Module Law On Obligations and Contracts

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Module LAW ON Obligations and contracts
Accountancy (Bulacan State University)
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MODULE
ON
OBLIGATIONS AND CONTRACTS
BOOK IV OF THE
CIVIL CODE OF THE PHILIPPPINES
I. Introduction
This module on Obligations and Contracts is divided into two (2) parts. Part I is about the
Law on Obligations while Part II will focus on Law on Contracts.
Law on Obligations and Contracts

The law on obligations and contracts refers to the provisions under the civil code and
other pertinent rules which deal with the nature, sources, kinds, extinguishment of obligations as
well as the rights, liabilities and duties arising from agreement between the parties to a contract.
Objectives
At the end of the lesson, the students should be able to:
Learn the general provisions on obligation, its sources, nature, effects, kinds and how
they are extinguish. The students will also learn the requisites, forms and interpretation of
contracts, including defective and quasi-contracts, as well as natural obligations and estoppel.
The student will be able to apply the law in real life scenarios as they will be aided by exhaustive
discussions, illustrations and examples of the provisions of the law as well as case digests of
relevant decisions of the court to determine how the provisions of the law was interpreted by the
court.
PART I : LAW ON OBLIGATIONS (Article 1156 to Article 1304 NCC)
CHAPTER I: GENERAL PROVISIONS (Article 1156 to 1162)
OBLIGATION
An obligation is a juridical necessity to give, to do or not to do. (Art. 1156 NCC)
JURIDICAL NECESSITY
The demandable claim should be complied with. If the specific demandable claim is not
complied with there will be legal consequence.
ESSENTIAL ELEMENTS OF OBLIGATION

1. active subject (creditor/obligee) - one who demands the fulfillment of an obligation.
2. passive subject (debtor/obligor) - one who has the duty to fulfill an obligation.
3. Object or Prestation- the conduct to be performed by the passive subject

(debtor/obligor) for the active subject (creditor/obligee) e.g. to give, to do or not to
do.
KINDS OF OBLIGATION
A. From the viewpoint of sanction
(a) Civil Obligation –an unfulfilled obligation, when due and demandable, may be
enforced in court through action.
(b) Natural Obligation – a special kind of obligation which cannot be enforced in court
but which authorizes the retention of the voluntary payment or performance made
by the debtor.
(c) Moral Obligation – the sanction is conscience or morality, or the law of the church.
B. From the viewpoint of subject matter

(a) Real Obligation– the obligation to give
(b) Personal Obligation– the obligation to do or not to do.

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C. From the affirmativeness and negativeness of the obligation -

(a) Positive or Affirmative Obligation – the obligation to give or to do
(c) Negative Obligation– the obligation not to do (which naturally includes not to give)
D. From the viewpoint of persons obliged

(a) Unilateral– where only one of the parties is bound.
(b) Bilateral– where both parties are bound, may be:
 reciprocal
 non-reciprocal – where performance by one is non-dependent upon
performance by the other
SOURCES OF OBLIGATIONS
(1) Law
Law refers to a rule, usually made by a government, that is used to order the way
in which a society behaves. (Cambridge dictionary) An Obligation arise when the law so
provides. The obligation cannot be presumed in order to be demandable it should be
expressly or clearly be provided for in the law itself.
Example:
Pay tax under R.A. 8424 National Internal Revenue Code (NIRC) as amended by R.A.
10963.
(2) Contracts
A contract is a meeting of minds between two persons whereby one binds himself,
with respect to the other, to give something or to render some service. (Art. 1305, NCC)
The parties to a contract may not unilaterally evade his obligation, unless:
a) The contract authorizes it;
b) The other party assents to it.
(3) Quasi-contract
This refers to an obligation of one party to another imposed by law which is
separate and independent from the agreement between the parties. This arises from a
lawful, voluntary and unilateral acts which are enforceable to the end that no one shall be
unjustly enriched or benefited at the expense of another.
Two (2) Kinds of Quasi-contracts
a. Negotiorum Gestio or unauthorized management
This takes place when a person (officious manager) voluntarily takes
charge of another’s abandoned business or property without the owner’s consent
or authority.
The officious manager is entitled only to reimbursement for expenses and
not to remuneration. Negotiorum gestio is intended as an act of generosity and
friendship and not to allow the gestor to profit from his interfering.
b. Solutio Indebiti or undue payment.

