BSSLAW1

SCHOOL OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

THE LAW ON OBLIGATIONS

CHAPTER5 EXTINGUISHMENT OF OBLIGATIONS

CHAPTER6 GENERAL PROVISION ON CONTRACTS
APPENDICES

INTRODUCTION TO THE MODULE

Course Code and Course BSSLAW1
Title Law on Obligations and Contracts
This unit introduces the students to the basic legal concepts
related to obligations and contracts. It will cover the general
principles of obligations and contracts, the various
classifications and kinds thereof, its nature and effect, the
Course Description modes of extinguishing the obligations, the form of contracts
and the remedy of reformation as well as the rules of
interpretation.

This learning module is being formulated considering the

following situations of students: (1) Those students who do
not have internet connection, (2) students whose family
share computer equipment (3) students with slow and weak
Rationale of the Module internet connectivity. The pandemic created a global change
in our daily norm and the academe, as dynamic as it is, is
adjusting to these changes.
The learning module seeks to provide an avenue for students
to learn by self-paced learning or asynchronous learning.
● Periodical Examination for the first semester:
Prelims, Midterms and Finals
Requirements of the ● Assignments
Course ● Quizzes
● Research Work

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 Chapter 5: EXTINGUISHMENT OF OBLIGATIONS
Objective(s)
At the end of the module, the students will be able to enumerate and identify basic
concepts relating to the modes of extinguishing obligations.

CHAPTER 5: EXTINGUISHMENT OF OBLIGATIONS

Prefatory questions:
1. Is payment the same as performance?
2. When does the death of a debtor extinguish his/her obligation?
3. Are debts transmissible to heirs?

GENERAL PROVISIONS

Art. 1231. Obligations are extinguished:

(1) By payment or performance:

(2) By the loss of the thing due:

(3) By the condonation or remission of the debt;

(4) By the confusion or merger of the rights of creditor and debtor;

(5) By compensation;

(6) By novation.

Other causes of extinguishment of obligations, such as annulment, rescission,

fulfillment of a resolutory condition, and prescription, are governed elsewhere in
this Code.

Other modes of extinguishing an obligation include:

1. Death of either party in a personal obligation

2. Mutual desistance or withdrawal of the parties
3. Arrival of a resolutory period
4. Compromise agreement
5. Impossibility of fulfillment
6. Happening of fortuitous event

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SECTION 1. - Payment or Performance

Art. 1232. Payment means not only the delivery of money but also the
performance, in any other manner, of an obligation.

Payment infers applicability to a real obligation while performance infers

applicability to positive personal obligations. Corollarily, non-performance would apply to
negative personal obligation.

Art. 1233. A debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered
or rendered, as the case may be.

Requisites of payment

1. Identity of the prestation which means that the very thing due or service due must be
delivered or complied with.
2. Integrity of the prestation which means that prestation must be fulfilled completely.

Art. 1234. If the obligation has been substantially performed in good faith, the
obligor may recover as though there had been a strict and complete
fulfillment, less damages suffered by the obligee.

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

General rule: Principle of integrity

Payment or performance shall be full and complete.

Exceptions

1. If there has been substantial compliance and good faith

2. Acceptance by the obligee of the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection

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Art. 1236. The creditor is not bound to accept payment or performance by a third
person who has no interest in the fulfillment of the obligation, unless
there is a stipulation to the contrary.

Whoever pays for another may demand from the debtor what he has
paid, except that if he paid without the knowledge or against the will
of the debtor, he can recover only insofar as the payment has been
beneficial to the debtor.
Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against
the will of the latter, cannot compel the creditor to subrogate him in
his rights, such as those arising from a mortgage, guaranty, or penalty.

Art. 1238. Payment made by a third person who does not intend to be reimbursed
by the debtor is deemed to be a donation, which requires the debtor's
consent. But the payment is in any case valid as to the creditor who
has accepted it.

Who is bound to pay?

1. Debtor
2. Heirs, successors-in-interest
3. Authorized third persons

Rights of the third person who pays

1. If payment is made with the knowledge or consent of the debtor, the third person has
the rights of reimbursement and subrogation.
2. If payment is made without knowledge or consent of the debtor, the third person has
the right of reimbursement.
3. If the third person does not intend to be reimbursed, then the payment he made is a
donation which requires acceptance of the debtor as no on can impose his generosity
on another.

Art. 1239. In obligations to give, payment made by one who does not have the free
disposal of the thing due and capacity to alienate it shall not be valid,
without prejudice to the provisions of Article 1427 under the Title on
"Natural Obligations."

General rule

Payment by an incapacitated person is not valid.

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Exception

Art. 1427. When a minor xxx who has entered into a contract without the consent of
the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in
fulfillment of the obligation, there shall be no right to recover the same from the obligee who
has spent or consumed it in good faith.

Art. 1240. Payment shall be made to the person in whose favor the obligation has
been constituted, or his successor in interest, or any person authorized
to receive it.

