OBLIGATIONS
Contract as a source of obligation
Article 1156. An obligation is a juridical necessity to give, to do, or not to do.
Obligation
– civil obligation or one that is enforceable in a court of justice.
– legal duty or responsibility to perform certain actions or refrain from certain
behaviors .
– tie or bond recognized by law by virtue of which one is bound in favor of another
to render something - consist of giving a thing, doing a certain act or not doing a
certain act.
– obligation is a juridical necessity because the debtor must perform his obligation.
If he fails to perform his obligation, the creditor may invoke the aid of the court to
order its performance. In the enforcement of the obligation, the court may order the
taking of debtor’s properties and sale thereof at public auction so that the proceeds
may be applied in payment of the obligation.
Elements of Obligation
1. Passive subject (debtor or obligor) – the person whom the performance of the
obligation is demandable.
2. Active subject (creditor or obligee) – the person who has right to demand
performance of the obligation.
3. Prestation (subject matter) – conduct required to be observed by the debtor.
Consist of giving, doing or not doing.
4. Efficient cause (juridical tie/vinculum) – binds the parties to the obligation ; the
reason why the obligation exists.
Civil obligations are based on positive law, while natural obligations are based on
equity and natural law.
Civil obligations give a right to compel their performance, while natural obligations
do not grant a right of action to compel their performance, but after voluntary
fulfillment by the obligor; they authorize the retention of what has been delivered or
rendered by reason thereof.
Forms of obligations
- manner in which an obligation is manifested or incurred. It may be oral, or in
writing or partly oral and partly in writing.
As a general rule, the law does not require any form of obligations arising from
contracts for their validity or binding force
Obligations arising from other sources do not have any form at all.
Kinds of obligation according to subject matter
Real obligation (obligation to give) the subject matter is a thing which the obligor
must deliver to the obligee.
Personal obligation (obligation to do or not to do) the subject matter is an act to be
done or not to be done.
Positive personal obligation – obligation to do or render service.
Negative personal obligation – obligation not to do (includes obligation not to give)
Article 1157. Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.
Sources of Obligation
Although the Civil Code lists five sources of obligations, there are actually only two
sources, namely, law and contract. Obligations arising from quasi-contracts, acts or
omissions punished by law and quasi-delicts are imposed by law.
Article 1158. Obligations derived from law are not presumed. Only those expressly
determined in this Code or in special laws are demandable, and shall be regulated
by the precepts of the law which establishes them; and as to what has not been
foreseen, by the provisions of this Book.
Law
– when they are imposed by law itself.
– rule of conduct, just and obligatory, laid down by legitimate authority for the
common observance and benefit.
– obligations derived from law not presumed.
Article 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.
Contract [consent, object, cause]
- 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.
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An obligation is derived from contract if it arises from the agreement of the parties.
It shall have the force and effect of law between them and should be complied with
in good faith. However, in order that the obligation may be enforced, the contract
must be valid and enforceable. Once a contract is entered into, neither party can
disregard it at will or withdraw from it without a valid cause.
Breach of contract takes place when a party fails or refuses to comply, without legal
reason or justification, with his obligation under the contract as promised.
Compliance in good faith means compliance or performance in accordance with the
stipulations or terms of the contract or agreement.
Article 1160. Obligations derived from quasi-contracts shall be subject the
provisions of Chapter 1, Title XVII, of this Book.
Quasi-contracts is a juridical relation arising from certain lawful, voluntary and
unilateral acts, and which has for its purpose the payment of indemnity to the end
that no one shall be unjustly enriched or benefited at the expense of another.
Two principal kinds of quasi-contracts
Negotiorum gestio takes place when a person voluntarily takes charge of the
business or property of another, without any power from the latter.
Solutio indebiti takes place when something is received when there is no right to
demand it’s and it was unduly delivered through mistake.
Other examples of quasi-contracts (provided in Article 2164 to 2175)
Supreme Court reiterated the rule that the Government is not exempt from the
application of solutio indebiti.
Under the Tax Code itself, apparently in recognition of the pervasive quasi-contract
principle, a claim for tax refund may be based on the following: (a) erroneously or
illegally assessed or collected internal revenue taxes; (b) penalties imposed without
authority; and (c) any sum alleged to have been excessive or in any manner
wrongfully collected.
Quasi-contract distinguished from contract – a contract is the result of the
conformity of wills of the parties, while a quasi-contract is the result of the lawful,
voluntary and unilateral act of one party. A quasi-contract is not an implied contract
because there is no meeting of minds.
Article 1161. Civil obligations arising from criminal offenses shall be governed by
penal laws, subject to the provisions of article 2177, and of the pertinent provisions
of Chapter 2, Preliminary Title, on Human Relations, and of Title XVIII of this Book,
regulating damages.
Civil liability for acts and omissions punished by law
Civil liability without civil liability – when crime is committed and no material
damage is caused upon the offended party, civil liability cannot be enforced.
Civil liability in addition to criminal liability – when the crime committed has caused
material damage upon the offended party (provides “Every person criminally liable
for a felony is also civilly liable.”) Liability includes restitution, reparation and
indemnification.
Restitution – restoration of the object of the crime, with allowance for any
deterioration or diminution in its value.
Reparation – repair of the material damage of the object of the crime.
Indemnification – includes not only those caused the injured party, but also those
suffered by his family or by a third person by reason of the crime. (payment of
damages)
Effect of death of criminal offender pending trial
The death of the offender before final judgment does not extinguish his civil liability
arising from the crime. The action for the recovery of the civil liability will be directed
against the administrator of the estate, the obligation having become the obligation
of the heirs. However, the heirs will not be liable beyond the value of the property
that they inherit.
Effect of acquittal of offender in the criminal case
The extinction of the penal action does not carry with it the extinction of the civil,
unless the extinction proceeds from a declaration of a final judgment that the fact
from which the civil action might arise did not exist.
Article 1162. Obligations derived from quasi-delicts shall be governed by the
provisions of Chapter 2, Title XVII of this Book, and by special laws.
Quasi-delicts is an act or omission which causes damage to another there being
fault or negligence but without any pre-existing contractual relations between the
parties.
Requisites of quasi-delict
1. There must be an act or omission.
2. There must be fault or negligence.
3. There must be damage caused.
4. There must be a direct relation or connection of cause and effect between the act
or omission and the damage.
5. There is no pre-existing contractual relation between the parties.
Basis of offender’s liability
The liability of a person for quasi-delict is founded upon the principle of equity, that
one should be responsible for the act done by him by reason of his fault or
negligence which causes damage to another.
Crime distinguished from quasi-delict
1. In crime, there is criminal or malicious intent or criminal negligence, while in
quasi-delict, there is only negligence.
2. In crime, the purpose is punishment, while in quasi-delict, indemnification of the
offended party.
3. Crime affects public interest, while quasi-delict concerns private, interest.
4. In crime, there are generally two liabilities: criminal and civil, while in quasi-delict,
there is only civil liability.
5. Criminal liability can not be compromised or settled by the parties themselves,
while the liability fro quasi-delict can be compromised as any other civil liability.
6. In crime, the guilt of the accused must be proved beyond reasonable doubt, while
in quasi-delict, the fault or negligence of the defendant need only be proved by
preponderance of evidence.
Quasi-delict distinguished from breach of contract
1. In quasi-delict, negligence is direct, substantive and independent, while in breach
of contract, negligence is merely incidental to the performance of the contractual
obligation; there is a pre-existing contract or obligation.
2. In quasi-delict, the defense of “good father of a family” is a complete and proper
defense insofar, as parents, guardians and employers are concerned, while in
breach of contract, such is not a complete and proper defense in the selection and
supervision of employees.
3. In quasi-delict, there is no presumption of negligence and it is incumbent upon
the injured party to prove the negligence of the defendant, otherwise, the former’s
complaint will be dismissed, while in breach of contract, negligence is presumed so
long as it can be proved that there was breach of contract and the burden is in the
defendant to prove that there was no negligence in the carrying out the terms of the
contract; the rule of respondeat superior is followed. (Respondeat superior means
“Let the principal answer for the acts of his agent”.)
Article 1163. Every person is obliged to give something is also obliged to take care
of it with the proper diligence of a good father of a family, unless the law or
stipulation of the parties requires another standard of care.
Determinate thing – one which is particularly designated or physically segregated
from all others of the same class.
Generic thing – one that refers to a class or genus without being distinguished from
others of the same class.
Obligations of one obliged to give a determinate thing
1. To take care of the thing before its delivery with the diligence of a good father of a
family, unless the law or stipulation of the parties requires another standard of care.
2. To deliver the thing.
3. To deliver the fruits of the thing.
4. To deliver its accessions and accessories.
Diligence of a good father of family
the diligence which an ordinary prudent man would exercise with regard to his own
property.
Effect of failure to observe the diligence required
the debtor who fails to observe the diligence required in the preservation of the
thing shall be liable for the payment of damages, unless such failure is due to a
fortuitous event.
Delivery – placing the object in the control and possession of the creditor, either
physically or constructively.
Obligations of one obliged to give a generic thing
1. To deliver a thing which is of the quality intended by the parties taking into
consideration the purpose of the obligation and other circumstances.
2. To be liable for damages in case of fraud, negligence, or delay, in the
performance of his obligation, or contravention of the tenor thereof.
Article 1164. The creditor has a 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.
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Kinds of fruits
• Natural fruits – spontaneous products of the soil, and the young and other
products or animals
• Industrial fruits – produced by lands of any kind through cultivation or labor.
• Civil fruits – derived by virtue of a juridical relation.
Right of creditor to the fruits
The creditor has a right to the fruits of the thing from the time the obligation to
deliver the thing arises. Such obligation to deliver arises as follows:
If the obligation is a pure obligation or one whose performance is not subject to a
suspensive period it suspensive condition, the obligation to deliver arises from its
perfection.
If the obligation is subject to a suspensive condition or suspensive period, then,
the obligation to deliver arises upon the fulfillment of the condition or upon the
arrival of the term.
Nature of the creditor’s right
Before the delivery
From the time the obligation to deliver the thing arises, the creditor acquires the
right to demand the delivery of the thing and its fruits that have accrued from such
time from the debtor. This right which can be enforced only against a definite
passive subject, i.e., the debtor, is known as personal right which is also called as
jus in personam or jus ad rem.
After the delivery
After the delivery of the thing and its fruits to him, the creditor acquires a real
right over them. A real right, also called jus in re, such as the right of possession or
ownership, is one that is enforceable against the whole world. This is a right that
can be enforced only over the thing and not the person of the debtor.
Article 1165. When what is to be delivered is a determinate thing, the creditor, in
addition to the right granted to him by article 1170, may compel the debtor to make
the delivery.
If the things is indeterminate or generic, he may ask that the obligation be
complied with at the expense of the debtor.
If the obligor delays, or has promised to deliver the same thing to two or more
persons who do not have the same interest, he shall be responsible for any
fortuitous event until he has effected the delivery.
Remedies of the creditor when the debtor fails to perform an obligation to give (real
obligation).
1. Obligation to deliver a determinate thing
• To compel the debtor to make the delivery.
• To demand the payment of damages from the debtor.
In compelling the debtor to make the delivery, the creditor has to institute a court
action against the debtor and if he obtains judgment in his favor, he can ask the
court to order the debtor to make the delivery and pay damages.
2. Obligation to deliver a generic thing
• To ask that the obligation be complied with at the expense of the debtor.
• To demand the payment of damages from the debtor.
The creditor has to institute a court action against the debtor and if he obtains
judgment in his favor, he can ask the court to order that the debtor to comply with
his obligations and pay damages.
Loss due to fortuitous event of the determinate thing
As a rule, the loss of the thing due by reason of fortuitous event extinguishes the
debtor’s obligation. However, he shall be liable in the following cases:
• If he is guilty of delay
• If he promised to deliver the same thing to two or more persons who do not have
the same interest.
Where debtors delays or has promised delivery to separate creditors – fortuitous
event does not exempt the debtor from responsibility. It likewise refers to a
determinate thing. An indeterminate thing cannot be the object of destruction by a
fortuitous event because genus nunquam permit (genus never perishes).
Article 1166. The obligation to give a determinate thing includes that of delivering all
its accessions and accessories, even though they may not have been mentioned.
Accessions include everything which is produced by a thing or which is incorporated
or attached thereto, either naturally or artificially. The term accessions includes the
fruits of a thing.
Accessories is anything that is attached to or included in another thing of more
importance to add to the utility, ornamentation, preservation or completion of the
latter.
Duty to deliver accessions and accessories
The debtor must deliver the accessions and accessories even though they may
not have been mentioned. The parties may, however, stipulate that the accessions
and accessories will not be included.
Article 1167. If a person obliged to do something fails to do it, the same shall be
executed at his cost.
The same rule shall be observed if he does it in contravention of the tenor of the
obligation. Furthermore, it may be decreed that what has been poorly done be
undone.
Remedies of the creditor in an obligation to do (positive personal obligation)
1. If the debtor fail to perform the obligation
• To have the obligation be executed at the expense of the debtor. The debtor,
however, cannot be compelled to perform the obligation because this would violate
his constitutional right against involuntary servitude.
• To demand the payment of damages from the debtor.
2. If the debtor performs the obligation but does it in contravention of the tenor
thereof, i.e., not following the specifications or stipulations agreed upon
• To have the obligation be executed at the expense of the debtor.
• To demand the payment of damages from the debtor.
3. If the debtor performs the obligation but does it poorly
• To ask that what was poorly done be undone at the debtor’s expense.
• To demand the payment of damages from the debtor.
Article 1168. When the obligation consists in not doing, and the obligor does what
has been forbidden him, it shall also be undone at his expense.
Remedies of the creditor in obligation not to do (negative personal obligation), if the
debtor does what has been forbidden him.
• To ask that what has been done be undone at the debtor’s expense.
• To demand the payment of damages from the debtor.
Article 1169. Those obliged to deliver or to do something incur in delay from the
time the obligee judicially or extrajudicially demands from them the fulfillment of
their obligation.
However, the demand by the creditor shall not be necessary in order that delay
may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond
his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply
or is not ready to comply in a proper manner with what is incumbent upon him.
From the moment one of the parties fulfills his obligation, delay by the other begins.
Delay or default or mora is the non-fulfillment of an obligation with respect to time.
Ordinary delay is merely failure to perform an obligation on time.
Legal delay or default or mora is the failure to perform an obligation on time which
failure constitutes a breach of the obligation.
Kinds of delay
1. Mora solvendi – default on the part of the debtor
• Mora solvendi ex re - debtor’s default in real obligations (obligation to give)
• Mora solvendi ex persona - debtor’s default in personal obligations (obligations to
do)
2. Mora accipiendi – default on the part of the creditor
3. Compensatio morae – default of both parties in reciprocal obligations; here it is
as if neither party was in default.
Necessity of demand to make the debtor in delay.
The debtor incurs in delay from the time the creditor judicially or extrajudicially
demands from him the fulfillment of his obligation. Judicial demand takes the form
of a complaint filed in court by the creditor against the debtor. Extrajudicial demand
is one made outside of the court and which may be made orally or in writing. A
demand in writing is sometimes made through a person’s lawyer who may threaten
the filing of a court action against the debtor unless the latter complies with his
obligation.
In order for delay to exist, the following requisites must concur:
• That the obligation be demandable and already liquidated.
• The debtor does not perform the obligation.
• The creditor demands the performance either judicially or extrajudicially.
• The debtor fails to comply with such demand.
Effects of delay
Mora solvendi
• The debtor is guilty of breach or violation of the obligation.
• He is liable to the creditor for interest or damages. In the absence of extrajudicial
demand, the interest shall commence from the filing of the complaint.
• He is liable even for a fortuitous event when the obligation is to deliver a
determinate thing. However, if the debtor can prove that the loss would have
resulted just the same even if he had not been in default, the court may equitably
mitigate or reduce the damages.
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In an obligation to deliver a generic thing, the debtor is not relieved from liability for
loss due to a fortuitous event. He can still be compelled to deliver a thing of the
same kind or held liable for damages.
Mora accipiendi
• The creditor is guilty of breach of obligation
• He is liable for damages suffered, if any, by the debtor.
• He bears the risk of loss of the thing due
• Where the obligation is to pay money, the debtor is not liable for interest from the
time of the creditor’s delay.
• The debtor may release himself from the obligation by the consignation or deposit
in court of the thing or sum due.
Compensatio morae
• The delay of the obligor cancels the delay of the obligee and vice-versa. Legally
speaking, there is no default or delay on the part of both parties.
When demand is not required to make debtor in delay
• When the obligation expressly so declares.
• When the law expressly so declares.
• When the designation of time was a controlling motive for the establishment of the
contract (time is of the essence).
• When demand would be useless.
• When there is performance of by a party in reciprocal.
Article 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof,
are liable for damages.
Grounds for liability to pay damages
• Fraud
• Negligence
• Delay
• Contravention of the tenor of the obligation
Damages (distinguished from injury) harm done and the sum of money that may be
recovered in reparation for the harm done.
Injury is the wrongful, unlawful or tortuous act which causes loss or harm to another.
It is the legal wrong to be redressed.
Kind of damages
• Actual or compensatory damages – pecuniary loss, that may be recovered. It
includes the value of the loss suffered and profits not realized.
• Moral damages – include physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock…social humiliation
and similar injury
• Nominal damages – damages to vindicate or recognize a right, and not for
indemnifying any loss suffered, such as when there is a trespass upon real property.
• Temperate or moderate damages – they are more than nominal but less than
compensatory damages, but may be recovered if the court finds that some
pecuniary loss has been suffered but its amount cannot, from the nature of the
case, be proved with certainty.
• Liquidated damages – those agreed upon by the parties to a contract, to be paid in
case of breach.
• Exemplary or corrective damages – imposed by way of example or correction for
public good. In addition to the moral, temperate, liquidated or compensatory
damages.
Proof of pecuniary loss
Actual damages – proof is required unless provided by law or stipulation.
Other damages – proof is not required in order that moral, nominal, temperate,
liquidated or exemplary damages may be adjudicated. The assessment of such
damages, except liquidated ones, is left to the discretion of the court, according to
the circumstances of each case.
Article 1171. Responsibility arising from fraud is demandable in all obligations. Any
waiver of an action for future fraud is void.
Fraud is the deliberate and or intentional evasion by the debtor of the normal
compliance of his obligation.
Kinds of fraud
According to meaning
• Fraud at the time of giving consent
1. Causal fraud (dolo causante) fraud without which consent would not have been
given . It renders the contract voidable.
2. Incidental fraud (dolo incidente) fraud without which consent would have still
been given but the person giving it would have agreed on different terms . The
contract is valid but the party employing the fraud shall be liable for damages.
• Fraud at the time of performance
Deliberate act of evading the fulfillment of the obligation in a normal manner. This
will not affect the validity of the contract but it would entitle the injured party to
recover damages.

