Effect of payment by third persons EFFECT OF PAYMENT IF THE DEBTOR OR CREDITOR IS

INCAPACITATED
Who can pay 1. Debtor
2. 3rd person with the consent Effect of payment BY an Payment not valid
of the debtor (3rd person incapacitated debtor
interested; 3rd person not Effect of payment TO an Payment valid if:
interested but stipulated) incapacitated debtor 1. Creditor keeps
3. 3rd person without the the payment
knowledge consent of the 2. Creditor is
debtor (3rd person not benefited by the
interested, not stipulated) payment
Effect of payment 3rd person entitled to
rd
by a 3 person subrogation:
paying with the EFFECT OF PAYMENT TO A CREDITOR AND TO A THIRD
consent of the Principal obligation + PERSON
rd
debtor (3 person accessory obligation
To whom 1. Creditor
interested; 3rd
payment 2. Creditor’s successor-in
person not Accessory obligations include
should be interest
interested but mortgage, guaranty, and
made 3. Any person authorized to
stipulated) penalty.
receive payment
Effect of payment 3rd person entitled to
When 1. Payment redounds to benefit
by 3rd person paying beneficial reimbursement:
payment to of the creditor
without knowledge Reimbursement only to the
an 2. Exceptions:
or consent of extent that the debtor was
unauthorized a. After payment, the 3rd
debtor (3rd person benefited
3rd person is person acquires the
not interested, not
valid creditor’s rights.
stipulated)
b. The creditor ratifies the
Effect of payment As to creditor who accepts
payment.
by any 3rd person payment:
c. The creditor is in
who does not Payment extinguishes
estoppel.
intent to be obligation.
reimbursed
As to the debtor: Donation, if
the debtor agrees not to
reimburse the 3rd person

3rd person who does not

intend to be reimbursed: The
3rd person is entitled to
subrogation, if payment is
with the consent of the
debtor.

If the debtor insists on

payment to the 3rd person
who does not intent to be
reimbursed: The 3rd person is
entitled to beneficial
reimbursement, if payment is
without the knowledge or
consent of the debtor.
 Place of Payment

Stipulated At the place stipulated by the parties Loss of the thing due

No If there is no stipulation on the place of Applicable to Obligation to give and

Stipulation, payment and the obligation is to give a specific obligation to do
Specific thing, When the loss of the 1. The thing is lost or
Thing the place of payment is where the thing due extinguishes destroyed without
thing was at the time the agreement an obligation to give a the debtor’s fault,
was perfected specific thing unless the debtor is
liable for the
No If there is no stipulation on the place of fortuitous event.
Stipulation, payment and the obligation is to give a generic 2. Before the debtor
thing,
Generic incurs delay.
The place of payment is domicile of
Thing When the debtor is 1. Law provides:
the debtor.
liable for a fortuitous
event a. Debtor is in delay
Dation in Payment V. Payment by Cession b. Debtor promises to
deliver the same specific
DATION IN PAYMENT PAYMENT BY CESSION thing to two people with
Substitute form of Substitute form of different interests.
payment payment c. Obligation is to give a
1 debtor, 1 creditor 1 debtor, 2 or more generic thing.
creditors d. Obligation to give the
Debtor may be SOLVENT Debtor is INSOLVENT or thing arises from a crime.
or may NOT BE EXPERIENCING
experiencing financial FINANCIAL DIFFICULTIES 2. Stipulation declares
difficulties
Involves 1 property of Involves ALL OF THE 3. Nature of obligation
the debtor PROPERTIES of the requires the assumption
debtor of risk.
Debtor gives a SPECIFIC Debtor only ASSIGNS When the loss of the 1. Prestation becomes
PROPERTY to the PROPERTIES to his thing due extinguishes legally or physically
creditor as a substitute to creditors so that they an obligation to do impossible without the
the object of the may be sold and the fault of the debtor.
obligation; OWNERSHIP proceeds applied to his 2. Service is so difficult as
of the specific property debts; ownership of the to be manifestly beyond
PASSES to the creditor debtor’s properties DO the contemplation of the
NOT PASS onto the parties.
creditors
Dation extinguishes the Obligations of the debtor
obligation, UNLESS the are ONLY EXTINGUISHED
parties agree that the to the EXTENT OF THE
value of the substitute is NET PROCEEDS of the
less than the value of sale of the debtor’s
the object of the properties.
obligation
 Condonation or remission of Debt COMPENSATION

