OBLICON REVIEWER

SECTION 4: CONFUSION OR MERGER OF RIGHTS

THE OBLIGATION IS EXTINGUISHED FROM THE TIME THE CHARACTERS OF CREDITOR AND DEBTOR ARE
MERGED IN THE SAME PERSON.

CONFUSION OR MERGER

 Meeting in one person of the characters of creditor and debtor with respect to the same
obligation.
 Confusion or merger as a mode of extinguishing obligation because if a debtor is his own creditor
obligation becomes absurd since a person cannot claim payment from himself.

REQUISITES OF CONFUSION

1. Must take place between the principal debtor and creditor

2. Must be complete

EFFECT OF MERGER IN THE PERSON OF PRINCIPAL DEBTOR OR CREDITOR

 Merger in the person of the principal debtor and creditor extinguishes obligation. Accessory
obligation guaranty is also extinguished in accordance with the principal that the accessory
follows the principal.

EFFECT OF MERGER IN THE PERSON OF GUARANTOR

 Extinguishment of the accessory obligation does not carry with it that principal obligation.
 Merger, which takes place in the person of the guarantor, while it extinguishes the guaranty,
leaves the principal obligation in force.

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 IN A JOINT OBLIGATION

 Joint obligation have many debts as there are debtors and as many credits as there are creditors.
 Debts or credits are distinct and separate from one another.
 Each debtor has his/her own creditor to whom he/she is liable.
 Confusion taking place in the person of any debtor or creditor does not affect the others.
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 Confusion will extinguish only the share corresponding to the creditor or debtor in whom the two
characters concur.

CONFUSION IN A SOLIDARY OBLIGATION

 Merger in the person of one of the solidary debtors shall extinguish the ENTIRE OBLIGATION.
 In solidary obligation there is only one obligation and every debtor is individually responsible for
the payment of the whole obligation.
 He/she who makes payment may claim REIMBURSEMENT from his/her co-debtors.

SECTION 5: COMPENSATION

COMPENSATION SHALL TAKE PLACE WHEN TWO PERSONS, IN THEIR OWN RIGHT, ARE CREDITORS AND
DEBTORS OF EACH OTHER.

COMPENSATION

 Extinguishment to the concurrent amount of the debts of two persons who, in their own right,
are debtors and creditors of each other.
 Often called simplified payment.

COMPENSATION AND CONFUSION DISTINGUISHED

 In CONFUSION, there is only ONE PERSON who is a creditor and debtor of himself while in
COMPENSATION, there are TWO PERSONS involved and each of whom is a creditor and debtor of
the other.
 In CONFUSION, there is but ONE OBLIGATION while in COMPENSATION, there are TWO
OBLIGATIONS.
 In CONFUSION, there is IMPOSSIBILITY OF PAYMENT while in COMPENSATION, there is INDIRECT
PAYMENT.

KINDS OF COMPENSATION

1. BY ITS EFFECT OR EXTENT:

a. TOTAL – both obligation are of the same amount and are entirely extinguished.
b. PARTIAL – two obligations are of different amounts and a balance remains.
2. BY ITS CAUSE OR ORIGIN:
a. LEGAL – it takes place by operation of law even without the knowledge of the parties.
b. VOLUNTARY – it takes place by agreement of the parties.
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c. JUDICIAL – it takes place by order from a court in a litigation.

d. FACULTATIVE – it can be set up only by one parties.

COMPENSATION MAY BE TOTAL OR PARTIAL but WHEN TWO DEBTS ARE OF THE SAME AMOUNT, THERE
IS A TOTAL COMPENSATION.

TOTAL AND PARTIAL COMPENSATIONS

 Total or partial compensation applies to all the different kinds of compensation.

THE PARTIES MAY AGREE UPON THE COMPENSATION OF DEBTS WHICH ARE NOT YET DUE.

VOLUNTARY COMPENSATION

 This provision of law is an exception to the general rule that only debts which are due and
demandable can be compensated.
 VOLUNTARY or CONVENTIONAL COMPENSATION includes any compensation which takes place
by agreement of the parties even if all the requisites for legal compensation are not present.
 This kind of compensation has NO SPECIAL REQUISITES.
 It is sufficient that the contract of the parties, which declares the compensation is VALID.

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.

JUDICIAL COMPENSATION

 Takes place when so declared by a final judgment of a court in a suit.