According to time of commission
• Future fraud
the debtor’s liability for future fraud cannot be waived. Such waiver is void as it
encourages the commission of fraud. Accordingly, the creditor can still recover
damages from the debtor despite the waiver.
• Past fraud
any waiver of an action for fraud already committed is valid as this will become
simply an act of generosity on the part of the creditor.
Article 1172. Responsibility arising from negligence in the performance of every kind
of obligation is also demandable, but such liability may be regulated by the courts,
according to the circumstances.
Article 1173. The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds with the
circumstances of the person, of the time and of the place. When negligence shows
bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be required.
Fault or negligence of the debtor consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstances of
the person, of the time and of the place. It is the failure to observe, for the
protection or interest of another person, that degree of cars, precaution and
vigilance with the circumstances justly demand, whereby such person suffers injury.
Verily, foreseeability is the fundamental test of negligence. It is the omission to do
something which are reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would do, or the doing of
something which is reasonable man would not do. If the law or contract does not
state the diligence which is to be observed in the performance, that which is
expected of a good father of a family shall be required.
Test of negligence
The test of negligence is whether the defendant in doing the alleged negligent act
used that reasonable care and caution which an ordinary person would have used
in the same situation.
When the negligence shows bad faith
In case negligence shows bad faith, the obligor shall be liable for all damages
which may be reasonably attributed to the non-performance of the obligation.
Hence, the debtor will be liable not only for the damages attributable to the natural
and probable consequences of breach of obligation and those which the parties
have foreseen or could have reasonably foresee but also those that may be
reasonably attributed to the non-performance of the obligation.
Kinds of negligence
Contractual negligence (or culpa contractual) – the negligence committed in the
performance of a contract. The negligence here is merely incidental in the
performance of an obligation already existing because of a contract between the
parties. The defense of a good father of a family in the selection and supervision of
employees is not a defense although it may mitigate the employer’s liability. What is
followed here is the “master-servant rule” or “ respondeat superior” or “command
responsibility.”
Civil negligence (or culpa aquiliana, tort, quasi-delict, or culpa extra-contractual) –
wrong or negligence committed independent of contract and without criminal intent.
The “master-servant” rule does not apply, i.e., the negligence of the servant is not
necessarily the negligence of the master. Hence, the employer may raise the
defense of diligence of a good father of a family in the selection and supervision of
his employees to escape liability. Once negligence on the part of the employee is
established, a presumption instantly arises that the employer was remiss in the
selection and/or supervision of the negligent employee. To avoid liability for quasi-
delict committed by its employee, it is incumbent upon the employer to rebut the
presumption by presenting adequate and convincing proof that it exercised the care
and diligence of a good father of a family in the selection and supervision of its
employees.
Criminal negligence (or culpa criminal) – negligence that results in the
commission of a crime. Defense of a good father of a family in the selection and
supervision of employees is not a defense because the employee’s guilt is
automatically employer’s civil guilt if the former is insolvent.
Distinctions between fraud and negligence
a. In fraud, there is deliberate intention to cause damage or prejudice, whereas in
negligence, there is no deliberate intention to cause damage to another.
b. In fraud, liability cannot be reduced or mitigated by the courts, whereas in
negligence, liability may be reduced by the courts in accordance with the
circumstances.
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Article 1174. Except in cases expressly specified by law, or when it is otherwise
declared by stipulation or when the nature of the obligation requires the assumption
of risk, no person shall be responsible for those events which could not be
foreseen, or which though foreseen, were inevitable.
Fortuitous event is an event that could not be foreseen, or which though foreseen,
was inevitable. It is not enough that the event should not be foreseen or anticipated,
but it must be one impossible to foresee or avoid.
Acts of man – strictly speaking, fortuitous event is an event independent of the will
of the obligor but not of other human wills.
Acts of God – they refer to what us called majeure or those events which are totally
independent of the will of every human being.
Characteristics of fortuitous event
• The cause must be independent of the will of the debtor.
• There must be impossibility of foreseeing the event or of avoiding it even if it can
be foreseen.
• The occurrence of the event must be of such character as to render it impossible
for the debtor to perform his obligation in a normal manner.
General rule and exceptions for liability for fortuitous event
As a general rule, no person shall be responsible for fortuitous event, i.e., his
obligation will be extinguished. The following are exceptions:
1. When expressly specified by law.
2. When it is declared by stipulation of the parties.
3. When the nature of obligation requires the assumption of risk.
Burden of proving loss due to fortuitous event
The burden of proving that the loss was due to fortuitous event rests on him who
invokes it. And, in order for a fortuitous event to exempt one from liability it is
necessary that he must have committed no negligence or misconduct that may
have occasioned the loss.
Article 1175. Usurious transactions shall be governed by special laws.
Usury is the contracting for or receiving something in excess of the amount allowed
by law for the loan or forbearance of money — the taking of more interest for the
use of money than the law allows.
New legal rate of interest
Under Circular No. 799, the Monetary Board declared that effective July 1, 2013,
“the rate of interest for the loan or forbearance of money, goods or credits and the
rate allowed in judgments, in the absence of an express agreement as to such rate
of interest, shall be six percent (6%) per annum.”
Requisites for recovery of interest
In order that interest may be recovered, the following requisites must be present:
1. The payment of interest must be expressly stipulated.
2. The agreement must be in writing.
3. The interest must be lawful.
Article 1176. The receipt of the principal by the creditor, without reservation with
respect to the interest, shall give rise to the presumption that said interest has been
paid.
The receipt of a later installment of a debt without reservation as to prior
installments, shall likewise raise the presumption that such instalments have been
paid.
Presumption is an inference as to the existence of a fact not actually known, arising
from its usual connection with another which is known.
Kinds of presumption
Conclusive presumption – is not allowed to be contradicted by other evidence.
Disputable presumption – is permitted to be contradicted and overcome by other
evidence.
Effect of issuance of receipt acknowledging payment of the principal without
reservation as to the payment of interest
This shall give rise to the presumption that the interest has been paid. This is so
because payment of the principal shall not be deemed to have been made until the
interests have been covered. The presumption that the interest has been paid is,
however, disputable, hence, the creditor may introduce evidence that such interest
has not been paid.
Effect of issuance of receipt acknowledging payment of a later installment without
reservation as to prior installments.
This shall give rise to the presumption that such prior installments have been paid.
This presumption is likewise disputable; hence, the creditor may present evidence
that such prior installments have not been paid.
Article 1177. The creditors, after having pursued the property in possession of the
debtor to satisfy their claims, may exercise all the rights and bring all the actions of
the latter for the same purpose, save those which are inherent in his person; they
may also impugn the acts which the debtor may have done to defraud them.
Remedies of the creditor to enforce payment of his claim
• Exact payment of the debtor’s obligation
• Pursue the properties in possession of the debtor.
• Exercise all the rights and bring all the actions of the debtor, except those that are
inherent in his person. (subrogatory action - accion subrogatoria
• Impugn the acts which the debtor may have done to defraud his creditors. (accion
pauliana – a remedy of last resort)
Article 1178. Subject to the laws, all rights acquired in virtue of an obligation are
transmissible, if there has been no stipulation to the contrary.
As a general rule, all rights acquired in virtue of an obligation are transmissible.
When right is not transmitted
1. When the parties stipulated against the transmission of the right.
2. When the law prohibits the transmission of the right.
3. When the nature of the obligation does not allow the transmission of the right,
such as when it is purely personal.
Article 1179. Every obligation whose performance does not depend upon a future or
uncertain event, or upon a past event unknown to the parties, is demandable at
once.
Every obligation which contain a resolutory condition shall also be demandable,
without prejudice to the effects of the happening of the event.
Pure obligation is one without a term or condition; hence, it is demandable at once.
Conditional obligation and condition
Conditional obligation is one whose demandability or extinguishment is subject to
the happening of a condition.
Condition is an uncertain event which wields an influence on a legal relationship.
Principal kinds of condition
a) Suspensive condition (condition precedent or condition antecedent) suspends
the effectivity of the obligation until the condition is fulfilled. If the condition is not
fulfilled, the obligation is not effective or demandable.
b) Resolutory condition (condition subsequent) extinguishes the obligation upon its
fulfillment. The obligation is demandable at once, but when the condition is fulfilled,
the obligation is extinguished and the parties shall return to each other at they have
received.
Article 1180. When the debtor binds himself to pay when his means permit him to
do so, the obligation shall be deemed to be one with a period, subject to the
provisions of Article 1197.
When the debtor binds himself to pay when his means permit him, his obligation
shall be considered as one with a period and not subject to a condition. Since the
time of the performance of the obligation cannot be determined, the creditor, before
he can enforce it, must file a court action for the fixing of the period. Any demand by
the creditor before the term arrives is considered premature.
Similar phrases
As soon as possible
From time to time
At any time I have the money
In partial payments
When I am in a position to pay
Article 1181. In conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening
of the event which constitutes the condition.
Reiterates the differences between the suspensive and resolutory condition.
Effect of happening of condition: acquisition of rights and loss of rights already
acquired.
Article 1182. When the fulfillment of the condition depends upon the sole will of the
debtor, the conditional obligation shall be void. If it depends upon chance or upon
the will of a third person, the obligation shall take effect in conformity with the
provisions of this Code.
Kinds of condition under the provision
Potestative condition (facultative condition) – depends upon the exclusive will of
one of the parties
a. Potestative on the part of the debtor
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• If the condition is also suspensive, the obligation and the condition are void.
• If the condition is also resolutory, the obligation and condition are valid.
b. Potestative on the part of the creditor
• The obligation and the condition are valid whether the condition is suspensive or
resolutory.
• Casual condition – depends upon chance or upon the will of third person. The
obligation and condition are valid.
• Mixed condition – depends partly upon the will of one of the parties and partly
upon chance or the will of a third person. The obligation and condition are likewise
valid.
Article 1183. Impossible conditions, those contrary to good customs or public policy
and those prohibited by law shall annul the obligation which depends upon them. If
the obligation is divisible, that part thereof which is not affected by the impossible or
unlawful condition shall be valid.
The condition not to do an impossible thing shall be considered as not having
been agreed upon.
Possible condition – capable of fulfillment.
Impossible condition – incapable of performance or cannot be physically done or
which is contrary to law, morals, good customs, public order and public policy.
Effect of impossible or unlawful condition on obligation
Impossible obligation shall annul the obligation that depends upon them. Both the
obligation and the condition are void.
Effect on the obligation contains both impossible and possible condition
a. If the obligation is divisible, only that part that is not affected by the unlawful or
impossible condition shall valid.
b. If the obligation is invisible, the entire obligation is void.
Negative impossible condition
The condition not to do an impossible thing shall be considered as not having
been agreed upon; hence, the obligation is demandable at once.
Article 1184. The condition that some event happen at a determinate time shall
extinguish the obligation as soon as the time expires or if it has become indubitable
that the event will not take place.
Article 1185. The condition that some event will not happen at a determinate time
shall render the obligation effective from the moment the time indicated has
elapsed, or if it has become evident that the event cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such time as
may have probably been contemplated, bearing in mind the nature of the obligation.
Positive condition and effect on obligation
A positive condition is a condition that some event will happen at a determinate
time. When the performance of an obligation depends upon the happening of some
event at a determinate time, the obligation shall be extinguished as soon as the
time expires without the event taking place or if there is no more doubt that the
event will not take place even before the expiration of such determinate time.
Negative condition and effect on obligation
A negative condition is a condition that some event will not happen at a
determinate time. When the fulfillment of the obligation depends upon the condition
that some event will not happen at a determinate time, the obligation becomes
effective as soon as the time expires, or it has become evident that the event will
not take place.
Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily
prevents its fulfillment.
Constructive fulfillment of condition
If the debtor voluntarily prevents the fulfillment of the condition, such condition is
deemed fulfilled and the obligation becomes demandable. In order that there is
constructive fulfillment of the condition, the following requisites must concur: (a)
there must be an intent on the part of the debtor to prevent compliance with the
condition, and (b) he actually prevents its fulfillment.
When constructive fulfillment not applicable
The condition is not deemed fulfilled if the debtor prevents its fulfillment in the
exercise of a lawful right or for justifiable reasons.
Article 1187. The effects of a conditional obligation to give, once the condition has
been fulfilled, shall retroact to the day of the constitution of the obligation.
Nevertheless, when the obligation imposes reciprocal prestations upon the parties,
the fruits and interests during the pendency of the condition shall be deemed to
have been mutually compensated. If the obligation is unilateral, the debtor shall
appropriate the fruits and interests received, unless from the nature and
circumstances of the obligation it should be inferred that the intention of the person
constituting the same was different.
 In obligations to do and not to do, the courts shall determine, in each case, the
retroactive effect of the condition that has been complied with.
Effects of the fulfillment of suspensive condition in conditional obligation to give
Upon the fulfillment of the suspensive condition, the obligation becomes effective
and demandable. However, the effects of the obligation shall retroact to the day the
obligation was constituted. Hence, the creditor shall be entitled to the thing from the
time the obligation was perfected.
When there is no retroactive effect
The retroactive effect, however, does not apply to the fruits and interests during
the pendency of the condition, as follows:
1. In reciprocal obligations, the fruits and interests received during the pendency of
the condition shall be deemed to have been mutually compensated, i.e., they are
not required to be delivered for convenience.
2. In unilateral obligations, the debtor shall keep the fruits and interests unless there
was a contrary intent.
Effects of fulfillment of suspensive condition in conditional obligation to do and not
do
The court shall determine in each case the retroactive effect of the condition that
has been complied with.
Article 1188. The creditor may, before the fulfillment of the condition, bring the
appropriate actions for the preservation of his right.
The debtor may recover what during the same time he has paid by mistake in case
of a suspensive condition .
Creditor’s right before the fulfillment of suspensive condition
a. Filing a court action to prevent debtor from deliberately alienating, destroying, or
concealing the property.
b. Recording the expected right with the Register of Deeds to give notice to third
persons.
c. Asking for security from the debtor if he is about to become insolvent, such as
requiring the debtor to provide a surety for the debt.
Debtor’s right to recover payment made before fulfillment of condition
a. If the debtor made the payment believing that the condition had been fulfilled, i.e.,
by mistake, then he can recover such payment as this is a case of solutio indebiti.
He shall also be entitled to the fruits or legal interest if the creditor accepted the
payment in bad faith.
b. If he made the payment with knowledge that the condition has not been yet
fulfilled:
If the condition is eventually fulfilled, then he can no longer recover the payment,
as fulfillment of the condition entitles the creditor anyway to demand performance of
the obligation.
If the condition is not fulfilled, then he shall be entitled to recover, except if his
making the payment is equivalent to a waiver of the condition.
Article 1189. When the conditions have been imposed with the intention of
suspending the efficacy of an obligation to give, the following rules shall be
observed in case of the improvement, loss or deterioration of the thing during the
pendency of the condition:
(1) If the thing is lost without the fault of the debtor, the obligation shall be
extinguished;
(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay
damages; it is understood that the thing is lost when it perishes, or goes out of
commerce, or disappears in such a way that its existence is unknown or it cannot
be recovered;
(3) When the thing deteriorates without the fault of the debtor, the impairment is to
be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose between
the rescission of the obligation and its fulfillment, with indemnity for damages in
either case;
(5) If the thing is improved by its nature, or by time, the improvement shall inure to
the benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right than
that granted to the usufructuary.
The provisions applies only if;
1. The object of the obligation is determinate
2. The loss, deterioration or improvement takes place before the fulfillment of the
condition
3. The obligation is subject to a suspensive condition which is eventually fulfilled.
> When a thing is considered loss
1. A thing is considered lost when it perishes.
2. When it goes out of commerce.
3. When it disappears in such a way that its existence is unknown, or it cannot be
recovered.
> Rules in case of loss
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1. If the thing is lost without the fault of the debtor, the obligation shall be
extinguished. This based on the rule that no person shall be responsible for
fortuitous event and the object, being determinate, cannot be replaced.
2. If the thing is lost through the fault of debtor, he shall be obliged to pay damages.
Deterioration of the thing
There is deterioration if the thing becomes impaired in quality, functioning or
condition.
Rule in case of deterioration
1. If the thing deteriorates without the fault of the debtor, the impairment shall be
borne by the creditor.
2. If the thing deteriorates through the fault of the debtor, the creditor may choose
between the rescission of the obligation and its fulfillment, with a right to damages
in either case.
Improvement of the thing
There is enhancement in its value or quality, something is added or attached to it.
Rules in case of improvement
1. If the thing is improved by its nature, or by time, the improvement shall inure to
the benefit of the creditor. This is to compensate the creditor who would otherwise
suffer in case the thing deteriorates without the debtor’s fault.
2. If the thing is improved at the expense of the debtor, he shall have no other right
than that granted to the usufructuary. Usufruct is the right to enjoy the property of
another with the obligation of preserving its form and substance. The debtor may
remove the improvements provided he does not cause damage to the thing.
Otherwise, he must deliver the thing in its improved condition to the creditor without
any right to reimbursement. He may however set off against the improvements any
damage he had caused upon the thing.
Article 1190. When the conditions have for their purpose the extinguishment of an
obligation to give, the parties, upon the fulfillment of said conditions, shall return to
each other what they have received.
In case of loss, deterioration or improvement of the thing, the provisions which,
with respect to the debtor, are laid down in the preceding article shall be applied to
the party who is bound to return.
As for obligations to do and not to do, the provisions of the second paragraph of
Article 1187 shall be observed as regards the effect of the extinguishment of the
obligation.
Effects of the fulfillment of a resolutory condition in a conditional obligation to give
• The obligation will be extinguished.
• The parties shall return to each other what they have received unless a contrary
intent appears.
• In case of loss, deterioration or improvement of the thing, the provisions of Article
1189 shall be applied to the party who is bound to return.
Effects of fulfillment of resolutory condition in conditional obligation to do & not to do
The courts shall determine, in each case, whether or not to give the
extinguishment of the obligation any retroactive effect.
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage
Law.
A reciprocal obligation is one that arises from the same cause and in which each
party is a debtor and a creditor of the other, such that the obligation of one is
dependent upon the application of the other. Reciprocal obligations are to be
performed simultaneously so that the performance of one is conditioned upon the
simultaneous fulfillment of the other. If one party performs his obligation but the
other does not, the party performs his obligation suffers injury by reason of the
delay.
Remedies of the injured party
1. Rescission with damages
Limitations on right to demand rescission
• Resort to the courts
• Power of court to fix period
• Right of third person
• Substantial violation
• Waiver of right
2. Fulfillment of the obligation with damages