To whom should payment be made

1. Creditor or obligee
2. Successors-in-interest or heirs of the creditor
3. Any authorized persons

Art. 1241. Payment to a person who is incapacitated to administer his property

shall be valid if he has kept the thing delivered, or insofar as the
payment has been beneficial to him.

Payment made to a third person shall also be valid insofar as it has

redounded to the benefit of the creditor. Such benefit to the creditor
need not be proved in the following cases:

(1) If after the payment, the third person acquires the creditor's rights;

(2) If the creditor ratifies the payment to the third person;

(3) If by the creditor's conduct, the debtor has been led to believe that
the third person had authority to receive the payment.

Effect of payment to an incapacitated person

Payment to a person who is incapacitated to administer his property shall be valid if

he has kept the thing delivered, or insofar as the payment has been beneficial to him.

Benefit to the creditor is presumed in the following cases

1) Subrogation - If after the payment, the third person acquires the creditor's rights.
2) Ratification - If the creditor ratifies the payment to the third person.
3) Estoppel - If by the creditor's conduct, the debtor has been led to believe that the third
person had authority to receive the payment.

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Art. 1242. Payment made in good faith to any person in possession of the credit
shall release the debtor.

Art. 1243. Payment made to the creditor by the debtor after the latter has been
judicially ordered to retain the debt shall not be valid.

Attachment

A court order to levy upon the properties of the defendant as security for the
satisfaction of whatever monetary judgment in an action filed by the creditor against the
debtor.

Art. 1244. The debtor of a thing cannot compel the creditor to receive a different
one, although the latter may be of the same value as, or more valuable
than that which is due.

In obligations to do or not to do, an act or forbearance cannot be

substituted by another act or forbearance against the obligee's will.

In real obligations, the debtor has to deliver the object agreed upon. In personal
obligations, the act agreed upon should be performed. Any deviation should be agreed upon.

Art. 1245. Dation in payment, whereby property is alienated to the creditor in

satisfaction of a debt in money, shall be governed by the law of sales.

Special modes of payment

1. Dation in payment or dacion en pago or adjudicacion en pago or payment of a money debt in

kind
2. Application of payment
3. Payment by cession
4. Tender and consignation

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Art. 1246. When the obligation consists in the delivery of an indeterminate or
generic thing, whose quality and circumstances have not been stated,
the creditor cannot demand a thing of superior quality. Neither can the
debtor deliver a thing of inferior quality. The purpose of the obligation
and other circumstances shall be taken into consideration.

Rule of the medium quality

When the obligation consists in the delivery of an indeterminate or generic thing, whose
quality and circumstances have not been stated, the creditor cannot demand a thing of
superior quality. Neither can the debtor deliver a thing of inferior quality.

Art. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by

the payment shall be for the account of the debtor. With regard to
judicial costs, the Rules of Court shall govern.

Extrajudicial expenses

These are expenses incurred by the parties in relation to the payment of the obligation,
like bank fees or foreign exchange costs, shall be for the account of the debtor, unless agreed
upon otherwise.

Judicial costs

These are costs related to court action to enforce payment or performance and is
governed by the Rules of Court.

Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot
be compelled partially to receive the prestations in which the
obligation consists. Neither may the debtor be required to make partial
payments.

However, when the debt is in part liquidated and in part unliquidated,

the creditor may demand and the debtor may effect the payment of the
former without waiting for the liquidation of the latter. (1169a)

This article sets another exception to the principle of integrity.

Art. 1249. The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency
which is legal tender in the Philippines.

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 The delivery of promissory notes payable to order, or bills of exchange
or other mercantile documents shall produce the effect of payment
only when they have been cashed, or when through the fault of the
creditor they have been impaired.

In the meantime, the action derived from the original obligation shall
be held in the abeyance.

Rules in payments of debts in money

1. It shall be made in the currency stipulated, and if it is not possible to deliver such
currency, then in the currency which is legal tender in the Philippines.
2. Delivery of promissory notes payable to order, or bills of exchange (checks) 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.

Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated

should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless
there is an agreement to the contrary.

Inflation

Inflation is the sudden increase in money circulating without a corresponding increase

in transactions.

Deflation

Deflation is the sudden decrease of money without a corresponding decrease in

business transaction.

Art. 1251. Payment shall be made in the place designated in the obligation.

There being no express stipulation and if the undertaking is to deliver a

determinate thing, the payment shall be made wherever the thing
might be at the moment the obligation was constituted.

In any other case the place of payment shall be the domicile of the
debtor.

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

These provisions are without prejudice to venue under the Rules of

Court.

Residence

Residence is where a person actually lives, whether permanent or where he is just

momentarily sojourning.

Domicile

Domicile is the place where a person habitually lives and goes back to after a temporary
sojourn in another place.

Venue

Venue is the place where an action may be filed.

SUBSECTION 1. - Application of Payments

Art. 1252. He who has various debts of the same kind in favor of one and the same
creditor, may declare at the time of making the payment, to which of
them the same must be applied. Unless the parties so stipulate, or when
the application of payment is made by the party for whose benefit the
term has been constituted, application shall not be made as to debts
which are not yet due.

