provisions.
If doubts refer to incidental circumstances of a gratuitous contract, such

interpretation should be made which would result in the least transmission of rights
and interests.
Example:
Ana gave her car to Ben. It is not clear in the contract whether it is commodatum or
a pure donation.
The Contract should be presumed as a mere commodatum because it would

transmit lesser rights than a donation since Ana retains ownership of her car.
If the contract in question is onerous, the doubt should be settled in favor of the
greatest reciprocity of interests.
Example:
Ana borrowed from Ben P 5,000.00 at 12% interest. It cannot be determined from
the terms of contract whether the loan is payable in six months or in one year.
It must be assumed that the period agreed upon is one year which results in a
greater reciprocity of interests since Ana can use the money for one year, and Ben,
on the other hand, can earn interest due for one year instead of only six months.
If the doubt refers to the principal object of the contract and such doubt cannot be
resolved thereby leaving the intention of the parties unknown, the contract shall be
null and void.
Example:
Ana sold her land to Ben. Ana has many lands. It cannot be determined which land
was intended by the parties to be the subject of the sale.
Therefore, the contract shall be null and void and it is as if the parties have not
entered into any contract at all.
G.R. No. L-11827 July 31, 1961
FERNANDO A. GAITE, plaintiff-appellee,
vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES & SMELTING CO.,
INC., SEGUNDINA VIVAS, FRNACISCO DANTE, PACIFICO ESCANDOR and
FERNANDO TY, defendants-appellants.
Alejo Mabanag for plaintiff-appellee.

Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendants-
appellants.
REYES, J.B.L., J.:
This appeal comes to us directly from the Court of First Instance because the claims
involved aggregate more than P200,000.00.
Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself
or in a representative capacity, of 11 iron lode mineral claims, known as the
Dawahan Group, situated in the municipality of Jose Panganiban, province of
Camarines Norte.
By a “Deed of Assignment” dated September 29, 1952(Exhibit “3”), Fonacier

constituted and appointed plaintiff-appellee Fernando A. Gaite as his true and lawful
attorney-in-fact to enter into a contract with any individual or juridical person for the
exploration and development of the mining claims aforementioned on a royalty basis
of not less than P0.50 per ton of ore that might be extracted therefrom. On March 19,
1954, Gaite in turn executed a general assignment (Record on Appeal, pp. 17-19)
conveying the development and exploitation of said mining claims into the Larap Iron
Mines, a single proprietorship owned solely by and belonging to him, on the same
royalty basis provided for in Exhibit “3”. Thereafter, Gaite embarked upon the
development and exploitation of the mining claims in question, opening and paving
roads within and outside their boundaries, making other improvements and installing
facilities therein for use in the development of the mines, and in time extracted
therefrom what he claims and estimated to be approximately 24,000 metric tons of
iron ore.
For some reason or another, Isabelo Fonacier decided to revoke the authority
granted by him to Gaite to exploit and develop the mining claims in question, and
Gaite assented thereto subject to certain conditions. As a result, a document entitled
“Revocation of Power of Attorney and Contract” was executed on December 8, 1954
(Exhibit “A”),wherein Gaite transferred to Fonacier, for the consideration of
P20,000.00, plus 10% of the royalties that Fonacier would receive from the mining
claims, all his rights and interests on all the roads, improvements, and facilities in or
outside said claims, the right to use the business name “Larap Iron Mines” and its
goodwill, and all the records and documents relative to the mines. In the same
document, Gaite transferred to Fonacier all his rights and interests over the “24,000
tons of iron ore, more or less” that the former had already extracted from the mineral
claims, in consideration of the sum of P75,000.00, P10,000.00 of which was paid
upon the signing of the agreement, and
1. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid

from and out of the first letter of credit covering the first shipment of iron ores
and of the first amount derived from the local sale of iron ore made by the
Larap Mines & Smelting Co. Inc., its assigns, administrators, or successors in
interests.
To secure the payment of the said balance of P65,000.00, Fonacier promised to