Nature of remedies
The remedies for rescission and fulfillment may be availed of by the injured party
in the alternative. He cannot ask for both. If he has chosen rescission of the
obligation, he can no longer ask for fulfilment. However, he may also seek
rescission, even after he has chosen fulfillment, if the latter becomes impossible.
Article 1192. In case bot parties have committed a breach of the obligation, the
liability of the first infractor shall be equitably tempered by the courts. If it cannot be
determined which of the parties first violated the contract, the same shall be
deemed extinguished, and each shall bear his own damages.
When it can be determined who first violated the contract
If both parties have committed a breach of the obligation, the liability of the first
infractor shall be equitably tempered or reduced. This rule is fair because the
second infractor also derived or though he would derive some advantage by his
own act or neglect.
When it cannot be determined who first violated the contract
The contract shall be extinguished. This rule likewise just, because it is presumed
that both at about the same tried to reap some benefit.
Article 1193. Obligations for whose fulfillment a day certain has been fixed, shall be
demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate upon arrival
of the day certain.
A day certain is understood to be that which must necessarily come, although it
may not be known when.
If the uncertainty consists in whether the day will come or not, the obligation is
conditional, and it shall be regulated by the rules of the preceding Section.
Obligation with a period is one whose effects or consequences are subjected in one
way or another to the expiration or arrival of said period or term.
Period is a space of time which determines the effectivity or extinguishment of an
obligation
A day certain is that which must necessarily come although it may not be known
when
Period distinguished from condition
1. As to fulfillment
A condition is an uncertain event; while period is an event which is certain to
happen at a date known beforehand, or at a time which cannot be determined.
2. As to influence on obligation
A condition causes an obligation to arise or cease, while a period merely fixes
the time for the efficaciousness of an obligation.
3. As to time
A period always refers to the future, while a condition may refer to a past event
unknown to the parties.
4. As to the will of the debtor
A period that depends upon the will of the debtor authorizes the court to fix its
duration, while a condition that depends upon the will of the debtor which is
suspensive shall annul the obligation.
Kinds of period
1. According to effect
Suspensive period (ex die – from a certain day) one the expiration of which causes
the obligation to arise. An obligation with a suspensive period cannot be demanded
until the expiration of the term.
Resolutory period (in diem – until a certain day) one the expiration of which
causes the extinguishment of the obligation. An obligation with a resolutory period is
demandable at once but it is terminated upon the expiration of the term.
2. According to source
Legal period – period fixed by law
Voluntary period – period fixed by stipulation of the parties
Judicial period – period fixed by the court
Article 1194. In case of loss, deterioration or improvement of the thing before the
arrival of the day certain, the rules in Article 1189 shall be observed.
Article 1195. Anything paid or delivered before the arrival of the period, the obligor
being unaware of the period or believing that the obligation become due and
demandable, may be recovered, with the fruits, and interests.
Application of the provision
The provision is applicable only to an obligation to give a thing.
Effect of payment before expiration of term or period
• If the debtor made the payment believing that the period has arrived, he may
recover what he has paid with its fruits and interests. This is based on the quasi-
contract of solutio indebiti.
7
• If the debtor made the payment with knowledge of the period or with knowledge
that the period or with knowledge that the period has not arrived, he cannot recover
what he has paid or delivered. By making the payment or delivery, he is deemed to
have impliedly waived the benefit of the period.
Article 1196. Whenever in an obligation a period is designated, it is presumed to
have been established for the benefit of both the creditor and the debtor, unless
from the tenor of the same or other circumstances, it should appear that the period
has been established in favor of one or of the other.
Party benefited by period
The period is presumed to have been established for the benefit of both the
debtor and the creditor, unless from the tenor of the obligation or other
circumstances it should appear that the period has been established for only one of
them.
Effect if period is for the benefit of both parties
If the period is for the benefit of both parties, the creditor cannot demand
payment from the debtor, and the debtor cannot compel the creditor to accept
payment, before the expiration of the period.
When period is for the benefit of one of the parties
Benefit of the debtor
The period is for the benefit of the debtor if the parties so stipulated or it can be
inferred from the tenor of the obligation that the period was established for the
benefit of the debtor.
Benefit of the creditor
The period is for the benefit of the creditor if the parties so stipulated or it can be
inferred from the tenor of the obligation that the period was established for the
benefit of the creditor.
Article 1197. If the obligation does not fix a period, but from its nature and the
circumstances it can be inferred that a period was intended, the courts may fix the
duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of
the debtor.
In every case, the courts shall determine such period as may under the
circumstances have been probably contemplated by the parties. Once fixed by the
courts, the period cannot be changed by them.
When the court may fixed the period
• If the obligation does not fix a period, but from its nature and the circumstances it
can be inferred that a period was intended.
• When the duration of the period depends upon the will of the debtor.
Effect of the period fixed by the court
When the period is fixed by the court, the period becomes part of the agreement of
the parties; hence, the court cannot change it without the consent of the parties.
When the court may not fix the period
If no term was specified in the obligation and the parties did not intend a period,
the court has no right to fix it, such as when the obligation is a pure one and
demandable at once.
Article 1198. The debtor shall lose every right to make use of the period:
(1) When after the obligation has been contracted, he becomes insolvent, unless he
gives a guaranty or security for the debt;
(2) When he does not furnish to the creditor the guaranties or securities which he
has promised;
(3) When by his own acts he has impaired said guaranties or securities after their
establishment, and when through a fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory;
(4) When the debtor violates any undertaking, in consideration of which the creditor
agreed to the period;
(5) When the debtor attempts to abscond.
Effect when debtor loses the benefit of the period
The benefit of the period may be established for the benefit of the debtor; hence,
the creditor may demand payment from him only upon the expiration of the term.
However, if the debtor loses the benefit of the period, the obligation becomes a pure
obligation and is immediately demandable.
Cases when the debtor loses the benefit of the period
• When he becomes insolvent unless he gives a guaranty or security for the debt.
• When he does not furnish the guaranties or securities that he has promised.
• When by his own acts he has impaired such guaranties or securities after their
establishment and when through a fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory.
• When he violates any undertaking in consideration of which the creditor agreed to
the period.
• When the debtor attempts to abscond.
Article 1199. A person alternatively bound by different prestations shall completely
perform one of them.
The creditor cannot be compelled to receive part of one and part of the other
undertaking.
Kinds of obligation according to number of prestations
• Simple obligation – there is only one prestation
• Compound obligation – there are two or more prestations. It may either be
conjunctive or distributive.
Conjunctive – there are several prestations which are all due and need to be
performed.
Distributive – only one of two or more prestations needs to be performed. It may
either be alternative or facultative.
Alternative obligation – several prestations are alternatively due but the complete
performance of one of them by the debtor is sufficient to extinguish the debt.
Right of the creditor to complete compliance of a prestation
The creditor cannot be compelled to receive part of one and part of another
prestation.
Article 1200. The right of choice belongs to the debtor, unless it has been expressly
granted to the creditor.
The debtor shall have no right to choose those prestations which are impossible,
unlawful or which could not have been the object of the obligation.
As a general rule, the right to choose the prestation to be performed belongs to the
debtor. The parties may, however, expressly agree to grant the right of choice to
the creditor.
Limitations on the debtor’s right to choose
• The debtor must completely perform the prestation chosen by him. He cannot
compel the creditor to accept part of one prestation and part of another prestation.
• He cannot choose those prestations that are impossible, unlawful or which could
not have been the object of the obligation.
Article 1201. The choice shall produce no effect except from the time it has been
communicated.
Since no form is required by law, the notice of choice may be given;
Expressly, which may be oral or written.
Impliedly, such as when the debtor already performs one of the prestations.
Effect of communicating the choice
Once the choice made by the debtor is communicated to the creditor, or by the
creditor to the debtor if the creditor was expressly granted the right of choice, the
obligation becomes a simple obligation to perform the prestation selected. The party
making and communicating the choice will no longer be permitted to renounce it
and take an alternative that was first available to him.
Article 1202. The debtor shall lose the right of choice when among the prestations
whereby he is alternatively bound, only one is practicable.
When alternative obligation is converted into a simple obligation
• When the choice made by the debtor is communicated to the creditor.
• When the creditor was expressly granted the right of choice and the choice he
made is communicated to the debtor.
• When among the prestations whereby he is alternatively bound, only one is
practicable.
Article 1203. If through the creditor’s acts, the debtor cannot make a choice
according to the terms of the obligation, the latter may rescind the contract with
damages.
If the debtor cannot make a choice due to the creditor’s act, he may rescind the
contract with a right to ask for damages.
Rescission not automatic
The debtor may choose not to rescind the contract, but to perform any of the
remaining prestations.
Article 1204. The creditor shall have a right to indemnity for damages when, through
the fault of the debtor, all the things which are alternatively the object of the
obligation have been lost, or the compliance of the obligation has become
impossible.
The indemnity shall be fixed taking as a basis the value of the last thing which
disappeared, or that of the service which last became impossible.
Damages other than the value of the last thing or service may also be awarded.
Application of the provision
• The right of choice belongs to the debtor.
8
• The loss or impossibility happened before the choice was communicated to the
creditor.
Rules in case of loss or impossibility before choice is communicated
a. If only one or some are lost through a fortuitous event or through the debtor’s
fault, the debtor may deliver any of the remainder, or that which remains if only one
subsists.
b. If all are lost through a fortuitous event, the obligation is extinguished (based on
the rule that no person shall be responsible for fortuitous event).
c. If all are lost through the debtor’s fault, the debtor shall pay the value of the last
thing that was lost plus damages.
d. If all except one are lost through the debtor’s fault, and the remaining items is
subsequently lost through a fortuitous event, then the debtor’s obligation is
extinguished.
e. If all except one are lost through a fortuitous event, and the remaining items is
subsequently lost through the debtor’s fault, the debtor shall pay damages.
Article 1205. When the choice has been expressly given to the creditor, the
obligation shall cease to be alternative from the day when the selection has been
communicated to the debtor.
Until then the responsibility of the debtor shall be governed by the following rules:
(1) If one of the things is lost through a fortuitous event, he shall perform
the obligation by delivering that which the creditor should choose from
among the remainder, or that which remains if only one subsists;
(2) If the loss of one of the things occurs through the fault of the debtor, the
creditor may claim any of those subsisting, or the price of that which,
through the fault of the former, has disappeared, with a right to
damages;
(3) If all the things are lost through the fault of the debtor, the choice by the
creditor shall fall upon the price of any one of them, also with indemnity
for changes.
The same rules shall be applied to obligations to do or not to do in case one, some
or all of the prestations should become impossible.
Application of the provision
a. The right of choice was expressly granted to the creditor.
b. The loss or impossibility happened before the choice was communicated to the
debtor.
Rules in cases of loss or impossibility before choice is communicated by he creditor
to the debtor
• If only one or some are lost through a fortuitous event, the debtor shall deliver that
which the creditor should choose from among the remainder, or that which remains
if only one subsists.
• If all are lost through a fortuitous event, the obligation shall be extinguished.
• If only one or some are lost through the debtor’s fault, the creditor may claim any
of those subsisting, or the price of any of those which were lost through the debtor’s
fault plus damages.
• If all are lost through the debtor’s fault, the creditor may claim the price of any of
them plus damages.
Article 1206. When only one prestation has been agreed upon, but the obligor may
render another in substitution, the obligation is called facultative.
The loss or deterioration of the thing intended as a substitute, through the
negligence of the obligor, does not render him liable. But once the substitution has
been made, the obligor is liable for the loss of the substitute on account of his delay,
negligence or fraud.
Facultative obligation – only one prestation has been agreed upon but the debtor
may render another in substitution.
The right to determine whether the substitute is to be given or not belongs to the
debtor.
Effect of loss
Before the substitution, i.e., before the debtor has informed the creditor that he
would deliver the substitute.
• Loss of principal thing
- if due to fortuitous event, the obligation is extinguished
- if due to the debtor’s fault, he shall be obliged to pay damages
• Loss of substitute
- the loss of substitute whether through a fortuitous event or the debtor’s fault
imposes no additional obligation on the debtor because it is not yet due. The debtor
has still to deliver the principal thing which is the thing due. The loss of the
substitute, however, converts the obligation into a simple obligation.
After the substitution, i.e., after the debtor has informed the creditor that he
would deliver the substitute.
• Loss of the principal thing
- the loss of principal thing whether through a fortuitous event or the debtor’s fault
imposes no additional obligation on the debtor because it is no longer due. After
substitution, the obligation ceases to be facultative and becomes a simple obligation
to deliver the substitute.
• Loss of the substitute
- if due to fortuitous event, the obligation is extinguished.
- if due to the debtor’s fault, he shall be obliged to pay damages.
Distinctions between an alternative obligation and a facultative obligation
• In an alternative obligation, several prestations are due but the complete
performance of one is sufficient to extinguish the debt. In a facultative obligation,
only one prestation, the principal obligation, is due.
• In an alternative obligation, there are void prestations, the others may still be valid;
hence, the obligation remains. In a facultative obligation, if the principal obligation is
void, the debtor is not required to give the substitute.
• In an alternative obligation, the right of choice belongs to the debtor, unless
expressly given to the creditor. In a facultative obligation, the right of choice belongs
to the debtor only.
• In an alternative obligation, if all prestations are impossible except one, that which
is possible must still be given. In a facultative obligation, if the principal obligation is
impossible, the debtor is not required to give the substitute.
Article 1207. The concurrence of two or more creditors or of two or more debtors in
one and the same obligation does not imply that each one of the former has a right
to demand, or that each one of the latter is bound to render, entire compliance with
the prestation. There is a solidary liability only when the obligation expressly so
states, or when the law or the nature of the obligation requires solidarity.
Joint obligation is one where each debtor is liable only for a proportionate part of the
debt, and each creditor is entitled only to a proportionate part of the credit. The
terms “pro rata,” “proportionately,” “mancomunada,” and “mancomunada simple,”
when used in relation to the character of the obligation of the debtors, indicate a
joint liability.
Solidary obligation is one where any one of the debtors can be held liable for the
whole obligation, and any one of the creditors can collect the whole obligation. The
terms “jointly and severally,” “in solidum,” “mancomunada solidaria,” “juntos o
separadamente,” and “individually and collectively,” when used in relation to the
nature of the liability of the debtors, indicate solidary liability.
Rules in case of dual nature of obligation
If the obligation of the debtors is joint and the right of the creditors is solidary, or
if the obligation of the debtors is solidary and the right of the creditors is joint, the
rules on joint and solidary obligation shall be applied in determining the liabilities
and rights of the debtors and creditors, as the case may be.
Presumption of joint obligation; when solidarity exists
When there are two or more debtors and/or two or more creditors in one and the
same obligation, the presumption is that the debtors are only jointly liable and the
creditors have only a joint right. There is a solidary liability only in the following
cases:
• When the obligation expressly so states
• When the law so provides
• When the nature of the obligation requires solidarity
Consequences of joint liability
1) Incapacity or vitiated consent of one debtor does not affect the other debtors.
2) Insolvency of one debtor does not make the other debtors liable for his share.
3) A demand made on one debtor makes him in default if he does not perform his
part of the debt , but not the other debtors.
4) Defenses of one debtor may not be available to the other debtors.
Article 1208. If from the law, or the nature or the wording of the obligations to which
the preceding article refers, the contrary does not appear, the credit or debit shall be
presumed to be divided into as many equal shares as there are creditors or debtors,
the credits or debits being considered distinct from one another, subject to the
Rules of Court governing the multiplicity of suits.
Presumption of joint obligation when there is a concurrence of two or more debtors
and/or two or more creditors.
1) The debt shall be divided into as many equal shares as there are creditors or
debtors, the credits or debts being considered distinct from one another.
2) Only one court action should be filed in case of non-payment.
Article 1209. If the division is impossible, the right of the creditors may be
prejudiced only by their collective acts, and the debt can be enforced only by
proceeding against all the debtors. If one of the latter should be insolvent, the
others shall not be liable for his share.
Joint indivisible obligation is an obligation where the debtors or creditors are jointly
bound, but the prestation or object is indivisible.
Characteristics of a joint indivisible obligation
9
• The creditors must act collectively, meaning, all of them must make the demand
unless one is specifically authorized to act for the others. A demand made by one or
some but not all of the creditors will not be effective.
• The demand must be made against all the debtors since compliance is possible
only if they act together.
• The right of the creditors may be prejudiced only by their collective acts. This, a
renunciation made by all the joint creditors extinguishes only his own share. The
obligation, however, is converted into an obligation to pay the value of the thing less
the share of the renouncing creditor.
• If one of the debtors does not comply with his undertaking, the obligation is
converted into a monetary obligation to pay damages. The debtors who may have
been ready to comply shall not contribute to the indemnity beyond the
corresponding price of the thing or the value of the service in which the obligation
consists.
• If one of the debtors is insolvent, the others shall not be liable for his share.
Article 1210. The indivisibility of an obligation does not necessarily give rise to
solidarity. Nor does solidarity of itself imply indivisibility.
Indivisibility does not give rise to solidarity
Indivisibility refers to the subject matter or object not being susceptible of partial
performance. If the performance of an obligation is indivisible, it does not follow that
the debtors are solidarily bound. The debtors may be jointly bound although the
fulfillment of the obligation is indivisible. (Joint indivisible obligation)
Solidarity does not imply indivisibility
Solidarity refers to the tie between the parties. Although the debtors may be
solidarily bound, it does not follow that the performance of the obligation is
indivisible. The fulfillment of the obligation may be divisible even if the debtors are
solidarily bound.
Article 1211. Solidarity may exist although the creditors and the debtors may not be
bound in the same manner and by the same periods and conditions.
Existence of solidarity notwithstanding diversity of terms and conditions
Solidarity does not require that the parties e uniformly bound. It will exist although
the debtors and creditors are differently bound for as long as solidarity was
stipulated, or is provided by law, or the nature of the obligation requires solidarity.
Article 1212. Each one of the solidary creditors may do whatever may be useful to
the others, but not anything which may be prejudicial to the latter.
Acts useful to the other creditors
Each one of the solidary creditors may do whatever may be useful or beneficial to
the other creditors. Thus, a solidary creditor may make an extrajudicial demand
upon the debtor or file a court action against him for the recovery of the entire
obligation.
Acts prejudicial the other creditors
A solidary creditor should not do anything prejudicial to the other creditors;
otherwise, he can be held liable for damages. Thus, a solidary creditor should not
delay making a demand upon the debtor if he knows that the debt is nearing
prescription. In case he causes the extinguishment of the obligation by novation,
compensation, confusion or remission, he shall be liable to the others for the share
in the obligation corresponding to each.
Article 1213. A solidary creditor cannot assign his rights without the consent of the
others.
Mutual agency among the solidary creditors
The solidary creditors are bound by mutual trust and confidence. Hence, a
solidary creditor cannot assign his rights without the consent of the others because
the assignee may not enjoy the trust and confidence of the non-assigning creditors.
Any assignment made without the consent of the other creditors will not be valid as
to the latter. Accordingly, they can recover their respective shares from assigning
creditor in case the assignee who has collected the debt fails to give them their
respective shares.
The above rule applies only when the assignee is a third person. If the assignment
is made in favor of a co-creditor, the same is valid even without the consent of the
others since the assignee already enjoys the trust and confidence of the others.
Secondly, the law favors an assignment to a co-creditor to do away with co-
ownership or pro-indivision.
Article 1214. The debtor may pay any one of the solidary creditors; but if any
demand, judicial or extrajudicial, has been made by any of them, payment be made
to him.
To whom debtor may pay
• If no demand has yet been made by any of the solidary creditors, payment may be
made to any of them.
• If a demand has been made by one of the solidary creditors, payment must be
made to him.
This is so because the solidary creditor making the demand acts as an agent of the
others. If the debtor makes the payment to a non-demanding creditor, the payment
is not valid as to the creditor who made the demand. Accordingly, the latter may
require the debtor to pay his share of the credit.
Article 1215. Novation, compensation, confusion or remission of the debt, made by
any of the solidary creditors or with any of the solidary debtors, shall extinguish the
obligation, without prejudice to the provisions of Article 1219.
The creditor who may have executed any of these acts, as well as he who
collects the debt, shall be liable to others for the share in the obligation
corresponding to them.
Effect of novation, compensation, confusion or remission effected by a solidary
creditor
• The obligation is extinguished.
• The solidary creditor who executed such acts shall be liable to the others for the
share in the obligation corresponding to each.
Novation is the modification of an obligation by changing the object or the principal
conditions, or by substituting the person of the debtor, or by subrogating a third
person in the right of the creditor.
Compensation is a mode of extinguishing obligations up to their concurrent amount
when two persons are in their own right reciprocally debtors and creditors of each
other.
Confusion or merger is that which takes place when the characters of creditor and
debtor are merged in the same person.
Remission or condonation is an act of liberality of the creditor whereby he waives
his right to collect the debt.
Article 1216. The creditor may proceed against any one of the solidary debtors of
some or all of them simultaneously. The demand made against one of them shall
not be an obstacle to those which may subsequently be directed against the others,
so long as the debt has not been fully collected.
Against whom creditor may proceed
The creditor may proceed against any one of the solidarity debtors or some or all
of them simultaneously. If he proceeds against one of them or some but not all of
the solidary debtors and he is unable to collect the whole amount of the debt, he
can still proceed against the others for the remainder of the debt.
Passive solidarity and suretyship
Similarities
1) Both the solidary debtor and the surety guarantee for the obligation of another
person.
2) Both can demand reimbursement after paying the debt.
Distinctions
1) The solidary debtor is indebted not only for his own share but also those of his
co-debtors, while the surety is indebted only for the share of the principal debtor.
2) A solidary debtor can demand reimbursement of what he had paid minus his own
share, while the surety can demand reimbursement of the whole amount he had
paid.
3) If a solidary debtor receives an extension of time to pay, the other solidary
debtors are still liable for the whole obligation minus the share of the debtor who
was given an extension but such share can be demanded from any of them upon
the arrival of the extended term. In suretyship, an extension of time to pay granted
to the principal debtor without the consent of the surety releases the latter.
Article 1217. Payment made by one of the solidary debtors extinguishes the
obligation. If two or more solidary debtors offer to pay, the creditor may choose
which offer to accept.
He who made the payment may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made. If the payment
is made before the debt is due, no interest for the intervening period may be
demanded.
When one of the solidary debtors cannot, because of his insolvency, reimburse
his share to the debtor paying the obligation such share shall be borne by all his co-
debtors, in proportion to the debt of each.
Effects of payment by debtor in solidary obligation
a) The obligation is extinguished.
b) The paying debtor is entitled to demand reimbursement from his co-debtors.
c) The collecting creditor must give the share of his co-creditors.
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Article 1218. Payment by a solidary debtor shall not entitle him to reimbursement
from his co-debtors if such payment is made after the obligation has prescribed or
become illegal.
When debtor not entitled to reimbursement
a) When the payment was made by him after the obligation has prescribed.
b) When the payment was made by him after the obligation has become illegal.
Article 1219. The remission made by the creditor of the share which affects one of
the solidary debtors does not release the latter from his responsibility towards the
co-debtors, in case the debt had been totally paid by anyone of them before the
remission was effected.
Effect of remission of the share of one solidary debtor after total payment of the
debt
If the payment was made by a solidary debtor before the remission of another
debtor’s share, the obligation is extinguished by the payment; hence, there is
nothing more to condone or remit. Accordingly, the paying debtor can demand
reimbursement from the debtor whose share was condoned or remitted.
Effect of remission of the share of one solidary debtor before payment of the debt
The paying debtor can no longer demand reimbursement from the debtor whose
share was condoned or remitted. However, if another solidary debtor is insolvent,
the debtor whose share was remitted can be made liable pro-rata for the share of
the insolvent debtor.
Article 1220. The remission of the whole obligation obtained by one of the solidary
debtors, does not entitle him to reimbursement from his co-debtors.
Effect of remission of the whole obligation
The remission of the whole obligation by the creditor extinguishes the debt. The
debtor who obtained the remission is not entitled to demand reimbursement from
the others because he paid nothing to the creditor.
Article 1221. If the thing has been lost or if the prestation has become impossible
without the fault of the solidary debtors, the obligation shall be extinguished.
If there was fault on the part of any one of them, shall be responsible to the
creditor, for the price and the payment of damages and interest, without prejudice to
their action against the guilty or negligent debtor.
If through a fortuitous event, the thing is lost or the performance has become
impossible after one of the solidary debtors has incurred in delay through the
judicial or extrajudicial demand upon him by the creditor, the provisions of the
preceding paragraph shall apply.
Effect of loss or impossibility of prestation
a) If the loss is without the fault of any of the solidary debtors, the obligation shall be
extinguished.
b) If the loss was due to the fault of one of them or occurred after one of them has
incurred in delay although the loss is due to fortuitous event, all shall be liable for
the price and damages and interest, without prejudice to the right of the debtors not
at fault to recover from the debtor at fault for the amount they had paid.
Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of
all defenses which are derived from the nature of the obligation and of those which
are personal to him, or pertain to his own share. With respect to those which
personally belong to the others, he may avail himself thereof only as regards that
part of the debt for which the latter are responsible.
Defenses available to solidary debtor in actions filed by the creditor
a) These are defenses that will render the debtor not liable because of the invalidity,
unenforceability, extinguishment, or inexistence of the obligation. These defenses
are complete defenses because the creditor is barred from recovering from the
debtor. The following are some examples of such defenses:
• Illegality of object or cause
• Absolute simulation
• Unenforceability under the Statute of Frauds
• Payment of the obligation
• Remission
• Prescription
b) Those personal to the debtor being sued, or those that pertain to his own share.
These defenses may be complete (such as vitiated consent or incapacity to give
consent) or partial (such as non-fulfillment of the condition or non arrival of the term
regarding his share)
c) Those personal to the others or those pertaining to the others’ shares
These defenses are the same as (b) above, but they are only partial defenses.
Article 1223. The divisibility or indivisibility of the things that are the object of
obligations in which there is only one debtor and only one creditor does not alter or
modify the provisions of Chapter 2 of this Title.
Divisible obligation is one that is susceptible of partial performance. The following
are considered divisible:
• When the obligation has for its object the execution of a certain number of days of
work [such as the obligation to plow a rice field in three days].
• When the obligation has for its object the accomplishment of work by metrical
units (such as the obligation to deliver ten cubic meters of garden soil).
• things which by their nature are susceptible of partial performance.
Indivisible obligation is one that is not susceptible of partial performance. The
following are considered indivisible:
• Obligations to give definite things (such as the obligation to give a specific car).
• Those not susceptible of partial performance (such as the obligation to give a
vocal solo rendition of the Philippine National Anthem before a boxing match)
• Those where the object or service is physically divisible but it is invisible by
provision of law (such as the payment of the whole amount of certain taxes)
• Those where the object or service is physically divisible but it is indivisible by the
intention of the parties (such as the obligation to give five sacks of rice in one
delivery by agreement of the parties).
Article 1224. A joint indivisible obligation gives rise to indemnity for damages from
the time anyone of the debtors does not comply with his undertaking. The debtors
who may have been ready to fulfill their promises shall not contribute to the
indemnity beyond the corresponding portion of the price of the thing or of the value
of the service in which the obligation consists.
A joint indivisible obligation is one where the debtors and creditors are jointly bound,
but the prestation or object is indivisible.
Article 1225. For the purposes of the preceding articles, obligations to give definite
things and those which are not susceptible of partial performance shall be deemed
to be indivisible.
When the obligation has for its object the execution of a certain number of days
of work, the accomplishment of work by metrical units, or analogous things which by
their nature are susceptible of partial performance, it shall be divisible.
However, even though the object or service may be physically divisible, an
obligation is indivisible if so provided by law or intended by the parties.
In obligations not to do, divisibility or indivisibility shall be determined by the
character of the prestation in each particular case.
(Refer to Article 1223)
Article 1226. In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of non-compliance, if
there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.
The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.
Obligation with a penal clause is one which provides for a greater liability in case of
non compliance. The accessory undertaking on the part of the debtor is called the
penal clause. The penal clause is generally undertaken to insure performance and
works as either, or both, punishment and reparation. It is an exception to the
general rules in recovery of losses and damages. As an exception to the general
rule, a penal clause must be specifically set forth in the obligation.
A penal clause is attached to an obligation in order to insure performance and has a
double function:
• To provide for liquidated damages, and
• To strengthen the coercive force of the obligation by a threat of greater
responsibility in the event of breach.
Kinds of penal clause
As to source
1) Legal penal clause – one imposed by law, such as the penalty imposed on the
late payment of taxes.
2) Conventional penal clause – one agreed upon by the parties.
As to demandability
1) Joint penal clause – one in which the principal obligation and the penalty may be
demanded.
2) Subsidiary penal clause – one in which only the penalty may be demanded.
Rule when an obligation is with a penal clause
As a general rule, when an obligation is with penal clause, the penalty shall take
the place of damages and the payment of interests in case of non-compliance.
However, damages and interests may be demanded aside from the penalty in the
following cases:
• When there was a stipulation that aside from the penalty, damages and interests
may also be recovered.
• When the debtor refuses to pay the penalty stipulated.
• When the debtor is guilty of fraud in the performance of the obligation.
11
This is so because any waiver of an action to enforce liability for future fraud is
void for being contrary to public policy.
Article 1227. The debtor cannot exempt himself from the performance of the
obligation by paying the penalty, save in the case where this right has been
expressly reserved for him. Neither can the creditor may demand the fulfillment of
the obligation and the satisfaction of the penalty at the same time, unless this right
has been clearly granted him. However, if after the creditor has decided to require
the fulfillment of the obligation, the performance thereof should become impossible
without his fault, the penalty may be enforced.
Debtor not allowed to substitute penalty for the principal obligation
The debtor cannot exempt himself from the performance of the obligation by just
paying the penalty, unless there was an express stipulation giving him this right.
Creditor cannot demand both fulfillment and penalty at the same time
As a general rule, the creditor cannot demand fulfillment and payment of penalty
at the same time. The exceptions are the following:
• When there was an express stipulation granting him such right.
• When he has chosen fulfillment but the performance of the obligation has become
impossible without his fault, in which cases, he may also enforce the penalty.
Article 1228. Proof of actual damages suffered by the creditor is not necessary in
order that the penalty may be demanded.
Proof of actual damages not required
In fixing the penalty, the parties are presumed to have deliberated upon the actual
damages that may be sustained by the creditor in case of breach. However with or
without damages suffered by the creditor, no further proof is required in order that
such penalty may be recovered.
The obligor is bound to pay the stipulated indemnity without the necessity of proof
of the existence and the measure of damages caused by the breach.
Article 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if there
has been no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.
When penalty may be reduced by the court
• When the principal obligation has been partly complied with.
• the principal obligation has been irregularly complied with.
• When the penalty is iniquitous or unconscionable, even if there has been no
performance.
Article 1230. The nullity of the penal clause does not carry with it that of the
principal obligation.
The nullity of the principal obligation carries with it that of the penal clause.
Effect of nullity of principal obligation
The nullity of the principal obligation carries with it that of the penal clause. This is
so because the penal clause is only an accessory obligation; hence, it cannot stand
alone without a valid principal obligation.
Effect of nullity of penal clause
The nullity of the penal clause does not carry with it that of the principal obligation.
This is so because the principal obligation can stand independently of the penal
clause.
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 elsewhere in this Code.
Modes of extinguishing an obligation
a. Primary classification under Article 1231
• Payment or performance
• Loss of the thing due
• Condonation or remission of the debt
• Confusion or merger of the rights of creditor and debtor
• Compensation
• Novation
b. Other causes
• Annulment
• Rescission
• Fulfillment of a resolutory condition
• Prescription
• Occurrence of fortuitous event
• Expiration of resolutory period
• Impossibility of performance
• Death of a party
• Compromises
• Insolvency and bankruptcy
Article 1232. Payment means not only the delivery of money but also the
performance, in any other manner, of an obligation.
Payment is a mode of extinguishing an obligation which consists of:
• the delivery of money
• the performance in any other manner of an obligation
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.
How payment is made
• The thing or service contemplated must be delivered or rendered, as the case may
be.
1) The debtor of a thing cannot compel the creditor to accept a different one
although the latter may be of the same value as, or more valuable than that which is
due.
2) 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.
3) In obligations to give a generic thing whose quality and circumstances have not
been stated, the debtor cannot deliver a thing of inferior quality.
4) In monetary obligations, the payment must be in legal tender although the parties
may stipulate that payment may be made in currency other than Philippine legal
tender at the time of payment.
• Fulfillment of the obligation must be complete.
1) If the obligation has been substantially performed in good faith.
2) When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection.
Article 1234. If the obligation has been substantially performed in good faith, the
obligor made recover as though there had been a strict and complete fulfillment,
less damages suffered by the obligee.
Substantial performance in good faith
If the obligation has been substantially performed in good faith, it is considered as
though there had been strict and complete fulfillment. The obligation is therefore
extinguished and the debtor is allowed to recover from the creditor less damages
suffered by the latter. The right of the debtor to recover is based on the benefit
derived by the creditor from the substantial performance, while the damages which
the creditor is allowed to deduct gives him a just compensation for the slight breach
committed by the debtor.
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.
Acceptance of incomplete or irregular payment
When the creditor accepts the performance knowing that it is incomplete or
irregular, and he does not express any protest or objection, the obligation shall be
considered fulfilled. This is so because the creditor is considered to be in estoppel
or to have waived his right to enforce the complete or regular payment of the
obligation.
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 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.
Article 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.
Payment made by a third person
The creditor cannot be compelled to accept payment from a third person because
the creditor may not have the confidence in the honesty of the third person who
might deliver a defective thing or pay with a check which may not be honored. The
following are the exceptions:
1) When there is a stipulation to that effect.
2) When the third person has an interest in the fulfillment of the obligation (such as
in the case of a guarantor or co-debtor).
Rights of a third person making the payment
12
a. Payment without the knowledge or against the will of the debtor
1. He can recover from the debtor but only in so far as the payment was beneficial
to the latter.
2. He is not entitled to be subrogated in the rights of the creditor.
Subrogation transfers to the person subrogated the credit with all the rights there to
appertaining, either against the debtor or against third persons, be there guarantors
or possessors of mortgages, subject to stipulation in a conventional subrogation.
b. Payment with the consent of the debtor
1. He can recover from the debtor what he has paid.
2. He shall be entitled to be subrogated in the rights of the creditor.
Article 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.
When payment by third person considered a donation
Payment made by a third person who does not intend to be reimbursed is deemed
to be a donation to the debtor. However, for the donation to be valid, the consent of
the debtor is required because no person can be compelled to accept the
generosity of another. Whether the debtor gives his consent or not, payment shall
be valid with respect to the creditor who has accepted the payment.
Rights of the third person making the payment
1) If the debtor consented to the non-reimbursement, the third person cannot
recover anything from the debtor. This is so because in donation, the cause is the
liberality of the donor.
2) If the debtor consented to the payment but not to the non-reimbursement, the
third person can recover what he has paid and he shall be entitled to subrogation.
3) If the debtor did not consent to both the payment and the non-reimbursement,
the third person can only recover the amount beneficial to the debtor. He shall not
be entitled to subrogation.
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 should not be valid, without
prejudice to the provisions of Article 1427 under the Title on “Natural obligation.”
Who must make the payment
Payment must be made by the debtor who must possess the following:
• The free disposal of the thing due.
The debtor does not have the free disposal of the thing if a third person has a
right to claim or retain the thing.
• The capacity to alienate the thing.
Thus, the payment by a minor, insane or demented person, or a deaf-mute who
does not know how to write, is not valid. If the creditor accepted the payment, the
guardian of the incapacitated person or the incapacitated person himself, when he
attains capacity, may recover the payment.
The exception as provided for in Article 1427 is no longer applicable because of
the lowering of the age of majority from 21 to 18. Article 1427 provides: “ When a
minor between eighteen and twenty-one years of age, 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.”
Third person making the payment
A third person who is capacitated and has the free disposal of the thing, may also
make the payment subject to the provision Article 1236 and 1237 on the right to
reimbursement and subrogation.
Article 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.
Payment must be made to:
• The person in whose favor the obligation has been constituted (the creditor).
The creditor referred to here is the creditor at the time of the payment, and not the
creditor at the time of the constitution of the obligation. Thus, if there is subrogation,
the payment should be made to the person subrogated in the rights of the creditor.
• To the creditor’s successor in interest.
The creditor’s successor-in-interest includes his heirs and assignees.
• To any third person authorized to receive the payment.
The third person authorized to receive the payment may be one authorized by the
creditor himself, such as an agent bank, or by the law such as an executor,
administrator or guardian.
Article 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 creditor
As a general rule, payment to an incapacitated creditor is not valid. The following
are exceptions:
a. If the incapacitated creditor has kept the thing delivered.
b. Insofar as the payment has been beneficial to him.
Effect of payment to a third person
As a general rule, payment to a third person is not valid. The following are
exceptions:
a. When the third person is authorized to receive the payment.
b. If the payment has redounded to the benefit of the creditor. Such benefit must be
proven by the debtor; it is not presumed. The benefit to the creditor, however, need
not be proved in the following cases:
• If after the payment, the third person acquired the creditor’s rights.
• If the creditor ratifies the payment to the third person.
• If by the creditor’s conduct, the debtor has been led to believe that the third person
had authority to receive the payment.
• If the payment was made in good faith to a person in possession of the credit.
Article 1242. Payment made in good faith to any person in possession of the credit
shall release the debtor.
Requisites for valid payment to a third person under this provision
a. The payor must be in good faith in making the payment.
b. The person to whom the payment is made must be in possession of the credit.
*and not merely the credit instrument.
Note: An instrument payable to bearer may be negotiated by mere delivery, i.e., no
indorsement is required, while an instrument payable to order can be negotiated
only by means of indorsement completed by delivery.
Article 1243. Payment made to the creditor by the debtor after the latter has been
judicially ordered to retain the debt shall not be valid.
Payment made after judicial order to retain
Payment made by the debtor after he has been ordered by the court not to make
any payment is not valid. The proceeding in which the court orders the debtor to
retain or not to make any payment to his creditor, but to the creditor of his creditor,
is known as garnishment.
Article 1244. The debtor of a thing cannot compel the creditor to receive a different
one, although the latter may be at 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 or forbearance against the obligee’s will.
Debtor cannot compel creditor to accept a different prestation
• In obligation to give, the debtor cannot compel the creditor to accept 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 creditor’s will.
When the provision does not apply
The provisions of Article 1244 do not apply in the following instances since the
creditor is considered to have agreed that another prestation may be performed by
the debtor:
a. In facultative obligations when the debtor is given the right to deliver a substitute.
b. When there is dation in payment.
c. When there is novation.
d. In case the creditor has waived his right, whether expressly or impliedly.
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.
Special forms of payment
 Dation in payment
 Application of payment
 Payment by cession
 Tender of payment and consignation
Dation in payment is a special form of payment whereby the debtor alienates
property in favor of his creditor to satisfy a monetary obligation. Other terms used
are dacion en pago, adjudicacion en pago, and datio in solutum.
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What actually takes place in dacion en pago is an objective novation of the
obligation where the thing offered as an accepted equivalent of performance is
considered as the object of the contract of sale, while the debt is considered as the
purchase price. In any case, common consent is an essential prerequisite, be it sale
or novation, to have the effect of totally extinguishing the debt or obligation.
Dation in payment governed by the law of sales; distinguished from sale
Dation in payment is governed by the law of sales because it partakes of the
nature of a sale. It was as if the debtor sold his property to his creditor with the
amount borrowed as the payment. Dation in payment and sale, however, have the
following distinctions:
a. In dation in payment, there is a pre-existing credit; while in sale, there is no pre-
existing credit.
b. Dation in payment extinguishes obligations; while a sale creates obligations.
c. In dation in payment, the cause is the extinguishment of the obligation, from the
debtor’s point of view, and the delivery of the object in place of the credit, from the
creditor’s point of view. In sale, the cause is the price, from the seller’s point of view,
and the delivery of the object from the buyer’s point of view.
d. In dation in payment, there is less freedom in fixing the price because of the
amount of the pre-existing credit which the parties seek to extinguish. In sale, there
is greater freedom in fixing the price.
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.
Obligation to give a generic thing
If the contract does not specify the quality of the thing:
(1) The creditor cannot demand acting of superior quality.
(2) The debtor cannot deliver a thing of inferior quality.
In such a case, the purpose of the obligation and other circumstances shall be
considered in determining what kind of thing is to be delivered.
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 cost, the
Rules of Court shall govern.
Who bears expenses of payment
a. Extrajudicial expenses
These refer to expenses outside of a court litigation between the parties. They shall
be borne by the debtor unless otherwise stipulated.
b. Judicial expenses
These refer to expenses in relation to a litigation between the parties. As a rule,
costs shall be awarded to the prevailing party. Section 1 of Rule 142 of the Rules of
Court provides “Unless otherwise provided in these rules, costs, shall be allowed to
the prevailing party as matter of course, but the court shall have the power, for
special reasons, to adjudge that either party shall pay the costs of an action, or that
the same be divided, as may be equitable.”
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.
When partial payments allowed
As a rule, the debtor cannot compel the creditor to accept partial payments
because of the rule that the payment must be complete. However, partial payments
are allowed in the following cases:
• When there is a stipulation to that effect.
• 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.
The amount is considered liquidated if it has been fixed or can be easily
determined.
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.
Legal tender is that which a debtor may compel his creditor to accept in payment of
his debt, whether public or private. It is the money that is legally valid for the
payment of debts and that must be accepted for that purpose when offered.

