CHAPTER 2

NATURE AND EFFECT OF OBLIGATIONS

1. Duties of debtor in specific real obligation

A. Preserve the thing.

a. Diligence of a good father of a family pending delivery (ordinary diligence).

b. Another standard of care (Extra-ordinary diligence) - if the law or the

stipulation of the parties so provides.

B. Deliver the fruits of the thing

C. Deliver the accessions and accessories

a. Accessions - fruits of a thing/addition/improvement upon a thing, (i.e. House/trees on a land)

b. Accessories - thing joined with the principal for embellishment, better use or completion (i.e.
Key of house, bracelet of a watch)

D. Deliver the thing itself

a. Before delivery of the thing - Creditor has personal right.

b. Creditor acquires real right only at the time of delivery.

E. Damages in case of breach

2. Different kinds of fruit.

a. Natural fruit. Spontaneous product of the soil, and the young and other products of animals.
(No human intervention)

b. Industrial fruit. Produce by lands of any kind through cultivation or labor.

c. Civil fruit. Are those derived by virtue of juridical relation. (e.g. Rents of building, price of
lease of lands and other property and the amount of perpetual or life annuities or other similar
income)

3. Right of the creditor to the fruits.

The creditor has the right to the fruits of the thing from the time the obligation to deliver it arises.
However, he shall acquire no real right over it until the same has been delivered to him. (Art. 1164)

EXAMPLE: A is obliged to give B on December 3, 2021, a particular parcel of land. Before December 3, he
has no right whatsoever over the fruits. After December 3, 2021, B, the creditor is entitled (as of rights)
to the fruits.

Exception: Obligation to deliver the fruits arises from:

 1. If the obligation is subject to a suspensive condition - fulfillment of the condition 2. If the
obligation is subject to a suspensive period - arrival of the period

3. In a contract of sale - perfection of the contract even if the obligation is subject to a

suspensive condition or suspensive period.

4. Arise from law, quasi contract, delict, quasi delict-provision of law

4. Remedies of the creditor in a real obligation in case of noncompliance by the debtor.

1. Specific real obligation (Only the debtor can comply with the obligation) a. Demand specific
performance + damages

b. Demand rescission + damages

2. Generic real obligation

a. Ask that the obligation be performed by a third person at the expense of the debtor.

b. Damages

5. Remedies of the creditor in a personal obligation.

1. Positive personal - to do.

a. Debtor fail to comply

i. To be performed by the creditor himself or 3rd person at the debtor's expense when personal
consideration is involved

ii. Damages

b. Debtor perform in contravention of the obligation or the debtor perform but poorly done

i. to be undone if possible at the debtor's expense + damages

ii. Specific performance is not available, ask for damages

2. Negative personal - not to do

a. To undo the act at debtor's expense

b. Damages

6. Kinds of Damages.

a. Moral - for mental and physical anguish

b. Exemplary-corrective or to set an example

c. Nominal - to vindicate a right, when no other kind of damages may be recovered

d. Temperate - when the exact amount of damages cannot be determined

e. Actual - actual losses as well as unrealized profit

 f. Liquidated - predetermined beforehand, by agreement

7. The injured party may ask for damages in case of breach (GROUNDS FOR LIABILITY)

1. Fraud (deceit or dolo)

- Incidental fraud (Dolo incidente). It is the deliberate or intentional evasion of the normal
fulfillment of the obligation. It is committed in the performance of an obligation already existing
because of contract.

Note:

a. Future fraud - Responsibility arising from fraud is demandable in all obligation. Any waiver of
an action for future fraud is void. Same rule in case of negligence which shows bad faith

b. Past fraud - can be waive

2. Negligence (culpa).

- It is any voluntary act or omission, there being no malice, which prevents the normal fulfillment
of an obligation. The omission of diligence required by the nature of the obligation and
corresponds with circumstances of the person, time and place. It is also demandable in every
kind of obligation but such liability may be regulated by the courts according to the
circumstances.

a. Contractual negligence (Culpa contractual) - performance of the contract

b. Civil negligence(Culpa aquiliana) - No pre existing contract

c. Criminal negligence (Culpa criminal) - Result from criminal act

3. Delay (default or mora). Failure of the parties to perform an obligation on time which failure
constitutes a breach of the obligation.

a. Mora solvendi - Delay of debtor

i. Mora solvendi ex re - Debtor delay/default in real obligation

ii. Mora solvendi ex persona - Debtor delay/default in personal obligation

b. Mora accipiendi - delay of creditor

c. Compensatio morae - delay/default on the part of both parties (debtor and creditor)

Rule: NO DEMAND (JUDICIAL OR EXTRAJUDICIAL), NO DELAY.

Except:

1. When the obligation so provides

2. When the law so declares

3. When time is of the essence of the contract

4. When demand would be useless

 5. When there is performance of one party in case of reciprocal obligation

4. Contravention of tenor of obligation

8. Fortuitous event.

Any event which cannot be foreseen, or which, though foreseen, is inevitable.

