Chapter 4

EXTINGUISHMENT OF OBLIGATIONS

GENERAL PROVISIONS

Article 1231 Obligation Is extinguished by:

1. By payment or performance
2. By loss of the thing due
3. By condonation o remission of debt
4. By confusion or merger of the rights of the debtor and creditor
5. By compensation
6. By novation

Other causes of extinguishment of obligations are:

1. Annulment
2. Rescission
3. Fulfillment of resolutory condition
4. Prescription
5. Death of a party in case the obligation is a personal one
6. Resolutory term- the obligation ceases upon the arrival of the term
7. Change of civil status- single to married, married to widow
8. Compromises
9. Mutual dissent- both parties refused to go ahead with the contract
10. Impossibility of fulfillment
11. Fortuitous event

Section 1 - Payment or performance

Article 1232- payment means not only delivery of money but also the performance in any manner, of
obligations

Payment may consist of: (1) delivery of money; and (2) performance in any man ner of an
obligation. (Ex. rendition of the required services)
There must be a pre-existing obligation. If there is no such obligation, there is no payment.
Acceptance of payment by the creditor- payment must be accepted by the credito r.
expressly, or impliedly, In order for payment to exist.

Article 1233. Requisites for a valid payment:

1. The very thing or service contemplated must be paid
2. Fulfillment must be complete.

How payment or performance Is made-

1. If the debt is monetary obligation, by delivery of money. The money must be in full,
unless there is stipulation in the contract.
2. If the debt is the delivery of a thing, by delivery of the thing or object.
3. If the debt is performance or doing a personal undertaking, by said
performance or undertaking.
4. If the debt is the not doing of something, by refraining from doing the
action.

Burden proof
Creditor - has the burden of showing a valid debt or obligation exists.
DEBTOR- has the burden of proof that the debt has been paid. If the promissory note Is still In
the hands of the creditors, the presumption is that it Is not yet been paid.

Proof of payment- the presentation of the receipt of payment.

Article 1234. Substantial performance in good faith. The obligee Is benefited. The obligor
should be allowed to recover as if there has been a strict and com plete fulfillment, less
damage suffered by the oblige. This last condition affords a just compensation for the relative
beach committed by the obligor.

Article 1235. When the oblige accepts the performance, knowing is incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with.

Reason- Waiver and estoppels

Article 1236.

The creditor has the right to refuse payment from a third person EXCEPT

when:

1. When there Is a stipulation allowing this

2. If the said person has an interest in the fulfillment of the obligation (E x. co-debtor, co-
guarantor, even a Joint debtor)

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 Is beneficial to the debtor.

Article 1237.Whoever pays on behalf of the debtor without his knowledge or against his will,
cannot compel the creditor to subrogate him in his rights, such those arising from guaranty,
mortgage or penalty.

SUBROGATION DEFINED- the act of putting somebody Into the shoes of the creditor, thus,
enabling the former to exercise all the rights and actions that could be exercised by the
creditor.

Rights which maybe exercised by another person In the place of the creditor:
1.) Mortgage
2). Guaranty
3). Penalty or penal clause
 -

Article 1238. Payment made by a third person who does not Intend to be reim bursed by the
debtor is deemed a donation, which requires the debtor's con sent. But the payment Is in any
case valid to the creditor who accepted It

Reason for the) debtor's consent. No one should be compelled to accept the generosity of another.

Article 1239. Payment made by an incapacitated person.

General rule- if the person paying has no capacity to give:
1. Payment is not valid if accepted;
2. The creditor cannot even be compelled to not accept it.
Exception under Art.1427 of NCC on Natural Obligations.
Ex. Joseph, a minor 17 yrs. of ago, without the consent of his parents, en tered Into a contract with
Luis. Under the said contract, Joseph was supposed to pay Luis P5,000. Luis did not know Joseph
was a minor. When Joseph voluntarily Paid the amount. Luis voluntarily accepted it. Luis spent
P4,500. Later upon learning of Joseph's transaction, his parents filed an action against Luis to recover
the P5,000 paid by Joseph. How much can the parents recover from
Luis? ANS. P500 only. Since Luis spent the P4,500 in good faith.

Article 1240. To whom payment must be made-

1. to the person to whom the obligation has been constituted (the creditor)

2.To the successor-In-Interest (His heirs)

3.To any person authorized to receive it (authorization may be by agreement or by law).

Ex. Haw Pia vs. China Banking Corporation (CBC)

Haw Pia owed CBC a sum of money (Philippine peso) secured by a mortgage before WW II. During the
Japanese occupation, the Bank of Taiwan was liven by the Military Administration to liquidate the
assets of enemy banks. Haw pia then paid off the mortgage, not to CBC, but to the Bank of Taiwan. After
WWII end during the liberation, Haw Pin Is now asking for the cancellation of the mortgage on the ground
that It has been fully paid. CBC refused and asked for payment of the debt

ISSUES:

1. Has the Japanese Military Administration the right to liquidate and freeze assets of enemy banks
during WWII?
Ans. YES, under the principle of international law, the Japanese Mili tary Administration has tho
right to liquidate and freeze assets of enemy banks. What it did was NOT confiscation, but
merely liquidation so as to freeze assets.

2. did the payment of Haw Pia to the Bank of the Taiwan extinguished the debt? ANS. YES, in as much
as under the law prevailing yen, the Bank of Taiwan was authorized to receive payment. Thus the
mortgage should be cancelled.

3. Was Japanese money legal tender? Ans. YES. Under international law, the invading power or
forces has the right to Issue currency for circulation here.
4. Does the fact that the obligation to pay here is In Philippine peso makes It an obligation to pay on
a specific specie or currency? Ans. TRUE, the obligation as to pay In Philippine peso, BUT this was
not a stipulated specie, but obviously referred only to the legal tender since after all, the most
common occurrence ore transactions in Philippine peso. It was never the intention of the parties
to specify that only Philippine peso of pre-war valuation, may be paid. The use of the term
"Philippine Pesos" Is merely Incidental.

Article 1241.

Payment to an incapacitated person Is valid only;

1. If the Incapacitated person has kept the thing delivered;
2. If insofar as he payment has boon beneficial to him.

Payment to a third party shall also be valid Insofar as It redounded to the benefit of the creditor.
Such benefit to the creditor need not be proved In the ff. cases;

1. If after payment, the third person acquires the creditor's rights; Ex. an Impostor-agent after
payment to him became the company-creditor.

2. if the creditor ratifies the payment to the third person;

Ex. if the Meralco after a few days after Its unauthorized collec tor has collected from you, inform
you that your payment to him Is all right .

3.If by the creditor's conduct, the debtor has been led to believe
that the third person has authority to receive the payment.
Ex.This is a case of estoppel, when the Impostor-agent had been
given by Meralco the usual uniform for collectors.
Article 1242. Payment made in good faith o any person In possession of the creditor shall
release the debtor.

This is another instance of a valid payment. Requisites:

1. Payment by the payor must be made in a good faith. (this is presumed)(but the payee maybe
in a good or bad faith)
2. The payee must be in a possession of the credit itself(not merely the document evidencing
the credit)

Ex. Josie found a negotiable promissory note payable to bearer. ( if the maker thereof pays in
good faith to X the debt is extinguished, even if Josie was not entitled to it) Note: if the
promissory note is payable to a specific person, Alan, then payment to Josie is not valid,
because Josie would be the possessor of the document only, but not the credit itself.

Article 1243. Payment made rifler Judicial order to retain

Effect- The Judicial order may have been prompted by an order of attachment, Injunction or
garnishment (garnishment takes place when the debtor of the debtor Is ordered NOT to pay
the latter so that preference would be given to the latter's creditor. The payment made under this
Article is void.

Ex of garnishment. - A owes B P1,000. f3 in turn owes C P1,000. C brought an action against 8

who set up the defense of Insolvency but admit the credit which he has over A. Before A
pays B, the latter was summoned In court and asked to the retain tho debt In the meantime.
Thus, the debt Is garnished.

Article 1244. Debtor cannot compel the creditor to accept a different object, al though the latter
may be of the same value as, or more valuable than what is due.

Obligations to do or not to do- an act of forebearance cannot be substituted by another act of

forebearance against the obligee's will.

Forebearance defined- an act or determination of will, producing a negative ef fect in the sensible
world; patience; control (Pagtitimpi ; hlnahon)

Article 1245. Dation in payment defined- mode of extinguishing an obligation whereby the
debtor alienates In favor of the creditor property for the satisfaction of a monetary debt,
Governed by the laws on sales.