Legal tender in the Philippines
Under Section 52 f Republic Act No. 7653 (The New Central Bank Act), as adjusted
by Circular No. 537 issued on July 18, 2006, the following are legal tender in the
Philippines:
a. One (1) sentimo, 5-sentimo, 10-sentimo, and 25-sentimo coins are legal tender
up to P100.00
b. One (1) Piso, 5-Piso and 10-Piso coins are legal tender up to P1,000.00
c. All bills are legal tender up to any amount.
Medium of payment
The law governing the medium of payment for debts in money is Republic Act 8183
which was approved on June 11, 1996. This law provides that “ (A)ll monetary
obligations shall be settled in the Philippine currency which is legal tender in the
Philippines. However, the parties may agree that the obligation or transaction shall
be settled in any other currency at the time of payment.”
Effect of delivery of promissory notes and other mercantile documents
The creditor cannot be compelled to accept promissory notes, checks or other bills
of exchange, or other mercantile documents because they are not legal tender. If
the creditor accepts them, their acceptance will not operate as payment of the
obligation, but will merely hold in abeyance whatever action the creditor intends to
take on them. The delivery of these documents will produce the effect of payment
only in the following cases:
a. When they have been cashed.
Cashing the check may be done either by presenting it to the bank against which it
was drawn or depositing it in the said bank or another bank and clearing it through
the clearing house of the central bank.
b. When through the fault of the creditor they have been impaired.
The impairment here may be physical, as when the creditor intentionally cancels the
instrument (Section 119, Negotiable Instruments Law), or constructive, such as
when the creditor was guilty of unreasonable delay in presenting the check for
encashment and the check could no longer be cashed because the bank has
become in solvent. In the latter case, however, it is necessary that the drawer’s
deposit should have been sufficient to meet the amount of the check.
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.
Inflation and extraordinary inflation
Inflation is a sharp sudden increase in money or credit or both without a
corresponding increase in business transactions. In inflation, since the value of
money decreases, its natural tendency is the substantial and continuing rise in the
general price level of goods and services.
Extraordinary inflation is understood to be any uncommon decrease in the
purchasing power of the currency which the parties could not have reasonably
foreseen and which has been due to war or the effect thereof, or any other unusual
force majeure or fortuitous event.
Deflation and extraordinary deflation
Deflation is the opposite of inflation. It is a sharp sudden decrease in money or
credit or both without a corresponding decrease in business transactions. In
deflation, since the value of money increases, its natural tendency is the decline in
the general price level of goods and services.
Extraordinary deflation is understood to be any uncommon increase in the
purchasing power of the currency which the parties could not have reasonably
foreseen and which has been due to war or the effect thereof, or any other unusual
force majeure or fortuitous event.
Basis of payment when there is an extraordinary inflation or deflation
In case an extraordinary inflation or deflation of the currency is stipulated should
supervene, the value of the currency at the time the obligation was constituted shall
be the basis of payment, unless the parties agreed otherwise. The value referred to
here as the purchasing power of the amount or its real worth at the time the
obligation was incurred.
Whether there is extraordinary inflation or extraordinary deflation supervening, the
amount to be paid can be determined by using the following formula:
M=(D/V)×D
Where:
M = amount to be paid at maturity
D = amount of the debt or obligation
V = value on date of maturity
When extraordinary inflation (or deflation) exists
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In order that the effects of extraordinary inflation (or deflation) are to be applied,
there should be an official pronouncement or declaration by competent authorities
of the existence of extraordinary inflation (or deflation) during a given period.
When the same amount is to be paid even in case of inflation or deflation
1) When the inflation or deflation is only ordinary.
2) When there was a stipulation that the same amount is to be paid even in case of
extraordinary inflation or deflation.
Article 1251. Payment should 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.
Where must payment be made
(1) If there is a stipulation, then in the place designated.
(2) If there is no stipulation –
• If the obligation is to give a determinate thing, wherever the thing might be at the
time the obligation was constituted.
• If the obligation is to give a generic thing or an obligation to do, then at the
domicile of the debtor.
Article 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.
Application of payment is the designation of the debt to which payment shall be
applied when the debtor owes several debts in favor of the same creditor.
Requisites of application of payment
(1) There must be two or more debts.
(2) The debts must be of the same kind.
(3) The debts are owed by the same debtor to the same creditor.
(4) All debts are due, except:
 When the parties have stipulated that payment may be
applied to a debt not yet due.
 When the application to a debt not yet due is made by the
party for whose benefit the term has been constituted.
(5) The amount being given in payment is not sufficient to cover all the
debts.
How application is made
1. The debtor who is given the preferential right to apply the payment designated
the debt to be paid.
2. If the debtor does not make the designation, the right is shifted to the creditor.
The creditor applies the payment by indicating the debt being paid in his receipt. If
the debtor accepts the receipt from the creditor, the debtor cannot complain, unless
there is a just cause for invalidating the contract.
This means that the application made by the creditor requires the consent of the
debtor. Once the debtor has accepted the receipt, he can no longer contest the
application unless there is a just cause for invalidating it such as when his consent
is vitiated by any of the vices of consent.
3. If neither the debtor nor the creditor makes the designation or application cannot
be inferred from the circumstances, payment shall be applied by operation of law as
follows:
• Payment shall be applied to the debt, among those due, which is the most
onerous to the debtor.
A debt is onerous if it is burdensome to the debtor. In determining whether a debt is
more onerous than another, the attendant circumstances must be considered. The
following are instances of more onerous debts:
a. An interest-bearing debt is more onerous than a non-interest-bearing debt.
b. A debt bearing a higher rate of interest is more onerous than one that bears a
lower rate of interest.
c. A debt secured by a mortgage, pledge or other security is more onerous than one
which is unsecured.
d. A debt with a penal clause is more onerous than one without a penal clause.
• If the debts are of the same nature and burden, payment shall be applied to all
due debts proportionately.
The application must be made when the payment is made by the debtor, not
afterwards.
An application of payment can no longer be revoked after it has been made.
Article 1253. If the debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered.
Payment of interest ahead of principal
When a debt produces interest and the debtor pays the creditor, the payment shall
be applied first to the interest, then any residue to the principal. This application is
obligatory; hence, the debtor cannot insist that the payment shall be credited to the
principal ahead of the interest, unless the creditor agreed. Applying the payment to
the principal ahead of the interest will be unfair to the creditor because the basis of
the computation of his interest earning will be reduced, while at the same time he
may remain unpaid or not fully paid of the interest that had accrued.
Article 1254. When the payment cannot be applied in accordance with the
preceding rules, or if application cannot 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.
When neither of the parties applies the payment
When neither the debtor nor the creditor applies the payment, application shall be
made by operation of law as follows:
1) If the debts are of different nature and burden, payment shall be applied to the
debt which is the most onerous to the debtor.
2) If the debts are of the same nature and burden, payment shall be applied to all of
them proportionately.
Article 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 cession, are made between the debtor
and his creditors shall be governed by special laws.
Payment by cession is the abandonment or assignment by the debtor of all his
properties in favor of his creditors so that the latter may sell them and recover their
claims out of the proceeds.
The cession or assignment operates only to authorize the creditors to sell the
debtor’s properties; hence, ownership of such properties is not transferred to them.
Unless otherwise agreed upon, the cession releases the debtor from his
responsibility only to the extent of the net proceeds of the things assigned.
Kinds of payment by cession
a. Voluntary or conventional – that which is agreed upon by the parties and which
requires the consent of all the creditors.
b. Legal – cession by operation of law.
Requisites of payment by cession
• There must be two or more creditors.
• The debtor must be insolvent either partially or completely.
• The debtor abandons all his properties except those that are exempt from
execution.
• The creditors accept the abandonment.
Distinctions between payment by cession and dation in payment
a. In payment by cession, there should be two or more creditors, while in dation in
payment, plurality of creditors is not required.
b. In payment by cession, the debtor is insolvent, while in dation in payment, the
debtor may not be insolvent.
c. Payment by cession affects all the debtor’s properties, except those that are
exempt from execution, while dation in payment affects only such properties as are
necessary to extinguish the debt.
d. In payment by cession, the creditors are authorized to sell only the debtor’s
properties, while in dation in payment, the creditor becomes the owner of the
properties given as payment.
e. In payment by cession, the debtor as a rule is not released totally from his
liabilities, while in dation in payment, the debtor as a rule is released from his
liabilities.
Article 1256. If the creditor to whom tender of payment has been refused 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.
15
Tender of payment is the act of the debtor of offering to the creditor what is due him
together with a demand that the creditor accept the same.
Consignation is the act of depositing the sum or thing due with the judicial
authorities whenever the creditor refuses without just cause to accept the same, or
in cases when the creditor cannot accept it.
Distinctions between tender of payment and consignation
a. Tender of payment is the antecedent of consignation, that is, an act preparatory
to consignation. Consignation is the principal, and from which are derived the
immediate consequences which the debtor desires or seeks to obtain.
b. Tender of payment me be extrajudicial, while consignation is necessarily judicial,
and the priority of the first is the attempt to make a private settlement before
proceeding to the solemnities of consignation.
Requisites for tender of payment and consignation to extinguish the obligation
1) There must be a valid tender of payment.
2) The creditor refuses without just cause to receive the payment.
3) The persons interested in the fulfillment of the obligation must be notified by the
debtor of his intention to deposit the sum or thing due with the judicial authorities.
4) The sum or thing due is deposited with judicial authorities.
5) The persons interested in the fulfillment of the obligation must again be notified
by the debtor that the consignation has been duly made.
When obligation is extinguished by consignation
The obligation is extinguished by the consignation of the sum or thing due through
any of the following means:
a. Acceptance by the creditor of the consignation.
b. Declaration by the judge that the consignation has been properly made.
When consignation may be made even without previous tender of payment
a. When the creditor is absent or unknown, or does not appear at the place of
payment.
b. When he is incapacitated to receive the payment at the time it is due.
c. When, without just cause, he refuses to give a receipt.
d. When two or more persons claim the same right to collect.
d. When the title to the obligation has been lost.
Article 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.
The consignation shall be ineffectual if it is not made strictly in consonance with
the provisions which regulate payment.
Prior notice before consignation
This is the first of two notices that debtor must give when he avails himself of
consignation.
[Refer to No. 2 (c) Article 1256]
Rules governing payment to be followed when consignation is to be made
The very object due must be the one deposited, not another.
[Refer to No. 2 (a) Article 1256]
Article 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.
How consignation made
Consignation is made by depositing the very thing due with the proper judicial
authorities. If the obligation consists of payment in money, the whole amount of the
obligation and the interest thereon must be deposited.
Second notice to person interested in the obligation
After the consignation has been made, notice must be given to the persons
interested in the obligation to the effect that the payment has been deposited in
court. This second notice is required to enable the creditor to withdraw the thing
deposited if he accepts the consignation without any protest.
Article 1259. The expenses of consignation, when properly made, shall be charged
against the creditor.
Who bears expenses of consignation
When properly made, the creditor shoulders the cost of consignation because the
same would not have been incurred had he accepted payment when it was first
tendered.
Article 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.
Article 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.
When obligation is extinguished
After the consignation has been duly made, the debtor may ask the judge to order
the cancellation of the obligation. The obligation shall be extinguished:
a. When the judge declares that the consignation has been properly made, or
b. When the creditor accepts the consignation.
Who bears risk of loss
Once the consignation is approved by the court or the creditor has accepted the
consignation, the creditor bears the risk of loss.
Debtor’s right to withdraw the sum or thing consigned
a. Before the acceptance by the creditor of the consignation or before the
declaration by the judge that the consignation has been properly made –
The debtor may withdraw the sum or thing consigned as a matter of right, i.e., the
creditor’s consent is not required. Such withdrawal produces the following effects:
1) The obligation shall remain in force.
2) The co-debtors, guarantors and sureties are not released.
3) The debtor shoulders the expenses.
b. After acceptance by the creditor of the consignation or the declaration by the
judge that the consignation has been properly made –
The debtor may withdraw the sum or thing consigned as a matter of privilege, i.e.,
the creditor’s consent is required. Such withdrawal produces the following effects:
1) The obligation shall be revived.
2) The creditor shall lose every preference which he may have over the thing.
3) The guarantors and sureties are released unless they consented. As regards the
co-debtors, they are not released from liability they being principal debtors.
However, their obligation shall become joint if it was previously solidary.
Article 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.
Article 1263. In an obligation to deliver a generic thing, the loss or destruction of
anything of the same kind does not extinguish the obligation.
A thing is considered lost when it perishes, or goes out of commerce, or disappears
in such a way that its existence is unknown or it cannot be recovered. Loss includes
the physical or legal impossibility of the service in which the obligation consists.
For loss to extinguish an obligation, it should occur after the constitution of the
obligation. If the loss occurred prior thereto, the obligation would not have any
subject matter and will be considered void.
Effect of loss of thing on obligation
a. Loss of a determinate thing
As a general rule, the loss of a determinate thing extinguishes the obligation. In the
following cases , however, the debtor shall be liable for damages despite the loss of
the thing.
1) When the loss is due to the fault of the debtor.
2) When the debtor has incurred in delay
3) When so provided by law, such as when the debtor has promised to deliver the
same thing to two or more persons who do not have the same interest.
4) When it is stipulated by the parties.
5) When the nature of the obligation requires the assumption of risk.
6) When the debt proceeds from a criminal offense unless the person who should
receive it refuses to accept it without just cause.
b. Loss of a generic thing
If the obligation is to deliver a generic thing, the loss or destruction of anything of
the same kind does not extinguish the obligation.
The exception is in the case of a “delimited generic thing”, i.e., a generic thing
whose source is defined or limited.
Article 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.
Effect of partial loss
If the part lost is so important in relation to the whole object that the obligation
would not have been established without it, the court may declared the
extinguishment of the obligation.
16
Article 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 a proof of 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.
Presumption of fault on the part of the debtor
The debtor is presumed to be at fault when the thing i lost while it is in his
possession. This presumption presupposes that the loss was due to the negligence
of the debtor; hence, he has the burden of proof that he was not negligent.
When presumption does not apply
The presumption that the debtor was at fault does not apply when the loss
occurred during an earthquake, flood, storm or other natural calamity.
Article 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.
Effect of impossibility of performance in personal obligations
The obligation of the debtor is extinguished when compliance is no longer possible,
without his fault, due to any of the following cases of impossibility.
a. Physical impossibility - when the act by its nature, can no longer be done, such
as when the debtor becomes physically incapacitated.
b. Legal impossibility - When the act can no longer be performed because it is
prohibited by law.
Article 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.
Effect of difficulty of performance in personal obligations
The debtor’s obligation will be extinguished, either totally or in part, if the service
has become so difficult as to be manifestly beyond the contemplation of the parties.
Article 1268. When the debt of a thing certain and determinate proceeds from a
criminal offenses, 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.
Effect of loss of object in criminal offense
If the obligation to give a determinate thing proceeds from a criminal offense, the
debtor shall be liable whatever may be the cause of the loss, even if it may be due
to fortuitous event. The only exception is when the creditor refuses without just
cause to accept it, in which case, he will be in delay (mora accipiendi) which will
exempt the debtor from liability.
Debtor’s remedy if creditor refuses to accept the thing
The debtor may consign the thing if the creditor refuses without just cause to
accept it. Until he has made the consignation, however, he is obliged to take care of
the thing with the diligence of a good father of a family.
Article 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.
Transfer of debtor’s right to creditor in case of loss
If the loss is caused by the act of a third person resulting in the extinguishment of
the obligation, the creditor shall have all the rights of action which the debtor may
have against the third person. The debtor need not assign his rights to the creditor
who acquires them by operation of law.
Article 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.
Condonation or remission is the gratuitous abandonment by the creditor of his right.
In plain language, this refers to the forgiveness of indebtedness. To extinguish the
obligation, the consent of the debtor is required.
Kinds of condonation or remission
As to amount or extent
Total – when the total obligation (both principal and accessory obligations) is
extinguished.
Partial – when only a part of the obligation, or only the accessory obligation is
remitted.
As to form
 Express – one made orally or in writing. It must, to be valid comply with the
formalities of donation, as follows:
• If the remission involves an immovable property, the remission and the
acceptance must be in a public instrument. The public instrument must specify the
property remitted and the value of the charges that the debtor (donee) must satisfy.
• If the remission involves a movable/personal property–
1. If the value of the property exceeds P5,000.00, the remission and the acceptance
must be in writing (public or private).
2. If the value of the property is P5,000.00 or less, the remission and the
acceptance may be in any form, i.e., oral or in writing (public or private). The
remission, however, if made orally, requires the simultaneous delivery of the thing or
the document representing the right remitted.
Implied – one inferred from the conduct of the parties, such as when the creditor
voluntarily delivers the private document evidencing the credit to the debtor.
As to date of effectivity
Inter vivos – one that takes effect during the lifetime of the donor.
Mortis causa – one that takes effect upon the death of the donor (creditor) and
partakes of the nature of a testamentary disposition, i.e., similar to a disposition
made by means of a will.
Requisites of condonation or remission
1) The obligation must be demandable at the time of the remission.
2) The cause or consideration must be the liberality of the creditor.
This is so because condonation is essentially gratuitous. It is not generally
presumed.
3) It must be accepted by the debtor.
4) It must not be inofficious.
The condonation is inofficious if it impairs the legitime, i.e., the portion of the estate
which of the law reserves for the compulsory heirs.
Article 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.
Presumption of remission
The delivery of a private documents evidencing a credit made voluntarily by the
creditor to the debtor implies the remission of the debt. This presumption, however,
is disputable; hence, the creditor is allowed to show that he has not renounced his
right to the debt, such as when he merely lent the document to the debtor so that
the latter may photocopy the same.
There is no implied remission, however, if what was delivered by the creditor to the
debtor is a public document evidencing the credit because a copy thereof is easily
available, being a public record, and may be used to prove the existence of the
credit. A private document becomes a public document if it is acknowledged before
a notary public.
When waiver is claimed inofficious
When the creditor or his heirs claim the remission to be inofficious, the debtor or
his heirs may show proof that the private document was delivered to them because
there was payment actually made to the creditor.
Article 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.
Presumption of voluntary delivery
When the private document evidencing the debt is found in the possession of the
debtor, there is a presumption that the creditor delivered it voluntarily to the debtor.
This presumption, however, is disputable; hence, the creditor may prove otherwise.
Article 1273. The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force.
Effect of remission of the principal obligation
The remission of the principal obligation shall extinguish all accessory obligations
because the latter cannot stand by themselves. This is in accordance with
“accessory follows the principal “ rule.
Effect of remission of accessory obligation
The remission of the accessory obligation does not carry with it the remission of
the principal obligation since the latter can exist independently of the former.
Article 1274. It is presumed that the accessory obligation of pledge has been
remitted when the thing pledged, after its delivery to the creditor, is found in the
possession of the debtor, or of a third person who owns the thing.
Remission of pledge
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There is a disputable presumption that the accessory contract of pledge is
extinguished when the thing pledged is found in the possession of the debtor or of a
third person who owns the thing. This is so because for a contract of pledge to be
perfected, the thing object of the pledge should be placed in the possession of the
creditor or of a third person by common agreement. The principal obligation,
however, remains, although the pledge may have been extinguished.
Article 1275. The obligation is extinguished from the time the characters of creditor
and debtor are merged in the same person.
Confusion or merger is the meeting in one person of the characters of debtor and
creditor. The obligation here is extinguished because it is now absurd for the
creditor to claim payment from himself.
Article 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.
Effect of the merger in the person of the principal debtor or creditor when there is a
guarantor
Merger in the person of the principal debtor or creditor benefits the guarantors.
Here both the principal obligation and the guaranty are extinguished following the
“accessory follows the principal “ rule.
Effect of the merger in the person of the guarantor
Merger in the person of the guarantor extinguishes the guaranty but not the
principal obligation because the latter can stand independently of the former.
Article 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.
Merger in joint obligation
In joint obligation, merger taking place in the person of one of the joint debtors or
joint creditors extinguishes only the share corresponding to the debtor or creditor in
whom the two characters occur.
Merger in solidary obligation
Merger in one of the solidary debtors or solidary creditors extinguishes the whole
obligation. The solidary debtor in whom the characters of debtor and creditor concur
can demand reimbursement from his co-debtors. In the case of the solidary
creditors, he shall be liable to his co-creditors for the share corresponding to each
of them.
Article 1278. Compensation shall take place when two persons, in their own right,
are creditors and debtors of each other.
Compensation takes place when two persons, in their own right, are creditors and
debtors of each other. It is a mode of extinguishing obligations when two persons in
their capacity as principals are mutual debtors and creditors of each other with
respect to equally liquidated and demandable obligations to which no retention or
controversy has been timely commenced and communicated by third parties.
Kinds of compensation
As to amount or extent
Total – when the debts are of the same amount.
Partial – when the debts are of different amounts.
As to cause or origin
Legal -one that takes place by operation of law.
Voluntary or conventional – one that takes place by agreement of the parties.
Judicial – one that is ordered by the court.
Facultative – one that may be claimed or opposed by one of the parties.
Article 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;
(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.
Application of provision
The provision refers to legal compensation or compensation by operation of law.
Requisites of legal compensation
• That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other.
• That both debts consists 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.
• That the two debts be due.
• That both debts be liquidated and demandable.
• That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.
Article 1280. Notwithstanding the provisions of the preceding article, the guarantor
may set up compensation as regards what the creditor may owe the principal
debtor.
Right of guarantor
Under Article 1279, compensation is proper if each one of the debtor’s is bound
principally and that he is at the same time a principal creditor of the other. Article
1280 is an exception because a guarantor, although bound only subsidiarily, may
set up compensation as regards what the creditor may owe the principal debtor.
Article 1281. Compensation may be total or partial. When the two debts are of the
same amount, there is a total compensation.
Kinds of compensation as to amount
• Total – when the debts are of the same amount
• Partial – when the debts are of different amounts
The provision applies to all kinds of compensation be they legal, conventional,
judicial or facultative.
Article 1282. The parties may agree upon the compensation of debts which are not
yet due.
Voluntary or conventional compensation
When not all the requisites of legal compensation are present, such as when one
or both debts are not yet due, compensation may still take place by the agreement
of the parties.
Article 1283. If one of the parties to a suit over an obligation has a claim from
damages against the other, the former may set it off by proving his right to said
damages and the amount thereof.
Judicial compensation or set-off
Ordered by the court. The party who has claim for damages must plead them in
his counterclaim and show proof that he is entitled to them.
Article 1284. When one or both debts are recessible or voidable, they may
compensated against each other before they are judicially rescinded or avoided.
Compensation when the debt or debts are rescissible or voidable
Compensation takes place although one or both debts are rescissible or
voidable since they are valid until rescinded or avoided by decree of court.
Effect if the rescissible or voidable debt is rescinded or avoided
If the rescissible debt is rescinded or the voidable debt is avoided or annulled, the
compensation that had taken place will be cancelled.
Article 1285. The debtor who has consented to the assignments 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.
Assignment of credits is a contract whereby a person (assignor) transfers his
credits, right or action against a third person to another (assignee) for a
consideration certain in money or its equivalent.
Compensation when the credit right is assigned
a. The assignment was made with the consent of the debtor where:
 The debtor did not reserve his right to the compensation.
 The debtor reserved his right to the compensation.
b. The assignment was communicated to the debtor but the debtor did not consent
to it.
c. The assignment was made without the knowledge of the debtor.
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Article 1286. Compensation takes place by operation of law, even though the debts
may be payable at different places, but there shall be an indemnity fro expenses of
exchange or transportation to the place of payment.
Legal compensation to take place although debts are payable at different places
Although debts are payable at different places, legal compensation will take place
but there shall be indemnity for expenses of exchange or transportation to the place
of payment.
Article 1287. Compensation shall not be proper when one of the debts arises from a
depositum or from the obligations of a depository 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.
Article 1288. Neither shall there be compensation if one of the debts consist in civil
liability arising from a penal offense.
I. When legal compensation is prohibited
The provision applies to cases whereby only one party has the right to claim or
oppose the compensation. This is known as facultative compensation.
II. The following are cases of facultative compensation (because legal
compensation cannot take place):
• When one of the debt arises from a depositum or from the obligations of a
depositary.
• When one of the debts arises from the obligations of a bailee in commodatum.
• When one of the debts arises from a claim for support by gratuitous title.
• When one of the debts consists in civil liability arising from a criminal offense.
Article 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.
Rules on application of payment
If a person should have against him several debts which are susceptible of
compensation, the rules on application of payments from Article 1252 to 1254 shall
apply to the order of the compensation.
Article 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.
When legal compensation takes place
If all the requisites mentioned in Article 1279 are present, legal compensation
automatically takes place. This compensation takes effect:
1. Up to their concurrent amount.
If the debts are not of the same amount, the balance still subsists as a debt.
2. Although the creditors and debtors are not aware of the compensation.
This does not apply, however, if there was a valid waiver of the compensation.
Legal compensation operates even against will of interested parties and even
without their consent. Such compensation takes effect, ipso jure (which means “ by
the law itself”); its effect arise on the very day on which the requisites concur.
Article 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.
Novation is the modification or extinguishment of an obligation by another, either by
changing the object or principal condition, substituting the person of the debtor, or
subrogating a third person in the rights of the creditor.
Novation serves two functions – one is to extinguish an existing obligation, the other
to substitute a new in its place.
Requisites of novation
a. There must be a previous valid obligation.
b. There must be an agreement between the parties to modify or extinguish the
obligation, except in the following:
• When the person of the debtor is changed, which can be made even if it is against
the will of the debtor.
• When another person is subrogated in the place of the creditor:
- When a creditor pays another creditor who is preferred even without the debtor’s
knowledge.
- When without knowledge of the debtor, a person interested in the obligation pays,
without prejudice to the effects of confusion as the latter’s share.
a) The extinguishment of the old obligation.
b) The validity of the new obligation.
Kinds of novation
 According to object or purpose
• Real or objective – novation by changing the object or principal condition.
• Personal or subjective – novation by change of the parties (debtor or creditor)
- substituting the person of the debtor, which may be by expromision or delegacion
- subrogating a third person in the rights of the creditor, which may be conventional
or legal.
• Mixed – change of object and parties.
According to form
• Express – novation declared in unequivocal terms.
• Implied – when the old and the new obligation are on every point incompatible with
each other.
According to extent
• Total or extinctive – when the old obligation is totally extinguished. Extinctive
novation results either by changing the object or principal conditions (objective or
real), or by substituting the person of the debtor or subrogating a third person in the
rights of the creditor (subjective or personal)
• Partial or modificatory – when the old obligation remains in force except as it has
been modified; also called imperfect or improper novation.
Article 1292. In order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared is unequivocal terms, or
that the old and the new obligations be in every point incompatible with each other.
Express novation
This is a novation declared in unequivocal terms, i.e., novation by express
declaration of the parties.
Implied novation
This is a novation where the old obligation and the new obligation are on every
point incompatible with each other.
Article 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge 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.
Article 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 obligation shall not give
rise to any liability on the part of the original debtor.
Article 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 he delegated his debt.
Kinds of novation by substitution of the person of the debtor
1) Expromision – substitution of debtors initiated by a third person who assumes the
obligation with the creditor’s consent
Requisites of expromision
a. The initiative must come from a third person who becomes the new debtor.
b. The new debtor and the creditor must give their consent to the substitution. (For
the original debtor, he may or may not give his consent to the substitution.)
2) Delegacion – substitution of debtors initiated by the debtor himself where a third
person assumes the obligation with the creditor’s consent.
Requisites of delegacion
a. The initiative must come from the original debtor.
b. All the parties (the original debtor, the new debtor and the creditor) must give
their consent.
c. The original debtor must be released from his obligation.
Distinctions between expromision and delegacion
1. Expromision is initiated by a third person, while delegacion is initiated by the
original debtor.
2. Expromision may be made without the knowledge or against the will of the
original debtor or with his consent, while delegacion is always with the consent of
the original debtor because it is he himself who initiates the substitution. (This,
expromision may take place although only the new debtor and the creditor gave
their consent, while delegacion requires the consent of original debtor, the new
debtor and the creditor.)
3. In expromision, if the substitution was with the consent of the original debtor, the
new debtor making the payment can recover what he has paid and shall be entitled
to subrogation, but if the substitution was without the knowledge or against the will
of the debtor he can only recover the amount beneficial to the debtor. In delegacion,
the new debtor making the payment shall always have the right to recover what he
has paid from the original debtor and shall be entitled to subrogation.
4. In expromision, the new debtor’s insolvency or non-fulfillment of the obligation
shall not give rise to any liability on the part of the original debtor. In delegacion, the
new debtor’s insolvency shall not revive the action of the creditor against the
original debtor, except when the insolvency was already existing and of the public
knowledge, or known to the original debtor, when he delegated his debt.
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Rule in case of insolvency of, or non-fulfillment of the obligation by, the new debtor
in expromision.
Under Article 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 obligation shall not
give rise to any liability on the part of the original debtor.”
* Suppose the substitution was with the knowledge or consent of the original debtor,
does it follow that the new debtor’s insolvency or non-fulfillment of the obligation will
give rise to liability on the part of the original debtor?
The weight of opinion is it, does not. If in delegacion the original debtor cannot
be held liable for the insolvency of the new debtor (except when the insolvency was
already existing and of the public knowledge, or known to the debtor, when he
delegated his debt), with more reason should the original debtor be not held liable if
he himself did not initiate the substitution and that he merely gave his consent
Secondly, making the original debtor liable not only for the insolvency of the new
debtor but also for his non-fulfillment of the obligation in case of expromision will be
enlarging the liability of the original debtor and will put him in a situation more
disadvantageous than in delegacion.
Article 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.
Effect of novation on accessory obligations
If the principal obligation is extinguished by reason of novation, accessory
obligations are also extinguished. This is accordance with “ the accessory follows
the principal” rule.
When accessory obligations not extinguished by novation.
a. When the accessory obligation was stipulated in favor of third persons who did
not give their consent to the novation. (stipulation pour autrui)
b. When there was a stipulation that the accessory obligations will subsist
notwithstanding the novation.
c. When the novation is one where a third person is subrogated in the rights of the
creditor.
Article 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.
Effect if new obligation is void
One of the requisites of novation is that the new obligation must be valid and