This takes place when something is received when there is no right to
demand it, and it was unduly delivered thru mistake.
(4) Act or omission punish by law or Delict

The obligation arised due to civil liability as a consequence of a criminal offense.
Extent of Civil Liability

This is governed by the Revised Penal Code and the Civil Code, it includes:
1. Restitution

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It is restoring to the rightful owner something that has been wrongfully taken; it
also means returning an injured party to a condition or situation that would have obtained
had no wrongful act been committed. (Oxford Public International Law)
2. Reparation of damages caused; and

It refers to recompense given to one who has suffered legal injury at the hands of
another; to make amends, provide restitution, or give satisfaction or compensation for
a wrong inflicted; it also refers to the thing done or given to the injured party. (Oxford
Public International Law)
3. Indemnity for consequential damages (Art.104, Revised Penal Code-RPC). (Tolentino,

1987)
Indemnification for consequential damages shall include not only those caused the
injured party, but also those suffered by his family or by a third person by reason of the
crime. (Art. 107 RPC)
Enforcement of Civil Liability

1. Independent
Criminal and civil action arising from the same offense may be instituted
separately.
2. Suspended
This is a situation where after criminal action had been commenced,

the prosecution for civil action is suspended in whatever stage it may be found, until
final judgment in the criminal proceeding is rendered.
3. Impliedly Instituted
The civil action is impliedly instituted with the criminal action, in the following
situations:
a. offended party expressly waives the civil action or reserves the right to
institute a separate civil action; or
b. the law provides for an independent civil action
(5) Quasi-delicts or torts

Whoever by act or omission causes damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing
contractual relation between the parties, is called a quasi-delict. (Art. 2176 NCC)
Requisites of Quasi-delict
(a) there must be an act or omission;
(b) such act or omission causes damage to another;
(c) such act or omission is caused by fault or negligence; and
(d) there is no pre-existing contractual relation between the parties. (Chan, Jr. v. Iglesia Ni
Cristo, Inc., G.R. No. 160283, October 14, 2005).
Difference between quasi-delict and crime

1. Quasi-delict is a private offense against private individual whereas crime is a public
offense against the State.
2. Criminal intent is not necessary in quasi-delict but it is necessary for criminal
liability.
3. Quasi-delict gives rise to liability for damage to the injured party. There are crimes
where no civil liability arises.
4. In quasi-delict, there can be reparation, compensation or indemnification of the injury
suffered by the injured party, in crimes fine or imprisonment or both can be assessed.
5. Preponderance of evidence is the degree of proof in quasi-delict, in crimes it is proof
of guilt beyond reasonable doubt.
6. Quasi-delict can be compromised, crimes cannot be compromised.

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CHAPTER I ASSESSMENT AND EVALUATION
CHAPTER II : NATURE AND EFFECTS OF OBLIGATIONS

(Article 1163 to Article 1178)
KINDS OF PRESTATION
1. Obligation to give: real obligation
There is an obligation to provide something to another person. It consists in the delivery
of a specific or determinate thing, or a generic or indeterminate thing to another.
Determinate Thing
 something which is susceptible of particular designation or specification;
 obligation is extinguished if the thing is lost due to fortuitous events.
 Cannot be substituted
Indeterminate Thing
 something that has reference only to a class or genus;
 obligation to deliver is not so extinguished by fortuitous events.
 Can be substituted
Before delivery
There exist a personal right to demand fulfillment of the obligation to give, to do
or not to do.
Personal right refers to a right enforceable only against the debtor. It is a right of the creditor to
demand from the debtor, the fulfillment of a prestation to give, to do or not to do and is
vested before delivery.
After deliver
A real right exist over the thing.
Real right is a right enforceable against the world and is vested after delivery.
Actual Delivery
There is actual delivery of a thing when from the hand of one party it was handed
to the other party (personally), or manifested by certain acts done with the consent of the
other such as execution of a deed of sale involving real estate which therefore transfer
ownership from one party to the others even without physical delivery of the land itself.
Constructive Tradition
There is representative or symbolical delivery, in essence, with intention to
transfer the ownership.
Debtor’s Obligation in case of specific things