RULE: THE DEBTOR IS NOT RESPONSIBLE FOR LOSS OR DAMAGES CAUSED TO ANOTHER RESULTING
FROM A FORFUITOUS EVENT, except:

1. When expressly specified by law

a. Guilty of fraud, negligence or delay or contravention of the tenor of the obligation

b. Promised to deliver the same thing (specific thing) to 2 or more person who do not have the
same interest

c. Lost of generic thing

d. Obligation arising from crime

2. When declared by stipulation

3. When the nature of the obligation requires the assumption of risk.

9. Presumption on the receipt of payment.

a. Receipt of principal without reservation as to interest - interest is already paid

b. Receipt of a later installment of debt without reservation as to prior installment - later

installment have been paid.

10. Right of creditor to satisfy his claim

1. Exact payment

2. Exhaust debtor's property (generally by attachment)

3. Accion subrogatoria (Subrogatory action) - Exercise all rights and actions except those
inherent in the person (parental authority, hold office, carry out agency)

4. Accion pauliana (impugn or rescind acts or contracts done by the debtor to defraud the
creditors. (Rescissible contract)

11. All right by virtue of obligation are transmissible

Exception: Law and stipulation

10 Kinds of Obligation

1. Pure

2. Conditional 3. Alternative

4. Facultative

5. Joint

6. Solidary 7. Divisible

8. Indivisible

9. Obligation w/ a period

10. Obligation w/ a penal clause

1. PURE OBLIGATION

- w/o condition, demandable at once (pure has resolutory condition/period)

2. CONDITIONAL OBLIGATION

- there is condition in performance; future & uncertain

2 Kinds

a. Suspensive condition - happening of condition gives RISE to obligation

b. Resolutory condition - happening of condition EXTINGUISHES obligation

6 MISCELLANEOUS RULES ON CONDITIONAL OBLIGATION

1. Impossible conditions, contrary to law, shall ANNUL obligation. 2. The condition not to do an
impossible thing is considered not agreed upon.

3. The condition that happens in determinate time, EXTINGUISHES obligation.

4. The condition that happens in INDETERMINATE time, obligation only effective at arrival.

5. The condition is fulfilled if DEBTOR prevents fulfillment.

6. The effect of conditional obligation, once fulfilled: -to give: retroact to the day of constitution of
obligation

- has reciprocal prestations: fruits & interests be mutually compensated

- has unilateral obligation: debtor shall give fruits & interests

RULES in case of Loss, Improvement, or Deterioration of thing during the pendency of condition

1. LOST

a. w/ debtor's fault - damages

b. w/o debtor's fault - extinguishes obligation

2. DETERIORATION

a. w/ debtor's fault - (1) cancel obligation & damages; or (2) fulfill obligation w/ damages

b. w/o debtor's fault - creditor suffer impairment

3. IMPROVEMENT

a. By nature/time - benefit to creditor

b. at expense of debtor - debtor no right than that granted to usufructuary (debtor no right to
compensate amount for improvement)

3 EFFECTS OF FULFILLMENT OF SUSPENSIVE CONDITION

General Rule: The obligation becomes effective retroactively to the day obligation was
constituted. Exceptions:

1. In reciprocal obligation, fruits & interests during pendency of condition shall compensate each
other.

2. In unilateral obligation, debtor gets fruits & interests unless there is a contrary intent.

3 EFFECTS OF FULFILLMENT OF RESOLUTORY CONDITION

1. Extinguish obligation.

2. Both parties restore what they received plus fruits & interests.

3. The rule on L, D, or I will apply to person who has to return the thing.

When one of debtors in reciprocal obligation does not comply w/ his obligation

1. The right of injured party is (1) cancel contract & damages; or (2) fulfill obligation & damages

3 Kinds of Obligation (Accdng to PERSON OBLIGED)

1. UNILATERAL - only 1 party obliged to comply

2. BILATERAL - both parties; performance not same time

3. RECIPROCAL - both parties; performance same time

3. OBLIGATION W/ A PERIOD - demandability/extinguishment subject to the expiration of period

PERIOD - interval of time; either suspends demandability or produces extinguishment

DAY CERTAIN - must come, not known when

7 CASES CONSIDERED TO BE "OBLIGATION W/ A PERIOD"

1. Little by little

2. In partial payment

3. Payable ASAP

4. When I can afford it

5. When I have the money

6. When I am able to

7. When my means permit me to do so

FOR WHOSE BENEFIT IS THE PERIOD?

General Rule: Both the debtor & creditor.

Therefore, NEITHER of them can demand performance of obligation.

Exception: If the term of obligation has to favor one of them.

5 INSTANCES WHEN DEBTOR LOSES RIGHT TO USE "PERIOD”

1. Debtor is insolvent.

2. Debtor attempts to abscond.

3. Impairment of guarantees/securities.

4. Failure to furnish guarantees/securities promised.

5. Violation of undertaking.

4. ALTERNATIVE OBLIGATION - w/ 2 or more prestations, only 1 is due.

5. FACULTATIVE OBLIGATION - w/ ONLY 1 prestation but can be substituted.

ALTERNATIVE prestations LOST w/ debtor's fault Creditor entitled to damages but needs ff requisites:

1. Debtor can choose.

 2. All prestations lost/become impossible due to debtor's fault.

(3) SUMMARY OF RULES, OBLIGATIONS, & RIGHTS OF DEBTOR IN ALTERNATIVE OBLIGATION

1. If 1 of prestations lost through fortuitous event, shall still be perform by choosing (creditor)
damages from the remainder.