Applies to Obligation to give

Elements 1. Gratuitous
2. Acceptance of the
debtor
3. Complies with the
forms of donation of
property
4. Subject to the rules
on inofficious
donations
Presumptions 1. Delivery of the
promissory note to the
debtor is voluntary.
2. The promissory note is
delivered because the
debt is condoned.
CONFUSION OR MERGER OF RIGHTS
Applies to Obligation to give
Applies to Obligation to give
Elements 1. Parties are principally bound
as creditors and debtors of each
other.
2. Both debts consist in a sum of
money or are of the same kind.
3. Both debts are due.
4. Both debts are liquidated and
demandable.
5. There is no controversy over
either of the debts.
Kinds of As to amount:
compensation 1. Total
2. Partial
As to how compensation takes
place:
1. Legal (by operation of law)
2. Conventional (by agreement
of the parties)

Elements 1. The characters of the debtor and the

creditor merge in one person. NOVATION
Applies to Obligation to give
2. The merger in one person of the
characters of the principal creditor or Elements I. Previous valid contract
principal debtor 2. Agreement of the parties as to
the new contract
3. Complete and definite 3. Extinguishment of the old
contract by the new valid
Effects of 1.  If the obligation is joint, the debt is contract
merger extinguished proportionally.
Kinds of I. Real: Change of object
2. If the obligation is solidary, the novation
whole debt is extinguished completely. 2. Subjective: Change of party
a. Substitution - change of
debtor
b. Subrogation - change of
creditor

3. Mixed: Change of object and

party
 debtor without virtue of such payment to
prejudice to the all of the rights which the
effects of creditor has against the
Expromision Delegacion
confusion as to debtor (Article 2067).
Initiative for the Initiative for the the latter's When the guarantor pays,
substitution of the substitution of the debtor share. there is a merger or
debtor does not comes from the debtor. confusion of the
come from the characters of the
debtor and may be guarantor and creditor.
made without this
knowledge.
CHARACTERISTICS OF CONTRACTS
The consent of the The consent of the
creditor and the 3rd creditor, debtor, and 3rd
is person is person is required. AUTONOMY The parties are free to stipulate the
required. (ART. 1306) terms of the contract.
Limitation: The stipulations should not
The insolvency of The insolvency of the new
be contrary to law, morals, good
the new debtor debtor gives the creditor
customs, public policy, or public order.
does not give the a right of action against
creditor a right of the original debtor if such Obligatory Contracts have the force of law
action against the insolvency was existing force between the parties and from the
original debtor. and of public knowledge (Arts. 1159, moment of their perfection, the
or existing and known to 1315) contracting parties are bound to fulfill
the original debtor. them.

EXPROMISION V. DELEGACION Mutuality (Art. Contracts must bind both of the

1308) contracting parties.

Relativity (Art. Contracts take effect between the

CASES WHERE LEGAL SUBROGATION IS PRESUMED
1311) parties, their assigns, and heirs.
A creditor pays a A preference of credit Limitation on liability of heirs: Only to
preferred bestows upon the the extent of the value of the property
creditor, even preferred creditor an they received from the decedent
without the advantage of having his
debtor's credit satisfied first, ahead
knowledge. of other claims
which may be established
against the debtor

A 3rd person not If the paying 3rd person is

interested in the authorized to pay, he is
obligation pays subrogated to the rights
with the of the creditor, such as
approval of the those arising from a
debtor. mortgage, guaranty, or
penalty

A 3rd person A guarantor is a 3rd

interested in the person interested in the EXCEPTIONS TO RELATIVITY
obligation pays fulfillment of an
even without the obligation. The guarantor Rights are Assigns and heirs are not bound
knowledge of who pays is subrogated by intransmissi by a contract where the rights and
ble (Art. obligations are not transmissible acceptance that is absolute
1311) by their nature, stipulation, or
provision of law. Form of acceptance Express or implied; by letter
or telegram,
Stipulation A 3rd party can claim benefits through an agent
pour autrui under a contract if the contracting
(Art. 1311) parties clearly and deliberately In accordance with the time,
conferred a benefit to him and he place, and manner
accepted it. of the acceptance stated in
the offer
Contracts 3rd parties are bound by real
creating rights once they are registered. When offer becomes Upon death, civil interdiction,
real rights ineffective insanity, or insolvency before
(Art. 1312) acceptance

Contracts A creditor can rescind a contract Effects of option Offer cannot be withdrawn
intended to to which he is not a party if the contract during the option
defraud said contract is executed with the period in consideration of the
creditors intention of prejudicing his rights. option money
(Art. 1313) paid or promised

Tortuous A 3rd person interferes with a Nature of business Invitations to make an offer
interference valid contract without a legal advertisements
with justification.
contractual Nature of Invitations to make an offer
relations advertisements for
(Art. 1314) bidders