Requisites in order that dation In payment be valid:

1. Consent of the creditor- a sale presupposes the consent of both par ties.
2. Payment will not prejudiced the other creditors- this might lead the debtor to connive
with one creditor In defrauding the other creditors.
3. The debtor is not judicially declared Insolvent- here his property is supposed to be
administered by the assignee.

Article 1246. Obligation to give generic things

Gen. rule: If the contract does not specify the quality-

1. The creditor cannot demand a thing of superior quality but If he de sires, he may demand
and accept one of inferior quality.
2. The debtor cannot deliver a thing of inferior quality, but if he so desires , he may deliver
one of superior quality provided it is not a different kind,

When Is the contract void- When the KIND and QUANTITY (as distinguished from quality)
cannot be determined without need of a new agreement of the parties, the contract is VOID.

Article 1247. Unless otherwise stipulated, the extra-Judicial expenses reqired by the payment
shall be for the account of the debtor.

Article 1248. Gen. rule- Art. 1233- provides a debt shall not be understood to have been
paid unless the thing or service in which the obligation consists have been completely
delivered or rendered, as the case may be.
Exceptions under Art. 1248- Partial performance is allowed when:

1. There is a stipulation to that effect;

2. The different prestations or objects are subject to different conditions or terms; Ex. a debt
payable in installments
3. A debt Is in pert liquidated and in unliquidated, In which case perfor mance of the liquidated
part may be Insisted upon by the either by the debtor or creditor;

4. A Joint debtor pays his sharp or the creditor demands the same;
5. A solidary debtor pays only the part demandable because he rest are not yet demandable
on account of their being subject to different terms and conditions;

6. In case of compensation, when one debt is larger than the other, It fol lows that a balance Is
left;
7. Work Is done by parts.

Article 1249. The payment of dabs in money shall be made in the currency stipu lated and If it
is not possible to deliver such currency, then the currency which Is legal tender In the
Philippines.
The delivery of promissory notes to order, or hills 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.

Legal Tender- it is that which a debtor may compel a creditor to accept in payment of he
debt.

Article 1250. No longer applicable at present.

Article 1251. where payment shall be made-

1. If there is a stipulation- at the place designated

2. If there is NO stipulation-
a. Obligation to deliver a determine thing- payment shall be made wherever the thing might
be at the moment the obligations was constituted.
b. In any other cases- the place of payment shall be at the domicile of the debtor.

If the debtor changes his domicile in bad faith or after he incurred delay, the additional
expenses shall be borne by him.

Subsection 1
APPLICATION OF PAYMENTS
Article 1252.

Special forms of payments:

1 . A p pl i ca ti on o f p a yme n ts
2 . Dation In payment
3 . Assignment In favor of creditors
4 . Tender of payment & consignation
Application of payment- it is the designation of the debt to which should same creditor.
be applied a payment made by a debtor who owes several debts in favor of the Reason- It Is
Important to know the rules on application of payments because otherwise, we may not know
which one, of two or more debts, has been extinguished.
Requisites:

1. There must be two or more debts

2. The debts must be of the same kind
3. The debts are owed by the same dobtor to the same creditor (thus, 1 debtor & 1 creditor
only)
4. All the debts must be due
5. The payment Is not enough to extinguish all the debts

Preferential right of tho debtor- It Is tho debtor who la given by the law the right
to select which of his debt ho Is paying, This right however, Is not absolute when-

1. There was a valid prior but contrary agreement, the debtor cannot choose

2. The debtor cannot choose to pay part of the principal ahead of the In terest unless the creditor
consents.

Cases when application of payment Is made-

1. The debtor makes the designation

2. if not, the creditor makes it, by so stating in the receipt that ho issues It " unless there is a cause
for Invalidating the contract"
3. If neither the debtor or the creditor has made the application, or If the

application Is not valid, then application, Is made by operation of law.

The application must b made at the time when payment by the debtor Is made, NOT
afterwards. Application made by a creditor without the consent of the debtor, Is void.

Article 1253. If the debt produces interest, payment of the principal shall not be deemed to have
been made until the Interest have been covered.

The interest is obligatory, that Is, the debtor cannot Insist that his payment be credited to the
principal Instead of the Interest unless tho creditor agrees. The reduction of the principal
would result In the decrease of the total Interest collectible.
Interest is supposed to be paid by way of: a). compensation; and b) damages due to
default.

Article 1254. In case no application of payment has been voluntary made or cannot be
Inferred from other circumstances. Rules to bo applied:
1. Apply It to the most onerous (in case the due and demandable debts are of different
nature)
2. If the debts are of the same nature and burden, payment shall be ap plied to them
proportionately.

Ex. of more burdensome or onerous debts:

1. Older onus In case of running accounts

2. Interest-bearing debts even If the non-Interest bearing debt Is older

3. Of two Interest-bearing debts, that which charges the higher interest is more burdensome.

4. Debts secured by mortgage or by pledge.

5. Debts with a penalty clause.

6. Advances for subsistence are more onerous than cash advances
7. A debt where the debtor Is in morn in more onerous than whore ho Is not.

8. An exclusive debt, not solidary is more onerous than a solidary debt.

Subsection 2

PAYMENT BY CESSION

Article 1255.

Cession or assignment In favor of tho creditor defined- It Is the process by which the debtor
transfer all the properties not subject not execution In favor of his creditors so that the latter may sell
thorn, and thus applied the proceeds to their credits.

Kinds of assignment : a) Legal- governed by the Insolvency Law. The majority of the creditors must
agree. b) Voluntary- referred to in Article 1255. All creditors must agree.

Requisites of voluntary assignment.:

1. More than one debt;
2. More than one creditor;
3. Complete or partial Insolvency of the debtor;
4. Abandonment of all debtor's property not exempt from execution (unless validly waived by the
debtor) in favor of the creditor;
5. Acceptance or consent on the part of the creditor (for It cannot be Imposed on an unwilling creditor)

Effect of voluntary assignment:

1. The creditors do not become tho owners; they are mere assignees with authority to sell.
2. Tho debtors are released up to the amount of the net proceeds of the sale, unless there Is a
stipulation to the contrary. Tho balance remains collectible.

3. The creditors will collect the credits In the order of preference agree upon, or In default of
agreement. In the order ordinarily established by law.

Subsection 3
TENDER OF PAYMENT AND CONSIGNATION

Tender of payment - the act of offering the creditor what Is due to him together with a demand
that the creditor accepts the same.

Consignation- the act of depositing the thing due with the court or judicial authorities whenever
the creditor cannot accept or refuses to accept payment. It generally requires prior tender of
payment. If the lessor refuses to accept the payment of rentals, what the leases should do is to
resort to judicial depicts.

Article 1256. if the creditor to whom the tender of payment has been made without
just cause to accept it the debtor shall be released from the responsibility by the
consignation of the thing or sum due.

Consignation alone shall produce the same effect in the following cases;

1. When the creditor is absent or unknown, o does not appear at the place of payment;
2. When he is incapacitated to receive the payment at the time it is due;
3. When without Just causes, he refuses to give a receipt;
4. When two or more persons claim the same right to collect;
5. When the title of the obligation has been lost.
Effect of tender without consignation- does not extinguished the debt: consignaion must follow.
When creditor is justified In refusing to accept tender of payment. -The tender of
payment must have the following requisites:
1. It must be In legal tender (tendering a check oven a manager's check is not valid)
2. It must include whatever Interest Is due.
3. The obligation must be already be due.

Article 1257.
Essentlal requisites of consignation:

1. Existence of a valid debt

2. Valid prior tender, unless the tender is excused
3. Prior notice of consignation (before deposit)
4. Actual consignation (deposit)
5. Subsequent notice of consignation

Article 1258. How consignation is actually made- by depositing the thing due at the disposal of
Judicial authority, before whom the tender of payment must be proved, In a proper case, and the
announcement ofJ..he consignation in other cases. The consignation having been made, the
interested parties shall also be notified thereof.

Article 1259- expense of consignation, when properly made, shall be charged against the
creditor.

Article 1260. Effect If consignation has been duly made;

1. The debtor may ask the Judge the cancellation of the obligation.
2. The running of Interest is suspended.
3. Before the creditor accepts the consignation, or a Judicial declaration that the consignation
has been properly made, the debtor may withdraw the thing or sum deposited, allowing the
obligation to remain In force.

Risk of loss- If the Consignation has been Judicially approved; OR if all the essential requisites
are present; OR if the creditor has signify his acceptance, the creditor bears the loss,
otherwise, it Is the debtor who boars the burden.