effective. So if the new obligation is void, the novation is likewise void. In such a
case, the original one shall subsist unless the parties intended that it shall be
extinguished in any event.
Article 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.
Effect if old obligation is void
One of the requisites of novation is that the old obligation must be valid. This, if
the old obligation is void, it does not exist and so there is nothing to novate.
Accordingly, neither the old nor the new obligation may be demanded.
Effect if old obligation us merely voidable
If the old obligation was voidable and has not yet been annulled, the novation is
valid provided annulment may be claimed only by the debtor or when ratification
validates acts which are voidable. This is so because the defect of the old obligation
is deemed cured.
Article 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.
Effect of novation on condition of the obligation (Article 1299)
Article 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.
Article 1301. Conventional subrogation of a third person requires the consent of the
original parties and of the third person.
Article 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.
Article 1303. Subrogation transfers to the person subrogated the credit with all the
rights thereto appertaining, either against the debtor or against third persons, be
they guarantors or possessors of mortgages, subject to the stipulation in a
conventional subrogation.
Subrogation is the substitution of another person in the place of the creditor, so that
the person in whose favor it is exercised succeeds to the right of the creditor in
relation to the debt. The transferee acquires all the rights and actions of the creditor
against the debtor and the third persons subsidiarily liable such as guarantors,
mortgagors and pledgors.
Kinds of subrogation
Conventional subrogation – one that takes place by agreement of the original
parties and the third person. This must be clearly established in order that it may
take effect.
Legal subrogation - one that takes place by operation of law. It is presumed that
there is legal subrogation in the following cases:
• When a creditor pays another creditor who is preferred, even without the debtor’s
knowledge.
• When a third person, not interested in the obligation, pays with the express or tacit
approval of the debtor.
• 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.
Article 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.
Partial subrogation
In case partial payment is made by the third person to the creditor, the third
person shall be subrogated in the rights of the creditor. However, the creditor who
received the partial payment shall be given preference over the third person who
made the payment in the remaining assets of the debtor in case the debtor has no
sufficient assets to pay both debts.
CONTRACTS
Article 1305. A contract is a meeting of minds between two persons where by one
binds himself, with respect to the other, to give something or to render some
service.
Concept
For a contract exist, there should be a conformity of wills between the parties and
must create obligations that are demandable. An agreement that produces
obligations that are not enforceable in a court of justice is not a contract. If the
contract is reduced into writing, the writing is not the contract itself but only the
written evidence of it; there may be a contract although there is no writing
evidencing it.
Parties to a contract
The term “persons” actually refers to the parties to the contract. The number of
parties to a contract is not limited to two, as there are contracts which have more
than two parties, such as in the case of tripartite and multipartite contracts. Each
party to a contract may also be composed of more than one person, such as when
two or more persons are collectively known as one party.
A person may be a natural person or human being, or an artificial person like a
partnership or a corporation. Thus, a contract maybe entered into between two
natural persons, between a natural person and a corporation or a partnership, or
between a partnership and another partnership, or between a corporation and
another corporation, or between a partnership and a corporation.
Elements of a contract
a. Essential elements – those without which there will be no contract.
1) Consent of the contracting parties.
2) Object retain which is the subject matter of the contract.
3) Cause of the obligation which must be established.
If the contract is a real contract, there should also be a delivery of the object, and if
it is formal or solemn contract, the contract must be in the form provided by law,
such as public instrument, for its perfection. In such cases, the delivery of the object
or the observance of the form, is also an essential element of the contract.
b. Natural elements – those found in certain contracts and are presumed to exist,
unless set aside or suppressed by the parties (such as warranty against eviction
and warranty against hidden defects in a contract of sale).
c. Accidental elements – those that refer to particular stipulations that may be
agreed upon by the parties (such as the terms of payment, interest rate and place
20
of payment). They may be present or absent depending on whether or not the
parties have stipulated upon them.
Classification contracts
a. According to perfection or formation
1) Consensual – those that are perfected by the mere consent of the parties (such
as sale, barter and lease).
2) Real – those that are perfected by the delivery of the object of the contract (such
as depositum, pledge and commodatum).
3) Formal or solemn – those that must be in the form provided by law so that they
may be perfected (such as the donation of an immovable which, together with the
acceptance of donee, must be in a public instrument).
b. According to cause
1) Onerous – those where there is an exchange of valuable consideration (such as
sale, lease and barter). For each contracting party, the cause is the prestation or the
promise of a thing or service by the other.
2) Gratuitous – those where one party receives no equivalent consideration (such
as donation and commodatum). These contracts are referred to as contracts of pure
beneficence, the cause of which is the liberality of the benefactor.
3) Remunerative or remuneratory – those where one prestation is given for a
benefit or service previously rendered. The cause of these contracts is the service
or benefit remunerated.
c. As to form
1) Express – one which the terms are fully and explicitly stated in words, whether
oral or written.
2) Implied – one that can be inferred from the conduct of the parties.
d. According to importance or dependence of one upon another
1) Principal – one that can stand independently by itself (such as sale, barter, lease
and loan).
2) Accessory – one whose existence depends upon another contract (such as
pledge and mortgage which are dependent upon a principal contract such as loan).
3) Preparatory – one which serves as a means by which other contracts may be
entered into (such as agency, partnership and contract to sell).
e. According to name or designation
1) Nominate – those that have a special name under the law (such as sale, lease,
barter and partnership).
2) Innominate – those that do not have a special name under the law.
f. According to risk or fulfillment
1) Commutative – those where the parties give equal or almost equal values (such
as sale and barter); hence, there is real fulfillment.
2) Aleatory – those whose fulfillment depends upon chance; thus, the values given
by the parties vary because of the risks involved. (An example is an insurance
contract.)
g. According to the parties obligated
1) Unilateral – those where only one of the parties is obligated to give or do
something (such as commodatum).
2) Bilateral or synalagmatic – those where both parties are required to give or do
something (such as sale and barter). They may be reciprocal or non-reciprocal.
h. According to subject matter
1) Contracts involving things (such as sale and barter).
2) Contracts involving rights (such as usufruct and assignment of credits).
3) Contracts involving services (such as agency and lease of service).
i. According to the time of fulfillment
1) Executed – one that has been fully performed on both sides.
2) Executory – one that has not been performed.
j. According to the number of persons physically entering into the contract
1) Ordinary – those where the parties are represented by different persons (such as
sale and barter).
2) Auto-contracts – those where only one person represents the e two opposite
parties to the contract (such as when an agent lends his money to the principal
whom he represents as borrower.
k. According to the number of persons who participated in the drafting and
preparation of the contract
1) Ordinary – one where both parties participated in the preparation of the contract
(such as a deed of sale prepared by both parties).
2) Contract of adhesion – one where only one party prepared the contract (such as
an insurance contract).
It is so-called because its terms are prepared by only one party, while the other
party merely affixes his signature signifying his adhesion thereto.
A contract of adhesion is one in which one of the parties imposes a ready-made
form of contract, which the other party may accept or reject, but which the latter
cannot modify. It gives no room for negotiation and deprives the latter the
opportunity to bargain on equal footing. It presupposes that the party adhering to
the contract is a weaker party. The participation of the weaker party is reduced to
the alternative to take it or to leave it. Thus, adhesion contracts are viewed as traps
for the weaker party whom the courts of justice must protect.
Stages of a contract
a. Preparation or conception – this involves preliminary negotiations and bargaining
and discussion of terms and conditions, with no arrival yet of a definite agreement.
b. Perfection or birth – the point when there is a meeting of minds between the
parties on a definite subject matter and a valid cause.
c. Consummation or death or termination – this occurs when the parties fulfill or
perform the terms agreed upon in the contract, culminating in the extinguishment
thereof.
Article 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.
Principle of liberty (autonomy) of contracts or freedom to stipulate
The right to enter into a contract freely is one of the liberties granted to the people.
Having the liberty to contract, the contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient. This
freedom, however, is not absolute. It is subject to the limitation That's such
stipulation, clauses, terms and conditions are not contrary to law, morals, good
customs, public order or public policy. Any stipulation, clause, term or condition to
law, morals, good customs, public order or public policy is void.
Limitations on the freedom to contract
Law – the law which the stipulations in the contract must not contravene should be
one that is mandatory and prohibitive as its intention is to promote order and
maintain harmony. If the law is merely discretionary, it need not be complied with.
Contracts must respect the law because the law is deemed incorporated in the
contract.
Thus, a stipulation that the creditor shall appropriate for himself the thing pledged or
mortgaged upon failure of the debtor to pay at maturity (pactum commissorium) is
void for being contrary to law. Likewise, a stipulation in a mortgage contract
providing for a specified price below which the mortgaged property is not supposed
to be sold at the foreclosure sale is void for being contrary to law.
Morals – relate to the generally accepted standard of rightness of human conduct.
Thus, an agreement by the debtor to work as servant without pay until he could find
money to pay the debt is void for being contrary to morals as this amounts to
involuntary servitude. An agreement between a man and woman to live together as
husband and wife without the benefit of marriage being contrary to morals is
likewise void.
Good customs - refers to a rule of conduct formed by repetition of acts, uniformly
observed (practiced) as social rule, legally binding and obligatory. Thus, an
agreement whereby a son will not greet his father when the latter comes home is
contrary to good customs and therefore void.
Public order and public policy – signifies the weal, and includes public safety. It is
synonymous with public policy. Public policy is, however, broader, as it refers not
only to public safety but to considerations which are moved by the public good. A
contract is contrary to public policy “if it has a tendency to be injurious to the public
or against the public good.”
The following agreements have been held to be contrary to public policy and are
considered void:
1) An agreement to hide a crime, to suppress evidence and to stifle the prosecution
of the offender is void because the public has interest in the prosecution and
punishment of criminals.
2) An agreement that encourages the commission of fraud.
3) An agreement exempting a carrier from liability for gross negligence.
4) An agreement that constitutes an undue or unreasonable restraint of trade, such
as the prohibition to engage in any business within a period of five years after
leaving the services of the employer.
5) An agreement not to compete without any restriction as to the time and place, as
this will considered in restraint of trade.
Article 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.
An innominate contracts is one that has no particular name under the law. It is a
contract that does not follow any prescribed class, but is recognized by law.
Kinds of innominate contracts
a. Do ut des (I give and you give)
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b. Do ut facias (I give and you do)
c. Facio ut des (I do and you give)
d. Facio ut facias (I do and you do)
Rules governing innominate contracts
a. Stipulations of the parties
b. Titles I and II of Book IV – Obligations and Contracts
c. Rules governing the most analogous nominate contracts
d. Customs of the place
Article 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
Principle of mutuality of contracts
Since it is the result of an agreement, a contract must bind both contracting parties.
After a party has voluntarily entered into a contract, he cannot revoke or renounce it
without the consent of the other. The mere fact that he had made a poor bargain is
not a ground to set aside the contract. A party cannot unilaterally disregard the
contract because its validity or compliance cannot be left to the will of one of them.
The binding effect of a contract on both parties is based on the principle that
obligations arising from contracts have the force of law between the contracting
parties, and there must be mutuality between them based essentially on their
equality under which it is repugnant to have one party bound by the contract while
leaving the other free therefrom. The ultimate purpose is to render void a contract
containing a condition which makes its fulfillment dependent solely upon the
uncontrolled will of one of the contracting parties. Thus, if the fulfillment of the
suspensive condition of an obligation depends upon the sole will of the debtor, the
obligation and the condition are void since compliance is dependent upon him
alone.
Article 1309. The determination of the performance may be left do a third person,
whose decision shall not be binding until it has been made known to both
contracting parties.
Article 1310. The determination shall not be obligatory If it is evidently inequitable.
In such case, the court shall decide what is equitable under the circumstances.
Determination of performance by a third person
An agreement whereby the determination of the performance of a contract is left to
a third person is valid. The decision of the third person shall be binding upon the
parties after it has been made known to both of them, except when it is evidently
inequitable. In such a case, the court shall decide what is equitable under the
circumstances.
Article 1311. Contracts take effect only between the contracting 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 third person, he may
demand its fulfillment provided he communicated his acceptance to the obligor
because 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.
Article 1312. In contracts creating real rights, third persons who come into the
possession of the object of the contracts are bound thereby, subject to the
provisions of the Mortgage Law and the Land Registration laws.
Article 1313. Creditors are protected in cases of contracts intended to defraud them.
Article 1314. Any third person who induces another to violate his contract shall be
liable for damages to the other contracting party.
Principle of relativity of contracts
Under this principle, a contract is generally effective only between the parties, their
assigns and their heirs. Accordingly, only the parties can maintain an action to
enforce the rights and obligations arising from the contract. In other words, a
contract cannot be enforced by or against a person of which he was not a party. As
regards obligations, the heirs shall not be liable beyond the value of the property
they receive from the decedent.
When a contract does not take effect among the assigns and heirs
a) When the rights and obligations arising from the contract are not transmissible by
their nature.
b) When the parties stipulated against the transmission.
c) When the law prohibits the transmission of the rights and obligations.
When a contract may be enforced by or against a third person
a) If the contract should contain some stipulation clearly and deliberately conferring
a favor upon. A third person (stipulation pour autrui). A mere incidental benefit or
interest of person is not sufficient.
In order that the third person can demand the fulfillment of the stipulation, he must
communicate his acceptance to the obligor before its revocation. Acceptance may
be in the form of demand.
b) In contracts creating real rights, third persons who come into the possession of
the object of the contract are bound thereby, subject to the provisions of the
Mortgage Law and Land Registration laws.
c) In contracts intended to defraud creditors.
d) If the contract has been violated by a party by reason of the inducement of a third
person.
Here, the third person who induced the party to violate his contract shall be liable to
the other contracting party although such third person was not a party to it. The
basis of liability of the third person is unwarranted interference with the contract.
The third person, however, cannot be held liable for more than the liability for
damages of the party induced to violate his contract. At most, the liability of both
may be solidary because of the commission of the tort.
Article 1315. Contracts are perfected by mere consent, and from the 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.
Article 1316. Real contracts, such as deposit, pledge and commodatum, are not
perfected until the delivery of the object of the obligation.
Principle of consensuality of contracts
Under this principle, contracts are perfected by mere consent, i.e., when there is a
meeting of minds with respect to the subject matter and the cause of the contract.
The following, among other contracts must, however, comply with additional
requirements before they can be perfected:
a) Real contracts – these are contracts that require the delivery of the object for
their perfection, such as deposit, pledge and commodatum.
1) Deposit – this is a contract that is constituted from the moment a person receives
a thing belonging to another, with the obligation of safely keeping it and returning
the same.
2) Pledge – this is a contract whereby a person delivers a movable property as
security for the payment of a principal obligation.
3) Commodatum – this is a 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.
b) Formal or solemn contracts – these are contracts that must be in the form
provided by law for their perfection, such as the donation of a movable property
whose value exceeds P5,000.00, which, together with the acceptance of the donee,
must be in writing.
Principle of obligatory force of contracts and compliance in good faith;
consequences of perfection
Related to the principle of consensuality is the principle of obligatory force of
contracts and their compliance in good faith. Under this principle, obligations arising
from contracts shall have the force of law between the contracting parties and
should be complied with in good faith. Upon the perfection of the contract, the
parties are bound by the following:
a. The fulfillment of what has been expressly stipulated.
b. All the consequences which, according to their nature, may be in keeping with
good faith, usage and law.
Article 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 in whose behalf it has been
executed, before it is revoked by the other contracting party.
Contracts entered into in the name of another
As a general rule, no one may contract in the name of another. The exceptions the
following:
a. When he is authorized by the party in whose name the contract was entered into,
such as in a contract of agency.
b. When he has by law a right to represent the person in whose name the contract
was entered into.
Effect if contract is unauthorized
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 in whose behalf it has been
executed, before it is revoked by the other contracting party.
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Ratification refers to the adoption by a person of an act performed by another.
Ratification cleanses the contract from all its defects from the moment the contract
was entered into. Thus, there is a retroactive effect, which means that it was as if
the contract was authorized from the start.
Article 1318. 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.
Additional essential elements for certain contracts
The three elements mentioned in the preceding number refer to the essential
requisites of a consensual contracts. In real contracts and formal or solemn
contracts, the following, in addition to the said three elements, must be present in
order for the contract to be perfected:
a. Real contracts – the object of the contract must be delivered.
b. Formal contracts – the object must be in the form provided by law, such as a
written instrument which may either be public or private.
Article 1319. Consent is manifested by the meeting of the offer and the acceptance
upon the thing and the cause which are to constitute the contract. The offer must be
certain and the acceptance absolute. A qualified acceptance constitutes a counter-
offer.
Acceptance made by letter or telegram does not bind the offerer except from the
time it came to his knowledge. The contract, in such a case, is presumed to have
been entered into in the place where the offer was made.
Consent is the manifestation of the meeting of the offer and the acceptance upon
the thing and the cause which are to constitute the contract. It is the conformity of
wills of one contracting party with that of another or others, upon the object and
terms of the contract. The area of agreement must extend to all the points that the
parties deem material, or there is no consent at all.
Characteristics of consent
a. The consent must be given by two or more parties.
b. It must be intelligently given.
Consent is intelligently given if the parties are capable or capacitated. Thus, if one
party is insane, the contract is voidable because an insane person “is not
possessed of mind and reason equal to a full and clear understanding of his act,” or
“there is a complete absence of power to discern”. For consent to be intelligent,
there should be an exact notion of the matter to which it refers.
c. It must be freely, voluntarily and consciously given.
Thus, if consent is given because of violence, intimidation or undue influence, the
contract is voidable because their employment results in the defect of the will; or if
by means of fraud or mistake, the employment of the fraud or the causing of the
mistake results in the defect in the intellect.
d. The person giving his consent should not be suffering from any legal disability, as
this would render the contract void, as in the case of husband and wife who are
generally prohibited by law from selling property to each other.
Requisites for the meeting of minds
a. The offer must be certain.
An offer is a proposal to enter into a contract. It is the signification by one person to
another of his willingness to enter into a contract with him on the terms specified in
the offer. A mere statement of willingness to enter into negotiations is not an offer.
The person making the proposal or offer is known as the offerer, while the person to
whom it is made is known as the offeree.
The offer must be definite, complete and intentional. It must be certain so that the
liability of the parties may be fixed. If it is indefinite, its acceptance will not give rise
to a contract.
b. The acceptance must be absolute.
Acceptance is the act of agreeing either expressly or by conduct to the offer of
another so that a contract is concluded and the parties become legally bound.
The acceptance must be absolute. To conclude an agreement, the acceptance
must in every respect meet and correspondent with the terms and conditions of the
offer. This requirement on acceptance is referred to as the “ mirror image rule” which
provides that the terms of the acceptance must exactly match or “mirror” the terms
of the offer.
An acceptance that varies or modifies any term or condition of the offer becomes a
qualified acceptance. If the acceptance is qualified, there is no concurrence of
minds. There is merely a counter-offer which, if accepted, will produce a contract on
the terms of the counter-offer and not on the original offer. A qualified acceptance
has the effect of rejecting the offer.
Acceptance by letter or telegram
a. When it binds the offerer
Acceptance by letter or telegram binds the offerer from the time it comes to his
knowledge. Knowledge may be actual or constructive. In the case of constructive
knowledge, this takes place when the letter or telegram is received in the house or
office of the offerer by a person of reasonable discernment.
b. Place of perfection
 If the acceptance is by letter or telegram, the contract is deemed to have been
perfected in the place where the offer was made. It means that any question
concerning the contract shall be governed by the laws of the place where the offer
was made and which was prevailing at such time.
c. Effect of revocation of offer or acceptance
• If the offer was revoked before the offerer came to know of the acceptance, no
contract is perfected because at the time of the alleged meeting of minds, the
parties were no longer of one mind.
• If the acceptance was given but it is revoked by the offeree before the acceptance
came to the knowledge of the offerer, no contract is likewise perfected because at
the time of the supposed meeting of minds, the parties were no longer of one mind.
Article 1320. An acceptance may be express or implied.
Form of acceptance
a. Express – this may be oral, or written such as by letter or telegram.
b. Implied – this can be inferred from the conduct of the offeree showing his
intention to accept.
Article 1321. The person making the offer may fix the time, place, and manner of
acceptance, all of which must be complied with.
Time, place and manner of acceptance
The person making the offer may fix the time, place and manner of acceptance, all
of which must be complied with. If the acceptance is not in conformity with what the
offerer wants, the acceptance becomes a counter-offer or counter-proposal.
Article 1322. An offer made through an agent is accepted from the time acceptance
is communicated to him.
The provision applies when both the offer and the acceptance were made through
an agent. The knowledge of the agent of the acceptance is deemed knowledge of
the principal because the agent is merely an extension of the personality of the
principal.
If the offer was made by the principal, but the acceptance was communicated to the
agent, such knowledge by the agent results in the perfection of the contract if the
agent was duly authorized to receive the acceptance. Otherwise, the contract is not
perfected until the agent has communicated the acceptance to the principal.
Article 1323. An offer becomes ineffective upon the death, civil interdiction, insanity,
or insolvency of either party before acceptance is conveyed.
When offer becomes ineffective
If the offerer has made an offer, such offer becomes ineffective upon his or the
offeree’s death, civil interdiction, insanity, or insolvency before the offerer comes to
know of the acceptance.
Under our laws, the death of a person extinguishes his civil personality; civil
interdiction, an accessory penalty for the commission of an offense, deprives the
offender during the time of his sentence of the right to manage his property and to
dispose of it by any act or conveyance inter vivos; insanity deprives a person of his
legal capacity to act; and insolvency, modifies or limits his capacity to enter into a
contract.
Other instances when offer becomes ineffective
a) Lapse of the period given to the offeree to signify his acceptance of the offer.
b) Destruction or loss of the subject matter of the contract.
c) Supervening illegality of the object of the contract or of the object itself by reason
of legislation subsequent to the offer.
d) Acceptance which deviates from the terms of the offer, or rejection by the offeree
of the offer.
e) Revocation by the offerer of the offer.
Article 1324. When the offerer has allowed the offeree a certain period to accept,
the offer may be withdrawn at any time before acceptance by communicating such
withdrawal, except when the option is founded upon a consideration, as something
paid or promised.
Option contract
An option is a contract whereby the offerer grants the offeree the privilege to accept
the offer within a certain period of time. The period granted to the offeree within
which to accept the offer is called option period, while the money paid or promised
to be paid by the offeree as consideration for the option is known as option money,
which is separate and distinct from the purchase price. The cause or consideration
for the option may, however, be the liberality of the offerer.
When the offer may be withdrawn if there is an option
a) If the option is not founded upon a valuable consideration, the offer may be
withdrawn at anytime before acceptance by communicating such withdrawal.
b) If the option is founded upon a valuable consideration, i.e., is there was option
money paid or promised to be paid by the offeree, the offer may not be withdrawn
23
before the lapse of the option period. Otherwise, the offerer can be held liable for
damages for breach of contract.
Earnest money is the money given as part of the purchase price and as proof of the
perfection of the contract of the sale. It is likewise a proof of commitment by the
buyer to the contract of sale. Option money is separate and distinct from the
purchase price. It is the consideration given to bind the offerer in the contract of
option. The giving thereof does not necessarily result in a contract of sale because
the offeree may decide not to accept the offer of the offerer to sell.
Article 1325. Unless it appears otherwise, business advertisements of things for
sale are not definite offers, but mere invitations to make an offer.
Business advertisements of things for sale are not definite offers, but mere
invitations to make an offer. However, when the advertisement contains all the
specific particulars required of a contract, the advertisement is a definite offer.
Article 1326. Advertisements for bidders are simply invitations to make proposals,
and the advertiser is not bound to accept the highest or lowest bidder, unless the
contrary appears.
Advertisements for bidders are mere invitations to make proposals. When the
proposals are submitted, the advertiser is not bound to accept any of them, whether
they be the highest or lowest, or even the only, bidder. This is so because the
advertiser may consider other factors such as the financial capability, reputation and
experience of each bidder. The invitation to make proposals, however, may indicate
a contrary intention.
Effect of submission of bid or proposal
Where the advertiser prescribed the manner, terms and conditions of the sale (or
other transaction), anybody participating in the bidding at public auction is bound by
all the conditions set forth at such sale (or other transaction).
Article 1327. The following cannot give consent to a contract:
(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who do not know how to write.
Persons incapable of giving consent
a) Unemancipated minors.
A minor is a person under 18 years of age. Emancipation takes place by the
attainment of majority which commences at the age of 18 years. Emancipation shall
terminate parental authority over the person and property of the child who shall then
be qualified and responsible for all acts of civil life, save the exceptions established
by existing laws in special cases.
b) Insane or demented persons.
An insane or demented person is one who is not possessed of mind and reason
equal to a full and clear understanding of his act. Previous declaration of insanity by
the court is not required for as long as it is shown that the insanity existed at the
time the contract was entered into.
c) Deaf-mutes who do not know how to write.
Effect of incapacity on the contract
a) If only one of the parties is incapacitated, the contract is voidable.
b) If both parties are in capacitated, the contract is unenforceable.
Article 1328. Contracts entered into during a lucid interval are valid. Contracts
agreed to in a state of drunkenness or during a hypnotic spell are voidable.
Contracts entered during a lucid interval
Lucid interval refers to the period of temporary sanity of a person known to be
insane. The contract entered into by a person known to be insane during such
period as valid. It is the insanity at the time of the execution of the contract that
renders the contract voidable. The sanity at the time the contract was entered into
of a person presumed to be insane must be proved.
Contracts agreed to in a state of drunkenness or during a hypnotic spell
Contracts entered into during a state of drunkenness or during a hypnotic spell are
voidable by reason of a complete loss of understanding on the part of the one giving
consent. Such persons are incapable of giving intelligent consent. In the case of
intoxication, it must be shown that the intoxicated person’s reasoning and
judgement were impaired to the extent that he did not comprehend the legal
consequences of his act. If despite the intoxication, he understands such
consequences, the contract will be valid and enforceable against him.
Article 1329. The incapacity declared in article 1327 is subject to the modifications
determined by law, and is understood to be without prejudice to special
disqualifications established in the laws.
Modifications as to incapacity
The incapacity declared in article 1327 is not absolute. It is subject to modifications
determined by law thereby enabling the incapacitated person to validly enter into a
contract. Thus, where necessaries are sold to a minor or other person without
capacity to act, the sale is valid and he must pay a reasonable price therefor.
Necessaries are those indispensable for sustenance, dwelling, clothing, medical
attendance, education and transportation.
Special disqualifications
Article 1327 lists the persons incapable of giving consent. However, there are
persons who, although not included in the enumeration and thus considered
capable, cannot give consent to certain contracts because they are specially
disqualified by law. Such persons include the following:
a) The husband and wife who, as a rule, cannot sell property to each other, or
donate to each other. The sale or donation is considered void.
b) The guardian, who cannot acquire by purchase the property of the person or
persons under his guardianship.
c) Agents, who cannot acquire by purchase the property whose administration or
sale has been entrusted to them, unless the principal gives his consent.
d) Executors and administrators, who cannot acquire by purchase the property of
the estate under their administration.
e) Public officers and employees, who cannot acquire by purchase the property of
the State or any subdivision thereof, the administration of which has been entrusted
to them.
f) Justices, judges, prosecuting attorneys and other officers and employees
connected with administration of justice, cannot acquire by purchase property and
rights in litigation.
Note: For items (b), (c), and (d), the sale is voidable since only private interests are
involved. For items (e) and (f), the sale is void since the contracts are imbued with
public interest.
Article 1330. A contract where consent is given through mistake, violence,
intimidation, undue influence, or fraud is voidable.
Causes that vitiates consent
a. Mistake (or error)
b. Violence (or physical coercion)
c. Intimidation (or moral coercion)
d. Undue influence
e. Fraud (or deceit or misrepresentation)
Effect on contract when consent is vitiated
The contract is voidable if consent was given through mistake, violence,
intimidation, undue influence or fraud.
Article 1331. In order that mistake may invalidate consent, it should refer to the
substance of the thing which is the object of the contract, or to those conditions
which have principally moved one or both parties to enter into the contract.
Mistake as to the identify or qualifications of one of the parties will vitiate consent
only when such identity or qualifications have been the principal cause of the
contract.
A simple mistake of account shall give rise to its coercion.
The mistake that vitiates consent is that which involves the absence of knowledge
with respect to a thing or a wrong conception about said thing.
When mistake invalidates consent
a) If the mistake refers to the substance of the thing which is the object of the
contract.
b) If the mistake refers to the conditions which have principally moved one or both
parties to enter into the contract.
c) If the mistake refers to the identity or qualifications of one of the parties when the
same have been the principal cause of the contract.
d) If the mistake refers to the legal effect of an agreement when the real purpose of
the parties is frustrated and the same is mutual.
This refers to mistake of law which does not generally vitiate consent because of
the maxim that “(I)gnorance of the law excuses no one from compliance therewith. ”
However, the contract shall be voidable if the mistake as to legal effect of an
agreement is mutual and frustrates the real purpose of the parties. This is so
because a mistake on a doubtful question of law is analogous to mistake of fact. In
the words of the Code Commission “ (W)hen even the highest courts are sometimes
divided upon difficult legal questions, and when one-half of the lawyers in all
controversies on a legal question are wrong, why should a layman be held
accountable for his honest mistake on a doubtful legal issue?”
When mistake does not invalidate consent
a) When the mistake refers to a simple mistake of account.
b) If the party alleging the mistake knew the doubt, contingency or risk affecting the
object of the contract.
Here, there is no mistake because the party entered into the contract with
knowledge of the risks involved.
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Article 1332. When one of the parties is unable to read, or if the contract is in a
language not understood by him, and mistake or fraud is alleged, the person
enforcing the contract must show that the terms thereof have been fully explained to
the former.
When one of the contracting parties is unable to read or is otherwise illiterate, a
presumption that there is fraud or mistake in obtaining his consent arises. However,
he must show by clear and convincing evidence that he was unable to read at the
time of the execution of the contract. Once, proved the burden will shift to the other
party to show that the terms of the contract were fully explained to him who is
unable to read. He who is seeking to enforce the contract must therefore show that
the other party fully understood the terms of the contract.
Article 1333. There is no mistake if the party alleging it knew the doubt, contingency
or risk affecting the object of the contract.
Refer to No. 3 (b) under Article 1331
Article 1334. Mutual error as to the legal effect of an agreement when the real
purpose of the parties is frustrated, may vitiate consent.
Refer to No. 2 (d) under Article 1331
Article 1335. There is violence when in order to wrest consent, serious or irresistible
force is employed.
There is 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.
To determine the degree of the intimidation, the age, sex and condition of the
person shall be borne in mind.
A threat to enforce one’s claim through competent authority, if the claim is just or
legal, does not vitiate consent.
Article 1336. Violence or intimidation shall annul the obligation, although it may
have been employed by a third person who did not take part in the contract.