2. If 1 of prestations lost through debtor's fault, creditor may claim any of remainders w/

3. If ALL prestations lost through debtor's fault, creditor choose price w/ damages.

RULES on LOSS/DETERIORATION of the thing intended as SUBSTITUTE in FACULTATIVE OBLIGATION

1. If there is a loss/deterioration of thing intended as substitute, debtor is NOT liable if NOT HIS FAULT.

But if substitution is already made, debtor is liable for loss of substitute when in DELAY, NEGLIGENCE, or
FRAUD.

6. JOINT OBLIGATION

- obligation is to be paid proportionately by debtors or to be demanded proportionately by creditors

7. SOLIDARY OBLIGATION

- each one of debtors has right to render or each one of creditors has right to demand the entire
compliance w/ prestation

(3) SOLIDARY OBLIGATION EXIST ONLY IF: *RULES

1. Law states

2. Stipulation states

3. Nature of obligation requires

2 PRESUMPTIONS THAT OBLIGATION IS JOINT

1. The debts be divided as many shares as there are debtors/creditors.

2. The debtors/creditors are distinct from one another.

8. DIVISIBLE OBLIGATION

- prestation is capable of partial performance

9. INDIVISIBLE OBLIGATION - prestation incapable of partial performance

10. OBLIGATION W/ A PENAL CLAUSE

- one w/ accessory undertaking attached to obligation to assume greater liablity in case of breach/non-
fulfillment of obligation

3 PURPOSES OF PENAL CLAUSE

1. Ensure performance of obligation 2. Substitute for damages & interest in case of noncompli-ance

3. Penalize debtor in case of breach

In case obligation has a PENAL CLAUSE

General Rule: Penalty takes the place of damages & interest in case of non-compliance.

Exceptions:

1. Stipulation states.

2. Debtor refuse to pay penalty. 3. Debtor guilty of fraud in performance of obligation.

NULLITY OF PRINCIPAL OBLIGATION OR THE PENAL CLAUSE

Nullity of principal obligation = nullity of penal clause

Nullity of penal clause = NOT nullity of principal obligation

10 MODES OF EXTINGUISHMENT OF OBLIGATIONS

1. Payment or performance

2. Prescription

3. Compensation

4. Confusion/merger

5. Condonation/remission
 6. Fulfillment of resolutory condition

7. Annulment

8. Rescission

9. Novation

10. Loss of thing due

1. PAYMENT/PERFORMANCE

- Payment means delivery of money & performance of obligation

2. PLACE OF PAYMENT

1. At place agreed upon

2. If w/o agreement

a. Object is indeterminate - paid at domicile of DEBTOR

b. Object is determinate - place of thing at the time of constitution of obligation

4 SPECIAL MODES OF PAYMENT

a. Application of payment

b. Cession

c. Tender of payment & consignation

d. Dacion in payment

a. APPLICATION OF PAYMENT

-designation of debt to w/c payment must be applied when debtor has several obligations of same kind
in favor of same creditor.

3 REQUISITES OF APPLICATION OF PAYMENT

1. Only 1 debtor & 1 creditor

2. 2 or more debts, same kind

3. All debts are due

4. Insufficient payment to exinguish ALL debts

3 RIGHTS TO MAKE APPLICATION OF PAYMENT

1. Right belongs to CREDITOR.

2. If debtor does not avail, creditor can give him receipt designating the debt from which payment will
be applied. 3. If debtor accepts the receipt, he cannot complain unless THERE IS just cause to invalidate
the
contract.

b. CESSION

- debtor abandons ALL his property for creditor's benefit to obtain payment from proceeds of his
property

5 REQUISITES OF VALID CESSION

1. 1 debtor & 2 or more creditors

2. Debtor is in partial/total insolvency.

3. Debtor to deliver ALL his property to creditors

4. Debt is due & demandable.

5. Creditors must sell the properties & apply the proceeds to their respective credits
proportionately.

c. DACION IN PAYMENT (dacion en pago)

- alienation of property to the creditor in satisfaction of debt

3 REQUISITES OF DACION IN PAYMENT

1. Consent of creditor

2. NOT prejudicial to another creditor

3. Debtor not insolvent declared by a judicial decree

d. TENDER OF PAYMENT & CONSIGNATION

TENDER OF PAYMENT - act of offering the creditor what is due to him w/ a demand that the creditor

accept it

CONSIGNATION - act of depositing thing due w/ the court when creditor cannot/refuses acceptance of
payment

5 REQUISITES OF CONSIGNATION

1. Debt due.

2. Creditor refused the tender of payment w/o just cause

 3. Notice of consignation already given to persons interested in fulfillment of obligation

4. Consignation of thing/amount due

5. Subsequent notice of consignation to interested persons

5 VALID CONSIGNATION W/O PREVIOUS TENDER OF PAYMENT

1. Creditor is absent/unknown.

2. Creditor is incapacitate to receive at time it is due.

3. Creditor refused give a receipt, w/o just cause.

4. 2 or more persons claim the right to collect.