Requisites of consent Must be intelligent, free, and

CLASSIFICATION OF CONTRACTS BASED ON spontaneous
PERFECTION

CLASSES OF VOIDABLE CONTRACTS

Consensual Examples: Contract of sale;
Incapacitated parties Consent is vitiated
(perfected by compromise agreement
mere consent)  Minors  Mistake
 Insane or  Violence
Real (perfected Examples: Contract of deposit;
demented persons  Intimidation
upon delivery of pledge; commodatum; simple
 Deaf-mutes who do  Undue influence
object of the loan or mutuum
not know how to  Fraud
contract)
write
Formal or Solemn Examples: Donation of real  Persons in a state
(perfected upon property made in a public of drunkenness
compliance instrument; Donation of personal  Persons under a
with certain property exceeding the value of hypnotic spell
forms) P5,000 made in writing

CONSENT
Manifestation of Concurrence of an offer that DOLO CAUSANTE v. DOLO INCIDENTE
consent is certain and an Dolo causante (Art. 1338) Dolo incidente (Art.
 particular provision are inconsistent, the particular
1344)
provision is paramount to the general provision, so a
Deception of a serious Deception not of serious particular intent will control a general one that is
character character inconsistent with it.

Essential cause of the
consent
Remedy is the annulment
of the contract, plus
damages
Reformation
There is a meeting of minds
between the parties but
the written contract does
not reflect the agreement
of the parties.
Reason: Mistake , fraud,
inequitable conduct, or
accident due to ignorance,
lack of skill, negligence, or
bad faith of person drafting
the contract, or clerk, or
typist.
Refers to some
particular or accident of
the obligation
Remedy is only damages
Annulment
There is no meeting of
minds between the
parties.
Reason: Vitiated consent
or the presence of
mistake, violence,
intimidation, undue
influence, or fraud in
obtaining the consent of
a party
3. For the proper construction of an instrument, the
circumstance 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 whose language he is to interpret.
4. The terms of 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.
5. When an instrument consists partly of written words
and partly of a printed form, and the two are
inconsistent, the written word controls the printed
form.
6. When the characters in which the 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.

Reformation does not Annulment invalidates 7. When the terms of an agreement have been intended
invalidate the contract but the contract because the in a different sense by the parties to it, that sense is to
is only an equitable remedy consent of a contracting prevail against either party in which he supposed the
so that the contract can party is vitiated, i.e., it is other understood it, and when different constructions
express the true intentions not given freely and of a provision are likewise proper, that is to be taken
of the  parties. voluntarily. which is the most favorable to the party in whose favor
the provision was made.
The principles of interpretation stated in Rule 123 of the
Rules of Court shall likewise be observed in the 8. When an instrument is equally susceptible of two
construction of contracts. interpretations, one in favor of a natural right and the
other against it, the one favoring natural right is to be
PRINCIPLES OF INTERPRETATION UNDER THE RULES OF adopted.
COURT. 
Under the Rules of Court, the principles of 9. An instrument may be construed according to usage
interpretation of documents are the following: in order to determine its true character (Rule 130
[formerly Rule 1231, Sections 10 to 19, Rules of Court).
1. The language of a writing is to be interpreted
according to the legal meaning it bears in the place of
execution, unless the parties intended otherwise.

2. In the construction of an instrument, the intention of Resciss voidable unforceabl void

the parties is to be pursued; and when a general and a ible e
 Valid Valid Cannot be Inexist
until until sued upon ent,
rescind annulled or absolu
ed enforced, tely
unless null
ratified and
void,
and
has no
effect
at all

Defecti Defectiv Defective Defecti

ve e because of ve
becaus because the becaus
e of an of absence of e the
econo vitiated authority, essenti
mic consent absence of al
prejudi or memorand requisi
ce to a because um,or tes of
party a because a
or a contracti both contra
3rd ng party contracting ct are
person is parties are absent
incapacit incapacitat or
ated ed declar
ed
void or
prohib
ited by
law

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.
 Art. 1381 art. 1191

Contract validly entered into; the ground for Contract validly entered into; the ground for
rescission is economic prejudice to one party. rescission is the substantial breach of the guilty
party of the obligation.

Rescission may be demanded by a party to the Rescission may be demanded only by

contract or a 3rd party prejudiced by the the injured party to the contract.
contract.

Rescission is a subsidiary action and effective Rescission is a principal action which is retaliatory in
only to the extent necessary to cover the character.
damages caused.

Prescriptive period is 4 years. Prescriptive period is 10 years.