If the debtor accepts from the creditor a receipt in which an application

of the payment is made, the former cannot complain of the same,
unless there is a cause for invalidating the contract.

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Application of payment

Application of payment is the designation of the debt to which the payment must be
applied when the debtor has several obligations of the same in favor of the same creditor.

Requisites of application of payment

1. There must be one debtor and one creditor.

2. There must be two or more debts of the same kind.
3. All debts must be due.
4. The amount paid by the debtor must not be sufficient to cover all the debts.

Rules on application of payment

1. The debtor makes the choice as to which debt the payment will be applied.
2. If the debtor does not make the choice, the creditor can make the choice.
3. If the creditor does make the choice or the choice is invalid, the payment shall be
applied to the most onerous or burdensome debt.
4. If the debts are of equal weight, ceteris paribus, the payment shall be applied
proportionately.

Art. 1253. If the debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered.
(1173)

Art. 1254. When the payment cannot be applied in accordance with the preceding
rules, or if application can not be inferred from other circumstances,
the debt which is most onerous to the debtor, among those due, shall
be deemed to have been satisfied.

If the debts due are of the same nature and burden, the payment shall
be applied to all of them proportionately.

SUBSECTION 2. - Payment by Cession

Art. 1255. The debtor may cede or assign his property to his creditors in payment
of his debts. This cession, unless there is stipulation to the contrary,
shall only release the debtor from responsibility for the net proceeds
of the thing assigned. The agreements which, on the effect of the

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 cession, are made between the debtor and his creditors shall be
governed by special laws.

Payment by cession

Payment by cession is the voluntary abandonment of the debtor of his rights over his
properties in favor of the creditors who would dispose the same and divide the proceeds
among themselves.

Requisites

1. There is one debtor

2. There are two or more creditors
3. The debtor is partially or relatively insolvent
4. There must be acceptance of the cession by the creditors

SUBSECTION 3. - Tender of Payment and Consignation

Art. 1256. If the creditor to whom tender of payment has been made refuses
without just cause to accept it, the debtor shall be released from
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, or 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 cause, 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.

Art. 1257. In order that the consignation of the thing due may release the obligor,
it must first be announced to the persons interested in the fulfillment
of the obligation.

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 The consignation shall be ineffectual if it is not made strictly in
consonance with the provisions which regulate payment.

Art. 1258. Consignation shall be made by depositing the things due at the disposal
of judicial authority, before whom the tender of payment shall be
proved, in a proper case, and the announcement of the consignation
in other cases.

The consignation having been made, the interested parties shall also
be notified thereof.

Art. 1259. The expenses of consignation, when properly made, shall be charged
against the creditor.

Art. 1260. Once the consignation has been duly made, the debtor may ask the
judge to order the cancellation of the obligation.

Before the creditor has accepted the consignation, or before a judicial

declaration that the consignation has been properly made, the debtor
may withdraw the thing or the sum deposited, allowing the obligation
to remain in force.

Art. 1261. If, the consignation having been made, the creditor should authorize
the debtor to withdraw the same, he shall lose every preference which
he may have over the thing. The co-debtors, guarantors and sureties
shall be released.

Tender of payment

Tender of payment is the unconditional offer to pay the exact amount to satisfy a debt.

Consignation of payment

Consignation is the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment and generally requires a
prior tender of payment.

General rule

Consignation is preceded by tender.

Exception

There is no need for a prior tender and the debtor can immediately consign the payment
in court in the following instances:

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(1) When the creditor is absent or unknown, or 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 cause, 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.

Requisites of consignation

1. There is a debt that is due.

2. There was prior tender or prior tender is not required
3. Debtor files a case of consignation in court.
4. The creditor is notified.
5. The amount is placed at the disposal of the court,
6. The creditor is notified of such disposal.

SECTION 2. - Loss of the Thing Due

Art. 1262. An obligation which consists in the delivery of a determinate thing shall
be extinguished if it should be lost or destroyed without the fault of
the debtor, and before he has incurred in delay.

When by law or stipulation, the obligor is liable even for fortuitous

events, the loss of the thing does not extinguish the obligation, and
he shall be responsible for damages. The same rule applies when the
nature of the obligation requires the assumption of risk.

Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of

anything of the same kind does not extinguish the obligation.

Art. 1264. The courts shall determine whether, under the circumstances, the
partial loss of the object of the obligation is so important as to
extinguish the obligation.

Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be
presumed that the loss was due to his fault, unless there is proof to
the contrary, and without prejudice to the provisions of article 1165.
This presumption does not apply in case of earthquake, flood, storm,
or other natural calamity.

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Art. 1266. The debtor in obligations to do shall also be released when the
prestation becomes legally or physically impossible without the fault
of the obligor.

Art. 1267. When the service has become so difficult as to be manifestly beyond
the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part.