5. Title of obligation lost.

2. LOSS OF THING DUE

- perishes, disappears, or goes out of commerce; existence is unknown; cannot be recovered

3 REQUISITES TO EXTINGUISH OBLIGATION DUE TO LOSS

1. Determinate thing.

2. W/o debtor's fault.

3. No delay.

3. CONDONATION/REMISSION

- gratuitous abandonment of right by the creditor

3 REQUISITES OF A VALID CONDONATION/REMISSION

1. It must be gratuitous.

2. Accepted by obligor.

3. Obligation is demandable.

4. CONFUSION/MERGER

- meeting in 1 person of qualities of debtor & creditor w/ same obligation

3 REQUISITES OF VALID CONFUSION/MERGER

1. The merger of characters of debtor & creditor must be in same person.

2. Take place between principal debtor & creditor. 3. Clear & definite.

5. COMPENSATION

- 2 persons are debtors & creditors of each other

6 ESSENTIAL REQUISITES OF COMPENSATION

 1. Parties both principal debtors & creditors of each other.

2. Compensation is not prohibited by law.

3. No retention/controversy by 3rd person.

4. 2 debts are due & demandable.

5. 2 debts are liquidated.

6. 2 debts both in money/consumable things.

(2) CLASSES OF COMPENSATION

1. As to effect

a. TOTAL - obligations completely extinguished.

b. PARTIAL - a balance remains

2. As to origin or cause

a. LEGAL by law

b. VOLUNTARY/CONVENTIONAL - agreement of parties c. JUDICIAL-order from the court

d. FACULTATIVE - 1 of parties can choose/oppose claiming compensation

6. NOVATION

- substitution/change of obligation
- substitution of debtor
- subrogation of creditor

(3) OBLIGATIONS MAY BE MODIFIED BY:

1. Changing object/principal conditions. (REAL NOVATION)

2. Changing the person of debtor/creditor. (PERSONAL NOVATION)

a. Substitution - change of debtor

b. Subrogation - change of creditor

3. Changing person of the parties & the objects of principal condition. (MIXED NOVATION)

4 REQUISITES OF NOVATION

1. Old valid obligation.

2. Agreement of parties to new obligation.

3. Extinguishment of old obligation.

4. Validity of new obligation.

 2 FORMS OF NOVATION BY SUBSTITUTION OF DEBTOR

1. EXPROMISION - w/ consent of creditor, NO consent of old debtor

REQUISITES

a. Initiative of 3rd person.

b. Consent of creditor.

2. DELEGACION - all must agree (creditor, old debtor, new debtor)

3 REQUISITES

a. Initiative from old debtor.

b. Consent of debtor.

c. Acceptance by creditor.

7. SUBROGATION

- change of creditor

2 KINDS OF SUBROGATION

1. CONVENTIONAL - consent of original parties & 3rd person

2. LEGAL - by law

a. creditor pays another preferred creditor even w/o debtor's knowledge

b. 3rd person pays the express approval of debtor

C. 3rd person pays even w/o knowledge of debtor

Extinguishment of Obligation

ARTICLE 1231

Obligations are extinguished:

1. By payment or performance;

2. By the loss of the thing due;

3. By the condonation or remission of the debt;

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

5. By compensation;

6. By novation.
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory
condition, and prescription, are governed elsewhere in this Code.

Payment or Performance

X bound himself to give a specific book to Y.

X bound himself to repair Y's car.

WHO CAN PAY?

ARTICLE 1236

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

Whoever pays for another may demand from the debtor what he has paid, except that if he paid
without the knowledge or against the will of the debtor, he can recover only insofar as the payment has
been beneficial to the debtor.

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.

Generally: Valid,

debtor

authorized agent

successor in interest

3rd Person

- interested in the fulfillment of the obligation (creditor cant refuse)

- not interested in the fulfillment of the obligation (creditor can refuse)
- does not intend to be reimbursed (creditor can refuse)

WHO TO PAY?

Generally: Valid, if incapacitated its invalid. exception: kept the thing delivered, payment benefited him

1. creditor
2. authorized agent
3. successor in interest

3rd Person: valid if 3rd person proves that benefit redounded to creditor

benefit need not to be proven in the following cases:

1. after the payment, 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

WHAT TO PAY

ARTICLE 1244

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

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.

ARTICLE 1246

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

ARTICLE 1249

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

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

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

ARTICLE 1233

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

ARTICLE 1234

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

ARTICLE 1235

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

ARTICLE 1248

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

However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the
debtor may effect the payment of the former without waiting for the liquidation of the latter.

WHERE TO PAY

ARTICLE 1251

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

There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment
shall be made wherever the thing might be at the moment the obligation was constituted. In any other
case the place of payment shall be the domicile of the debtor.

If the debtor changes his 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.
 ARTICLE 1239

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

ARTICLE 1242

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

ARTICLE 1245

Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall
be governed by the law of sales.

ARTICLE 1247

Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the
account of the debtor. With regard to judicial costs, the Rules of Court shall govern.

ARTICLE 1250
In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of
the currency at the time of the establishment of the obligation shall be the basis of payment, unless
there is an agreement to the contrary.