Specific things refer to those particularly designated or physically segregated from all other of the
same class; identified by individuality.
To preserve or take care of the thing.
To deliver the specific thing (the thing of the quality intended by the parties in
case of generic things) fruits, accessions and accessories.
To pay damage in case of breach.
Fruits:
The fruits mentioned by the law refer to natural, industrial, and civil fruits.
(a) Natural fruits are the spontaneous products of the soil, and the young
and other products of animals, e.g., grass; all trees and plants on lands produced
without the intervention of human labor.

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(b) Industrial fruits are those produced by lands of any kind through
cultivation or labor, e.g., sugar cane; vegetables; rice; and all products of lands
brought about by reason of human labor.
(c) Civil fruits are those derived by virtue of a juridical relation, e.g., rents
of buildings, price of leases of lands and other property and the amount of
perpetual or life annuities or other similar income.
Accessories:
Those joined to or included with principal for the latter’s completion, better use,
perfection or enjoyment.
Accessions:
It refers to additions to or improvement upon a thing, either naturally or
artificially.
Rights of Creditor in real obligation to give

To compel specific performance.
To ask for damage in case of breach of the contract.
Entitlement to fruits and interest from the time to deliver arise.
To ask that the obligation be complied with by a third person at the expense of the
debtor in case of generic things.
Generic things refers to object which is designated only by its class/genus/ species.
Debtor can give anything of the same class as long as it is of the same kind.
2. Obligation to do: positive personal obligation

There is an obligation to do something to another person. It covers all kinds of works or
services whether physical or mental.
Remedies of creditor in positive personal obligation.

A. If the debtor fails to comply with his obligation to do, the creditor has the right:
(a) to have the obligation performed by himself, or by another unless personal
considerations are involved, at the debtor’s expense; and
(b) to recover damages. (Art. 1170.)
B. In case the obligation is done in contravention of the terms of the same or is poorly
done, it may be ordered (by the court) that it be undone if it is still possible to undo what
was done.
3. Obligation not to do: negative personal obligation

There is an obligation not to do, to refrain or abstain from doing an act. It includes the
obligation not to give.
Duties of Debtor
Not to do what should not be done
To shoulder the cost of undoing what should not have been done
To pay for damages in case of breach
Rights of Creditor
a. To ask to undo what should not be done
b. To recover damages, where it would be physically or legally impossible to undo what
has been undone, because of :
-the very nature of the act itself;
-rights acquired by third persons who acted in good faith;
-when the effects of the acts prohibited are definite in character and will not
cease even if the thing prohibited be undone.
BREACH OF OBLIGATION
Breach of obligation can be:

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1. Voluntary- such as fraud, negligence, delay or contravention of the tenor of the obligation.
2. Involuntary-in the case of fortuitous event.
Voluntary
1. Fraud (Dolo)- there exist an intention to evade the fulfillment of the obligation and to
cause damage. The fraud is causal (dolo causante) when fraud was used to induce a person to
agree to a contract. This kind of fraud is a ground for annulment of the contract plus damages;
2. Negligence or fault-this refer to the omission of that diligence which is required by the
nature of the obligation and corresponds with the circumstances of the person, time and place.
Required Diligence (De Leon 2003)

a. By stipulation-those agreed upon by the parties.
b. By law- if parties did not stipulate, that required by law applicable to the particular
case.
c. Diligence of a good father of a family-if both the parties and the law did not provide
the required diligence.
Difference between fraud and negligence

a. In fraud there is deliberate intention to cause damage there is none in negligence.
b. In fraud, the liability cannot be mitigated in negligence it can be mitigated.
c. Waiver for future fraud is void, gross negligence may not be excused while simple
negligence may be excused in certain situation.
3. Delay
(a) Ordinary delay is merely the failure to perform an obligation on time.
(b) Legal delay or default or mora is the failure to perform an obligation on time
which failure, constitutes a breach of the obligation.
There can be no delay in negative personal obligation.
Kinds of delay (mora)