When may the debtor withdraw the thing or sum consigned:

1. As a matter of right-
a. Before the creditor accepts the consignation
b. Or before there is a Judicial declaration that the consignation has been properly made.

2. As a matter of privilege,
When after consignation has been properly made ( the creditor having accepted or the court having
declared It proper) the creditor authorizes the debtor to withdraw.

Article 1261. Withdrawal by debtor after consignation has been made- The with drawal of the debtor
Is a matter of PRIVILEGE.

Effects: a. the obligation remains

b.the creditor loses any preference (priority) over the thing
c.the co-debtors, guarantors, and sureties are released unless they consented.

Section 2
LOSS OF THE THING DUE

Loss included Impossibility of performance.

When is there loss:

1. When it perishes (physically, It Is destroyed)

2. When It goes out of commerce
3. When It disappears In such a way:
a. It can no longer recovered or
b. Its existence is unknown
Impossibility of performance includes:
1. Physically impossibility
2. Legal impossibility which is either: a) directly caused as when prohibited by law. b) Indirectly
caused as when the debtor Is required to enter Into a military training. c) moral Impossibility as in
Impracticability.
Article 1262. An obligation which consist 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 incurred In
delay.
When by law or In stipulation, the obligor Is liable even for fortuitous ,,vents, the loss of the
thing duo does not extinguished the obligation, and he shall be responsible for damages. Tho
Remo rule applies when the obligation roquires the assumption of risk.
Two kinds of obligation to give:
1) to give a generic thing;
2)to give a specific thing

Effect of loss of n specific thing- general rule, the obligation Is extinguished.

Exception:

1. If the debtor Is nt fault

2. When the debtor Is mad liable for a fortuitous event because of : a) a provision of law; or b)
a contractual stipulation

Article 1263. Loss on obligation to deliver a generic thing- does not extinguished
the obligation.
Exception:
1. If the generic thing Is delimited (Ex. 50 kilos of sugar from my2016 harvest when the harvest
was totally destroyed. (delimited generic thing)

2.If the generic thing has already been segregated or set aside, In which case, it become
specific.

An obligation to pay money Is generic. Failure to raise funds Is not a defense nor
Is It excusable Just because the debtor lost some properties due to a fortuitous

event.

Article 1264. Effect of partial loss- If the partial loss Is so significant, the court will determine
whether it extinguished the obligation.

Article 1265. presumption that loss was due to the debtor's fault unless proven otherwise, or
without prejudice to Art 1165. This presumption does not apply in case of earthquake flood, storm
or other natural calamity.

Fire is NOT a natural calamity- but If a tenant proved that the fire that destroyed the apartment he Is
leasing, Is accidental, he Is not liable,

Article 1266. The debtor in obligations to do shall also be released when the prestat1on
become legally or physically impossible without the fault of the obligor.

Cases when compliance of personal obligation becomes, without the deb tor's fault;

1. Legal Impossibility- Ex. refusal of tho govt. to Issue building permit

To work on Sundays when the sumo Is prohi bited by law.
2. Physical Impossibility- must exists AFTER the constitution of tho obliga tion. If It exists
from the very beginning, the obligation Is VOID.
Ex. to Install the motor of a ship that Is lost after the perfection of the
Contact but prior to such installation.

Article 1267. Effect of Difficulty Beyond the Parties’ Contemplation-refers to

impossibility or Impracticability dun to change of certain conditions.

The Art. 1267 refers to SERVICES which Is n personal obligation and NO a real obligation.

Requisites in order for Art. 1267 to apply:

1. Tho service must be so difficult that It was manifestly beyond the con templation of BOTH
parties, It Is not enough that neither party actually anticipated or foresaw the difficulty; the
difficulty could not possibly have been anticipated or foreseen.
2. One of the parties must ask for relief.
3. The object must be a future service with future unusual change In con ditions.

Ex. oil exploration. Repair of pipes under the ocean

Article 1268. Effect of loss In criminal cases- loss of the object subject of a crim inal offense
duo to a fortuitous event does not extinguished the obligation. Reason- the obligation to
deliver the thing stolen arose from a criminal offense. and the rule In such cases, the debtor
Is liable oven If the loss occurs because of a fortuitous event.

Article 1269. Transfer of rights of debtor to the creditor in case of loss.- the credi tor shall
115Ve all the rights of action which the debtor may have against third persons by reason of
the loss. Rights of action-Includes Insurance indemnity
Ex. A is obliged to deliver this motorbike to B. X destroyed the bike. B has the right to sue X
instead of A because the latter would unduly profit in that he will gain two things: (1) his
obligation to give the bike is already extinguished; and (2) He would be allowed to recover
from X. It is obvious that A must not unduly profit at the expense of B.

Section 3

CONDONATION OR REMISSION OF DEBT

Remission or condonation defined- the gratuitous abandonment by the creditor of his right.

Essential requisites:

1. There must bo an agreement- since acceptance of the offer Is required

2. The parties must be capacitated and consent

3. There must be a subject matter - object of the remission

4. The cause or consideration must be liberality- It Is essentially gratuit ous
5. The obligation remitted must bo demandable at the time of remission
6. The remission must not be inofficious

7. Formalities of a donation are required in case of an express remission

8. Waivers or remissions are not to be presumed generally, but must be clearly and
convincingly shown, either by express stipulation or by acts admitting of no other reasonable
explanantion.

Inofficious Donation govern b Art. 771, NCC- three (3) special modes by which donation Inter
vivos may be reduced:

(1) when the donor did not reserve sufficient----- donation was made, are by law entitled to be
supported by the donation,
(2) supervening birth, survival or adoption of a child; and
(3) Inofficious donation .

Classes of remission:

A. As to its effect or extent: Total or partial

B. As to Its date of effectivity- inter vivos or mortis causa

C. As to Its form- Implied or tacit- no formality required; only conduct Is sufficient

- Express or formal- formalities of a donation

Effect If remission is not accepted by the debtor- this would not be remission; however, If the
creditor did not collect within the statute of limitations; he debt may be said to have been
extinguished by prescription.

Article 1271. Effect of delivery of private document evidencing credit- the volun tary delivery of
the document by the creditor to the debtor presupposes a remission or renunciation has been
made .
The article speaks of implied remission.
Interpretation of second par.- it must not be though that the second par. Allows a falsehood.
The debtor and his heirs can now claim that the instrument was de livered not because there was
payment BUT only when indeed there was payment. The law must not be allowed an immoral
actuation.
Conflict of presumption- Between the presumption of remission and the pre sumption of
payment, the former (remission) ordinarily prevails.
Article 1272. Effect t when the private document evidencing Indebtedness is in
the possession of the debtor, It is is presumed that It was voluntarily delivered by the creditor
unless the contrary proved.
Article 1273. The renunciation of the principal debt shall extinguished the accessory
obligation; but the waiver of the accessory obligation shall remain the principal obligation in
force.
Doctrine "THE ACCESSORY FOLLOWS THE PRINCIPAL"
Ex. A remission of the penalty does not remit the principal obligation; but II the principal obligation
Is condoned, the penalty Is also condoned.

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 a third person who owns the thing.
Presumption- is only disputable, for the debtor or tho third person may be
possession of the property by theft or because it has been sent for repairs
It Is essential In pledge that the thing delivered to the creditor, or to a third person by common
agreement. The third person must own tho thing, otherwise, the presumption does not rise.

Section 4

MERGER OR CONFUSION OF RIGHTS

Article 1275. The obligation Is extinguished from the time the characters of creditor and debtor are
merged In the same person.

Merger or confusion defined- it Is the meeting in one person of the qualities of creditor and debtor
with respect to the same obligation.

Requisites of a valid merger:

1. It should takes place between the principal debtor and principal creditor.

2. The merger must be clear and definite.

3. The very obligation involved must be the same or identical. Ex. A makes a check payable to
bearer, and hand over the check to B who hand It to C who finally hand It over to A. Here A
owes himself, a clear case of merger, and hence, the obligation is extinguished.

Effect of mere transfer of rights BUT not the credit- mere transfer to a third per son of rights
belonging to both debtor and creditor but not the credit as against the debt does not result in
merger.