Violence or physical coercion
• When it invalidates consent
There is violence when in order to wrest consent, serious or irresistible force is
employed. The physical force employed is the reason why the victim gives his
consent. This is true whether it has been employed by the other contracting party or
by a third person who did not take part in the contract.
Intimidation or moral coercion
• When it invalidates consent
There is 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. The act threatened to be done must be serious
and unlawful and must produce a reasonable and well-grounded fear. The fear
arises from the fact that the person making the threat is capable of carrying out the
threatened evil. Hence, a mere fear of displeasing a person to whom respect and
obedience are due will not vitiate consent. Thus, there is no intimidation if an
employee signs a document lest he incurs the displeasure of his employer.
Intimidation exists although it may have been employed by a third person who did
not take part in the contract.
• Factors to be considered in determining degree of intimidation on person giving
consent
• When intimidation does not exist
There is no intimidation if consent is given because of a threat to enforce through a
competent authority a claim that is just or legal. In other words, a threat to do a
lawful act or to enforce a right will not constitute intimidation that will invalidate
consent.
Article 1337. There is 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. The following circumstances shall be considered: the confidential, family,
spiritual and other relations between the parties, or the fact that the person alleged
to have been unduly influenced was suffering from mental weakness, or was
ignorant or in financial distress.
Undue influence vitiates consent when a person takes improper advantage of his
power over the will of another, depriving the latter of a reasonable freedom of
choice. To nullify consent, the influence must be such that it subdues and
overwhelms the will of a party as to destroy his free will and make him follow the
express will of another. For undue influence to be present, the influence exerted
must have so overpowered or subjugated the mind of a contracting party as to
destroy his free agency, making him express the will of another rather than his own.
Solicitation, importunity, argument and persuasion, the same not being prohibited
by law, morals, or equity, do not constitute undue influence and a contract is not to
be set aside merely because one party used these means to obtain the consent of
the other.
Undue influence employed by a third person vitiates consent, just like in the case of
violence and intimidation.
Factors to consider in determining undue influence
a) Confidential, family, spiritual and other relations between the parties;
Thus, the relation between a physician and his patient, a lawyer and his client, a
pastor and member of his flock, or between an elderly member and a younger
member of a family, may be considered in determining the presence of undue
influence in a contract entered into between them.
b) Mental weakness;
c) Ignorance; and
d) Financial distress of the party alleged to have been unduly influenced.
In the foregoing instances, the party in position of dominance is likely the one who
will exert unfair persuasion upon the other party to give his consent.
Article 1338. There is fraud when, through the 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.
Article 1339. Failure to disclose facts, when there is a duty to reveal them, as when
the parties are bound by confidential relations, constitutes fraud.
Fraud consists of some deceitful practice or willful device, resorted to with intent to
deprive another of his right, or in some manner to do him injury. It is always positive
and intentional.
Kinds of fraud at the time of the celebration of the contract
a. Causal fraud or dolo causante
This refers to fraud without which consent would not have been given. It is a
deception employed by one party prior to or simultaneous to the contract in order to
secure the consent of the other. It renders the contract voidable. It is committed
through any of the following means:
1) By the use of insidious words or machinations. Insidious words or machinations
cover any form of deception such as false representation, trickery, plot or scheme
which may induce a party to give his consent. This is also referred to as active
fraud.
2) By the failure to disclose facts, when there is a duty to reveal them, as when the
parties are bound by confidential relations. This is fraud by concealment and
referred to as passive fraud.
b. Incidental fraud or dolo incidente
This refers to fraud without which consent would have still been given but the
person giving it would have agreed on different terms. The contract is valid but the
party employing the fraud shall be liable for damages.
Requisites of causal fraud or dolo causante
a) There must be misrepresentation or concealment of a material fact.
b) The fraud must be serious.
The fraud is serious when it is sufficient to impress, or to lead an ordinarily prudent
person into error, or to influence or induce a party to give his consent.
c) The fraud must have been employed by only one of the contracting parties upon
the other.
If both parties employed fraud, the bad faith of one will negate the bad faith of the
other. The contract will be valid; hence, neither one may ask for its annulment.
d) There must be a deliberate intent to deceive the other party.
e) The fraud must have induced the party enter into the contract.
When no fraud exists
a. In case of the usual exaggerations in trade, when the other party had an
opportunity to know the facts.
b. In case of a mere expression of an opinion, unless made by an expert and the
other party has relied upon the former’s special knowledge.
c. In case of misrepresentation of a third person, unless such a misrepresentation
has created substantial mistake and the same is mutual.
d. If the representation was made in good faith. However, the same may constitute
error.
Article 1340. The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent.
Usual exaggerations in trade refers to dealer’s talk or sales talk. It is natural for
sellers to exaggerate the characteristics of their products in order to make a sale at
a high price. Hence, the law allows a considerable latitude to dealer’s talk. A man
who accepts such talk at face value does so at his peril, and he cannot annul the
contract on the ground of fraud, provided that he had an opportunity to verify the
affirmations made by the seller.
Article 1341. A mere expression of an opinion does not signify fraud, unless made
by an expert and the other party has relied on the former’s special knowledge.
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Mere expression of opinion
As a general rule, a mere expression of an opinion, even if it turns out to be false,
does not constitute fraud. However, when the opinion comes from an expert, it is
like a statement of fact, and if it turns out not to be true, the contract can be
annulled on the ground of fraud if the other party has relied upon such opinion. But
if a contracting party hired his own expert whose opinion turned out to be false,
such party cannot ask for the annulment of the contract because the expert is
considered his own employee.
Article 1342. Misrepresentation by a third person does not vitiate consent, unless
such misrepresentation has created substantial mistake and the same is mutual.
Misrepresentation by a third person will not render a contract voidable, except in the
following cases:
a. If the misrepresentation has created substantial mistake and the same is mutual.
Here, the contract may be annulled not principally on the ground of fraud, but on
the ground of error or mistake.
b. If the third person connives with a contracting party in the commission of fraud
against the other party.
Here, the conniving party in effect committed the fraud against the other party.
Article 1343. Misinterpretation made in good faith is not fraudulent but may
constitute error.
Misrepresentation in good faith (innocent misrepresentation)
In order that fraud may exist, there should be a deliberate intent to deceive. Hence,
if the misrepresentation was made by a party in good faith, no fraud is committed.
The other party, however, may ask for the annulment of the contract on the ground
of mistake.
Article 1344. In order that fraud may make a contract voidable, it should be serious
and should not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages.
Refer to kinds of fraud at the time of the celebration of the contract (b) and
requisites of causal fraud or dolo causante (b) and (c) under Article 1339.
Article 1345. Simulation of a contract may be absolute or relative. The former takes
place when the parties do not intend to be bound at all; the latter, when the parties
conceal their true agreement.
Article 1346. An absolutely simulated or fictitious contract is void. A relative
simulation, when it does not prejudice a third person and is not intended for any
purpose contrary to law, morals, good customs, public order or public policy binds
the parties to their real agreement.
Simulation is the declaration of a fictitious will, deliberately made by agreement of
the parties, in order to produce, for purposes of deception, the appearance of a
juridical act which does not exist (absolute simulation) or is different from that which
is really executed (relative simulation).
Kinds of simulated contracts
a. Absolutely simulated contract
The parties here do not intend to be bound at all. Being fictitious, the contract is
void. In absolute simulation, there is a colorable contract but it has no substance as
the parties have no intention to be bound by it. The main characteristic of an
absolute simulation is that the apparent contract is not really desired or intended to
produce legal effect or in any way alter the juridical situation of the parties. As a
result, an absolutely simulated contract is void, and the parties may recover from
each other what they may have given under the contract. The simulation must be
on the part of both parties. Where only one simulates, there is deceit or fraud, and
the contract is regarded as voidable, not void.
b. Relatively simulated contract
This takes place when the parties conceal their true agreement. There are in effect
two agreements: the ostensible or apparent agreement which they make it appear
to have been entered into (the relatively simulated contract); and the hidden
agreement, which shows their real or true agreement.
If the parties state a false cause in the contract to conceal their real agreement, the
contract is only relatively simulated and the parties are still bound by their real
agreement. Hence, where the essential requisites of a contract are present and the
simulation refers to only to the content or terms of the contract, the agreement is
absolutely binding and enforceable between the parties and their successors in
interest.
In a relatively simulated contract, the parties are bound by their real agreement,
except in the following cases, where the parties will be bound by their ostensible
agreement:
1) If the real agreement is prejudicial to a third person.
The parties here are estopped from asserting the real agreement against the third
person.
2) If the purpose of the real agreement is contrary to law, morals good customs,
public order or public policy.
Article 1347. All things which are not outside the commerce of men, including future
things may be the object of a contract. All rights which are not intransmissible may
also be the object of contracts.
No contract may be entered into upon future inheritance except in cases expressly
authorized by law.
All services which are not contrary to law, morals, good customs, public order or
public policy may likewise be the object of a contract.
Article 1348. Impossible things or services cannot be the object of contracts.
Article 1349. The object of every contract must be determinate as to its kind. The
fact that the quantity is not determinate shall not be an obstacle to the existence of
the contract, provided it is possible to determine the same, without the need of a
new contract between the parties.
Object of contract is its subject matter. The object of a contract is the creation or
extinguishment of an obligation involving a thing, right or service. In effect, the
object of a contract is a thing, right or service.
Requisites of object of a contract
a. It must be within the commerce of men.
An object is within the commerce of men if it is capable of being owned or
appropriated. Thus, the air and sunlight which are not susceptible of appropriation,
and rivers, roads and parks which are of public dominion, cannot be the subject
matter of commercial transaction.
b. It must be existing or capable of coming into existence.
When a future thing is the object of a contract, the contract is subject to the
condition that the thing will come into existence. Future things include those that are
to be manufactured, raised or acquired, or have a potential existence.
By way of exception, no contract maybe entered into upon future inheritance,
except in cases expressly authorized by law. An inheritance is a future inheritance if
at the time the contract involving the inheritance was entered into, the person from
who the inheritance will come from was still alive. A contract involving future
inheritance is void when the following requisites concur: (a) The succession has not
been opened; (b) The object of the contract forms part of the inheritance; and (c)
The promisor has, with respect to the object, an expectancy or right which is purely
hereditary in nature. The following contracts involving future inheritance have been
held void:
1) An agreement for the partition of the properties of a living person entered into
among the heirs.
2) A contract renouncing the right to inherit from a person still alive.
3) The sale by a son of the property he expected to receive from his father who was
still alive at the time of the sale.
By provision of law, however, the following contracts, though involving future
inheritance, are valid:
1) Marriage settlement, otherwise known as ante-nuptial agreement, executed by a
husband and wife at the time of celebration of the marriage, which will govern their
property relationship during the marriage.
2) Partitions of property inter vivos by a person prior to his death.
When a person dies, his property, rights and obligations to the extent of the value of
inheritance are transmitted through his death to his heirs. The inheritance in such a
case, is considered an existing inheritance, and may be the subject matter of a
contract. Thus, the sale by a son of his share of the property inherited from his
father upon the latter’s death although such property has not been delivered to him
is valid because he acquired the right to succeed his father from the moment of his
death.
c. It must be transmissible.
This requirement refers to the right. Rights that are intransmissible by their nature,
or by stipulation, or by provision of law, cannot be the object of contracts. Thus,
political rights such as the right to vote or the right to hold public office, or personal
rights such as parental or marital authority, cannot be the object of contracts.
d. It must not be impossible.
The impossibility may be physical (when the obligation is not capable of physical
performance), or legal (when the performance is contrary to law, morals, good
customs, public order or public policy.)
e. It must be determinate as to its kind.
An object is determinate as to its kind of the class to which it belongs can be
determined or is determinable although the object has not been particularized.
Human internal organs as object of contract
R.A. No. 9208 penalizes human trafficking for the purpose of the removal or sale
of internal organs. The law provides that the human body and its parts cannot be
26
the subject of commercial transactions. Giving or receiving payment including any
other compensation or reward for organs is prohibited along with advertising the
need for or availability of organs, with a view to offering or seeking payment.
Under the law, however, a living and related voluntary donor or a living and non-
related voluntary donor may be allowed to donate organs, but not living minor is
allowed to donate any organ for the purpose of transplant. Organ donations under
the said law are subject to the World Health Organization’s Guiding Principles on
Human Organ Transplantation which was forged by member countries in 1981.
Under the international agreement, organ for transplant should be removed
preferably from the bodies of deceased persons, and that adult living persons may
also donate organs but such donors should be genetically related to the recipients.
Article 1350. In onerous contracts the cause is understood to be, for each
contracting party, the prestation or promise of a thing or service by the other; in
remuneratory ones, the service or benefit which is remunerated; and in contracts of
pure beneficence, the mere liberality of the benefactor.
The cause of a contract is the immediate, direct and proximate reason which
justifies the creation of an obligation through the will of the contracting parties.
Classification of contracts according to cause
a. Onerous contracts – are those where there is an exchange of valuable
considerations. For each contracting party, the cause is the prestation or the
promise of a thing or service by the other.
b. Gratuitous contracts – are those where one party receives no equivalent
consideration. These contracts are referred to as contracts of pure beneficence, the
cause of which is the liberality of the benefactor.
c. Remunerative or remuneratory contracts – are those where one prestation is
given for a benefit or service previously rendered. The cause of these contracts is
the service or benefit remunerated. The past service or benefit is by itself not a
recoverable debt to distinguish it from an onerous contract where there is a
prestation of service which by itself is a recoverable debt.
Requisites of cause
a. It must exist.
It is presumed that the cause of a contract exists even if it is not stated in the
contract, unless the debtor proves the contrary. Contracts without cause produce no
effect whatsoever; i.e., the contract is void.
b. It must be lawful.
Contracts with lawful cause, produce no effect whatsoever. The cause is unlawful if
it is contrary to law, morals, good customs, public order or public policy. It is
presumed that the cause of a contract is lawful, unless the debtor proves the
contrary.
c. It must be true.
The cause is false if the contract states a consideration but the statement is not
true. The statement of a false cause in a contract shall render it void. However, the
contract is valid if it is proved that it is founded upon another cause which is true
and lawful.
Article 1351. The particular motives of the parties in entering into a contract are
different from the cause thereof.
Motive is the private or secret reason or intention of a party in entering into a
contract. It is different from cause which is the essential reason that moves the
contracting parties to enter into the contract.
Distinctions between cause and motive
a. Cause is the essential reason of the contract, while motive is the private or secret
reason of a party in entering into a contract.
b. The illegality of the cause makes the contract void, while the illegality of the
motive does not affect the validity of the contract.
c. The cause of a contract is always known to the contracting parties, while the
motive of one party may not be known by the other.
Article 1352. Contracts without cause, or with unlawful cause, produce no effect
whatsoever. The cause is unlawful if it is contrary to law, morals, good customs,
public order or public policy.
Refer to requisites of cause (a) and (b) under Article 1350
Article 1353. The statement of a false cause in contracts shall render them void, if it
should not be proved that they were founded upon another cause which is true and
lawful.
Refer to requisites of cause (c) under Article 1350
Article 1354. Although the cause is not stated in the contract, it is presumed that it
exists and is lawful, unless the debtor proves the contrary.
Refer to requisites of cause (a) and (b) under Article 1350
Article 1355. Except in cases specified by law, lesion or inadequacy of cause shall
not invalidate a contract, unless there has been fraud, mistake or undue influence.
Lesion refers to the insufficiency or in inadequacy of cause. There is inadequacy of
cause if the consideration is not commensurate with or less than the value of the
thing, such as when the price is insufficient for the thing sold.
Rule in case of inadequacy of cause
As a general rule, lesion or inadequacy of cause does not invalidate a contract. The
following are the exceptions:
a. When lesion was accompanied by fraud, mistake or undue influence.
b. In cases expressly specified by law.
Article 1356. Contracts shall be obligatory, in whatever form they may have been
entered into, provided all essential requisites for their validity are present. However,
when the law requires that a contract be in some form in order that it may be valid
or enforceable, or that a contract be proved in a certain way, that requirement is
absolute and indispensable. In such cases, the rights of the parties stated in the
following article cannot be exercised.
Form
A contract may be oral, in writing, partly oral and partly in writing, or it may be
inferred from the conduct of the parties. If a contract is in writing, the writing may be
a public instrument or a private instrument. A private instrument becomes a public
instrument if the person executing it appears before and acknowledges to a notary
public that the instrument he had executed is of his own voluntary act and deed and
such notarial acknowledgment is indicated in the instrument itself. Registration in
the proper recording office requires that the instrument must be a public instrument.
In certain cases, registration is required for the validity of a contract such as in the
case of contract of chattel mortgage which requires recording in the Chattel
Mortgage Register.
Rule on what form is required
As a general rule, form is not essential since contracts are obligatory in whatever
form they may have been entered into provided all the essential requisites for their
validity are present. Form, however, is important in the following cases:
a) For validity
If form is required by law for the validity of the contract, that form is indispensable.
If the required form is not followed, the contract is void. The following are some
examples of contracts that are required to be in a certain form to be valid:
1) Contract of donation of immovable property must be in public document together
with the acceptance by the donee.
2) Contract of donation of personal property whose value exceeds P5,000.00 must
be in writing together with the acceptance by the donee.
3) The authority of an agent to sell a piece of land must be in writing; otherwise, the
sale is void.
4) Contract of partnership where immovable property is contributed in a public
instrument to which shall be attached a signed inventory of the immovable property.
Otherwise, the contract is void.
5) A stipulation to pay interest must be in writing; otherwise, no interest is payable.
b) For enforceability
The contracts that are enumerated under the Statute of Frauds are required to be
in writing and signed by the party sought to be charged. Otherwise, they are
unenforceable and are not allowed to be proved. The required writing may,
however, be waived by the failure to object to the presentation of oral evidence to
prove them, or by the acceptance of benefits under them.
c) For convenience
The contracts enumerated under Article 1358 are required to be in a certain form
for the convenience of the parties.
Article 1357. If the law requires a document or other special form, as in the acts and
contracts and numerated in the following article, the contracting parties may compel
each other to observe that form, once the contract has been perfected. This right
may be exercised simultaneously with the action upon the contract.
Right of a contracting party to compel the other to observe form
This right is available only if the form is needed for the convenience of the parties,
and not for validity or enforceability. In other words, this right can be availed of by a
party only if the contract is valid and enforceable.
Article 1358. The following must appear in a public document:
(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 article 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
and act appearing or which should appear in a public document, or should prejudice
a third person;
27
(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.
Form for convenience of parties
The contracts enumerated in Article 1358 are valid and enforceable between the
parties even if the require form, public document or private writing, is not observed.
The law does not require the accomplishment of the said acts and contracts in a
public instrument or writing to validate the act or contract but only to insure their
efficacy. The embodiment of the said contracts in a public instrument, is only for
convenience, and registration of the instrument only adversely affects third parties.
Formal requirements are, therefore, for the benefit of third parties. Non-compliance
therewith does not adversely affect the validity of the contract nor the contractual
rights and obligations of the parties.
When public document required for convenience
The following contracts are required to appear in a public document for the
convenience of the parties and so that they may be registered in the proper
recording office to be binding against third persons:
a. Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property.
b. The cession, repudiation or renunciation of hereditary rights or of those of the
conjugal partnership of gains.
c. 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.
d. The cession of actions or rights proceeding from an act appearing in a public
document.
When any writing required for convenience
All other contracts where the amount involved exceeds P500.00 must appear in
writing; even a private one. However, the sales of goods, chattels or things in action
at a price of at least P500.00 are governed by articles 1403, No.2 and 1405.
Article 1359. When, there having been a meeting of minds of the parties to a
contract, their true intention is not expressed in the instrument purporting to embody
the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of
the parties may ask for the reformation of the instrument to the end that such true
intention may be expressed.
If mistake, fraud, inequitable conduct has prevented a meeting of the minds of the
parties, the proper remedy is not reformation of the instrument but annulment of the
contract.
Reformation is a remedy in equity by means of which a written instrument is made
or construed so as to express or conform to the real intention of the parties when
some error or mistake has been committed.
Requisites of reformation
a. There must be a meeting of minds of the parties to the contract.
b. The true intention of the parties is not expressed in the instrument.
c. The failure of the instrument express true intention of the parties is due to
mistake, fraud, inequitable conduct or accident.
When an instrument may be reformed
a) When a mutual mistake of the parties, causes the failure of the instrument to
disclose their real agreement.
b) If one party was mistaken and the other acted fraudulently or inequitably in such
a way that the instrument does not show their true intention.
c) When a party was mistaken and the other knew or believed that the instrument
did not state their real agreement, but concealed the fact from the former.
d) When through ignorance, lack of skill, negligence or bad faith on the part of the
person drafting the instrument or of the clerk or typist, the instrument does not
express the true intention of the parties.
e) If two parties agree upon the mortgage or pledge of real or personal property, but
the instrument states that the property is sold absolutely or with right of repurchase.
Distinctions between reformation and annulment
a) Reformation is the remedy when there has been a meeting of minds but the true
intention of the parties is not expressed in the instrument by reason of mistake,
fraud, inequitable conduct or accident. Annulment is the remedy when the mistake,
fraud, inequitable conduct or accident has prevented the meeting of minds of the
parties.
b) Reformation does not invalidate a contract. Annulment invalidates a contract.
Article 1360. The principles of the general law on the reformation of instruments are
here by adopted insofar as they are not in conflict with the provisions of this Code.
Article 1361. When a mutual mistake of the parties, causes the failure of the
instrument to disclose their real agreement, said instrument may be reformed.
Mutual mistake
The mistake shared by both parties must be of fact. Such mistake of fact exists
when the written evidence of the agreement includes something which should not
be there, or omits from such instrument something that should be there, or so
expresses their agreement that it sets something different from what was intended.
Article 1362. If one party was mistaken and the other acted fraudulently or
inequitably in such a way that the instrument does not show their true intention, the
former may ask for the reformation of the instrument.
Article 1363. When a party was mistaken and the other knew or believed that the
instrument did not state their real agreement, but concealed the fact from the
former, the instrument may be reformed.
Unilateral mistake
In both Articles 1362 and 1363, the mistake is committed by only one of the parties.
In order, however, that reformation may be availed of by the party who committed
the mistake, the other party must have acted fraudulently or inequitably in such a
way that the instrument does not show their true intention, or had knowledge or
believe that the instrument did not state their real agreement, but concealed such
fact from the other party.
Article 1364. When through ignorance, lack of skill, negligence or bad faith on the
part of the person drafting the instrument or of the clerk or typist, the instrument
does not express the true intention of the parties, the courts may order the
instrument be reformed.
Article 1365. If two parties agree upon the mortgage or pledge of real or personal
property, but the instrument states that the property is sold absolutely or with right of
repurchase, reformation of the instrument is proper.
Property mortgaged or pledged but stated in the instrument as sold
Reformation is proper when property mortgaged or pledged as intended by the
parties is shown in the instrument to have been sold. This is so because in a
contract of mortgage or pledge, the mortgagor or pledgor retains ownership of the
property which was merely given as security for a principal contract, whereas in
sale, the ownership is transferred to the other party.
Article1366. There shall be no reformation in the following cases:
(1) Simple donations inter vivos wherein no condition is imposed;
(2) Wills;
(3) When the real agreement is void.
Article 1367. When one of the parties has brought an action to enforce the
instrument he cannot subsequently ask for its reformation.
When reformation is not available
a. In the case of the following contracts
1) Simple donations inter vivos (i.e., one taking effect during the lifetime of the
donor) wherein no condition is imposed.
This is so because a donation is an act of liberality on the part of donor whose
desire must be respected. However, if the donation is conditional and the condition
does not reflect the true intention of the donor, reformation is allowed so as to show
such real intent. In case of donation mortis causa (i.e., one taking effect upon the
death of the donor), the same may be reformed because it partakes of the nature
of a testamentary disposition or one made in a will.
2) Wills
The reason is that the making of a will is strictly a personal act which is free and
the testator may revoke the will any time. Upon the death of the testator, the will
shall also be scrutinized in the proceedings for the settlement of the estate and any
error in descriptions may be corrected.
3) When the real agreement is void.
If the agreement is void, it is inexistent, and so there is nothing to reform.
b. When one of the parties has brought an action to enforce the contract, he
cannot subsequently ask for reformation.
Enforcement of the contract by a party is equivalent to ratification, waiver or
estoppel; hence, reformation is no longer allowed.
Article 1368. Reformation maybe ordered at the instance of either party or his
successors in interest, if the mistake was mutual; otherwise, the injured party, or his
heirs and assigns.
Who may ask for reformation
a. If the mistake was mutual, either party or his successors in interest, such as his
heirs or assigns.
b. In other cases, the injured party or his heirs and assigns.
Article 1369. The procedure for reformation of instruments shall be governed by the
rules of court to be promulgated by the Supreme Court.
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Article 1370. If the terms of the contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations shall
control.
If the words appear to be contrary to the evident intention of the parties, the latter
shall prevail over the former.
Interpretation of terms of contract
When the terms of the contract are clear and leave no doubt as to the intention of
the parties, the terms are to be understood literally as they appear in the contract.
Accordingly, there is no justification to read into any alleged intention outside of the
contract. As the Supreme Court held in Forest Hills Golf and Country Club, Inc. vs.
Gardpro, Inc., G.R. No. 164686, October 22, 2014, “(T)he rule is that where the
language of a contract is plain and unambiguous, its meaning should be
determined without reference to extrinsic facts or aids. The intention of the parties
must be gathered from that language, and from that language alone. Stated
differently, where the language of a written contract is clear and unambiguous, the
contract must be taken to mean that which, on its face, it purports to mean, unless
some good reason can be assigned to show that the words should be understood
in a different sense.”
When terms are contrary to evident intention
If the words appear to be contrary to the evident intention of the parties, the
intention of the parties shall prevail.
Court interpretation of terms of contract
Article 1370 is akin to the “plain meaning rule” applied by Pennsylvania courts,
which assumes that the intent of the parties to an instrument is “embodied in the
writing itself, and when the words are clear and unambiguous, the intent is to be
discovered only form the express language of the agreement”. It also resembles the
“four corners rule,” a principle which allows courts in some cases to search beneath
the semantic surface for clues to meaning. A court’s purpose in examining a
contract is to interpret the intent of the contracting parties, as objectively manifested
by them. The process of interpreting a contract requires the court to make a
preliminary inquiry as to whether the contract before it is ambiguous. A contract
provision is ambiguous if it is susceptible of two reasonable alternative
interpretations. Where the written terms of the contract are not ambiguous, and can
only be read in one way, the court will interpret the contract as a matter of law. If the
contract is determined to be ambiguous, then the interpretation of the contract is left
to the court, to resolve the ambiguity in the light of intrinsic evidence.
Article 1371. In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered.
Determination of intent of parties
In determining the intention of the parties, their contemporaneous and subsequent
acts, as well as the circumstances surrounding the execution of the contract, should
be considered.
Article 1372. However generals 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.
General terms exclude distinct things not intended
Although a contract may use general terms, they shall be interpreted as excluding
things that are distinct from what the parties intended to agree.
Article 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.
Interpretation of stipulation with several meanings
If a stipulation in a contract admits of an interpretation that makes it valid and legal
and another that will make it invalid and illegal, the former interpretation must
prevail.
Article 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.
Contract to be interpreted in its entirety
The various stipulation in a contract should not be interpreted separately but they
should be construed in relation to one another so as to arrive at the true meaning of
the whole contract. To ascertain the meaning of a contract, the whole of it and not
mere portions thereof must be considered.
Article 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.
Interpretation of words with different significations
 Words with different meanings shall be interpreted in the sense that is most in
keeping with the nature and object of the contract. If there is doubt as to the
meaning of the language of the contract taken by itself, the general scope and
purpose of the instrument should be considered.
Article 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.
Usage or custom to be considered in interpreting ambiguity
If a contract contains stipulations that are ambiguous, the usage or custom of the
place where the contract was executed shall be considered in clearing the
ambiguity and shall fill the omission of stipulations that are ordinarily established in
such kind of contract.
Article 1377. The interpretation of obscure words or stipulations in a contract shall
not favor the party who caused the obscurity.
Interpretation when obscurity was caused by a party
When a contract contains words or stipulations that are obscure, their interpretation
shall not favor the party who caused the obscurity since he should be made
responsible therefor.
Article 1378. When it is absolutely impossible to settle doubts by the rules
established in the preceding articles, and 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.
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.
When doubt is impossible to settle under preceding provisions
a. When the doubts refer to incidental circumstances of a gratuitous contract, the
least transmission of rights and interests shall prevail.
b. When the doubts refer to the incidental circumstances of an onerous contract, the
doubt shall be resolved in favor of the greatest reciprocity of interests.
c. 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 of the parties, the contract
shall be null and void.
Article 1379. The principles of interpretation stated in Rule 123 of the Rules of Court
shall likewise be observed in the construction of contracts.
Application of the Rules of Court on interpretation
The principles of interpretation in the Rules of Court, now provided by Rule 130
from Section 10 to 19, are to be observed in a suppletory character, in the
construction of contracts. The rules are as follows:
a. The language writing is to be interpreted according to the legal meaning it bears
in the place of execution, unless the parties intended otherwise.
b. In the construction of an instrument where there are several provisions or
particulars, such construction is, if possible, to be adopted as will give effect to all.
c. In the construction of an instrument, the intention of the parties is to be pursued,
and when a general and a particular provision are inconsistent, the latter is
paramount to the former. So a particular intent will control a general one that is
inconsistent with it.
d. For the proper construction of an instrument, the circumstances under which it
was made, including the situation of the subject thereof and of the parties to it, may
be shown, so that the judge may be placed in the position of those whose language
he is to interpret.
e. The terms are writing are presumed to have been used in their primary and
general acceptation, but evidence is admissible to show that they have a local,
technical, or otherwise peculiar signification, and were so used and understood in
the particular instance, and which case the agreement must be construed
accordingly.
f. When an instrument consists partly of written words and partly of a printed form,
and the two are inconsistent, the former controls the latter.
g. When the characters in which an instrument is written are difficult to be
deciphered, or the language is not understood by the court, the evidence of persons
skilled in the deciphering the characters, or who understand the language, is
admissible to declare the characters or the meaning of the language.
h. When the terms of an agreement have been intended in a different sense by the
different parties to it, that sense is to prevail against either party in which he
supposed the other understood it, and when different constructions of a provision
are otherwise equally proper, that is to be taken which is the most favorable to the