Special Modes of Payment or Performance

1. Application of Payment - marami kang utang sa iisang tao, due na lahat. Kapag magbabayad
ka na, pipiliin mo kung aling utang mo ang babayaran mo.

2. Dacion en pago (Dation in payment) - instead of paying money, you will pay using goods or
services

3. Cession en pago (Payment by cession] - pay with your properties, involves all your properties

4. Tender of Payment and Consignation -

Tender of payment - act of paying using something legal tender, legal tenders: bills and
coins, notes issued by banks

Consignation - deposit sa court

Loss of the Thing

lost due to fortuitous event, extinguish the obligation

Condonation

si creditor hindi na eenforce ang obligation mo

Confusion

characteristic of creditor and characteristic of debtor decides in one person only

Compensation

both parties are creditor and debtor

Kinds of Compensation

1. legal compensation - happen automatically, without the need of consent either of the parties
2. conventional compensation - need both parties consent
3. facultative compensation - kailangan ng consent ng isang party which has the right to enforce
compensation
4. judicial compensation - si court and mag dedecide kung ano magiging effect ng compensation

Novation

change of obligation

different kinds of novation

1. real novation - change of prestation

 2. personal novation - change of the subject

Substitution (debtor)

a. expromission - 3rd person initiate

b. delegacion - orig debtor initiate

Subrogation (creditor)

ESSENTIAL ELEMENTS OF CONTRACTS

There is no contract unless the following requisites concur:

1. Consent of the contracting parties;

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

3. Cause of the obligation which is established.

Consent

Requisites:

1. It must be manifested by the concurrence of the offer and acceptance [Arts. 1319-1326]

2. The contracting parties must possess the necessary legal capacity (Arts. 1327-1329)

3. It must be intelligent, free, spontaneous, and real (not vitiated] (Arts. 1330-1346)

1. It must be manifested by the concurrence of the offer and acceptance (Arts. 1319-1326)

Offer - a specific proposal to enter into an agreement with another.

Acceptance - agreeing verbally or in writing to the terms of a contract, which is one of the requirements
to show there was a contract
Offer

Note: an offer must be intentional and certain (Art. 1319 par. 1)

Example: When offering to sell something, you should specify the object being sold.

Special cases of offers:

1. The person making the offerac may fix the time, ple, and manner of acceptance, all of which must be
complied with (Art. 1321)

2. An offer made through an agent is accepted from the time acceptance is communicated to him (Art.
1322)

3. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party
before acceptance is conveyed (Art. 1323).

4. Advertisements for bidders are simply invitations to make offers (Art. 1326)

Advertisement for bidders

S sells at a public auction a specific land. The starting bid is P1,000,000. A placed a P1,100,000 bid; B
placed P1,150,000; and C placed P1,300,000.

Acceptance

Note:

1. an acceptance must be absolute (Art. 1319]

2. communicated to the offeror (Art. 1319 par. 2 & 1322)

How acceptance is communicated to offeror:

1. S, during an "in-person" conversation with B, offered B to sell his land for P1,000,000.
2. S, through letter, offered B to sell his land for P1,000,000.

S sends a letter of offer on Jan 1

B receives the letter on Jan 15

B sends a letter of acceptance on Jan 16

S receives the letter of acceptance on Jan 31

3. may be express/implied

Example: S offers B to sell his specific house and lot in Quezon City for P1,500,000. B accepted the offer
but is only willing to buy the land. COUNTER-OFFER

Promises in offer and acceptance

 Promise Binding Perfected Contract

Unilateral Promise No. None

Unaccepted

Unilateral Promise Binding if promise is supported Option contract only

by consideration
Accepted

Bilateral promise Yes Binding contracts of promise to

enter into an contract

Example 1: S offers to sell his land to B for P1, 000,000. B refused. However, S still insist that he is willing
to give B 30 days to decide. However, B still refuse. Again, S still stand with his promise. POLICITATION

Example 2: S offers to sell his land to B for P1, 000,000. B refused. However, S still insist that he is willing
to give B 30 days to decide. B accepted the promise. UNILATERAL PROMISE ACCEPTED, NOT BINDING

Example 3: S offers to sell his land to B for P1,000,000. B refused. However, S still insist that he is willing
to give B 30 days to decide. B accepted the promise and gave S P1,000 as option money. UNILATERAL
PROMISE ACCEPTED, BINDING

Example 4: S promised to sell his land to B for P1,000,000 after 1 month. Likewise, B promise to buy S's
land for P1,000,000 after 1 month. BILATERAL PROMISE

2. The contracting parties must possess the necessary legal capacity (Arts. 1327-1329)

2 kinds of incapacity:

1. Absolute incapacity

2. Relative incapacity

Absolutely incapacitated: VOIDABLE

1. Unemancipated minors

● Except for contracts involving necessary

● Where minor misrepresented his age

2. Insane or demented person

● Lucid interval

3. Deaf-mutes who do not know how to write

Relatively incapacitated: VOID

1. Those under Civil interdiction for transactions inter vivos [RPC Art. 34)

2. Undischarged insolvents (Insolvency Law, Sec.24]

3. Husband and wife: cannot donate (Art. 123 FC) to each other, nor sell if the marriage is under ACP
(Art. 1490]

3. It must be intelligent, free, spontaneous, and real (not vitiated) (Arts. 1330-1346)

Vices of consent:

● Violence – irresistible force

● Fraud – using insidious words or machinations

● Intimidation – threat or grave danger

● Undue Influence – takes improper advantage of power

● Mistake

Object vs. Cause

Contract of sale: S sells his land to B for P1,000,000.