Ex. A & B were co-owners of a house & lot worth P50,000. For some re pairs made thereon, B
paid P5,000. Because they are co-owners, A had to share In said expenses and so A owed B
P2,500. A sold his share of the property to X and B also sold his share to X. later, B flied an
action to recover P2,500 from A. A claimed that since X Is now the owner, X owes himself, and
thus, said merger extinguished his debt to B. Can B recover from A? Ans. YES, since there was
really NO merger here. What was sold to X were the half shares of A and B. X did not acquire
the indebtedness of P5,000 for the repairs, thus, there can be no merger with reference to the
debt_

Extinction of real rights- real rights, such as usufruct over the property, may be extinguished by
merger when the naked owner himself become the usufructuary.
Ex. A has two brothers, B and C. A gave a parcel of land to B In usufruct ( right to the use and
right to the fruits); and the same parcel to C in naked own ership. If later A donates to C the
naked ownership of the land , C now has the full ownership (by virtue of consolidation).

Naked ownership defined- ownership without right to beneficial use of the prop erty owned.

Article 1276. Merger which takes place in the person of the principal debtor and creditor benefits
the guarantors. Confusion which takes place in the person of the latter does not extinguish the
obligation.
Effect of merger on g uarantors.-accessory follows the principal. Guaranty being )nsidered as
accessory obligation.

Ex. A owes B P1,000 guaranteed by X. b assigns his credit to C. C assigns s credit to D. D

assigns his credit to A. A's obligation Is extinguished and x Is !leased from his obligation as
guarantor.

A owes B P1,000 guaranteed by X. B assigns his credit to C. C assigns s credit to Y. Y

assigns his credit to X, the guarantor. Does A still have to C?
is. YES. A is still liable to pay C P1,000 but the contract of guaranty
Is extin-
iished.

Article 1277. Confusion does not extinguished a Joint obligation except as re irds the share
corresponding to the creditor or debtor in whom the two chacters concur.
Ex. A and B are Jointly Indebted to C for P1,000. If C assigns the entire 'edit to A, A's share
Is extinguished but B's shares remain. B still owes A P500. a Joint obligation the debts are
distinct and separate from each other.

Section 5
COMPENSATION

ARTICLE 1278. Compensation takes pace, when two persons, in their own right, e creditors
and debtors to each other.

Compensation distinguished from merger:

1. As to number of persons- in confusion, there is only one person in whom is merged the
qualities of creditor and debtor. In compensation, there are 2 persons who are mutual debtor
and creditor to each other.
2. As to the number of obligations- In merger, here is only one obligation. In compensation
there are two.

Kinds or classes of compensation;

1. According to its effect or extent-

a. Total- both obligations a completely extinguished because they are of the same or equal
amounts.

b. Partial- when (hero Is a balance remains

2. According to Its origin or cause-

a. Legal- takes place by operation of law; need not bo pleaded

b. Voluntary or conventional- due to the agreement of the parties

c. Judicial- this must be pleaded; I can only bo made effective by an order of the court
d. Facultative- one of the parties has tho choice of claiming th com pensation or of opposing It.

E x . A o w e s P 1 , 0 0 0 p a y a b l e on October 12. 2017. B o w e s , A P1,000 payable on or

before Oct. 31, 2017. On Oct. 12. 2017. B who was given the benefit of the period,may claim
compensation because he could then choose to pay his debt on said date which is on before Oct. 31,2017. If
on the other hand, A claims compensation, B can properly opposed it because B could not be
made to pay until Oct. 31, 2017.

Article 1279. In order that compensation may be proper, o 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 things duo are consumable, they are of the same
kind, and also of tho same quality If the Inner had been stated;
3. That the two debts are due;

4. That they be liquidated and demandable;

5. That over neither of thorn there are any retention or controversy, commenced by a third person and
communicated In time to the debtor.

Notes- the requisites referred to under this article applies to legal compensation or compensation by
operation of law. Pars. 1,2,3,4 of Art. 1279 are affirmative requisites. Par. 5 Is the negative requisite.

Par.5- there can be no legal compensation when one's claim against another is still the subject of a
court litigation. Tho compensation of the debts must not be prohibited by law. There must have been
no waiver of the compensation.

Article 1280. The guarantor may set up compensation as regards what the creditor may owe the
principal debtor.
Reason for the law-extinguishment of the obligation extinguished the guaranty which is an accessory
obligations.
Ex. A owes B P5,000. C Is the guarantor of A. B owes A P2,000. When B sues A and, the latter
cannot pay, for how much will C be liable? ANS. C will only be liable (or P3,000 because C can set
up the P2,000 credit of A as the basis for partial compensation.

Article 1281. Compensation may be total or partial. When the two debts are of the same amount,
there Is total compensation.

Article 1282. The parties may agree upon the compensation of debts which are not yet due. (
conventional or Voluntary compensation) It Is sufficient that the agreement or contract which
declares the compensation should itself be valid; the parties must have legal capacity and must
freely give their consent.

Article 1283. Judicial Compensation or Set-Off-Pleading and proof of the counterclaim must be
made. All the requisites In Art. 127D must be present, except at the time of the pleading, the
claim need not yet be liquidated. The liquidation or the fixing of the proper amount must be
made In tho proceedings. Unless pleading and proof are made, the court cannot on Its own
accord declare compensation. The compensation takes place by the judgment as to the date
the compen sation was pleaded.

Jurisdiction of the court regarding the value of the demand-

Gen. rule- depends upon the totality of the demand in all the causes of action, Irrespective of
whether the plural cases arose out of the same or different transactions.
Exceptions:
1. Where the claim joined under the same complaint are separately owed by, or due to,
different parties, in which case each separate claim furnishes the jurisdictional test
2. Where not all the causes of action joint are demands or claims for money.

Article 1284. When on or both debts are rescissible or voidable, they may be
c o m p e n s a t e d a g a i n s t e a c h o t h e r b e f o re t h e y a re j u d i ci a l l y re s c i n d e d o r
avoided.
Ex. A owes B P1,00. Later A forced B to sign a promissory note for P1,000 In favor of A. The
first debt Is valid; the second is voidable. But if all the requi sites for legal compensation are
present, both debts are extinguished since B's debt is not yet annulled. This unfair I, later on
B's debt is annulled by the court. Thus here, the compensation that has taken place will be
cancelled.

Article 1285. Effect of Assignment on Compensation of Debts.- Three cases covered under this
article:

1. The assignment may be made with the consent of tho debtor- compen sation cannot be set
up because there has been consent and therefore, a waiver. Exception: If the right to the
compensation is reserved.
2. The assignment may be made with tho knowledge but without the con sent or against the
will of the debtor-compensation can be set up regarding debts previous to the cession or
assignment. This refers to debts maturing before the assignment or before notice, hence,
legal compensation has already taken place.
3. The assignment may be made without the knowledge of tho debtor-debtor can set up
compensation as a defense for all debts maturing PRIOR to his knowledge of the assignment
o whether the debts mature before or after the assignment. The crucial time hero is the time
of knowledge of the assignment; Not the time of assignment Itself.

Article 1286. Compensation by operation of law-

1. Compensation by operation of law
2. Indemnity for expenses of transportation
3. Indemnity for expenses for exchange- refers to monetary exchange, In the debts are money
debts.
Ex. A owes B P1,000 payable in Manila. And B owes A P1,000 payable in Australia.
Whoever claim compensation must pay for the exchange rate of currency.

Article 1287. When legal compensation cannot take place:

1. When one debt arises from a depositum - (not a bank deposit but a loan) The purpose is to
prevent breach of trust and confidence. It is he depositary who cannot claim compensation.
The depositor Is allowed to so claim.
2. When one arises from the obligation of a depositary
3. When one debt arises from the obligations of a bailee in commodatum (the borrower of
property who pays nothing for the loan)
4. When on debt arises because of a claim for support duo to gratuitous title- support In
arrears may be compensated but not future support, for this is vital to the life of the recipient.
Ex. a has a P10,000 saving deposit with BPI. A borrowed P5,000 four the bank. Without
asking permission from A, BPI subtracted the P5,000 from A's account, leaving a balance of
P5,000 In A's favor. Is the bank's action proper/ Ans. YES. Compensation is allowed
here, because the relationship of the bank and the depositor in this case, is that of a debtor
and creditor.

Some obligations of a depositary:

1. The depositary Is obliged to keep he thing safely and to return it when required, to the
depositor, or to his heirs and successors, or to the person who may have been designated
in the contract;
2. Unless there is a stipulation to the contrary, the depositary cannot deposit the thing with a
third person;

3. If the deposit to a third person Is aitowed,the depositary Is liable for the loss if he deposited
the thing with a person who Is manifestly careless or unfit;
4. The depositary is responsible for the negligence of his employees;
6. The depositary cannot make use of the thing deposited, without the ex press permission of
the depositor. Otherwise, he will be liable for damages. However, when the preservation of
the thing requires its use, It must be used but only for that purpose.