(A) Mora solvendi or the delay on the part of the debtor to fulfill his obligation (to
give or to do) by reason of a cause imputable to him.
Requisites
a. Obligation must be liquidated, due and demandable.
b. Non-performance on the part of the debtor on the period agreed upon.
c. Demand by the creditor.
Kinds:
a. mora solvendi ex re – default in real obligations (to give)
b. mora solvendi ex persona – default in personal obligations (to do)
Effects:
a. debtor – liable for damages and interests
b. debtor – liable for the loss of a thing due to a fortuitous event
(B) Mora accipiendi or the delay on the part of the creditor without justifiable
reason to accept the performance of the obligation.
Requisites
a. Debtor offers of performance
b. Offer must be in compliance with the prestation.
c. Creditor refuses the performance without just cause.
Effects:

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a. creditor – liable for damages

b. creditor – bears the risk of loss of the thing
c. debtor – not liable for interest from the time of creditor’s delay
d. debtor – release himself from the obligation
(C) Compensatio morae or the delay of the obligors in reciprocal obligations (like in
sale).
Effect:
The default of one compensates the default of the other; their respective liabilities
shall be offset equitable.
 Default / Delay in negative obligation is not possible. (In negative obligation,
only fulfillment and violation are possible)
Rules in mora, delay or default

A. Unilateral Obligation
General Rule
No demand no delay
Exception
a. The obligation or the law provides
b. Time is of the essence
c. Demand is useless
d. Debtor acknowledge that he is in default
B. Reciprocal obligation
General rule
Delay occur from the moment one party fulfill his undertaking, while the other
does not comply or is not ready to comply in a proper manner with what is incumbent
upon him.
Exception
The parties fix a different dates for the performance of their respective obligations.
4. Contravention of the tenor

Violation of the terms and condition stipulated in the obligation, which must not be due to
a fortuitous event or force majeure. (De Leon 2003)
Involuntary
1. Fortuitous event (Force majeure)
Any event which could not be foreseen or which though foreseen is inevitable. (Art.
1174) A happening independent of the will of the debtor and which makes the normal fulfillment
of the obligation impossible. (De Leon 2003) Fortuitous event can be:
A. Act of God
An accident due directly or exclusively to natural causes without human
intervention, which by no amount of foresight, pains or care reasonably to have been
expected, could have been prevented.
B. Act of man
Force majeure is a superior or irresistible force, which is essentially an act of
man; includes unavoidable accidents, even if there has been an intervention of human
element, provided that no fault or negligence can be imputed to the debtor.

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Liability for Fortuitous Event

No person shall be liable for Fortuitous Event, UNLESS
1. Expressly authorize by law;
2. By stipulation of the parties;
3. The nature of the obligation requires assumption of risk;
4. When debtor is guilty of concurrent or contributory negligence;
5. Debtor promise the same thing to two or more person who does not have the same
interest;
6. The thing is lost due to obligor’s fraud, negligence, delay or contravention of the tenor
of the obligation (Art. 1170)
7. The obligation to deliver a specific thing arises from a crime (Art. 1268)
8. The object is a generic thing as genus never perishes.
Requisites for Exemption

1. The event must be independent of the debtor’s will;
2. The event must be unforeseeable or inevitable;
3. The event renders it impossible for the debtor to fulfill his obligation in a normal
manner;
4. The debtor must be free of any participation in the aggravation of the injury to the
creditor. (Tolentino 1987; De Leon 2003)
5. It must be the only and sole cause, not merely a proximate cause.
“Proximate cause has been defined as “that cause, which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury, and without which the result would not
have occurred.” People vs. Villacorta (GR 186412, Sept. 7, 2011)
REMEDIES TO CREDITORS
Rights acquired by virtue of an obligation are transmissible in character, UNLESS
prohibited:
1. By their very nature (personal obligation);
2. By stipulations of the parties;
3. By Law
Primary Remedies
1. Specific performance- performance by the debtor of the prestation itself.
2. Substituted Performance- Someone else performs or something else is
performed at the debtor’s expense.
3. Equivalent Performance- right to claim damages (performance or recission)
4. Rescission- right to rescind or cancel the contract.
5. Pursue the leviable- to attach the property of the debtor, except those exempted
by law from execution.
Subsidiary Remedies
General Rule:
Contract are binding only between the parties, their heirs, assigns and the
estate UNLESS accion subrogatoria and accion pauliana.
1. Accion subrogatoria- right of creditor to exercise all of the right and