Contract of lease: S leases his land to B for P10,000 per year.

Object

1. Lawful: Not contrary to law, morals, good customs, public order or public policy.

2. Actual or possible

3. Transmissible: Within the commerce of man

4. Determinate or determinable

Future Inheritance: VOID

X is the son of Y. While Y is still alive, X sold his inheritance to Z.

Cause

Onerous Gratuitous Remuneratory

As to each of the contracting Mere liberality of the The service or benefit which is
benefactor remunerated
parties is understood to be the
undertaking or the promise of
 the thing or service by the other
party

Requisites:

1. Existing
2. Lawful
3. True

Cause vs. Motive: Motive doesn’t affect the validity of contract

X buys a gun from an arms dealer and procured the necessary permit.

FORMS OF CONTRACTS

Contracts classified according to perfection:

1. Consensual Contracts – consent, object, cause

2. Real Contracts – consent, object, cause, delivery
3. Formal or Solemn Contracts – consent object, cause, certain formality

Why contracts need to be in certain forms?

Needed for:

1. Validity of the contract

2. Enforceability of the contract

3. Convenience of the parties

Contracts that needs to be in certain forms for their validity

Contract Formality

Donation of personal property whose value Must be in writing

exceeds P5000 (Art. 748)

Donation of real property (Art. 749) Must be in public instrument

Partnership where immovables are contributed. Must be in public instrument with inventory of
(Art. 1773) immovables contributed

Sale of a piece of land or any interest therein Contract of agency must be in writing
through an agent (art.1874)

Antichresis (Art. 2134) Must be in writing

Chattel Mortgage (Art.2140) Must be registered

 Agreements regarding payment of interest in Payment of interest must be in writing
contracts of loans (Art.2314)

Contracts that needs to be in certain forms for their enforceability: needs to be in writing

1. An agreement that by its terms is not to be performed within a year from the making thereof;

2. A special promise to answer for the debt, default, or miscarriage of another;

3. An agreement made in consideration of marriage, other than a mutual promise to marry:

4. 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;

5. An agreement for the leasing for a longer period than one year, or for the sale of real property or of
an interest therein;

6. A representation as to the credit of a third person.

Contracts that needs to be in certain forms for convenience of the parties: still valid if not followed

1. Acts and contracts which have for their object the creation, transmission, modification or
extinguishment of real rights over immovable property; sales of real property or of an interest therein
are governed by articles 1403, No. 2, and 1405;

2. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of
gains;

3. The power to administer property, or any other power which has for its object an act appearing or
which should appear in a public document, or should prejudice a third person;

4. The cession of actions or rights proceeding from an act appearing in a public document.

All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even
a private one. But sales of goods, chattels or things in action are governed by articles 1403, No. 2 and
1405. [1280a]

Reformation of Contracts
A remedy whereby a written instrument to the contract is amended to conform to the true intentions of
the parties

Requisites:

1. There is a valid contract

2. The written instrument does not conform the true intention of the parties

3. The non-conformity is due to mistake, fraud, inequitable conduct or accident

Illustration

S sold to B a lot with 10 hectare area. However, through mistake of the clerk, their deed of sale showed

1 hectare area. BOTH CAN ASK REFORMATION

S sold to B a lot with 10 ha. Area with a right of repurchase after 5 years. However, through fraud, B
made it appear that the deed of sale is an absolute sale. Since the contract is in English language, S was
not aware that the deed is different from their real agreement. ONLY S CAN ASK FOR REFORMATION

Contracts that cannot be reformed

1. Simple donations inter vivos wherein no condition is imposed

2. Wills

3. When the real agreement is void

Wherty whn a person cannot seek reformation

A pao enforces the instrument representing the contract cannot subsequently ask for its reformation.
(Art. 1367)

Illustration

S unconditionally sold to B a lot with 10 ha. area. However, through mistake, the deed of sale appears to
be a sale with a right of repurchase after 5 years. Both parties didn't notice the deed because they didn't
bother reading it at all. BOTH CAN ASK FOR REFORMATION, BUT IF S ENFORCE THE WRITTEN IN
INSTRUMENT, ONLY B CAN ASK FOR REFORMATION.

Who may seek reformation?

Reformation may be ordered at the instance of either party or his successors in interest, if the mistake
was mutual; otherwise, upon petition of the injured party, or his heirs and assigns. (Art. 1368)

Interpretation of Contracts

Interpretation

Interpretation is the act of making intelligible that was not before understood, ambiguous, or not
obvious.

Intention always prevail

The intention of the parties always prevail over the words that appear in the instrument of a contract.
(Art. 1370)

In judging the intention, subsequent acts of parties are considered (Art. 1371)

Art. 1372

However general the terms of a contract may be, they shall not be understood to comprehend things
that are distinct and cases that are different from those upon which the parties intended to agree.