Article 1288. No compensation If one debt arises from crime- facultative compensation.

Article 1289 If a person should have against him several debts which are susceptible of
compensation, the rules on application of payments shall apply in the or of the compensation.

Article 1290. when all the requisites mentioned In Art. 1279 are present, compensation takes place by
operation of law, And extinguishes both debts to the noncurrent amount, even though the debtors
and creditors are not aware of the compensation.

Section 6 NOVATION

Article 1291. Obligations may be modified by:

1. Changing th e i r object or principal conditions;
2. Substituting he person of the debtor; and
3. Subrogating a third person in the right of the creditor

Novation defined- the substitution of an obligation by another, which extinguishes or modifies the
first, either by changing Its object or principal condition; or substituting another in place of the debtor;
o subrogating a third person to the rights of the creditor.

Requisites of a Novation:
1. the existence of a valid old obligation
2. the Intent to extinguish or to modify the old obligation by a substantial difference
3. the capacity and consent of all the parties (except in expromision, where the old debtor does not
participate)
4. the validity of the new obligation

Kinds of novatlon:

A. According to is object or purpose;

1. Real or objective-changing the object or the principal conditions of the obligation

2. Personal or Subjective- changing of persons:
A. Substituting the person of the debtor- expromIsion or delagacion
B. Subrogating a third person in the rights of the creditor either by:
b.1 changing the creditor- by agreement (conventional subrogation)
b.2 by operation of law (Legal subrogation)
3. Mixed- change of object and parties

B. According to the form or Its constitution

1 . E xp re ss
2 . Implied (when the two obligations are essentially Incompatible to each other)

C. According to its extent or effect

1.Total or extinctive novatlon- when the old obligation Is completely extinguished
2.Partial or modificatory- also referred to as imperfect or improper novatlon

Article 1292. In order that the obligation may be extinguished by another which
substitute the same. It Is Imperative that It be declared so In equivocal terms, or
that the old and the new obligation be on every point Incompatible with each o ther.

As manner and form. novatlon Is classified Into:

1. Express- here It Is declared In unequivocal terms
2. Implied- complete or substantial incompability

Implied novatlon Is done by making substantial changes:

1. In the object or subject matter of the contract Ex. from car to ring
2. In the cause or consideration of the contract. Ex. an upward change in the price.
3. In the principal terms or conditions of the contract. Ex. a debt subject to a condition is made a pure
obligation or reduction of the period or term originally stipulated.

Article1293 Substitution of a new debtor In place of the old one may be made on without the
knowledge or against the will of the tatter but NOT without the consent of the creditor.

Kinds of personal or subjective novatlon:

A. Change of the debtor (passive)

B. Change of the creditor (active)

SUBSTITUTION OF DEBTOR:

Kinds of passive subjective novatlon:

1. ExpromIsslon- where the Initiative comes from a third person. It is essential that the old debtor is
released from his obligation, otherwise there will be no expromisslon. no novatlon.

Requisites for expromission-

2. Delegaclon- Wherein the initiative comes from the debtor, for It was he who delegates another to
pay his debt and thus, he excuses himself, here, the old debtor, the new debtor and the creditor
must agree.
Parties In delegacion-
1. The delegante- the original debtor
2. The delegatario- the creditor
3. The delegado- the new debtor

Requisites for delegacion:

1. The Initiative must come from the old debtor

2. All the parties concerned must consent or agree - the consent of the creditor :

a. May be given in any form

b. May be express or Implied
c. May be before or after the new debtor has given his consent
d. May be conditional but the condition has to be fulfilled, otherwise there is no valid delegacion.

Article 1294. If the substitution Is without the knowledge or against the will of the debt or, the new
debtor's insolvency or non-fulfillment of the obligation shall not rise to any liability on the part of
the original debtor.
This article refers to expromission.

Article 1295. Effect of Insolvency of the new debtor In delegacion. The article re-only to
insolvency and not with other causes of non-fulfillment which the old :or is not liable.

Requisites to hold the old debtor liable if the new debtor Is insolvent;

1. The Insolvency must already be existing and of public knowledge at the time of the delegation.
2. Or the Insolvency Is already existing and known to the debtor at the time of the delegation.
NOTE- if the insolvency occurred only AFTER the delegation, the old debtor is not liable.

Article 1296. when the principal obligation Is extinguished in consequence of a nova tion
accessory obligations may subsist only insofar as they may benefit persons who did not
give their consent.
Accessory obligations- Ex. guaranty, mortgages, pledge, sureties
Stipulation pour Autrui- Gen. Rule: Accessory obligations or stipulations pour autrui
(stipulations made in favor of a third person )remain unless said persons their consent to the
novation.
Article 1297. If the new obligation Is void, the original one subsist. unless the p arties
intended that the former relation should be extinguished In any event.
Article 1298. the novation Is void If the original obligation Is void, except when annulment
may be claimed only by the debtor, or when ratification validates acts w hich are voidable.

Article 1299. If the original obligation was subject to n suspensive or resolutory c ondition, the
new obligation shall also be under the same condition unless otherwise stipulated.

Article 1300. Subrogation defined- (extinctive subjective novation by change off the
creditor) Is the transfer to a third person of all the rights pertaining to the creditor, including
the right to proceed to guarantors or possessors of mortgage subject to any legal provision
or any modification that may be agreed upon.

Kinds of subrogation:

From the viewpoint of cause or origin:

1. Conventional or voluntary- requires an agreement; and the consent of the original parties
and of the creditor; must be clearly established othrwise it Is as if no subrogation has taken
place.
2. Legal- takes place by operation of law; not presumed, except in the case expressly
mentioned In the law

From the viewpoint of extent:

1. Total-

2 . Partial- there would be two or more creditors

Article 1301. Conventional subrogation of a third person requires the consent of the original
parties and of the third persons.

Consent of following Is required in conventional subrogation:

1. Debtor- because he becomes liable under the now obligation; and be cause his old
obligation ends.

2. The old creditor- because his credit is affected

3. The new creditor-because he now becomes a party to the obligation

Article 1302. Presumption when thorn 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 shore.
Article 1303. Effects of subrogation- the credit and all appurtenant rights either against the debtor, or
against third persons, are transferred. If the transferred credit Is subject to a suspensive condition, the
creditor cannot collect un the condition has been fulfilled.

Article 1304. Partial subrogation- there are two creditors:

1. The old creditor- who still remains n creditor as to the balance ( only partial payment has been made
to him)
2. The new creditor- who is a creditor to the extent of what ho has paid the creditor.

Contracts

Chapter 1

General provisions
Article 1305. Contract defined- a meeting of the minds between two persons whereby one binds
himself, with respect to the other, to give something or to render some services.

Essential requisites of a contract :

1. Consent

2. Subject matter

3. Cause or consideration. Optional may also be considered a requisite: Form and delivery.

Classifications of contracts:

A. According to perfection or formation:

1. Consensual- perfected by more consent Ex. sale
2. Reel- perfected by delivery Ex. pledge, depositum
3. Formal or solemn- those where special formalities are essential before the contract may be
perfected- Ex. donation Inter vivo, requires for it! validity n public document

B. According to cause or equivalence of value of prestation:

1. Onerous-whore there Is an Interchange of equivalent valuation constd orations
2. Gratuitous or lucrative- this Is FREE, thus one party receives no equivalent prestation except a feeling
that one has been generous or liberal
3. Remunerative- one where one prestation is given for the benefit or service that has been rendered
PREVIOUSLY.