Art. 1268. When the debt of a thing certain and determinate proceeds from a
criminal offense, the debtor shall not be exempted from the payment
of its price, whatever may be the cause for the loss, unless the thing
having been offered by him to the person who should receive it, the
latter refused without justification to accept it.

Art. 1269. The obligation having been extinguished by the loss of the thing, the
creditor shall have all the rights of action which the debtor may have
against third persons by reason of the loss.

Relate this to the discussion under Art. 1189 on the rules of loss.

SECTION 3. - Condonation or Remission of the Debt

Art. 1270. Condonation or remission is essentially gratuitous, and requires the

acceptance by the obligor. It may be made expressly or impliedly.
One and the other kind shall be subject to the rules which govern inofficious
donations. Express condonation shall, furthermore, comply with the
forms of donation. (1187)

Art. 1271. The delivery of a private document evidencing a credit, made

voluntarily by the creditor to the debtor, implies the renunciation of
the action which the former had against the latter.

If in order to nullify this waiver it should be claimed to be inofficious, the debtor

and his heirs may uphold it by proving that the delivery of the
document was made in virtue of payment of the debt. (1188)

Art. 1272. Whenever the private document in which the debt appears is found in
the possession of the debtor, it shall be presumed that the creditor
delivered it voluntarily, unless the contrary is proved. (1189)

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Art. 1273. The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force.
(1190)

Art. 1274. It is presumed that the accessory obligation of pledge has been remitted
when the thing pledged, after its delivery to the creditor, is found in
the possession of the debtor, or of a third person who owns the thing.
(1191a)

Condonation or remission

Condonation or remission is the gratuitous abandonment of the creditor of his rights

to make the debtor liable. In essence, the creditor “forgives” the debt.

Requisites

1. It must be gratuitous.
2. It must be accepted by the debtor.
3. The obligation must be demandable.
4. The parties must have capacity.
5. The condonation must not be inofficious.
6. The condonation must comply with the forms of a donation or a will

Classes of condonation

1. As to effect or extent
a. Total condonation – when the total obligation is extinguished.
b. Partial condonation – when only a portion of the obligation is extinguished.
2. As to form
a. Express condonation – when it is made with the required formalities.
b. Implied or tacit condonation – when it can be deduced from the acts of the obligee.
3. As to constitution or date of effectivity
a. Inter vivos condonation – when it takes effect during the lifetime of the donor.
b. Mortis causa condonation – when it takes effect after the death of the creditor.

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SECTION 4. - Confusion or Merger of Rights

Art. 1275. The obligation is extinguished from the time the characters of creditor
and debtor are merged in the same person.

Art. 1276. Merger which takes place in the person of the principal debtor or
creditor benefits the guarantors. Confusion which takes place in the
person of any of the latter does not extinguish the obligation.

Art. 1277. Confusion does not extinguish a joint obligation except as regards the
share corresponding to the creditor or debtor in whom the two
characters concur.

Confusion or merger

Confusion or merger extinguishes an obligation when the qualities of the creditor and
debtor meet in one person with respect to one and the same obligation.

Requisites

1. The merger of the characters of the creditor and debtor must be in the same person.
2. The merger must take place in the person of either the principal debtor or the principal
creditor.
3. The merger must be complete and definite.

SECTION 5. - Compensation

Art. 1278. Compensation shall take place when two persons, in their own right,
are creditors and debtors of each other.

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be
at the same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if
the latter has been stated;

(3) That the two debts be due;

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 (4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy,

commenced by third persons and communicated in due time to the
debtor.

Art. 1280. Notwithstanding the provisions of the preceding article, the guarantor
may set up compensation as regards what the creditor may owe the
principal debtor.

Art. 1281. Compensation may be total or partial. When the two debts are of the
same amount, there is a total compensation.

Art. 1282. The parties may agree upon the compensation of debts which are not
yet due.

Art. 1283. If one of the parties to a suit over an obligation has a claim for damages
against the other, the former may set it off by proving his right to said
damages and the amount thereof.

Art. 1284. When one or both debts are rescissible or voidable, they may be
compensated against each other before they are judicially rescinded
or avoided.

Art. 1285. The debtor who has consented to the assignment of rights made by a
creditor in favor of a third person, cannot set up against the assignee
the compensation which would pertain to him against the assignor,
unless the assignor was notified by the debtor at the time he gave his
consent, that he reserved his right to the compensation.

If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts
previous to the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may

set up the compensation of all credits prior to the same and also later
ones until he had knowledge of the assignment. (1198a)

Art. 1286. Compensation takes place by operation of law, even though the debts
may be payable at different places, but there shall be an indemnity for
expenses of exchange or transportation to the place of payment.
(1199a)

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Art. 1287. Compensation shall not be proper when one of the debts arises from a
depositum or from the obligations of a depositary or of a bailee in
commodatum.

Neither can compensation be set up against a creditor who has a claim

for support due by gratuitous title, without prejudice to the provisions
of paragraph 2 of Article 301.