Example

S sold to B his house including all furniture.

Art. 1373

If some stipulation of any contract should admit of several meanings, it shall be understood as bearing
that import which is most adequate to render it effectual.
Example

S sold to B his race horse named "Tom". Incidentally, there are two horses with the name Tom.
However, one of them is amputated.

Art. 1374

The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that
sense which may result from all of them taken jointly.

Example

X leased his house to Y. X forbid Y from subleasing the property without his consent. Further, it was
stipulated: "If Y sublease the property to a third person, there will be additional P1,000 per month
payment on top of his rent."

Art. 1375

Words which may have different significations shall be understood in that which is most in keeping with
the nature and object of the contract.

Example

R leased to E a roof for the purpose of erecting an advertising sign. The contract provides for the
termination of the lease by E if a "building" should be constructed on an adjoining property of such
height as to obscure the view of E's sign. There was erected on the roof of an adjoining building a sign
which obstructed the view of E's sign. TERMINATE

Art. 1376

The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a
contract, and shall fill the omission of stipulations which are ordinarily established.

Example

S sold to B a horse. It was the customs of the place to place horse shoe on sold horses.

Art. 1378

When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and
the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and
interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest
reciprocity of interests.

Example
It was not clear whether A lent or donated to B a specific phone. Is the contract a commodatum or a
donation? COMMODATUM

It was not clear whether A sold or leased to B a building. Is the contract a sale or a lease? SALE

Art. 1378

If the doubts are cast upon the principal object of the contract in such a way that it cannot be known
what may have been the intention or will of the parties, the contract shall be null and void.

Defective Contracts

4 Kinds of Defective Contracts:

Valid Binding Enforceable

Rescissible Yes Yes Yes

Voidable Yes Yes Yes

Unenforceable Yes No No

Void No No No

Rescissible Voidable Unenforceable Void

Why defective? Causes damage to Consent is Lack of authority Missing essential

3rd persons defective or form elements

Can be ratified? Yes Yes Yes No

Applicable Art. 1381 Art. 1390 Art. 1403 Art. 1409

provisions

Remedy to avoid Rescission Annulment N/A N/A

Rescissible

Art. 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;

Example
G is the guardian of W, ward. G sold to X the property of W for P250,000. The value of the property is
P500,000. RESCISSIBLE, Ward can rescin the contract

2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;

Example

R is the representative of A, absentee. R sold to X the property of A for P250,000. The value of the
property is P500,000. RESCISSIBLE, absentee can rescind the contract

3. Those undertaken in fraud of creditors when the latter cannot in any other manner collect the
claims due them;

Example

D is a debtor of C, creditor. Fearing that he won't be able to pay his debt to C and his land levied, D sold
his land to X without the intention of using the proceeds to pay C. (RESCISSIBLE, C can rescind the
contract)

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;

Example

S sues B for the recovery of a parcel of land. In this case, the land is a "thing under litigation." Supposed
B sold to X the parcel of land. (RESCISSIBLE)

5. All other contracts specially declared by law to be subject to rescission.

Rescissible Contract Vs. Rescissible Payment (Art. 1382)

Art. 1382

Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be
compelled at the time they were effected, are also rescissible.

Example

D, while insolvent, pays X his debt. Y and Z are also creditors of D but cannot, in any manner, collect
from D. (Y and Z can rescind the contract)

Rescission

Art. 1383

The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage
has no other legal means to obtain reparation for the same.

Example
G is the guardian of M, a minor with two parcels of land valued at P200,000.00 each. G sold the two
properties to B for only P200,000.00. (RESCISSIBLE)

Extent of Rescission

Art. 1384

Rescission shall be only to the extent necessary to cover the damages caused.

Example

G is the guardian of M, a minor with two parcels of land valued at P200,000.00 each. G sold the two
properties to B for only P200,000.00.

For Rescission to be Possible

Art. 1385

Rescission creates the obligation to return the things which were the object of the contract, together
with their fruits, and the price with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss

Example

B asks for the rescission of a sale with S because of breach of warranty against hidden defects.

Rescission not possible for contracts approved by court

Art. 1386

Rescission referred to in Nos. 1 and 2 of article 1381 shall not take place with respect to contracts
approved by the courts.

Contracts presumed to be rescissible

Art. 1387

All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have
been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all
debts contracted before the donation.
Alienations by onerous title are also presumed fraudulent when made by persons against whom some
judgment has been rendered in any instance or some writ of attachment has been issued. The decision
or attachment need not refer to the property alienated, and need not have been obtained by the party
seeking the rescission.

In addition to these presumptions, the design to defraud creditors may be proved in any other manner
recognized by the law of evidence.

Example - Gratuitous

D contracted several debts amounting to P200,000. Also, D has P300,000 total assets. One day, D
donated to X a property from his total assets worth P170,000. (RESCISSIBLE)

Example - Onerous

D contracted several debts amounting to P200,000 with A and B. Also, D has P300,000 total assets
composed of a car, land, and building. For whatever reason, supposed A obtained a writ of attachment
on D's land. Meanwhile, D sold the car to X. (A and B can rescind the contract)

Acquisition of third person in bad faith

Art. 1388

Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for
damages suffered by them on account of the alienation, whenever, due to any cause, it should be
impossible for him to return them.