C. According to importance of importance or dependence of one upon another

1. Principal- the contract may stand alone by itself- Ex. sale, lease
2. Accessory- depends for its existence upon another contract- Ex. mortgage. Here the principal
contract is loan.
3. Preparatory- Here, the parties do not consider the contract as an end by itself,but as a means
thru which future transactions or contracts may be made. Ex. agency, partnership

D. According to parties obligated:

1. Unilateral-where only one party has an obligation. Ex. the borrowing of a bike
2. Bilateral- both parties are required to render prestations. Ex. sale

E. According to their name or designation:

1. Nominate- the contract Is given a particular or special name Ex. comemodatum, partnership,sale,
agency, deposit
2. Innominate -those that arc not given any special name- Ex. I give that you may give

F. According to the risk of fulfillment:

1. Commutative- the parties contemplate n real fulfillment, therefore equivalent value is given. Ex.
sale, lease
2. Aleatory- the fulfillment depends upon chance, thus the values vary because of the risk or
chance. Ex. Insurance contract

G. According time of performance or fulfillment:

1. Executed- one completed at the time the contract Is entered Into, that Is, obligations are
complied with at this time. Ex Contract of sale of property which has been delivered and already
paid for.
2. Executory- one where the prestations are to be compiled with at some future time. Ex. a perfected
sale where the property has not yet been delivered and the price has not been paid

H. According to subject matter:

1. Contracts Involving things
2. Contracts involving rights or credits- provided these are transmissible.
Ex. contract of usufruct or assignment of credit
3. Contracts involving services- Ex. Agency, lease of services, contract
of common carriage

I. According to obligations imposed and regarded by law:

1,Ordinary- sale
3. Institutional- contract of marriage (inviolable social Institution)

Stages of a contract

1. Preparation- the parties are progressing with their negotiations; hey have not yet arrived at a
definite agreement, although there may have been a preliminary offer, and bargaining.
2. Perfection- the parties have at long last came to a definite agreement, the element of definite
subject matter and valid cause have been accepted by
mutual consent.
3. Consummation- the terms of the contract have been performed, and the con tract may be
said to have been fully executed.

Basic Characteristics of a contract:

1. Freedom to stipulate
2. Obligatory force and compliance in good faith
3. Perfection by more consent
4. Both parties are mutually bound
5. R e l a t i v i t y
Article 1306. The parties may stipulate such terms and conditions, etc. as they may dee med
convenient provided they are not contrary to LAW, PUBLIC ORDER, MORALS, GOOD
CUSTOMS, OR PUBLIC POLICY.

Article 1307. Governing rules of innomlnate contracts (not given any special name)
1. Stipulations

2. Title I and II of book IV Obligations and Contracts

3. Rules on the Most analogous nominate contracts
4. Customs of the place
Four (4) kinds of innominate contracts:
1. Do ut des (I give that you may give) 3. Do ut facias (I give that you may do)
2 Faclo ut des ( I do that you may give) 4. Facio ut facias (I do that you may do)

Article 1308. the contract must bind both contacting parties, its validity or compliance cannot be
left to the will of one of them. Both parties are bound. The principle is based on the essential
quality of parties.

Consequence of Mutuality:
1. A party cannot revoke or renounce a contract without the consent of the other, nor can it be
set aside on the ground that he had made a bad bargain;
2. When fulfillment of the condition depends upon the sole will of the debtor, the conditional
obligation is void, if the condition is SUSPENSIVE. If RESOLUTORY, the contract is valid.

Article 1309. The determination of the performance may be left to a third parson, whose
decision shall not be binding until it has been made to both contracting parties

Ex. Cases submitted for arbitration

Article 1310 Evidently inequitable determination is NOT binding. What is equitable is a

question of fact, to be ascertained from the attendant circumstances. The court will decided
what Is equitable.

Article 1311 Principle of relativity. Gen Rule- contracts are generally effective only
between the parties, their assigns and their heirs. Reason for the rule: The act,
declaration, or omission of another, cannot affect another. e xce p t as otherwise
stipulated bylaw or agreement
Exceptions:
1. Where the obligation arising from the contract are not transmissible by their nature,
stipulation or by provision of law,
Ex. contract of partnership or agency wherein death of the principal extingui shed the
contract a n d the h e i r s c a n n o t step into the shoes of the deceased

2.Where the stipulation pour autrui (a stipulation in favor of a third person)

If the contract contains a stipulation pour autrui, h e may demand its fulfillment
provided he communicated his acceptance to the obligor before its r e v o c a t i o n T h e
parties must have clearly and deliberately conferred a favor upon a third person A
mere incidental benefit or interest of a person is n o t sufficient.

Stipulation pour autrui defined- it Is a stipulation in favor of a third person conferring a

clear and deliberate favor upon him,and which stipulation is merely part of the contract
e n te re d i n to b y t h e parties, neither whom acted as agent of the third person. NOTE
Such stipulation is binding on the said person, although too may no be a signatory to the
contract.
Ex. 1. insurance taken by a bus or taxi company In favor of its passengers,

2)B bought C's land lot P100.000 It was also agreed that P80.00.0 would be given to C and
the remaining P20.000 would be given by B to X. a creditor o f C. If X communicates his
acceptance to B. X can demand its fulfillment

3. where a third person induces another to violate his contract

Note. To be discuss under Art. 1311 of NCC

4.Where in some cases, third persons may be adversely affected by a contract wherein they did not
participate.
This is clearly evident in the case of COLLECTIVE CONTRACTS, where the majority naturally rules
over the minority.
Ex. collective bargaining contracts or agreement Suspension of payment and composition under the
Insolvency Law IN QUASI-CONTRACT of negotiorum gestio- some contract entered into by
unauthorized managers may bind the owner.

5. Where the law authorizes the creditor to sue on a contract entered into by his debtor. Referred
ocaccion directa.
Ex. even if the lessor does not have to respect a sub-lease, still the sub-lessee is subsidiarily liable to
the lessor for any rent due from the lessee

Article 1312. Contracts creating real rights.- third persons who came into possession of the object of
the contract are bound thereby subject to the provisions of the Mortgage laws and the Land
Registration law. Reason: A real right binds the property over which it is exercised.

Ex. If A purchased an apartment with an existing contract of lease, A must respect the lease if the
lease is registered in the Registry of Property; or if A has actual knowledge of the existence and the
duration of the lease. The rule applies if a buyer bought the land with an existing mortgage.

Article 1313. Creditors are protected in cases of contracts intended to defraud them. Under this
article, an outsider can in a sense interfere with another's contract.

Ex. If A donates a parcel of land to B and A has no other properties, real or personal, to satisfy his
indebtedness to his creditors, said creditors may ask for the rescission of the contract, to the extent
that they have been prejudiced.
Article 1314. Any person who induces another to violate his contract shall be liable for damages to
the other contracting party. Whoever is injured may sue for damages.

Ex. An actress has a two-year contract with XyZ Studios. A friend, B induces A to break her contract
with XYZ Studio. Can XYZ Studio sue B for damages? B's liability is at most be solidary with A, the
actress because of his commission of a tort. B's liability did not arose ex-contract for he is not a party
to the contract between A and XYZ Studio; his was an independent act generative of civil liability.

Article 1315. Contracts are perfected by mere consent, and from that moment the par ties 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 in good faith, usage and law.

How contracts are perfected:

a) Consensual contracts- by mere consent. Perfected from the moment there is an agreement
(consent) on the subject matter; and the cause or consideration.
b) Real contracts- perfected by delivery. Ex. pledge or deposit

Consequences of perfection
1. The parties are bound to the fulfillment of what has been expressly stipulated.
2. The parties are also bound to all the consequences, which according to their nature,
may be keeping in good faith, usage and law.

Article 1316 Real contracts such as deposit, pledge and commodatum are not perfected
until the d e l i ve r y of the object of the obligation.

Commodatum- a loan where identical object must be returned. Ex. Loan of a car

A rticl e 1317. Gen. Rule- No person may en te r Into n contract with another without the , latter’s
authority, or unless he is authorized to represent him by law.

Requisite for a person to contract in the name of another:

1. He must be d u t y authorized either expressly or impliedly

2. Or he must have by law a right to represent him- ex. administrator o guardian

3. Or the contract must b e subsequently ratified. express o r implied, by word or deed

Effect of ratification- cleanses the contract from all its defects from the moment the Contract Is
entered into.

Chapter 2

Essential Requisites of a Contract

General Provisions
Article 1318. Requisites of a contract-concurrence of all the requisites Is necessary:

1. Consent of the contracting parties

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

3. C a u s e of the obligation which is established.

The above requisites refer to consensual contracts.

Requisites of a real contract:

The three (3) ab ove requisites and the fourth (4) requisite is DELIVERY.

Consent-presupposes legal capacity and the fulfillment of the conditions if there should be
any attached.

Effect of non-consent-No consent No contract, the agreement may be considered as non-

existent or VOID. The rule also applies In case of absolute simulated contract (one where the
parties never Intended to enter into a contract)
If there is vitiated consent- Vice of consent i.e. error, fraud, undue Influence, the con tract is
merely voidable.

Article 1319. Consent defined- it is the meting of the mind between the parties on the subject matter and
cause or consideration of the contract, even if neither one has been delivered. The offer must be certain
and the acceptance be absolute. A qualified acceptance constitute 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 has been made.

Article 1320. An acceptance may be expressed or implied.