 Party may set off his/her claims for damages against his/her obligation to the other party by
proving his/her right to said damages and the amount thereof.

COMPENSATION OF RESCISSIBLE OR VOIDABLE DEBTS

 Rescissible and voidable obligations are VALID until they are judicially rescinded or avoided.

WHERE COMPENSATION HAS TAKEN PLACE BEFORE ASSIGNMENT

 When compensation takes effect by operation of law or automatically, the debts are
EXTINGUISHED to the concurrent amount.
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 If the extinguished debt is assigned by the creditor to a third party, the debtor can raise the
defense of compensation with respect to the debt. Remedy of the assignee is against the assignor.
The right to the compensation may be WAIVED by the DEBTOR before or after the assignment.

WHERE COMPENSATION HAS TAKEN PLACE AFTER ASSIGNMENT

1. Where the assignment is made with the consent of the debtor.

2. Where the assignment is made without the consent but with the knowledge of the debtor.
3. Where the assignment is without the knowledge of the debtor.

FOREIGN EXCHANGE

 The conversion of an amount of money or currency of one country into an equivalent amount of
money or currency of another.

ECHANGE RATE

 The price of one currency expressed or quoted in relation to another currency.

INSTANCES WHEN LEGAL COMPENSATION IS NOT ALLOWED BY LAW

1. WHERE ONE OF THE DEBTS ARISES FROM DEPOSITUM

DEPOSIT – constituted from the moment s person receives a thing belonging to another.
BANK DEPOSIT is NOT a DEPOSITUM.
DEPOSITUM – a loan which creates the relationship of debtor and creditor.
A BANK’S FAILURE TO HONOR A DEPOSIT OF MONEY is FAILURE TO PAY HIS/HER
OBLIGATION as debtor.
Bank has right of set off of the deposits in its hands for the payment.
Depositor also has every right to set off his/her money deposit with a bank.
2. WHERE ONE OF THE DEBTS ARISES FROM A COMMADATUM
COMMADATUM – a gratuitous contract whereby one of the parties delivers to another
something not consumable so that the latter may use the same for a certain time and
return it.
The purpose of law is to prevent a breach of trust and confidence on the part of the
borrower.
3. WHERE ONE OF THE DEBTS ARISES FROM A CLAIM FOR SUPPORT DUE BY GRATITOUS TITLE
4. WHERE ONE OF THE DEBTS CONSISTS IN CIVIL LIABILITY ARISING FROM A PENAL OFFENSE
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RULES ON APPLICATION OF PAYMENTS APPLY TO ORDER OF COMPENSATION

 Compensation is similar to payment.

 If a debtor has various debts which are susceptible of compensation, he/she must inform the
creditor which of them shall be object of compensation.
 In case he/she fails to do so, then the compensation shall be applied to the MOST ONEROUS
obligation.

SECTION 6: NOVATION

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

NOVATION

 The total or partial extinction of an obligation through the creation of a new one which substitutes
it.

KINDS OF NOVATION

ACCORDING TO THE SUBJECT:

1. REAL OR OBJECTIVE – when the object or principal conditions of the obligation are changed.
2. PERSONAL OR SUBJECTIVE – when the person of the debtor is substituted and/or when a third
person is subrogated in the rights of the creditor.
3. MIXED – when the object and/or principal conditions of the obligation and the debtor or the
creditor, or both the parties, are changed.

REQUISITES OF NOVATION

1. A previous valid obligation

2. Capacity and intention of the parties to modify or extinguish the obligation
3. The modification or extinguishment of the obligation
4. The creation of a new valid obligation

NOVATION IS NOT PRESUMED

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KINDS OF PERSONAL NOVATION

1. SUBSTITUTION – when the person of the DEBTOR is substituted.

2. SUBROGATION – when a third person is subrogated in the rights of the CREDITOR.

KINDS OF SUBSTITUTION

1. EXPROMISION – takes place when a third person of his own initiative and without the knowledge
or against the will of the original debtor. OLD DEBTOR MUST BE RELEASED from the obligation
otherwise there is no expromision.
2. DELEGACION – takes place when the creditor accepts a third person to take the place of the
debtor. The CREDITOR MAY WITHOLD the APPROVAL. ALL parties MUST AGREE.