If there are two or more alienations, the first acquirer shall be liable first, and so on successively.

Example

To defraud C, S sold to B his car. B knows S's purpose. (C can rescind the contract)

To defraud C, S sold to B his car. B knows S's purpose. B sold to D, bad faith, and D sold to E, good faith.
(Can be rescind to B first, second D. Can’t be rescind to E)

To defraud C, S sold to B his car. B doesn't know S's purpose. B sold to D, bad faith, and D sold to E, bad
faith. (Can't be rescind)

Prescription of Rescission

Art. 1389

The action to claim rescission must be commenced within four years.

For persons under guardianship and for absentees, the period of four years shall not begin until the
termination of the former's incapacity, or until the domicile of the latter is known.
Voidable Contracts

I. What Contracts are Voidable? (Art. 1390)

1. When one (1) of the parties is incapable of giving consent (absolute incapacity)

Exception: when contract involves necessaries

2. When one (1) or more of the vices of consent is present

A. Violence

B. Intimidation

C. Mistake

D. Fraud

E. Undue Influence

II. Incapacity

1. When one (1) of the parties is incapable of giving consent (absolute incapacity)

Exception: when contract involves necessaries

M, minor, bought food from X, 25 years old. This contract may have been voidable but it involves a
necessary (food). Therefore, this contract is Perfectly Valid.

III.Vices of Consent (Violence)

2. When one (1) or more of the vices of consent is present

A. Violence

When in order to wrest consent, serious or irresistible force is employed.

Example

A asks B to buy his cellphone for P1,000. B refused. A then punches B in the face until he agreed
to buy it.

B. Intimidation

when one of the contracting parties is compelled by a reasonable and well-grounded fear of an
imminent and grave evil upon his person or property, or upon the person or property of his spouse,
descendants or ascendants, to give his consent.

Example
 A asks B to lease B's land or else he will set B's house on fire.

C. Mistake

Mistakes that refer to the substance of the object, identity/qualification of a person, or conditions that
have principally moved one or both parties to enter into the contract.

Examples

S and B entered into a contract of sale for a piece of land worth P1,000,000. The clerk who made
the deed sale mistakenly typed P100,000.

Mistake of Fact: whether it’s mutual or not, it will result to a voidable contract

Example

S sold to B a diamond ring. Later on, both of them found out it was fake.

Mistake of Law

Example

In a pacto de retro sale between S (vendor a retro) and B, there was no redemption period
stated. B wants to annul the contract on grounds of mistake.

Art. 3 - Ignorance of the law, excuses no one from compliance therewith

Exception:

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

D. Fraud

Through insidious words or machinations of one of the contracting parties, the other is induced to enter
into a contract which, without them, he would not have agreed to.

Example - Dolo Incidente: after contract is made

X applies for a job with a requirement of 3-5 years experience on a specific job. Though having only 3
years of experience, X made it appear he has 5 years.

Example - Dolo Causante: before contract is made

X applies for a job with a requirement of 3-5 years experience on a specific job. Though having no

experience, X made it appear he has 5 years.

E. Undue Influence

When a person takes improper advantage of his power over the will of another, depriving the latter of a
reasonable freedom of choice.

Example

Your professor asks to marry you. You are of age but the biggest factor for you saying YES is
because he is your professor and if you say NO, you are afraid he might be disappointed and
FAIL you in class. (VOIDABLE)

IV. Annulment of Voidable Contracts

Voidable Contracts are Valid until annulled

When annulment cannot proceed

1. When the object of the contract is lost through the fault of the person who may annul the
contract

2. When the contract is ratified

Who can annul voidable contracts?

1. Incapacitated persons (upon ceasing of incapacity)

2. Persons whose consent were vitiated

When can it be annulled?

1. Within four (4) years after guardianship of minors or incapacitated persons ceases

Example

S sold to M (17 y/o) a land. Upon reaching 18 years old, M can avail annulment within 4 years
until his last day being 22 years old.

2. Within four (4) years after intimidation, violence or undue influence ceases

3. Within four (4) years from the time of discovery of mistake or fraud
VI.Ratification of Voidable Contracts

Who may ratify?

The party who can annul a voidable contract

How?

Ratification can be done orally, in writing, or may be implied.

Example

Supposed S sold his car to B (minor) in installment. Upon reaching 18 years old, B continued to
pay S.

Unenforceable Contract

What makes a contract unenforceable?

1. Unauthorized contracts

2. Both parties are incapacitated

3. Transactions under statute of frauds

Example:

A, representing himself as agent of P, sold P's land to B.

A sold P's land to B.

Statute of Frauds - verbally

1. Contracts not to be performed within a year

2. A special promise to answer for the debt, default, or miscarriage of another

3. Agreement in consideration of marriage

4. Sale of personal property for 500 pesos or more

5. Lease of real property for more than 1 year

6. A representation as to the credit of a third person

7. Sale of real property (Art. 1358)

Exception:

Partially Executed Contracts