Forms of acceptance:

1. Express 2. Implied 3. Presumed (by law)

Article 1321 The person making the offer may fix the time, place and manner of accep tance, all of
which must be complied with. Any act contrary to the prescribed terms re ally constitute a counter-
offer or counter-proposal. Ex. auction sale

Article 1322. An offer made through an agent is accepted from the time acceptance Is
communicated to him. The article applies when both the offer and acceptance was made thru
the agent who is in extension of the personality of the principal.

Q- Suppose the offer was made to the principal but the acceptance was made by an agent, is there
a meeting of the minds? Ans. It appears there is no yet meeting of the minds for the agent may be an
ordinary one who is not authorized to receive acceptance for a particular transaction. However, the
answer will be yes if he is authorized to receive the acceptance.

Article 1323. When does an offer became Ineffective:

1. Death
2. Insanity
3. Civil interdiction
4. Insolvency of either party BEFORE ACCEPTANCE IS CONVEYED.
Other cases when the offer becomes ineffective-
1. When the offeree rejects expressly or impliedly the offer
2. When the offer is accepted with a qualification or condition
3. When before acceptance is communicated, the subject matter becomes illegal or
impossible
4. When the period of time given to the offeree within which he must signify his acceptance has
already lapsed or prescribed
5. When the offer was revoked on time before acceptance

Article 1324. Gen. rule on options. If the offeree has allowed the offeree a certain period to
accept, the offer may be withdrawn at any time before acceptance of the thing
offered by communicating such withdrawal.
EXCEPTION: When the option Is founded on a consideration as something paid or promised. E x . if
the offeree gave the o f f e r e r m o n e y o r c a s h o r p r o m i s e i n c o n s i d e r a t i o n f o r t h e
o p t i o n , the latter cannot withdraw the offer until upon the and of the period agreed u pon by
both parties.

EARNEST MONEY - Money which perfects the contract and which is considered part of the
purchase price under Art. 1482 of NCC
-Money given as part of the purchase price and as a proof of the perfection of the contract.
-Actual advance of the purchase price
-The term Includes a deposit on sale, that is, an instalment of the price. If the purchaser falls to pay
the balance at the time agreed upon, the seller may treat the sale as cancelled and keep the
deposit.

BLACK'S LAW DICTIONARY

Earnest money- A sum of money paid by a buyer at the time of entering a con tract to indicate
the Intention and ability of the buyer to curry out the contract. Normally such earnest money Is
applied against the purchase price. Often the contract provides for the forfeiture of this sum if
the buyer defaults. A deposit of part payment of the purchase price on sale to be
consummated in the future. Import of term in real estate contract is that when comparatively
small sum is paid down down, it is an assurance that the party is in earnest and good faith, and if
his earnest and good faith fails, it will be forfeited.

Option- A right, which acts as a continuing offer, ,given for consideration, to purchase or lease
a property at an agreed upon price and terms within a spe cific time. An option Is an
agreement which gives the optionee the power to accept an offer for a limited time. An option to
purchase or to sell is not a contract to purchase or to sell, as the optionee has the right to reject
or accept the offer, In accordance with its terms, and Is not bound.

Phil. Law Dictionary:

Option- A contract granting a person the privilege to buy or not to buy certain object a any time
within the period at fixed price.

Special disqualifications- Rules of Court the ff. are considered Incompetent and therefore, can placed
under guardianship:
Perfection of an option: since it is by itself a contract, it is not perfected unless---- a meeting of the
minds on the option. Thus, the offer to grant the option found on a distinct cause or consideration,
may itself be withdrawn before the acceptance of the offer of the option.

Article1325. Unless it appears otherwise, business advertisements of things for sale are not definite
offers. But mere invitation to make an offer. .

Article 1326. Advertisement for bidders are simply invitations to make proposals, and the advertiser is
not bound to accept the highest or lowest bidder, unless the contrary appear.

Article 1327. The ff. cannot give consent to n contract.

1. unemancipated minors

2. Insane or demented person's and deaf-mutes who do not know how to write

Two classes of voidable contracts:

1. Those where one of the parties is Incapacitated to give consent
2. Those where the consent of one party Is vitiated ( error, fraud. violence. intimidation, and undue
Influence)

Persons Incapacitated to give consent:

1.Unemancipated minors- these ore minors who have not been emancipated by marriage, attainment
of age of majority, or by parental or judicial authority unless ratified, these contract are voidable. If
both parties are minors, the contract is unenforceable.
2.Insane or demented persons- unless they acted during lucid Interval. Reason People who contract
must know what they are entering into.

DEAF-MUTES WHO DO NOT KNOW HOW TO WRITE BUT KNOWS HOW TO READ. he
should be considered capacitated.

Article 1328. Contracts entered Into during lucid Interval are VALID. Contracts agree to in a state of
drunkenness or during n hypnotic spell are voidable.
Hypnotic spell- induced by drugs, by deliberate or unintentional hypnotism or while person walks
during his sleep, or somanbulism-for in these cases, a person is Incapable of intelligent consent.

Lucid interval- even If a person has been declared judicially insane, and is now under guardianship,
he may still enter into a valid contract, provided it can be shown that at the of contracting, he is
under lucid Interval. Her he Is already presumed Insane, and therefore, the sanity must be proven.

Article 1329. Modification as Incapacity;

Special disqualifications- Rules of Court the ff. are considered Incompetent and there fore, can
placed under guardianship:
1. Those under civil Interdiction
2. Hospitalized lepers
3. Prodigals (spendthrifts)
4. Deaf and dumb who cannot rend and write
5. Those of unsound mind even though they have lucid intervals
6. Those who by reason of age, disease, weak mind,and other similar causes, cannot without
outside aid, cannot take care of themselves and manage their property, thereby becoming prey for deceit
and exploitation.

Article 1330. A contract wherein consent is given through mistake, violence, intimidation, undue
influence or fraud is voidable.

Causes of vitiated consent. (Vices of consent)-

1. Mistake or error

2. Fraud or deceit

3. V i o l e n c e

4. Intimidation
5. Undue influence
Contract with vitiated consent- Is voidable unless ratified before annulment. There must b e c l e a r a n d
convincing evidence to established vitiated consent.Mere preponderance of
evidence Is not sufficient.

Requisite for mistake to vitiate consent:

1. The error must be substantial regarding;
A. The object of the contract
Ex. A person signed a deed sale thinking it was only a contract of loan.

B. The conditions which principally moved or induced one of the parties (error In quality or
quantity)

Ex. Error in knowledge of the true lend boundaries of n land offered for sale.

C. Identity or qualifications (error In personae) only If such was the principal cause of the contract.
Ex. Hiring of a pr-bar reviewer, n particular singer
2. The error must be excusable (not caused by negligence).- the error does not vitiate consent if
the party in error was negligent, or if having had the opportunity to ascertain the truth, he did not
do so.
3. The error must be a mistake of fact and not of law.- Reason- Ignorance of the law excuses no
one from compliance therewith.

Article 1332. Rule in cases of inability to read or understand-

Presumption- One always acts with due care and signs with full knowledge of all the contents of the
document. And this Is true even if the mind of the party signing was con fused at the time of
signing, as long as he stilt knew what he was doing. He cannot, thus, repudiate the transaction.

Exceptions:

1) when one of the parties cannot read;

2) the contract Is In a language not understood by one of the parties.

Article 1333. There Is no mistake if the party alleging it knew the doubt, risk or contin gency
affecting the object of the contract. Reason- It is to be assume that the party was willing to take
the risk .

Article 1334. Mutual error as to the legal effect of an agreement when the real purpose of the
parties is frustrated, may vitiate consent.

Requisites for mutual error to vitiate consent:

1) there must be mutual error;

2) the error must refer to the legal effect of the agreement; and

3) the real purpose of the parties is frustrated.

As distinguished from Article1361.- When a mutual mistake of the parties causes the failure of
the instrument to disclose their real agreement, said instrument maybe reformed. Under this
article, the real agreement was not disclosed. In Art. 1334, the error is as to legal effect of the
agreement.

Ex. If A and 13 agreed on a solo, but as written, the document shows a mortgage. H ere there is
meeting of the mind but the Instrument does not show the real intention. the remedy is reformation
of Instrument. Out on the other hand, both parties agreed on 3 sale, and as written, the
document is one of sale, but both parties thought erroneously that it had the same affect as
mortgage, there is no meeting of the minds, and the remedy Is annulment.

Article 1335. When Is there violence- when In order to wrest consent, serious and irresi stible force is
employed. Violence refers to physical coercion. Intimidation refers to moral coercion.

Requisite for violence to vitiate consent 1. Employment of serious and irresistible force 2. It must have
been the reason why the contract was entered into.