IF A NEW OBLIGATION IS VOID, THE ORIGINAL ONE SHALL SUBSIST

EFFECTS WHERE THE NEW OBLIGATION IS VOID

GENERAL RULE: there is NO NOVATION if the new obligation is void, therefore the original one shall subsist
for the reason that the second obligation being inexistent, it cannot extinguish or modify the first.

EFFECTS WHERE THE NEW OBLIGATION IS VOIDABLE

 If the new obligation is only voidable, NOVATION CAN TAKE PLACE. But the moment it is annulled,
the novation must be considered as not having taking place, and the original one can be enforced,
unless the intention of the parties is otherwise.

EFFECT WHERE THE OLD OBLIGATION IS VOID OR VOIDABLE

 Void obligation CANNOT BE NOVATED because there is nothing to novate. Voidable obligation is
VALID until it is annulled or if it is validated by ratification.

SUBROGATION

 Substitution of a third person (subrogee) in the place of a creditor (subroger) with reference to a
lawful claim or right.

KINDS OF SUBROGATION

1. CONVENTIONAL – takes place by express agreement of the original parties and the third person.
2. LEGAL – takes place without agreement but by operation of law.
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TITLE III: CONTRACTS

CONTRACT

 Meeting of minds between two persons whereby one binds himself

CONTRACT VS. OBLIGATION

 Contract is one of the sources of obligation while obligation is a legal tie or relation itself that
exists after a contract has been entered into.
 There can be no contract if there is no obligation however obligation may exist even without a
contract.

CONTRACT VS. AGREEMENT

 Contracts are binding agreements enforceable through legal proceedings while agreement is
broader than a contract because the former may not have all the elements of a contract.
 Agreement which cannot be enforced by action in courts of justice are not contracts but merely
MORAL or SOCIAL AGREEMENTS.
 ALL CONTRACTS are AGREEMENTS but no ALL AGREEMENTS are CONTRACTS.

VALID CONTRACTS

 Those that meet all the legal requisites for the type of agreement involved

MORALS

 Deal with norms of good and right conduct evolved in a community

PUBLIC ORDER

 Principally to public safety although it has been considered to mean also the public weal

PUBLIC POLICY

 Broader than public order

 May refer not only to public safety but also to considerations which are moved by the common
good
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CLASSIFICATION OF CONTRACTS ACCORDING TO ITS NAME OR DESIGNATION

1. Nominate contract
Has specific name or designation in law
2. Innominate contract
Has no specific name or designation in law

KINDS OF INNOMINATE CONTRACT

1. do ut des (I give that you may give)

No longer an innominate contract. It has already been given a name of its own
2. do ut facias (I give that you may do)
3. facto ut des (I do that you may give)
4. facto ut facias (I give that you may do)

STIPULATION POUR AUTURI

 Stipulation in a contract clearly and deliberately conferring a favor upon a third person who has a
right to its fulfillment

CLASSIFICATION OF CONTRACTS ACCORDING TO PERFECTION

1. Consensual contract
Perfected by mere consent
2. Real contract
Perfected by the delivery of the thing subject matter of the contract
3. Solemn contract
Requires compliance with certain formalities prescribed by law

STAGES IN THE LIFE OF A CONTRACT

1. Preparation or negotiation
Includes all steps taken by the parties leading to perfection of the contract
2. Perfection or birth
Parties have come to a definite agreement or meeting of the minds
3. Consummation or termination
Parties have performed their respective obligation
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CHAPTER 2: ESSENTIAL REQUISITES OF CONTRACTS

3 ESSENTIAL REQUISITES OF CONTRACTS

1. CONSENT of the contracting parties

2. OBJECT certain which is the subject matter of contract
3. CAUSE of the obligation which is established

SECTION 1: CONSENT

CONSENT

 Conformity or concurrence of wills and with respect to contracts

OFFER

 Proposal made by one party to another, indicating willingness to enter a contract

ACCEPTANCE

 Manifestation by the offeree of his assent to all the terms of the offer
 Without acceptance, there can be NO MEETING OF THE MINDS between parties

FORM OF ACCEPTANCE OF OFFER

1. EXPRESS ACCEPTANCE
Form of a promise to pay a certain amount, may be oral or written
2. IMPLIED ACCEPTANCE
Inferred from act or conduct

COMMUNICATION OF ACCEPTANCE

1. TO OFFERER
Acceptance must be absolute
2. TO AGENT
An extension of the personality of his principal
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OPTION CONTRACT

 Giving a person for a consideration a certain period within which to accept the offer of the offerer

OPTION PERIOD

 Period given within which the offeree must accept the offer

OPTION MONEY

 Money paid or promised to be paid in consideration for the option

PERSONS WHO CANNOT GIVE CONSENT TO A CONTRACT

1. Unemancipated minors
2. Insane or demented persons, and deaf-mutes who do not know how to write

A contract entered into where ONE OF THE PARTIES IS INCAPABLE of giving consent to a
contract is VOIDABLE.