Art. 1288. Neither shall there be compensation if one of the debts consists in civil
liability arising from a penal offense. (n)

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

Art. 1290. When all the requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law, and extinguishes both
debts to the concurrent amount, even though the creditors and
debtors are not aware of the compensation.

Compensation or Set-off

Compensation or set-off extinguishes in the concurrent amount of obligations of parties

who are reciprocally debtors and creditors of each other.

Classification of compensation

1. As to effect
a. Total compensation – when both obligations are completely extinguished because
they are of equal amount.
b. Partial compensation – when only one obligation is extinguished and a pat of the
larger obligation remains.

2. As to origin or cause
a. Voluntary or conventional compensation – which takes place by reason of the
agreement between the parties.
b. Judicial compensation – which takes place by virtue of a court order.
c. Facultative compensation where only one of the parties can claim compensation.

Examples:

Art. 1287. Compensation shall not be proper when one of the debts arises
from a depositum or from the obligations of a depositary or of a bailee in
commodatum.

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 Neither can compensation be set up against a creditor who has a claim for
support due by gratuitous title, without prejudice to the provisions of paragraph
2 of Article 301.

Art. 1288. Neither shall there be compensation if one of the debts consists in
civil liability arising from a penal offense.

d. Legal compensation – which takes place ipso facto or by operation of law as long as the
elements are present.

Requisites of legal compensation

(1) That each one of the obligors be bound principally, and that he be at the same time
a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.

Example: Delia owes Cora the amount of P100K with Greg as the guarantor, payable
on December 15, 2020. Cora owes Greg P50K, payable on December 30, 2020. Cora
owes Delia P80K and a chihuahua puppy worth P20K, both demandable on December
30, 2020. What are the legal effects as to compensation in this case? In case Greg files
a case against Cora for the collection of the amount owing him and he wins the case
and the court issues an order of garnishment ordering the creditors of Cora to withhold
payment, what will be the effect of compensation?

1. There can only be partial legal compensation between Delia and Cora as they are
principal debtors and creditors of each other.
2. The legal compensation between Delia and Cora can take place on December 30,
2020 because by then, both debts are due and demandable. However, they can
agree to have the voluntary compensation on any date.
3. The legal compensation will cover only the money debts. However, Delia and Cora
can also agree on voluntary compensation to cover the cash amount and the value
of the dog.
4. In case of legal compensation validly takes place between Delia and Cora, Greg will
be released as a guarantor.

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 5. The writ of garnishment will prevent the legal compensation between Cora and Delia
as Greg has a claim over the debt owed to Cora.

SECTION 6. - Novation

Art. 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor.

Art. 1292. In order that an obligation may be extinguished by another which

substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every
point incompatible with each other.

Art. 1293. Novation which consists in substituting a new debtor in the

place of the original one, may be made even without the knowledge
or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the rights mentioned
in Articles 1236 and 1237.

Art. 1294. If the substitution is without the knowledge or against the

will of the debtor, the new debtor's insolvency or non-fulfillment of
the obligations shall not give rise to any liability on the part of the
original debtor.

Art. 1295. The insolvency of the new debtor, who has been proposed
by the original debtor and accepted by the creditor, shall not revive
the action of the latter against the original obligor, except when said
insolvency was already existing and of public knowledge, or known to
the debtor, when the delegated his debt.

Art. 1296. When the principal obligation is extinguished in

consequence of a novation, accessory obligations may subsist only
insofar as they may benefit third persons who did not give their
consent.

Art. 1297. If the new obligation is void, the original one shall subsist,
unless the parties intended that the former relation should be
extinguished in any event.

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 Art. 1298. The novation is void if the original obligation was void,
except when annulment may be claimed only by the debtor or when
ratification validates acts which are voidable.

Art. 1299. If the original obligation was subject to a suspensive or

resolutory condition, the new obligation shall be under the same
condition, unless it is otherwise stipulated.

Art. 1300. Subrogation of a third person in the rights of the creditor

is either legal or conventional. The former is not presumed, except in
cases expressly mentioned in this Code; the latter must be clearly
established in order that it may take effect.

Art. 1301. Conventional subrogation of a third person requires the

consent of the original parties and of the third person.

Art. 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even

without the debtor's knowledge;

(2) When a third person, not interested in the obligation, pays with
the express or tacit approval of the debtor;

(3) When, even without the knowledge of the debtor, a person

interested in the fulfillment of the obligation pays, without prejudice
to the effects of confusion as to the latter's share.

Art. 1303. Subrogation transfers to the persons subrogated the credit

with all the rights thereto appertaining, either against the debtor or
against third person, be they guarantors or possessors of mortgages,
subject to stipulation in a conventional subrogation.

Art. 1304. A creditor, to whom partial payment has been made, may
exercise his right for the remainder, and he shall be preferred to the
person who has been subrogated in his place in virtue of the partial
payment of the same credit.