RESCISSION
requisites grounds prescription
Art. 1381-1382 4 years

1. Contract must be I. Contracts entered into by For a minor, the period commences
rescissible. (Arts. 1381- guardians where the ward from the time he
1382) suffers lesion attains the age of Majority.

2. The party asking for 2. Contracts entered into by

rescission has no representatives where the • For an incapacitated person, the
other legal means absentee suffers Lesion period commences from the time the
to obtain reparation incapacity ceases.
for the damages he 3. Contracts undertaken in
suffered. fraud of creditors
(Art. 1383) • For an absentee, the period
4. Contracts referring to things Commences from the time his
3. The party demanding under litigation  domicile is known. (Art. 1389)
rescission must be
able to return the 5. Payments made in a state of
thing which is the insolvency
object of the contract
and its fruits.
(Art. 1385)

4. The thing which is

the
object of the contract
is not legally in the
possession of a 3rd
party in good faith.
(Art. 1385)
5. The action for
rescission must be
brought within the
prescriptive period.
(Art. 1389)

Annulment
Grounds prescription 4 years

One party is incapacitated to For a minor, the period commences from the time he attains the age
give consent: of Majority.
I. Minors
2. Insane or demented For an incapacitated person under guardianship, the period
persons commences from the time the incapacity ceases (Art. 1391).
3. Deaf-mutes
4. Persons in a state of
drunkenness
5. Persons under a hypnotic
spell (Arts. 1327 and 1328)

Defective or vitiated consent,
or consent obtained by:
I. Mistake
2. Violence
3. Intimidation
4. Undue influence
5. Fraud (Art. 1330)
For mistake or fraud, the period commences from the time the
mistake or fraud is discovered.
For violence, intimidation, or undue influence, the period
commences from the time the violence, intimidation, or undue
influence ceases (Art. 1391).

Ratification

Effects of Ratification who can ratify modes of

ratification

Extinguishes action to annul voidable Guardian of incapacitated person Express

contract
Incapacitated person when Implied
Express capacitated

Implied Consent of the guilty party not

necessary in ratification
Cleanses contract from all of the defects
from the moment of perfection
 Annulment as a remedy

Party Who Can Effect of Decree of Effect of Loss of Thing

Institute Annulment
Annulment

Injured party Mutual restitution of the Loss through the fault of the guilty party - The
thing with fruits and interests guilty party returns the fruits received, value of
• Heirs and assigns the thing at time of loss, and interest from the
of the injured party Incapacitated person returns time of loss.
the thing to the extent that it
Guilty party cannot is beneficial to him Loss through the fault or fraud of the
institute the incapacitated party or party whose consent is
annulment. vitiated - The action for annulment is
extinguished.

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) Those 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 a 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 evidences, or some of them, of such
things in action or pay at the time some part of the purchase money; but when a 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 representation as to the credit of a third person.

(3) Those where both parties are incapable of giving consent to a contract.
 Unenforceable contracts

Kinds of Unenforceable Contracts infringing the Ratification

Contracts Statute of Frauds

Contracts entered into by an Agreement not to be Failure to object to parol evidence

agent without authority or in
excess of authority
Contracts infringing the
Statute of Frauds
performed within a year
Special promise to answer
for debt, default, or
miscarriage of another
Agreement made in
consideration of marriage
Acceptance of the benefits under the
contract
Where both parties are incapacitated,
ratification by the guardian of one of the
incapacitated parties makes the
contract voidable.

Agreement for the sale of Ratification by the guardians of both

goods and chattel for at incapacitated parties makes the
least P500 contract valid.

Agreement for a lease

longer than 1 year

Agreement for the sale of

real property

Representation as to the
credit of a 3rd
person

ARTICLE 1409
The following contracts are inexistent and void from the beginning:
1. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;
2. Those which are absolutely simulated or fictitious;
3. Those whose cause or object did not exist at the time of the transaction:
4. Those whose object is outside the commerce of men;
5. Those which contemplate an impossible service;
6. Those where the intention of the parties relative to the principal object of the contract cannot be ascertained;
7. 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.
 Void contracts
Cases of void contracts Characteristics

Any of the essential requisites of a contract is absent. Produces no legal effects

Cause, object, or purpose is contrary to law, morals, good No ratification

customs, public order, or public policy.
Defense of inexistence or absolute nullity
Absolutely simulated or fictitious cannot be renounced.

Cause or object did not exist. Imprescriptible

Object is outside the commerce of Inexistence or nullity cannot be invoked

men. by 3rd party.

Contemplates an impossible service

Object of the contract cannot be ascertained.

Expressly prohibited or declared void by law