execute in favor of Gaite a surety bond, and pursuant to the promise, Fonacier
delivered to Gaite a surety bond dated December 8, 1954 with himself (Fonacier) as
principal and the Larap Mines and Smelting Co. and its stockholders George
Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante, and Fernando Ty
as sureties (Exhibit “A-1”). Gaite testified, however, that when this bond was
presented to him by Fonacier together with the “Revocation of Power of Attorney and
Contract”, Exhibit “A”, on December 8, 1954, he refused to sign said Exhibit “A”
unless another bond under-written by a bonding company was put up by defendants
to secure the payment of the P65,000.00 balance of their price of the iron ore in the
stockpiles in the mining claims. Hence, a second bond, also dated December 8,
1954 (Exhibit “B”),was executed by the same parties to the first bond Exhibit “A-1”,
with the Far Eastern Surety and Insurance Co. as additional surety, but it provided
that the liability of the surety company would attach only when there had been an
actual sale of iron ore by the Larap Mines & Smelting Co. for an amount of not less
then, P65,000.00, and that, furthermore, the liability of said surety company would
automatically expire on December 8, 1955. Both bonds were attached to the
“Revocation of Power of Attorney and Contract”, Exhibit “A”, and made integral parts
thereof.
On the same day that Fonacier revoked the power of attorney he gave to Gaite and
the two executed and signed the “Revocation of Power of Attorney and Contract”,
Exhibit “A”, Fonacier entered into a “Contract of Mining Operation”, ceding,
transferring, and conveying unto the Larap Mines and Smelting Co., Inc. the right to
develop, exploit, and explore the mining claims in question, together with the
improvements therein and the use of the name “Larap Iron Mines” and its good will,
in consideration of certain royalties. Fonacier likewise transferred, in the same
document, the complete title to the approximately 24,000 tons of iron ore which he
acquired from Gaite, to the Larap & Smelting Co., in consideration for the signing by
the company and its stockholders of the surety bonds delivered by Fonacier to Gaite
(Record on Appeal, pp. 82-94).
Up to December 8, 1955, when the bond Exhibit “B” expired with respect to the Far
Eastern Surety and Insurance Company, no sale of the approximately 24,000 tons of
iron ore had been made by the Larap Mines & Smelting Co., Inc., nor had the
P65,000.00 balance of the price of said ore been paid to Gaite by Fonacier and his
sureties payment of said amount, on the theory that they had lost right to make use
of the period given them when their bond, Exhibit “B” automatically expired (Exhibits
“C” to “C-24”). And when Fonacier and his sureties failed to pay as demanded by
Gaite, the latter filed the present complaint against them in the Court of First
Instance of Manila (Civil Case No. 29310) for the payment of the P65,000.00
balance of the price of the ore, consequential damages, and attorney’s fees.
All the defendants except Francisco Dante set up the uniform defense that the
obligation sued upon by Gaite was subject to a condition that the amount of
P65,000.00 would be payable out of the first letter of credit covering the first
shipment of iron ore and/or the first amount derived from the local sale of the iron ore
by the Larap Mines & Smelting Co., Inc.; that up to the time of the filing of the
complaint, no sale of the iron ore had been made, hence the condition had not yet
been fulfilled; and that consequently, the obligation was not yet due and
demandable. Defendant Fonacier also contended that only 7,573 tons of the
estimated 24,000 tons of iron ore sold to him by Gaite was actually delivered, and
counterclaimed for more than P200,000.00 damages.
At the trial of the case, the parties agreed to limit the presentation of evidence to two
issues:
(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite
P65,000.00 become due and demandable when the defendants failed to renew the
surety bond underwritten by the Far Eastern Surety and Insurance Co., Inc. (Exhibit
“B”), which expired on December 8, 1955; and
(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant
Fonacier were actually in existence in the mining claims when these parties
executed the “Revocation of Power of Attorney and Contract”, Exhibit “A.”
On the first question, the lower court held that the obligation of the defendants to pay
plaintiff the P65,000.00 balance of the price of the approximately 24,000 tons of iron
ore was one with a term: i.e., that it would be paid upon the sale of sufficient iron ore
by defendants, such sale to be effected within one year or before December 8, 1955;
that the giving of security was a condition precedent to Gait’s giving of credit to
defendants; and that as the latter failed to put up a good and sufficient security in lieu
of the Far Eastern Surety bond (Exhibit “B”) which expired on December 8, 1955, the
obligation became due and demandable under Article 1198 of the New Civil Code.
As to the second question, the lower court found that plaintiff Gaite did have
approximately 24,000 tons of iron ore at the mining claims in question at the time of
the execution of the contract Exhibit “A.”
Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants

to pay him, jointly and severally, P65,000.00 with interest at 6% per annum from
December 9, 1955 until payment, plus costs. From this judgment, defendants jointly
appealed to this Court.
During the pendency of this appeal, several incidental motions were presented for
resolution: a motion to declare the appellants Larap Mines & Smelting Co., Inc. and
George Krakower in contempt, filed by appellant Fonacier, and two motions to
dismiss the appeal as having become academic and a motion for new trial and/or to
take judicial notice of certain documents, filed by appellee Gaite. The motion for
contempt is unmeritorious because the main allegation therein that the appellants
Larap Mines & Smelting Co., Inc. and Krakower had sold the iron ore here in
question, which allegedly is “property in litigation”, has not been substantiated; and
even if true, does not make these appellants guilty of contempt, because what is
under litigation in this appeal is appellee Gaite’s right to the payment of the balance
of the price of the ore, and not the iron ore itself. As for the several motions
presented by appellee Gaite, it is unnecessary to resolve these motions in view of
the results that we have reached in this case, which we shall hereafter discuss.
The main issues presented by appellants in this appeal are:
(1) that the lower court erred in holding that the obligation of appellant Fonacier to
pay appellee Gaite the P65,000.00 (balance of the price of the iron ore in question)is
one with a period or term and not one with a suspensive condition, and that the term
expired on December 8, 1955; and
(2) that the lower court erred in not holding that there were only 10,954.5 tons in the
stockpiles of iron ore sold by appellee Gaite to appellant Fonacier.
The first issue involves an interpretation of the following provision in the contract
Exhibit “A”:
1. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F.

Fonacier all his rights and interests over the 24,000 tons of iron ore, more or
less, above-referred to together with all his rights and interests to operate the
mine in consideration of the sum of SEVENTY-FIVE THOUSAND PESOS
(P75,000.00) which the latter binds to pay as follows:
2. TEN THOUSAND PESOS (P10,000.00) will be paid upon the signing of this
agreement.
3. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid
from and out of the first letter of credit covering the first shipment of iron ore
made by the Larap Mines & Smelting Co., Inc., its assigns, administrators, or
successors in interest.
We find the court below to be legally correct in holding that the shipment or local sale
of the iron ore is not a condition precedent (or suspensive) to the payment of the
balance of P65,000.00, but was only a suspensive period or term. What
characterizes a conditional obligation is the fact that its efficacy or obligatory force
(as distinguished from its demandability) is subordinated to the happening of a future
and uncertain event; so that if the suspensive condition does not take place, the
parties would stand as if the conditional obligation had never existed. That the
parties to the contract Exhibit “A” did not intend any such state of things to prevail is
supported by several circumstances:
1) The words of the contract express no contingency in the buyer’s obligation to pay:
“The balance of Sixty-Five Thousand Pesos (P65,000.00) will be paid out of the first
letter of credit covering the first shipment of iron ores . . .” etc. There is no
uncertainty that the payment will have to be made sooner or later; what is
undetermined is merely the exact date at which it will be made. By the very terms of
the contract, therefore, the existence of the obligation to pay is recognized; only
its maturity or demandability is deferred.
2) A contract of sale is normally commutative and onerous: not only does each one
of the parties assume a correlative obligation (the seller to deliver and transfer
ownership of the thing sold and the buyer to pay the price),but each party anticipates
performance by the other from the very start. While in a sale the obligation of one
party can be lawfully subordinated to an uncertain event, so that the other
understands that he assumes the risk of receiving nothing for what he gives (as in
the case of a sale of hopes or expectations, emptio spei), it is not in the usual course
of business to do so; hence, the contingent character of the obligation must clearly
appear. Nothing is found in the record to evidence that Gaite desired or assumed to
run the risk of losing his right over the ore without getting paid for it, or that Fonacier
understood that Gaite assumed any such risk. This is proved by the fact that Gaite
insisted on a bond a to guarantee payment of the P65,000.00, a not only upon a
bond by Fonacier, the Larap Mines & Smelting Co., and the company’s stockholders,
but also on one by a surety company; and the fact that appellants did put up such
bonds indicates that they admitted the definite existence of their obligation to pay the
balance of P65,000.00.
3) To subordinate the obligation to pay the remaining P65,000.00 to the sale or