Novation

Novation, from the word novatio which is literally construed as “to make new”, is a
mode of extinguishing an old obligation by replacing it with a new one. Based on the principle
of novatio non praesumitur, generally, novation is never presumed.

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Requisites

1. Existence of a valid obligation.

2. Intent to extinguish or modify the old obligation.
3. Capacity and consent of the parties.
4. Validity of the new obligation.

Kinds of novation

1. As to form
a. Express novation – where the novation is stated in unequivocal terms.
b. Implied novation – where the old and the new obligation are incompatible with each
other.

2. As to extent
a. Total or extinctive novation – where the entire agreement is novated with a new one.
b. Partial or modificatory novation – where the novation changes only the object or the
parties.

3. As to origin
a. Legal novation – which takes place by operation of law

(a.1) When a creditor pays another creditor who is preferred, even without the
debtor's knowledge.

(a.2) When a third person, not interested in the obligation, pays with the express or
tacit approval of the debtor.

(a.3) When, even without the knowledge of the debtor, a person interested in the
fulfillment of the obligation pays, without prejudice to the effects of confusion as to
the latter's share.

b. Conventional novation – which takes place by agreement of the parties.

4. As to subject
a. Real or objective novation – where the object or principal condition of the obligation
is changed.

Example: Flora agreed to deliver a mobile phone to Henry. Later, the parties agreed
that instead of the mobile phone, the object will be a laptop.

b. Personal or subjective novation – where the debtor or creditor is replaced.

b.1 Substitution of the debtor

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 Expromision is that kind of substitution where the initiative to pay or assume the
obligation comes from the new debtor, whether or not the new debtor does so with
or without the knowledge of the debtor, or that he does not intend to be
reimbursed, in which case, the rules in Articles 1236, 1237, 1238 and 1294 applies.
This novation should always be with the consent of the creditor.

Delegacion is that kind of substitution where the initiative to pay or assume the
obligation comes from the original debtor. It requires the consent of the creditor. As
a rule, the insolvency of the new debtor shall not revive the action against the
original debtor, unless:
1. Such insolvency was already existing when the debt was delegated and of public
knowledge or
2. Such insolvency was of known to the debtor when he delegated the debt.

Delegado – the new debtor Delegante –

the original debtor Delegatario – the
creditor

b.2 Subrogating a third person in place of the creditor

Conventional subrogation – which takes place by agreement of the parties.

Legal subrogation – which takes place by operation of law

1) When a creditor pays another creditor who is preferred, even without the
debtor's knowledge.

2) When a third person, not interested in the obligation, pays with the express
or tacit approval of the debtor.

3) When, even without the knowledge of the debtor, a person interested in the
fulfillment of the obligation pays, without prejudice to the effects of confusion as
to the latter's share.

c. Mixed novation – where the novation a combination of the objective and subjective
novation is present.

Reading Assignments:

24
1. Case 1: FOOD FEST LAND, INC. AND JOYFOODS CORPORATION VS. ROMUALDO C. SIAPNO,
TEODORO C. SIAPNO, JR. AND FELIPE C. SIAPNO. G.R. No. 226088
2. Case 2: DESIDERIO DALISAY INVESTMENTS, INC., VS. SOCIAL SECURITY SYSTEM, G.R. No.
231053 A Self-regulated Learning Module
ACTIVITY5_OBLIGATIONS:
5.a Vocabulary enhancement. Choose at least 50 words from the reading assignments/cases
of Chapter 5. Find a technical or legal definition or concept of those words. Write a conceptual
sentence using the word. Indicate from which reading assignment (Ex. Act 5/Case1) was the
word lifted from. Follow the format found in Appendix A.

5.b Create 50 Multiple Choice Questions based on Chapter 5. Provide 4 distinct but related
choices. Follow the format found in Appendix B.

5.c Online Quizzers will be scheduled.

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 Chapter 6: INTRODUCTION TO CONTRACTS

Objective(s)

At the end of the module, the students will be able to enumerate and identify basic concepts
relating to contracts.

CHAPTER 6: GENERAL PROVISIONS

Prefatory question

1. Does a contract refer to a document where an agreement is written?

2. Who is a third person in legal context and how is the third person affected by a contract?
3. What is the significance of the stages of a contract?
Relation of obligation and contract

In Art. 1157, the different sources of obligations were discussed. One of those sources
is contract.

CHAPTER 1 : GENERAL PROVISION ON CONTRACTS

Art. 1305. A contract is a meeting of minds between two persons

whereby one binds himself, with respect to the other, to
give something or to render some service.

Contract

Sanchez Roman, a Spanish Commentator in Civil Law, defined a contract as a juridical

convention manifested in legal form, by virtue of which, on or more persons bind themselves
in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to do or
not to do.

Common essential elements of a contract

All contracts have these basic elements:

1. Consent
2. Object or subject matter or prestation
3. Cause or consideration

Special essential elements of some contracts

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 Aside from the common essential elements, some contracts requires addition elements
like:

1. Form
2. Delivery

Natural elements of a contract

Natural elements are those found only in certain contracts and inherently part of those
contracts. They are presumed to exist, unless a contrary agreement appears.