Contacts entered into during a LUCID INTERVAL are VALID

Contracts agreed to in a STATE OF DRUNKENNESS OR DURING A HYPNOTIC SPELL are

VOIDABLE

LUCID INTERVAL

 Temporary period of insanity

CHARACTERISTICS OF CONSENT

1. IT IS INTELLIGENT
There is capacity to act
2. IT IS FREE AND VOLUNTARY
No vitiation of consent by reason of violence or intimidation
3. IT IS CONSCIOUS OR SPONTANEOUS
No vitiation of consent by reason of mistake, undue influence, or fraud
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VICES OF CONSENT

1. Error or mistake
False notion of a thing or a fact material to the contract
2. Violence or force
3. Intimidation or threat or duress
4. Undue influence
5. Fraud or deceit

NATURE OF MISTAKE

1. Mistake of fact
Arise from ignorance or lack of knowledge
2. Substantial mistake
Party would not have given his consent had he known of the mistake
3. Unilateral mistake
One party is mistaken about a material fact
4. Bilateral mistake
Both parties are in error

MISTAKE OF LAW (VOIDABLE)

 Arises from an ignorance of some provision of law

REQUISITES FOR THE APPLICATION OF ARTICLE 1334

1. The error must be mutual

2. It must be as to the legal effect of an agreement
3. It must frustrate the real purpose of the parties

REVERENTIAL FEAR

 Fear of displeasing a person to whom respect and obedience are due

 Contract is VALID because reverential fear by itself does not annul consent in the absence of actual
threat

VIOLENCE or INTIMIDATION may be employed by a third person who did not take part in the contract. To
make it VOIDABLE or ANNULLABLE, it is necessary that the violence or intimidation must be of the
character required in Article 1335.
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UNDUE INFLUENCE

 Influence of a kind that so overpowers the mind of a party as to prevent him from acting
understandingly and voluntarily

CAUSAL FRAUD

 Fraud committed by one party before or at the time of the celebration of the contract

TWO KINDS OF FRAUD IN THE MAKING OF CONTRACT

1. CAUSAL FRAUD
2. INCIDENTAL FRAUD (VALID – LIABLE FOR DAMAGES)

SIMULATION OF A CONTRACT

 Act of deliberately deceiving others

KINDS OF SIMULATION

1. ABSOLUTE SIMULATION (VOID)

When contract does not really exist and parties do not intend to bound at all
2. RELATIVE SIMULATION
When contract entered into by parties is different from their true agreement

SECTION 2: OBJECT OF CONTRACTS

OBJECT CERTAIN

 Second essential element of a valid contract

FUTURE INHERITANCE

 Any property or right, not in existence or capable of determination at the time of the contract
 Inheritance CEASES TO BE FUTURE upon the death of the decedent or deceased.
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KINDS OF IMPOSSIBILITY

1. PHYSICAL
Where the thing or service in the very nature of things cannot exist or be performed.
a. ABSOLUTE – act cannot be done at any case
b. RELATIVE – arises from special circumstances
2. LEGAL
When the thing or service is contrary to the law

SECTION 3: CAUSE OF CONTRACTS

CAUSE (CAUSA)

 Reason or purpose which the contracting parties have in view at the time of entering into the
contract.

CLASSIFICATION OF CONTRACT ACCORDING TO CAUSE

1. ONEROUS
2. REMUNERATORY or REMUNERATIVE
3. GRATITOUS

MOTIVE

 Purely personal or private reason which a party has in entering into a contract

If there is NO CAUSE the contract is VOID

ABSENCE OF WANT OF CAUSE

 There is a total lack of any valid consideration for the contract

ILLEGALITY OF CAUSE

 There is a cause but the same is unlawful or illegal

 Contracts with UNLAWFUL CAUSE are also NULL and VOID
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FALSITY OF CAUSE

 The contract states a valid consideration but such statement is not true

LESION

 Any damage caused by the fact that the price is unjust or inadequate