party in whose favor the provision is made.
i. When an instrument is equally susceptible of two interpretations, one in favor of a
natural right and the other against it, the former is to be adopted.
j. An instrument may be construed according to usage, in order to determine its true
character.
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Article 1380. Contracts validly agreed upon may be rescinded in the cases
established by law.
Article 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom they
represent suffer lesion by more than one-fourth of the value of the things which are
object thereof.
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion
stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any manner
collect the claims due them;
(4) Those which refer to things under litigation if they have been entered into by the
defendant without the knowledge and approval of the litigants or of competent
judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
Defective contracts
There are four defective contracts, namely, rescissible, voidable, unenforceable
and void contracts. These contracts are presented in the law according to their
degree of defectiveness with rescissible contracts as the least defective, and void
contracts as the most defective.
A rescissible contract is one which has all the essential requisites of a contract but
which may be set aside by reason of equity on account of damage caused to one of
the parties or upon a third person.
What contracts are rescissible
a. 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 of the contract.
A guardian is a person who has custody of the person and property, or of property
only, of another person who, not being under parental authority, is incapable of
taking care of himself. The person under guardianship is known as ward.
b. Those agreed upon in representation of absentees, if the latter suffer lesion by
more than one-fourth of the value of the things which are the object of the contract.
An absentee is a person who disappears from his domicile, his whereabouts being
unknown, and without leaving an agent to administer his property.
c. Those undertaken in fraud of creditors when the latter cannot in any manner
collect the claims due to them.
d. 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.
e. All other contracts specially declared by law to be subject to rescission.
Article 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.
Rescissible payment
A payment may be rescinded at the instance of a creditor who is prejudiced if the
following requisites are present:
a. The debtor is insolvent.
b. The debt is not due or demandable.
c. Such debtor makes the payment.
Article 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.
Rescission is a remedy granted by law to the contracting parties and even to third
persons, to secure the reparation of damages caused to them by a contract, even if
it should be valid, by means of the restoration of things to their condition at the
moment prior to the celebration of said contract. It is a remedy to make ineffective a
contract, validly entered into and therefore obligatory under normal conditions, by
reason of external causes resulting in a pecuniary prejudice to one of the
contracting parties or their creditors.
Rescission not a principal remedy
The remedy of rescission is subsidiary in nature; it cannot be instituted except
when the party suffering damage has no other legal means to obtain reparation for
the same.
Article 1384. Rescission shall only be to the extent necessary to cover the damages
caused.
Extent of rescission
Rescission will not be of the whole contract but only to the extent necessary to
repair the damage caused. Thus, there may be a partial rescission of the contract.
The alienation with respect to the part that is not rescinded is therefore valid.
Article 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.
Requisites of rescission
a. The party suffering damage must have no other legal means to obtain reparation
for the same.
b. The party demanding rescission must be able to return whatever he may be
obliged to restore.
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. The obligation to
return, however, does not apply to prejudiced creditors as there is nothing to be
returned by them.
c. The thing object of the contract must not be legally in the possession of a third
person who acted in good faith.
Rescission cannot be availed of if the object of the contract is legally in the
possession of third persons who acted in good faith. In this case, the injured party
can go after the person who caused the loss.
d. The action for rescission must be brought within the period allowed by law.
Article 1386. Rescission referred to in Nos. 1 and 2 of article 1381 shall not take
place with respect to contracts approved by the courts.
Effect of court approval when there is lesion
A contract entered into by a guardian. In behalf of his ward, or by a representative
of an absentee, shall not be rescissible if the contract is approved by the court
although the ward or absentee suffered lesion of more than one-fourth of the value
of the object of the contract. The court in such cases is presumed to have taken the
appropriate steps to safeguard the interest of the ward or of the absentee.
Article 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
rescission.
In addition to these presumptions, the design to defraud creditors may be proved in
any other manner recognized by the law of evidence.
Alienations in fraud of creditors
a. Gratuitous alienations
Alienations by gratuitous title (such as by donation) are presumed to have been
entered into in fraud of creditors if the debtor did not reserve sufficient property to
pay all debts contracted before the donation.
b. Onerous alienations
Alienations by onerous title (such as by sale) are presumed to have been entered
into in fraud of creditors when made:
1) By persons against whom some judgment has been rendered.
2) By persons against whom some writ of attachment has been issued. Attachment
is a provisional remedy by which property is taken into the custody of the law as a
security for the satisfaction of any judgment debt.
Badges of fraud
There are circumstances attending a sale by which the fraudulent character od the
transaction may be determined. These are referred to as Badges of Fraud.
The following have been denominated by the courts as badges of fraud:
a. The fact that the consideration of the conveyance is fictitious or inadequate.
b. A transfer made by a debtor after suit has been begun and while it is pending
against him.
c. A sale upon credit made by an insolvent debtor.
d. Evidence of large indebtedness or complete insolvency.
e. The transfer of all or nearly all of his property by a debtor, especially when he is
insolvent or greatly embarrassed financially.
f. The act that the transfer is made between father and son, when there are present
other of the above circumstances.
g. The failure of the vendee to take exclusive possession of all the property.
Article 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.
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Purchase was made in bad faith
The purchaser in bad faith shall indemnify the creditors for damages suffered by
them on account of the alienation whenever due to any cause, it would be
impossible to return them. This rule applies even if the cause of the loss is a
fortuitous event.
If there are two or more alienations, the first acquirer shall be liable first, and so on
successively provided they are also in bad faith.
Purchase was made in good faith
The purchaser in good faith shall not be liable notwithstanding the fraudulent
intention of the debtor in disposing the property. Hence, rescission will not be
available. If there are subsequent transfers, the transferees shall not be liable even
if they were in bad faith.
Article 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.
Prescriptive period
The prescriptive period is four years from the date of the contract, except in the
following:
a. For persons under guardianship – four (4) years from the termination of
incapacity.
b. For absentees – four (4) years from the time the absentee’s domicile is known.
Article 1390. The following contracts are voidable or annullable, even though there
may have been no damage to the contracting parties:
(1) Those where one of the parties is incapable of giving consent to a contract;
(2) Those where the consent is vitiated by mistake, violence, intimidation, undue
influence or fraud.
These contracts are binding, unless they are annulled by a proper action in court.
They are susceptible of ratification.
Voidable contract is one that is defective by reason of the incapacity or vitiated
consent of one of the parties. It is binding, unless annulled by proper action in court.
It is susceptible of ratification.
What contracts are voidable
a. Those where one of the parties is incapable of giving consent to a contract.
The following are incapable of giving consent to a contract:
1) Unemancipated minors.
2) Insane or demented persons.
3) Deaf-mutes who do not know how to write.
b. Those where the consent is vitiated by mistake, violence, intimidation, undue
influence or fraud.
c. Those where consent is given in state of drunkenness.
d. Those where consent is given during a hypnotic spell.
Annulment, concept; distinguished from rescission
Annulment is the action brought to set aside a voidable contract. Annulment and
rescission are distinguished as follows:
a. Annulment is brought to declare the inefficacy inherent in the contract; rescission
is availed of to produce the inefficacy which did not exist inherently in the contract.
b. Annulment is based on vitiated consent; hence, damage is immaterial.
Rescission is based on lesion or damage.
c. In annulment, the action is principal; in rescission the action is subsidiary.
d. Annulment is a sanction where the law predominates; rescission is a remedy
where equity predominates.
e. Annulment is available only to the parties, whether bound principally or
subsidiarily; rescission is available not only to the contracting parties but also to
third persons whose interests are affected.
f. Ratification is required to prevent annulment; ratification is not required to prevent
rescission.
Grounds for annulment
a. Incapacity of one of the parties
b. Vitiated consent
This includes instances when a person gives his consent in a state of drunkenness
or during a hypnotic spell.
Article 1391. The action for annulment shall be brought within four years.
This period shall begin:
In cases of intimidation, violence or undue influence, from the time the defect of the
consent ceases.
In case of mistake or fraud, from the time of the discovery of the same.
And when the action refers to contracts entered into by minors or other
incapacitated persons, from the time the guardianship ceases.
Prescriptive period
 An action for annulment must be brought within four (4) years which period shall
begin:
a. In cases of intimidation, violence or undue influence, from the time the defect in
the consent ceases.
b. In case of mistake or fraud, from the time of discovery of the same.
c. In case of minority or incapacity of one of the parties, from the time guardianship
ceases.
Effect of prescription
If annulment is not filed within the period mentioned in the foregoing number, the
right prescribes; hence, the contract can no longer be set aside.
Article 1392. Ratification extinguishes the action to annul a voidable contract.
Article 1393. Ratification may be effected expressly or tacitly. It is understood that
there is tacit ratification if, with knowledge of the reason which renders the contract
voidable and such reason having ceased, the person who has a right to invoke it
should execute an act which necessarily implies an intention to waive his right.
Article 1394. Ratification may be effected by the guardian of the incapacitated
person.
Article 1395. Ratification does not require the conformity of the contracting party
who has no right to bring the action for annulment.
Article 1396. Ratification cleanses the contract from all its defects from the moment
it was constituted.
Ratification is the adoption or affirmation of a contract which is defective because of
vitiated consent or incapacity of one of the parties.
How ratification is made
a. Express – there is express ratification when the party who is entitled to annul the
contract signifies his adoption thereof either orally or in writing.
b. Implied or tacit – there us tacit ratification if, with knowledge of the reason which
renders the contract voidable and such reason having ceased, the person who has
a right to invoke it should execute an act which necessarily implies an intention to
waive his right. Implied ratification may take diverse forms, such as silence or
acquiescence; by acts showing approval or adoption of the contract; or by
acceptance and retention of benefits flowing therefrom.
Who may ratify a voidable contract and when
a. The guardian of the incapacitated person during the latter’s incapacity.
b. The incapacitated person after he has attained capacity.
c. The party whose consent is vitiated by mistake or fraud, after it is discovered, or
in the case of violence, intimidation or undue influence, after it has ceased.
Hence, the party who employed such vices of consent cannot ratify the contract;
neither is his conformity to the ratification required. If consent was given by a
person in a state of drunkenness or during a hypnotic spell, he may also ratify the
contract when he is no longer in such condition or state.
Effects of ratification
a. It extinguishes the action to annul a voidable contract.
Ratification is the adoption of the contract by the party who has the right to seek its
annulment. Hence, once he ratifies it, he can no longer subsequently bring an
action for its annulment as he cannot take inconsistent positions thereon.
b. It cleanses the contract from all its defects from the moment it was constituted.
Thus, the contract will be validated from its inception.
Article 1397. The action for annulment of contracts may be instituted by all who are
thereby obliged principally or subsidiarily. However, persons who are capable
cannot allege the incapacity of those with whom they contracted; nor can those who
exerted intimidation , violence, or undue influence, or employed fraud, or caused
mistake, base their action upon these flaws of the contract.
Who may bring the action for annulment
The action for annulment may be instituted by all who are thereby obliged
principally or subsidiarily. Hence, it cannot be brought by third persons. It may be
brought by the following:
a. The guardian of the incapacitated person during the latter’s incapacity.
b. The incapacitated person after he has attained capacity.
Thus, persons who are capable cannot bring an action to annul the contract on the
ground of the incapacity of the other party.
c. The party whose consent is vitiated by mistake, violence, intimidation, undue
influence or fraud or who gave his consent in a state of drunkenness or during a
hypnotic spell.
Thus, the party who exerted intimidation, violence, or undue influence, or employed
fraud or caused mistake, cannot bring an action to annul the contract based on
such defects of which he himself was responsible. Neither can those who took
advantage of the other party’s state of drunkenness or his being under a hypnotic
spell when the latter gave his consent be entitled to such right. This is based on the
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principle that “he who comes to court must come with clean hands, ” which likewise
applies to a person who is capable.
Article 1398. An obligation having been annulled, the contracting shall restore to
each other the things which have been the subject matter of the contract, with their
fruits, and the price with its interest, except in cases provided by law.
In obligations to render service, the value thereof shall be the basis for damages.
Obligations created by annulment
a. In obligations to give, the contracting parties shall restore to each other, except in
cases provided by law, the following:
1) The things which have been the subject of the contract, with their fruits.
2) The price with its interest.
b. In obligations to render service, the value thereof shall be the basis of damages.
Article 1399. When the defect of the contract consist in the incapacity of one of the
parties, the incapacitated person is not obliged to make any restitution except
insofar as he has been benefited by the thing or price received by him.
Restitution by incapacitated person
If the contract is annulled on the ground of the incapacity of one party, such
incapacitated person, as a rule, is not obliged to make any restitution. This is an
exception to the rule under Article 1398 requiring mutual restitution.
By way of exception, the incapacitated person is required to make restitution only
up to the extent that he has been benefited by the thing or service received by him.
This is true if the thing is no longer in the possession of the incapacitated person. If
the thing is still his possession, he is obliged to return it; otherwise, he is deemed to
have ratified the contract.
Article 1400. Whenever the person obliged by the decree of annulment to return the
thing cannot do so because it has been lost through his fault, he shall return the
fruits received and the value of the thing at the time of the loss, with interest from
the same date.
Obligation when thing is lost
a) When lost due to the fault of the party obliged to return, he shall give the
following:
1) Value of the thing at the time of loss.
2) Fruits of the thing received from the time the thing was given to him up to the
time of loss.
3) Interest on the value of the thing from the time of loss.
b) When lost due to fortuitous event, the party obliged to return shall give the
following:
1) Value of the thing at the time of loss.
2) Fruits of the thing from the time the thing was given up to the time of loss.
Article 1401. The action for annulment of contracts shall be extinguished when the
thing which is the object thereof is lost through the fraud or fault of the person who
has the right to institute the proceedings.
If the right of action is based upon the incapacity of any one of the contracting
parties, the loss of the thing shall not be an obstacle to the success of the action,
unless said loss took place through the fraud or fault of the plaintiff.
Loss of thing while in the possession of party who has the right to institute
annulment
a) If lost through his fraud or fault, the action for annulment is extinguished.
b) If lost without his fault, he can still bring an action for annulment. However, the
other party cannot be compelled to make restitution unless the innocent party can
restore what he is bound to return under the decree of annulment.
Article 1402. As long as one of the contracting parties does not restore what in
virtue of the decree of annulment he is bound to return, the other cannot be
compelled to comply with what is incumbent upon him.
Mutual restitution upon annulment
Annulment creates the obligation on the part of the parties to restore to each other
the things which have been the object of the contract, with their fruits, and the price
with its interest. Hence, if one of the parties cannot restore what he is bound to
return, the other cannot be compelled to make restitution.
Article 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been given
no authority or legal representation, or who has acted beyond his powers;
(2) Those that do not comply with the Statute of Frauds as set forth in this number.
In the following cases an agreement hereafter made shall be unenforceable by
action, unless the same, or some note or memorandum thereof, be in writing, and
subscribed by the party charged, or by his agent; evidence, therefore, of the
agreement cannot be received without the writing, or a secondary evidence of its
contents;
(a) An agreement that by its terms is not to be performed within a year from the
making thereof;
(b) A special promise to answer for the debt, default, or miscarriage of another;
(c) An agreement made in consideration of marriage, other than mutual promise to
marry;
(d) An agreement for the sale of goods, chattels or things in action, at a price not
less than five hundred pesos, unless the buyer accept and receive part of such
goods and chattels, or the evidences, or some of them, of such things in action, or
pay at the time some part of the purchase money; but when the sale is made by
auction and entry is made by the auctioneer in his sales book, at the time of sale, of
the amount and kind of property sold, terms of sale, price, names of the purchasers
and person on whose account the sale is made, it is a sufficient memorandum.
(e) An agreement for the leasing for a longer period than one year, or for the sale of
real property, or of an interest therein;
(f) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a contract.
An unenforceable contract is one that cannot be sued upon or enforced in court
unless it is ratified. It has all the essential requisites for validity but it produces no
effect. It occupies an intermediate ground between voidable and void contracts. It
cannot be enforced because there are legal defenses against it.
Kinds of unenforceable contracts
a. Those that are not authorized.
b. Those that do not comply with the Statute of Frauds.
c. Those where both parties are incapable of giving consent to a contract.
Unauthorized contract is one that is entered into in the name of another person by
one who has been given no authority or legal representation or who has acted
beyond his powers. This contract cannot be enforced against the person in whose
name the contract was entered into unless it is ratified by him.
Unauthorized contracts are governed by Article 1317 of the Civil Code and the
principles of agency.
Contracts infringing the Statute of Frauds
a. Statute of Frauds
1) Concept
The Statute of Frauds is a statute whose chief characteristic is the provision that no
suit or action shall be maintained on certain classes of contracts, unless there is a
note or memorandum thereof signed by the party sought to be held liable or his duly
authorized agent.
2) Purpose
The Statute of Frauds was enacted to prevent the commission of fraud by requiring
certain contracts to be in writing because the recollection of memory of the parties
and witnesses cannot be relied upon. The writing is meant to be an evidence of the
intention of the parties.
3) Application
The Statute of Frauds applies only to wholly executory contracts, i.e., contracts
where no performance has yet been made by both contracting parties. It does not
apply to completed, executed or partially consummated, contracts. Contracts
infringing the statute cannot be sued upon either for damages or for specific
performance of the agreement.
b. Contracts required to be in writing under the Statute of Frauds; otherwise, they
are unenforceable.
1) An agreement that by its terms is not be performed within a year from the making
thereof.
2) A special promise to answer for the debt, default, or miscarriage of another.
This provision is often called the “Suretyship Section” and applies typically to
contracts wherein a promise is made to a creditor to pay the obligations of a third
person, the debtor. The promise is said to be “collateral”; hence, it does not apply if
the person making the promise is the one primarily liable.
3) An agreement made in consideration of marriage, other than mutual promise to
marry.
The agreement in consideration of marriage may be entered into between the
future spouses, or between one or both future spouses and a third person or third
persons. A mutual promise to marry, although not in writing, is enforceable for the
purpose of obtaining actual damages in case of breach, but not for the specific
promise to marry.
4) An agreement for the sale of goods, chattels or things in action for a price not
less than P500.00. Things in action include credit, shares of stock and other
incorporeal properties.
However, when the sale is made by auction, the entry made by the auctioneer in
his sales book, at the time of sale, of the amount and kind of property sold, terms of
sale, price, names of purchases and the person on whose account the sale is
made, is sufficient memorandum; hence, the sale is enforceable although not
subscribed by the party sought to be held liable.
5) An agreement for the leasing for a longer period than one year, of real property or
of an interest therein.
If the agreement is for the lease of real property or of an interest therein for a
period of one year or less, the same is enforceable although not in writing. So, too,
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is an oral agreement for the lease of personal property even if the lease period is
longer than one year.
6) An agreement for the sale of real property or of an interest therein (regardless of
the price).
7) A representation as to the credit of a third person.
The representation must have the effect of inducing the party to whom the
representation has been made to grant credit to another. The representation should
be in writing so that the person making the representation may be held liable if the
representation turns out to be false.
Contracts where both parties are incapable of giving consent.
Thus, the contract is unenforceable when both parties are minors, or one party is a
minor and the other is insane.
Article 1404. Unauthorized contracts are governed by article 1317 and the
principles of agency in Title X of this Book
[Refer to the comments in No. 2 under Article 1317]
Article 1405. Contracts infringing the Statute of Frauds, referred to in No. 3 of article
1403, are ratified by the failure to object to the presentation of oral evidence to
prove the same, or by the acceptance of benefits under them.
Ratification of contracts infringing the Statute of Frauds
Under this provision, contracts infringing the Statute of Frauds are ratified through
any of the following ways:
a) Failure to object to the presentation of oral evidence
When the purpose of the testimony of the person enforcing the contract or of his
witness is being offered which is to prove the contract by oral evidence, the other
party should immediately object to such purpose, or as soon as the question is
asked the witness which would allow him to present oral evidence to prove the
contract, the other party should object to the witness answering the question.
Otherwise, such other party will be deemed to have waived his right to raise the
unenforceability of the contract.
b) Acceptance of benefits under the contract
Acceptance of benefits will remove the contract within the application of the Statute
of Frauds because it is no longer wholly executory. Hence, acceptance of
performance even if only partially such as receiving a down payment will make the
contract enforceable.
Article 1406. When a contract is enforceable under the Statute of Frauds, and a
public instrument is necessary for its registration in the Registry of Deeds, the
parties may avail themselves of the right under Article 1357.
Right of a party to compel execution of public instrument
If the contract is enforceable under the Statute of Frauds and a public instrument
is necessary for its registration in the Registry of Deeds, either party may compel
the other to execute the said document.
Article 1407. In a contract where both parties are incapable of giving consent,
express or implied ratification by the parent, or guardian, as the case may be, of
one of the contracting parties shall give the contract the same effect as if only one
of them were incapacitated.
If ratification is made by the parents or guardians, as the case may be, of both
contracting parties, the contract shall be validated from inception.
Ratification when both parties are incapable of giving consent
a. If the parent or guardian of one of the contracting parties ratifies the contract, the
contract becomes voidable at the instance of the party whose parent or guardian
did not ratify the contract.
b. If the parent or guardian of both contracting parties ratify the contract, the
contract is validated from inception.
Article 1408. Unenforceable contracts cannot be assailed by third persons.
Unenforceable contracts can only be questioned by the contracting parties and their
heirs. Accordingly, third persons cannot assail a contract because of its
unenforceability. The Statute of Frauds is a personal defense available only to a
contracting party; hence, only a contracting party may waive his right to raise it as a
defense.
Article 1409. The following contracts are inexistent and void from the beginning:
(1)Those whose cause, object or purpose is contrary to law, morals, good customs,
public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the defense of
illegality be waived.
A void contract is one which has no force and effect from the very beginning, as if it
had never been entered into, and which cannot be validated either by time or
ratification. It is equivalent to nothing; it produces no civil effect. It does not create,
modify or extinguish a juridical relation.
Void contracts are of two kinds:
1) The inexistent ones (such as when the formalities for validity are not complied
with like a donation of an immovable which is not in a public instrument.)
2) The illegal ones (such as when the object is a dangerous drug or the cause is
immoral.)
Characteristics of a void contract
The following are some characteristics of a void contract:
a. A void contract cannot be ratified.
b. The right to set up the defense of illegality cannot be waived.
c. The action or defense for the declaration of the inexistence of a contract does not
prescribe.
d. The defense of illegality of contracts is not available to third persons whose
interests are not directly affected
e. A contract is void and inexistent if it is the direct result of a previous illegal
contract.
What contracts are void or inexistent
a. Those whose cause, object or purpose is contrary to law, morals, good customs,
public order or public policy.
b. Those which are absolutely simulated or fictitious.
c. Those whose cause or object did not exist at the time of the transaction.
d. Those whose object is outside the commerce of men.
e. Those which contemplate an impossible service.
f. Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained.
g. Those expressly prohibited or declared void by law.
Distinctions between voidable and void contracts
1) A voidable contract may be ratified, while a void contract cannot be ratified either
by the act of the parties or by the passage of time.
2) A voidable contract is binding until it is annulled by a proper action in court, while
a void contract produces no effect at all as it is inexistent from the start.
3) The action to annul a voidable contract prescribes, while the action or defense for
the declaration of the inexistence of a void contract does not prescribe.
Distinctions between unenforceable and void contracts
a. An unenforceable contract can be ratified, while a void contract cannot be ratified.
b. An unenforceable contract exists but it cannot be enforced by court action unless
it is ratified, while a void contract does not exist at all.
Distinctions between rescissible and void contracts
a. A rescissible contract is valid until it is rescinded, while a void contract produces
no effect at all as it is inexistent from the start.
b. The action for the rescission of a rescissible contract prescribes, while the action
or defense for the declaration of inexistence of a void contract does not prescribe.
Article 1410. The action or defense for the declaration of the inexistence of a
contract does not prescribe.
Imprescriptibility of action or defense for declaration of inexistence
If a contract is void, the action or defense to have it declared void does not
prescribe. Mere lapse of time cannot give effect to a contract that is void or
inexistent.
Action for declaration of nullity
An action for the declaration of the nullity of a contract is not required for a contract
that is void or inexistent since it produces no effect. However, for the purpose of
convenience or to prevent one from taking the law into his own hands, such action
should be brought so that upon the pronouncement by the court of the nullity, the
rights and obligations of the parties will be clearly defined.
Article 1411. When the nullity proceeds from the illegality of the cause or object of
the contract, and the act constitutes a criminal offense, both parties being in pari
delicto, they shall have no action against each other, and both shall be prosecuted.
Moreover, the provisions of the Penal Code relative to the disposal of the effects or
instrument of a crime shall be applicable to the things or the price of the contract.
This rule shall be applicable when only one of the parties is guilty; but the innocent
one may claim what he has given, and shall not be bound to comply with his
promise.
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Article 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules will be observed:
1) When the fault is on the part of both contracting parties, neither may recover
what he has given by virtue of the contract, or demand the performance of the
other’s undertaking.
2) When only one of the contracting parties is at fault, he cannot recover what he
has given by reason of the contract, or ask for the fulfillment of what has been
promised him. The other, who is not at fault, may demand the return of what he has
given without any of the obligation to comply with his promise.
Kinds of illegal contracts
a. When the illegality constitutes a crime
1) If both parties are guilty (in pari delicto)
If both parties are guilty, the illegality of the contract shall produce the following
effects:
• The parties shall have no right of action against each other.
• Both shall be criminally prosecuted.
• The effects and instruments of the crime (the things and price of the contract) shall
be confiscated in favor of the government.
2) If only one party is guilty
If only one party is guilty, the illegality of the contract shall produce the following
effects:
• The guilty party shall be criminally prosecuted.
• Neither one may compel the other to comply with his undertaking.
• The instruments will be confiscated in favor of the government.
• The innocent party shall not be bound to comply with his promises if he has not
yet performed it, and if he had given something, he may claim for its return.
b. When the illegality does not constitute a crime
1) If both parties are guilty (in pari delicto)
If both parties are guilty, the illegality of the contract shall produce the following
effects:
• Neither party may recover what he has given.
• Neither one may demand the performance of other’s undertaking .
2) If only one party is guilty
If only one party is guilty, the illegality of the contract shall produce the following
effects:
• The guilty party cannot recover what he has given nor can he ask for the fulfillment
of what has been promised him.
• The innocent party may demand the return of what he has given without any
obligation on his part to comply with his promise.
Pari delicto (Latin, “in equal fault) is a universal doctrine which holds that no action
arises, in equity or law, from an illegal contract; no suit can be maintained for its
specific performance, or to recover the property agreed to be sold or delivered, or
the money agreed to be paid, or damages for its violation; and where the parties are
in pari delicto, no affirmative relief of any kind will be given to one against the other.
Pari delicto applies only when there is equal guilt, and not when one party is more
guilty than the other.
Exceptions to the rule of pari delicto
As a rule, when the contract is unlawful, whether or not it constitutes a criminal
offense, recovery by either party is not allowed if both parties are in pari delicto. By
way of exception, recovery is allowed in the following cases:
a. The payor may recover interest he had paid in excess of the interest allowed by
usury laws together with interest from the date of payment.
b. A party may recover, if public interest will be subserved, money or property
delivered for an illegal purpose provided he repudiates the contract before the
purpose has been accomplished or before any damage has been caused to a third
person.
c. An incapacitated person who is a party to an illegal contract may recover, if the
interest of justice so demands, money or property delivered by him.
d. A person may recover, if public policy is thereby enhanced, what he has paid or
delivered, if the agreement is not illegal per se but is merely prohibited, and the
prohibition by law is designed for his protection.
e. Any person may recover any amount he has paid in excess of the price fixed by
law for any article or commodity.
f. A laborer may demand additional compensation for service rendered beyond the
maximum number of hours of labor in a contract where he undertakes to work
longer than the maximum hours fixed.
g. A laborer may recover the deficiency in a contract where he accepts a wage
lower than the minimum wage set by law.
Article 1413. Interest paid in excess of the interest allowed by the usury laws may
be recovered by the debtor, with interest thereon from the date of payment.
Interest paid in excess
The Usury Law provides for the maximum amount of interest that may be charged
by a lender. Any amount paid in excess of such ceiling may be recovered by the
payor under Article 1413 although he and the lender are in pari delicto. However,
with the promulgation of Central Bank Circular No. 905, s. 1982, effective January
1, 1983, suspending the Usury law, usury has become legally inexistent. The lender
and the borrower may thus freely agree on the interest to be charged on the loan,
until the Monetary Board should again place limits on the interest that may be
charged.
Nonetheless, the Supreme Court held that nothing in the said circular grants
lenders carte blanche to raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets. Stipulations authorizing such
interest are contra bonos mores, i.e., contrary to good customs, if not against the
law. They are inexistent and void from the beginning. Thus, the interest rate of 10%
per month agreed upon by the parties is clearly excessive, iniquitous and
unconscionable and cannot be sustained.
But the Supreme Court in certain cases, found the 10% interest per month clearly
excessive and reduced it to 12% per annum. In effect, the difference may be
recovered by the debtor if he had paid such excessive interest, despite the fact that
he and the creditor are in pari delicto.
Note: The Monetary Board, through Circular No. 799, declared that effective July 1,
2014, “the rate of interest for loan or forbearance of money, goods or credits and
the rate allowed in judgments, in the absence of an express contract as to such rate
of interest, shall be 6% per annum.” This amends the previous legal rate of 12% per
annum fixed by the board in 1974.
Article 1414. When money is paid or property delivered for an illegal purpose, the
contract may be repudiated by one of the parties before the purpose has been
accomplished, or before any damage has been caused to a third person. In such
case, the courts may, if the public interest will thus be subserved, allow the party
repudiating the contract to recover the money or property.
Recovery of money or property delivered for an illegal purpose
Under this provision, a party may recover money or property delivered by him for an
illegal purpose although he and the other party are in pari delicto provided the
purpose has not yet been accomplished or damage has not been caused to any
third person.
Article 1419. When the law sets, or authorizes the setting of a minimum wage for
laborers, and a contract is agreed upon by which a laborer accepts a lower wage,
he shall be entitled to recover the deficiency.
Acceptance of a wage below the minimum wage
The acceptance by a laborer of a wage lower than the minimum wage does not
constitute a waiver of his right to recover the deficiency. This is true even if the
laborer is in pari delicto with the employer.
Article 1420. In case of a divisible contract, if the illegal terms can be separated
from the legal ones, the latter may be enforced.
Effect when contract contains both legal and illegal terms
If the legal terms can be separated from the illegal ones, only that part that is illegal
is void. However, if the legal terms cannot be separated from the illegal ones, the
whole contract is void.
Article 1421. The defense of illegality of contracts is not available to third persons
whose interests are not directly affected.
Who may avail themselves of the defense of illegality of the contract
As a rule, only the parties to the contract may avail themselves of the defense of its
illegality. Accordingly, third person cannot set up such defense unless they are
prejudiced by such illegality of the contract.
Article 1422. A contract which is the direct result of a previous illegal contract, is
also void and inexistent.
Effect where contract is the direct result of an illegal contract
An illegal contract is void and inexistent; hence, it cannot give rise to a valid
contract. A contract that is the direct result of a previous illegal contract is also void
and inexistent.