Example: implied warranties in sale

Accidental elements of a contract

Accidental elements are only present in a contract because the parties agreed on them.

Example: The stipulation to pay interest and the period agreed upon

Classifications of contracts

1. As to perfection

a. Consensual contract which is perfected by mere consent as to object and cause.

Example: sale

b. Real contract which is perfected by delivery of the object of the contract. Example:
depositum, commodatum, pledge

2. As to form

a. Common or informal contract is one that does not require some particular form.
Example: mutuum, commodatum

b. Special or formal contract is one that requires a particular form. Example:

donation, chattel mortgage

3. As to their relation to other contracts

a. Principal contract is a stand-alone contract and does not depend on other

contracts for its validity. Example: sale, lease

b. Accessory contract is one which depends on other contracts for its validity.
Example: pledge, mortgage

c. Preparatory contract which is the basis of future contracts. Example:

partnership, agency

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4. As to purpose

a. Contract transferring ownership is one where the ownership is passed on.

Example: sale

b. Contract for the conveyance of use of a thing is one where only the enjoyment of
the use of the thing is given and no ownership is passed on. Example: usufruct,
commodatum

c. Contract for rendition of service is one where the object is the service. Example:
agency, employment

5. As to nomenclature

a. Nominate contract is one with has a special or specific designation given to it by

law. Example: sale, lease, donation

b. Innominate contract is one which has no specific name.

6. As to risk

a. Commutative contract is one where the parties bear equivalent risks. Example:
sale, lease

b. Aleatory contract is one where the fulfillment is based upon chance. Example:
insurance

7. As to fulfillment

a. Executory contract is one where the obligations are yet to be fulfilled. Example:
lease where the rentals are not yet paid

b. Executed contract is one where the obligations have been complied with.
Example: sale where full price has been paid and delivery is effected

8. As to the legal tie

a. Unilateral contract is one where only one of the parties has an obligation to fulfill.
Example: donation, gratuitous deposit

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 b. Bilateral or reciprocal contract is one which gives rise to an obligation for both
parties. Example: sale, lease

9. As to cause

a. Gratuitous contract is one where one of the parties performs an obligation for
free. Example: commodatum

b. Onerous or burdensome contract is one where both parties get a benefit from the
agreement. Example: sale

Art. 1306. The contracting parties may establish such stipulations,

clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.

Freedom to contract or liberality to contract or autonomy of contract

As a general rule, the parties can agree on anything and such contract has the force of
law between the parties. The only limitation is that the agreement must not be contrary to :

1. law

2. morals

3. good customs

4. public order

5. public policy

Art. 1307. Innominate contracts shall be regulated by the

stipulations of the parties, by the provisions of Titles I
and II of this Book, by the rules governing the most
analogous nominate contracts, and by the customs of the
place.

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Kinds of innominate contracts

1. Do ut des – I give that you may give

2. Do ut facias – I give that you may give
3. Facio ut des – I do that you may give
4. Facio ut facias – I do that you may do

Art. 1308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of
them.

Mutuality of contract

Since contracts bind both parties, the terms and conditions are to be agreed upon by
both parties as they should be on equal footing. It prevents the condition that makes the
fulfillment or pre-termination of the agreement to de dependent exclusively upon the
uncontrolled will of just one of the contracting parties.

Art. 1309. The determination of the performance may be left to a

third person, whose decision shall not be binding until it
has been made known to both contracting parties.
Art. 1310. The determination shall not be obligatory if it is evidently
inequitable. In such case, the courts shall decide what is
equitable under the circumstances.

General rule

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

Exception

The determination shall not be obligatory if it is evidently inequitable. The remedy is to

bring the matter to the court.

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 Art. 1311. Contracts take effect only between the parties, their
assigns and heirs, except in case where the rights and
obligations arising from the contract are not
transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value
of the property he received from the decedent.
If a contract should contain some stipulation in favor of a third
person, he may demand its fulfillment provided he communicated
his acceptance to the obligor before its revocation. A mere incidental
benefit or interest of a person is not sufficient. The contracting
parties must have clearly and deliberately conferred a favor upon a
third person.
Art. 1312. In contracts creating real rights, third persons who come
into possession of the object of the contract are bound
thereby, subject to the provisions of the Mortgage Law
and the Land Registration Laws.
Art. 1313. Creditors are protected in cases of contracts intended to
defraud them.
Art. 1314. Any third person who induces another to violate his
contract shall be liable for damages to the other
contracting party.

Relativity of contracts

General rule

Contracts take effect only between the parties, their assigns and heirs.

Exceptions

1. Contracts that are not transmissible by nature (Art. 1311)

2. Contracts that are not transmissible by agreement (Art. 1311)
3. Contracts that are not transmissible by provision of law (Art. 1311)
4. Contracts with stipulation pour autrui (Art. 1311)

5. In cases when a third person induces another to violate his contract (Art.
1314)
6. Contracts that are rescissible (Art. 1381)

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 Art. 1315. Contracts are perfected by mere consent, and from that
moment the parties are bound not only to the fulfillment
of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be
in keeping with good faith, usage and law.