shipment of the ore as a condition precedent, would be tantamount to leaving the
payment at the discretion of the debtor, for the sale or shipment could not be made
unless the appellants took steps to sell the ore. Appellants would thus be able to
postpone payment indefinitely. The desireability of avoiding such a construction of
the contract Exhibit “A” needs no stressing.
4) Assuming that there could be doubt whether by the wording of the contract the
parties indented a suspensive condition or a suspensive period (dies ad quem) for
the payment of the P65,000.00, the rules of interpretation would incline the scales in
favor of “the greater reciprocity of interests”, since sale is essentially onerous. The
Civil Code of the Philippines, Article 1378, paragraph 1, in fine, provides:
If the contract is onerous, the doubt shall be settled in favor of the greatest
reciprocity of interests.
and there can be no question that greater reciprocity obtains if the buyer’ obligation
is deemed to be actually existing, with only its maturity (due date) postponed or
deferred, that if such obligation were viewed as non-existent or not binding until the
ore was sold.
The only rational view that can be taken is that the sale of the ore to Fonacier was a
sale on credit, and not an aleatory contract where the transferor, Gaite, would
assume the risk of not being paid at all; and that the previous sale or shipment of the
ore was not a suspensive condition for the payment of the balance of the agreed
price, but was intended merely to fix the future date of the payment.
This issue settled, the next point of inquiry is whether appellants, Fonacier and his
sureties, still have the right to insist that Gaite should wait for the sale or shipment of
the ore before receiving payment; or, in other words, whether or not they are entitled
to take full advantage of the period granted them for making the payment.
We agree with the court below that the appellant have forfeited the right court below
that the appellants have forfeited the right to compel Gaite to wait for the sale of the
ore before receiving payment of the balance of P65,000.00, because of their failure
to renew the bond of the Far Eastern Surety Company or else replace it with an
equivalent guarantee. The expiration of the bonding company’s undertaking on
December 8, 1955 substantially reduced the security of the vendor’s rights as
creditor for the unpaid P65,000.00, a security that Gaite considered essential and
upon which he had insisted when he executed the deed of sale of the ore to
Fonacier (Exhibit “A”). The case squarely comes under paragraphs 2 and 3 of Article
1198 of the Civil Code of the Philippines:
“ART. 1198. The debtor shall lose every right to make use of the period:
(1) . . .
(2) When he does not furnish to the creditor the guaranties or securities which he
has promised.
(3) When by his own acts he has impaired said guaranties or securities after their
establishment, and when through fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory.
Appellants’ failure to renew or extend the surety company’s bond upon its expiration
plainly impaired the securities given to the creditor (appellee Gaite), unless
immediately renewed or replaced.
There is no merit in appellants’ argument that Gaite’s acceptance of the surety