Requisites for intimidation to vitiate consent;

1. Reasonable and well grounded fear 2. Of an imminent and grave evil

3. Upon his person, property or upon the person or property of descendants and ascendants

spouses

4. It must have been the reason why the contract is entered into. 5. The threat must be of unjust act,
an actionable wrong. An agreement not to prosecute on account of a crime is against public policy.

Article 1336. Violence or intimidation shall annul the obligation, although it may have
peen employed by a third person who did not take part in the contract. Article 1337. Undue influence-
when a person takes improper advantage of his power over the will of another, depriving the latter of
reasonable freedom of choice. The ff. circumstances must be considered:

1. Confidential

2. Family

3. Spiritual and other relations between the parties

4. The fact that the person alleged to have been unduly influence was suffering from mental illness

5.Ignorant

6.Financial distress

Note: If the influence is DUE or allowable, as when caused by solicitation, importunity,

argument or persuasion, the same is not prohibited by law, morals, or equity.

Article 1338. Fraud- when, through insidious words or machinations of one of the con tracting parties,
the other is induced to enter into a contract, which, without them, he would not have agreed to.

Kinds of fraud;

A. Fraud in the celebration of the contract:

1. Dolo causante or casual fraud- here, were I not for the fraud, the other party would not have
consented. Effect- the contract is voidable.

2. Dolo incidente or incidental fraud- here, even without the fraud the parties would have agreed just
the same, hence, the fraud is merely incidental in causing consent. Very likely though, different terms
would have been agreed upon. Effect:- the contract is valid. But there can be an action for damages.

Requisites of dolo causante:

1. The fraud must be material and serious, that is, is really induces consent.

2. The fraud must be employed by only one of the contracting parties, because if both committed
fraud, the contract would remain valid.
3. There must be deliberate intent to deceive or to induce, therefore misrepre sentation in good faith
is not fraud.
4. The other party must have relied on the untrue statement, and must himself not be guilty of
negligence in ascertaining the truth.

B. Fraud in the performance of the obligations stipulated in the contract- this pre supposes the
existence of an already perfected contract. Ex. Red vinegar was sold but what was delivered was
diluted vinegar.

Article 1338. Failure to disclose facts, when there is a duty to reveal them, as when the

are bound by confidential relations, constitutes fraud.

This is CONCEALMENT when there is a duty to reveal them. Ex. in case of partners.

Article 1340. The usual exaggerations in trade, when the other party had an opportunity to know the
facts, are in themselves fraudulent. (Refers to the rule "customer beware or Caveat emptor). The
usual exaggeration in trade constitute tolerated fraud when the other party had an opportunity to
know the facts.

Article 1341. A mere expression of opinion does not signify fraud, unless made by an expert and the
other party relied on the former's special knowledge. Reason- The opinion of an expert is almost the
same category as a fact, particularly when the expert's opinion is relied upon by other party.

Article 1342. misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual.

Distinction between participation by a third person in force and intimidation from fraud or
misrepresentation:

1. Due to force and intimidation- the contract is voidable.

2. Fraud or misrepresentation- does NOT make the contract voidable UNLESS a. The representation
has created a substantial mistake

b. The mistake is mutual.

In this case, the contract may be annulled, not mainly on the ground of

BUT on the ground of error or mistake.

Article 1343. Misrepresentation made in good faith us not fraudulent but may constitute error.

Article 1344. Two (2) requisites for fraud as ground for annulment;

1. The fraud must be serious.

2. The parties must not be in pari delicto (equally or mutually guilty) other neither party can ask for
annulment. The contract would therefore be considered valid.

Incidental fraud- does not vitiate consent but only obliges the person using it to pay for damages. It
can not be used as ground for annulment.

Article 1345. Simulation of contract may be absolute or relative.

Absolute-when the parties do not intend to be bound by it at all. Relative-when the parties conceal
their true agreement.

Simulation of contract defined- it is the process of intentionally deceiving others by producing the
appearance of a contract that really does not exist (absolute simulation) or which is different from the
true agreement (relative simulation).

Requisites for simulation;

1. An outward declaration of will different from the will of the parties.

2. The false appearance must have been intended by mutual agreement

2. The purpose is to deceive third person.

Article 1346, kinds of simulated contracts:

1. Absolutely simulated (simulados) fictitious contract the parties do not intend to be bound and the
contract is VOID. 2. Relatively simulated (disimulados) disguised contracts- the parties conceal their
true agreement and the parties are bound to the real or true agreement except:

a. If the contract should prejudice a third person b. If the purpose is contrary to law, morals, good
customs, public order or public policy.

Section 2

OBJECT OF CONTRACTS

Article 1347. All things which are NOT outside the commerce of men, including future hings may be
the object of a tract. All right which are not intransmissible may also me the object of a contract.

No contract may be entered into upon future inheritance except in cases ex ressly authorized by law.

All services which are not contrary to law, morals, good customs, public order or ublic policy may also
be the object of a contract.

OBJECT OR SUBJECT MATTER OF A CONTRACT-IS A THING OR A SERVICE

Requisites as to object of a contract

1. The thing or service must be within the commerce of man

3. Must be transmissible

3. Must not be contrary to law, morals, good customs, public order or public
policy

4. Must not be impossible

5. Must be determinate as to its kind or determinable without the need of a new

contract or agreement

Article 1348. Impossible things or services cannot be the object of a contract. impossibility NOT to be
confused with mere difficulty. Hence, a sowing of mere inconvience, unexpected impediments, or
increase expenses is not enough.

Article 1349. The object of every contract must be determinate as to its kind. The act at the quantity is
not determinate shall not an obstacle to the existence of the con act, provided it is possible to
determine the same, without the need of a new contract agreement.

Section 3 CAUSE OF CONTRACTS

Article 1350. Definition of cause:

onerous contracts- the prestation or promise of a thing or service by the other.

Ex. contract of sale

emuneratory contracts- the service or benefit which is remunerated Ex. The past service or benefit
which is by itself a recoverable debt contracts of pure beneficence (Gratuitous)- mere liberality of the
benefactor.

Ex. Pure donation

Article 1351. The particular motives of the parties in entering into a contract are differ ent from the
cause thereof. Ex. A bought a gun for 1,000 from a store to kill himself. The cause of the con

Eract (sale) is the gun for A, the buyer; and the money for the seller, the store owner. The motive is
killing himself (A). NOTE: Motives do not enter at all in the validity or inva idity of the cause or
consideration.
Motive as distinguished from cause:
1. The motive of a person may vary although he enters into the same kind of contract; the cause is
always the same.

2. The motive may be unknown to the other; the cause is always known.

3. The absence of motive cannot cure the absence of cause.

An illegal cause as distinguished from illegal motive. An illegal cause makes the contract void; an
illegal motive does not necessarily under the transaction void. Ex. If A purchase a knife to kill B, the
purchase is still void.

Article 1352. Contracts w/out cause, or with unlawful cause, produce no effect what soever. The
cause is unlawful if it is contrary to law, moral, good customs, public order public policy.

Requisites for cause: 1) it must be present at the time the contract was entered into; 2) must be true
not false; 3) it must be lawful.

If there is no cause whatsoever, the contract is void. Ex. a fictitious sale is void.

fect of illegal cause-the innocent party cannot be compelled to perform his obligation

and may recovered what he has already given.

Article 1353. The statement of a false cause in the contract shall render them void, if it would not be
proved that they were founded upon another cause which is true or valid.

ason- The parties are given the chance to show a cause really exists, and the said use is true and
lawful. Thus, under this Article, it would seem that the contract with a element of a false cause is NOT
void but merely revocable or voidable.

Article 1354. Although the cause is not stated in the contract, it is presumed and it exist is lawful,
unless the debtor proves the contrary.

Assumption that a cause exists- it is necessary that the cause must exists, although it t necessary
that it be stated in the contract. Reason: It is presumed hat the cause cs and is lawful unless the btor
proves the contrary. A mad a promissory note in of B. A alleged that the cause was his gambling
losses in a prohibited game. A has urden of proving that the cause is unlawful because of the
presumption that the e is lawful.

Article 1355. Except in cases provided by law, lesion or inadequacy of cause shall not date a
contract, unless there has been fraud, mistake or undue influence.
defined- inadequacy of cause. Ex. insufficient price for a thing sold. Gen. rule- it NOT invalidate a
contract. Exceptions: When together with lesion, there is fraud, e or undue influence. Lesion may be
evidence of the presence of fraud, mistake use influence.