Art. 1316. Real contracts, such as deposit, pledge and commodatum,

are not perfected until the delivery of the object of the
obligation.

Perfection of contracts
1. Consensual contracts are perfected by mere consent.
2. Real contracts are perfected by the delivery of the thing.

Deposit or depositum is a contract for safekeeping. A deposit is constituted from

the moment a person receives a thing belonging to another, with the obligation
of safely keeping it and of returning the same. If the safekeeping of the thing
delivered is not the principal purpose of the contract, there is no deposit but
some other contract. (Art. 1962)

Pledge or pignus is a contract of bailment where a good or property is delivered by

the bailor to the bailee to secure the payment or performance of a principal
obligation.

Commodatum is a contract of loan whereby one of the parties deliver a non-

consummable and non-fungible thing to another for the latter’s use for a period
of time and after which, the same thing must be returned.

3. Formal or solemn contracts require a special form.

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Legal effect of perfection

All the rights and obligations appurtenant to the contract becomes legally demandable
from each party.

Art. 1317. No one may contract in the name of another without

being authorized by the latter, or unless he has by law a
right to represent him.
A contract entered into in the name of another by one who has no
authority or legal representation, or who has acted beyond his
powers, shall be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been executed, before
it is revoked by the other contracting party.

General rule

A person should enter into a contract in his own name. No person can enter into a
contract for another, otherwise it becomes unenforceable.

Exceptions

1. When authorized by the person being represented

2. When the law gives him the right to represent the other
3. When the contract is ratified

Reading Assignments:

1. Case 1: G.R. No. 170134, ANGEL V. TALAMPAS, JR., v. MOLDEX REALTY, INC.

2. Case 2: G.R. No. 167874 ,SPOUSES CARMEN S. TONGSON and JOSE C. TONGSON
substituted by his children namely: JOSE TONGSON, JR., RAUL TONGSON, TITA
TONGSON, GLORIA TONGSON ALMA TONGSON, v. EMERGENCY PAWNSHOP BULA, INC.
and DANILO R. NAPALA

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ACTIVITY6_CONTRACTS:

6.a Vocabulary enhancement. Choose at least 50 words from the cases/reading assignments
of Chapter 6. Find a technical or legal definition or concept of those words. Write a conceptual
sentence using the word. Indicate from which case/reading assignment (ex. Act 6/Case1)
was the word lifted from. Follow the format found in Appendix A.

6.b Create 50 Multiple Choice Questions based on Chapter 6. Provide four (4) distinct but
related choices. Include the article number used as a basis for the question and/or answers.
Follow the format found in Appendix B.

6.c Online Quizzers will be scheduled.

APPENDIX “A”

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ACTIVITY #:
VOCABULARY ENHANCEMENT

SUBJECT: SECTION: DATE DUE:

FAMILY NAME GIVEN NAME EMAIL ADDRESS

TOPIC:

# WORD TECHNICAL MEANING

1 (Indicate source)

Contextual
sentence

2 (Indicate source)

Contextual
sentence

3 (Indicate source)

Contextual
sentence

4 (Indicate source)

Contextual
sentence

Word format, Times New Roman or Arial, font 14, single space, 1 inch margin on all sides, portrait,
letter size
Filename: GRADING_VOC(ACTIVITY #)_SECTION.BSSLAW1.FAMILY NAME, Given Name

Example: PRELIMS_VOC(1.A)_AAA.BSSLAW1.DELA CRUZ, Jose

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 APPENDIX “B”
ACTIVITY #:
MULTIPLE CHOICE QUESTIONS
1. The choices should include 4 distinct but related choices.
2. Use CAPITAL LETTERS for the choices.
3. Use complete sentences for the statements and always provide a complete
premise.
4. The following are not allowed as choices:
a. True, False, Maybe, I do not know
b. Either A or B
c. Both A or B
d. Neither A nor B
e. None of the above
f. All of the above
g. Article numbers
h. Numbers

SUBJECT: SECTION: DATE DUE:

FAMILY NAME GIVEN NAME EMAIL ADDRESS

ANS # STATEMENTS AND CHOICES

C 1 A kind of obligation that has for its prestation the

giving of an object.
(Art
#/Source) A. POSITIVE PERSONAL OBLIGATION
B. NEGATIVE PERSONAL OBLIGATION
C. REAL OBLIGATION
D. SIMPLE OBLIGATION

3
4

Word format, Times New Roman or Arial, font 14, single space, 1 inch margin on all sides, portrait,
letter size
Filename: GRADING_MCQ(ACTIVITY #)_SECTION.BSSLAW1.FAMILY NAME, Given Name

Example: PRELIMS_MCQ(1.A)_AAA.BSSLAW1.DELA CRUZ, Jose

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