Article 1415. Where one of the parties to an illegal contract is incapable of giving
consent, the courts may, if the interest of justice so demands, allow recovery of
money or property delivered by the incapacitated person.

Effect when one party to an illegal contract is incapacitated

This is another exception to the pari delicto rule. If one of the parties to an illegal
contract is incapacitated such as a minor, the court may allow him to recover money
or property delivered by him if the interest of justice so demands.

Article 1416. When the agreement is not illegal per se but is merely prohibited, and
the prohibition by the law is designed for the protection of the plaintiff, he may, if
public policy is thereby enhanced, recover what he has paid or delivered.

Effect when agreement is not illegal per se but merely prohibited

Recovery of money or property delivered is allowed, if public policy is thereby
enhanced, if the agreement is not illegal per se but is merely prohibited, and the
prohibition by law is designed for the protection of the plaintiff. This is true despite
the fact that both parties are in pari delicto.

Article 1417. When the price of any article or commodity is determined by statute, or
by authority of law, any person paying any amount in excess of the maximum price
allowed may recover such excess.

Effect when payment is made above the ceiling price fixed by law for an article or
commodity
If the law has set a maximum price for an article or commodity, any person paying
any amount in excess of such price may recover the excess. This is true even if
both parties are in pari delicto as the law has for its object the curbing of the evils of
profiteering.

Article 1418. When the law fixes or authorizes the fixing of the maximum number of
hours of labor, and a contract is entered into whereby a laborer undertakes to work
longer than the maximum thus fixed, he may demand additional compensation for
service rendered beyond the time limit.

Maximum number of hours of work

The normal hours of work of any employee shall not exceed eight (8) hours a day.
Hours worked include (a) all time during which an employee is required to be on
duty or to be at the prescribed workplace, and (b) all the time during which he is
suffered or permitted to work. Rest periods of short duration during working hours
shall be counted as hours worked.
When an employee performs work beyond eight (8) hours a day, he is entitled to an
additional compensation equivalent to his regular wage plus at least twenty-five
percent (25%) thereof. Work performed beyond eight (8) hours on a holiday or rest
day shall be paid additional compensation equivalent to the rate of the eight hours
on a holiday or rest day plus at least thirty percent (30%) thereof.

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