company’s bond with full knowledge that on its face it would automatically expire
within one year was a waiver of its renewal after the expiration date. No such waiver
could have been intended, for Gaite stood to lose and had nothing to gain barely;
and if there was any, it could be rationally explained only if the appellants had
agreed to sell the ore and pay Gaite before the surety company’s bond expired on
December 8, 1955. But in the latter case the defendants-appellants’ obligation to pay
became absolute after one year from the transfer of the ore to Fonacier by virtue of
the deed Exhibit “A.”.
All the alternatives, therefore, lead to the same result: that Gaite acted within his
rights in demanding payment and instituting this action one year from and after the
contract (Exhibit “A”) was executed, either because the appellant debtors had
impaired the securities originally given and thereby forfeited any further time within
which to pay; or because the term of payment was originally of no more than one
year, and the balance of P65,000.00 became due and payable thereafter.
Coming now to the second issue in this appeal, which is whether there were really
24,000 tons of iron ore in the stockpiles sold by appellee Gaite to appellant Fonacier,
and whether, if there had been a short-delivery as claimed by appellants, they are
entitled to the payment of damages, we must, at the outset, stress two things: first,
that this is a case of a sale of a specific mass of fungible goods for a single price or a
lump sum, the quantity of “24,000 tons of iron ore, more or less,” stated in the
contract Exhibit “A,” being a mere estimate by the parties of the total tonnage weight
of the mass; and second, that the evidence shows that neither of the parties had
actually measured of weighed the mass, so that they both tried to arrive at the total
quantity by making an estimate of the volume thereof in cubic meters and then
multiplying it by the estimated weight per ton of each cubic meter.
The sale between the parties is a sale of a specific mass or iron ore because no
provision was made in their contract for the measuring or weighing of the ore sold in
order to complete or perfect the sale, nor was the price of P75,000,00 agreed upon
by the parties based upon any such measurement.(see Art. 1480, second par., New
Civil Code). The subject matter of the sale is, therefore, a determinate object, the
mass, and not the actual number of units or tons contained therein, so that all that
was required of the seller Gaite was to deliver in good faith to his buyer all of the ore
found in the mass, notwithstanding that the quantity delivered is less than the
amount estimated by them (Mobile Machinery & Supply Co., Inc. vs. York Oilfield
Salvage Co., Inc. 171 So. 872, applying art. 2459 of the Louisiana Civil Code). There
is no charge in this case that Gaite did not deliver to appellants all the ore found in
the stockpiles in the mining claims in questions; Gaite had, therefore, complied with
his promise to deliver, and appellants in turn are bound to pay the lump price.
But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy,
not a definite mass, but approximately 24,000 tons of ore, so that any substantial
difference in this quantity delivered would entitle the buyers to recover damages for
the short-delivery, was there really a short-delivery in this case?
We think not. As already stated, neither of the parties had actually measured or
weighed the whole mass of ore cubic meter by cubic meter, or ton by ton. Both
parties predicate their respective claims only upon an estimated number of cubic
meters of ore multiplied by the average tonnage factor per cubic meter.
Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the
stockpiles of ore that he sold to Fonacier, while appellants contend that by actual
measurement, their witness Cirpriano Manlañgit found the total volume of ore in the
stockpiles to be only 6.609 cubic meters. As to the average weight in tons per cubic
meter, the parties are again in disagreement, with appellants claiming the correct
tonnage factor to be 2.18 tons to a cubic meter, while appellee Gaite claims that the
correct tonnage factor is about 3.7.
In the face of the conflict of evidence, we take as the most reliable estimate of the
tonnage factor of iron ore in this case to be that made by Leopoldo F. Abad, chief of
the Mines and Metallurgical Division of the Bureau of Mines, a government
pensionado to the States and a mining engineering graduate of the Universities of
Nevada and California, with almost 22 years of experience in the Bureau of Mines.
This witness placed the tonnage factor of every cubic meter of iron ore at between 3
metric tons as minimum to 5 metric tons as maximum. This estimate, in turn, closely
corresponds to the average tonnage factor of 3.3 adopted in his corrected report
(Exhibits “FF” and FF-1″) by engineer Nemesio Gamatero, who was sent by the
Bureau of Mines to the mining claims involved at the request of appellant Krakower,
precisely to make an official estimate of the amount of iron ore in Gaite’s stockpiles
after the dispute arose.
Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles
made by appellant’s witness Cipriano Manlañgit is correct, if we multiply it by the
average tonnage factor of 3.3 tons to a cubic meter, the product is 21,809.7 tons,
which is not very far from the estimate of 24,000 tons made by appellee Gaite,
considering that actual weighing of each unit of the mass was practically impossible,
so that a reasonable percentage of error should be allowed anyone making an
estimate of the exact quantity in tons found in the mass. It must not be forgotten that
the contract Exhibit “A” expressly stated the amount to be 24,000 tons, more or less.
(ch. Pine River Logging & Improvement Co. vs U.S., 279, 46 L. Ed. 1164).
There was, consequently, no short-delivery in this case as would entitle appellants to

the payment of damages, nor could Gaite have been guilty of any fraud in making
any misrepresentation to appellants as to the total quantity of ore in the stockpiles of
the mining claims in question, as charged by appellants, since Gaite’s estimate
appears to be substantially correct.
WHEREFORE, finding no error in the decision appealed from, we hereby affirm the
same, with costs against appellants.
Article 1379. The principles of interpretation stated in Rule 123 of the Rules of
Court shall likewise be observed in the construction of contracts.
Ang mga prinsipyo ng interpretasyon na nakasaad sa Rule 123 ng Rules of

Court ay dapat ding sundin sa paggawa ng mga kasunduan.
Interpretation of Documents under Rule 130
 Section 10. Interpretation of a writing according to its legal meaning. — The

language of a writing is to be interpreted according to the legal meaning it
bears in the place of its execution, unless the parties intended otherwise.
 Section 11. Instrument construed so as to give effect to all provisions. — In
the construction of an instrument, where there are several provisions or
particulars, such a construction is, if possible, to be adopted as will give effect
to all.
 Section 12. Interpretation according to intention; general and particular
provisions. — In the construction of an instrument, the intention of the parties
is to be pursued; and when a general and a particular provision are
inconsistent, the latter is paramount to the former. So a particular intent will
control a general one that is inconsistent with it.
 Section 13. Interpretation according to circumstances. — For the proper
construction of an instrument, the circumstances under which it was made,
including the situation of the subject thereof and of the parties to it, may be
shown, so that the judge may be placed in the position of those who language
he is to interpret.
 Section 14. Peculiar signification of terms. — The terms of a writing are
presumed to have been used in their primary and general acceptation, but
evidence is admissible to show that they have a local, technical, or otherwise
peculiar signification, and were so used and understood in the particular
instance, in which case the agreement must be construed accordingly.
 Section 15. Written words control printed. — When an instrument consists
partly of written words and partly of a printed form, and the two are
inconsistent, the former controls the latter.
 Section 16. Experts and interpreters to be used in explaining certain
writings. — When the characters in which an instrument is written are difficult
to be deciphered, or the language is not understood by the court, the
evidence of persons skilled in deciphering the characters, or who understand
the language, is admissible to declare the characters or the meaning of the
language.
 Section 17. Of two constructions, which preferred. — When the terms of an
agreement have been intended in a different sense by the different parties to
it, that sense is to prevail against either party in which he supposed the other
understood it, and when different constructions of a provision are otherwise
equally proper, that is to be taken which is the most favorable to the party in
whose favor the provision was made.
 Section 18. Construction in favor of natural right. — When an instrument is
equally susceptible of two interpretations, one in favor of natural right and the
other against it, the former is to be adopted.
 Section 19. Interpretation according to usage. — An instrument may be
construed according to usage, in order to determine its true character.
 Genjo and Deshi are both Chinese immigrants who acquired Filipino
citizenship.
 Genjo wants to buy the parcel of land of Deshi for the construction of his
commercial building.
 Being both ethnically and culturally Chinese, they wrote their document of
sale in Cantonese.
 If ever there will be a litigation between the two parties with regards to this
contract, experts and interpreters may be asked to declare the characters or
the meaning of the language used as it is NOT understood by the court (Sec
10, Rule 130).

Obli 1 6

Uploaded by

Copyright:

Available Formats

You might also like

Obli 1 6

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Obli 1 6

Uploaded by

Copyright:

Available Formats

ANSWER OBLI CON

3. Subsidiary Remedy doesn't defined as the "exhaustion of all remedies by the

4. Article 1383 is inapplicable in New Civil Code of the Philippines – TRUE

1. A person, usually a minor, who is under a guardian's charge or protection.

2. It is a subsidiary action based on injury to the plaintiff's economic interest as described in

Answer: B. ART. 1380

Answer - Article 1384

Answer- Article 1386

Answer - Voluntarily, Prevents, Fulfillment

Answer: D. ART. 1382

Answer: D. ART. 1381 and ART. 1383

Answer: A. VOIDABLE OR ANNULLABLE CONTRACTS

13. The following are the meaning of Rescission, except;

Answer: D. THE ACTION IS PRINCIPAL

14. The following are the meaning of Annulment, except;

Answer: B. The action is subsidiary

15. Article 1337 defines the concept of what?

Answer: B. UNDUE INFLUENCE

1. When the entire obligation is extinguished.

ALL ANSWERS ARE TRUE

4. Contracts agreed to in a state of drunkenness or during a hypnotic spell is voidable. Answer:

6. Contracts entered into during a lucid interval are valid. Answer:

10. A mere expression of an opinion does not signify fraud. Answer:

1.Those which are perfected by the mere agreement of the parties.

7. Those which are perfected by the mere agreement of the parties.

8. An imperfect promise which is merely an offer.

D. All of the above

15. The following are the so-called vices of consent, except:

Essential Elements of a Contract

1. Consent of the contracting parties;

2. Object certain which is the subject matter of the contract; and

3. Cause of the obligation which is established.

1. According to their relation to other contracts:

2. According to their perfection:

4. According to their purpose:

5. According to their subject matter:

6. According to their vinculum which they produce:

7. According to their cause:

8. According to risks involved:

9. According to their names or norms regulating them:

Autonomy of contracts or freedom of contract

- The above provision expresses the principle of autonomy of contracts.

Example: Vote buying (it is contrary to law and public policy).

Article 1307: Innominate contracts shall be regulated by the stipulations of the

Kinds of innominate contract

- I give that you give

- I give that you do

- I do that you give

*This is another characteristics of contracts, which is commonly referred as the principle of

Article 1310: The determination shall not be obligatory if it is evidently inequitable. In

If a contract should contain some stipulation in favor of a third person, he may

Assign or heirs (mga tagapagtalaga/tagapagmana)

1. Contracts are not transmissible by their nature; or

2. Contracts are not transmissible by stipulation; or

3. Contracts are not transmissible by provision of law.

This is an exception to the principle of relativity of contracts.

What is tort interference?