bring all of the actions which his debtor may have against third person.
Requisites
a. The debtor to whom the right of action properly pertains must be
indebted to the creditor;
b. That debt is due and demandable;
c. The creditor must be prejudiced by the failure of the debtor to collect his
own debt to the third person either through malice or negligence;

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d. The debtor’s assets are insufficient;

e. The right of action is not purely personal to the debtor.
It is not required that creditor’s claim is prior to acquisition of the right by

the debtor. There is no need for fraudulent intent. Period does not prescribe.
2. accion pauliana- Rescission, which involves the right of the creditor to

attack or impugn by means of a rescissory action any act of the debtor which is in
fraud and to the prejudice of his right as creditor.
Requisites:
a. There is a credit in favor of the plaintiff prior to alienation;
b. The debtor has performed a subsequent contract conveying a
patrimonial benefit to third person;
c. The creditor has no other legal remedy to satisfy his claim;
d. The debtor’s act are fraudulent to the prejudice of the creditor;
e. The third person who receive the property is an accomplice in the fraud.
Credit must exist before the fraudulent act. Fraudulent intent is required if
the contract is onerous. Prescribe in four year from discovery of the fraud.
USURIOUS TRANSACTION
Usury- stipulation of interest rates higher than those imposed by law.
Determination of Liability for Interest

If there is no agreement, a party is not entitled to pay interest because payment of interest
must be stipulated by the parties (Art. 1956). However, even without stipulation as to payment of
interest, a person can be charge legal interest for breach of obligation.
On the payment of interest, the 12% rate is applied only when the obligation breached
consists in the payment of a sum of money, i.e., forbearance of money, in the absence of a
stipulation. Otherwise the applicable rate is 6% per annum. Upon the finality of this ruling, the
rate of interest shall be 12% per annum for the entire judgment, until its satisfaction. (United
Planters Sugar Milling, Inc. v. CA, et al., G.R. No. 126890, November 28, 2006).
Forbearance is refraining from the enforcement of something (such as a debt, right, or

obligation) that is due.(Merriam-Webster Dictionary)
Kinds of Loan
1. Commodatum—where the bailor delivers to the bailee a non-consumable
thing so that the latter may use it for a certain time and return the identical thing.
Bailor refers to an individual who temporarily relinquishes possession but not ownership
of a good or other property under a bailment. Bailee is one to whom Personal Property is
entrusted for a particular purpose by another, the bailor, according to the terms of an
express or implied agreement. (Free dictionary) Bailment is a legal relationship in common
law, where the owner transfers physical possession of personal property ("chattel") for a
time, but retains ownership. (Wikipedia)
2. Simple loan or mutuum—delivery by lender to the borrower of money or
other consumable thing upon the condition that the latter shall pay the same amount of
the same kind and quality.
CHAPTER II ASSESSMENT AND EVALUATION
CHAPTER III: DIFFERENT KINDS OF OBLIGATIONS

I. Pure and Conditional Obligations
II. Reciprocal Obligations
III. Obligations with a Period
IV. Alternative and Facultative Obligations

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V. Joint and Solidary Obligations

VI. Divisible and Indivisible Obligations
VII. Obligations with a Penal Clause
I. PURE AND CONDITIONAL OBLIGATIONS
Condition
It is a future and uncertain event upon which the existence or extinguishment of an
obligation is made to depend.
Conditional Obligation
The effectivity of the obligation is subject to the fulfillment or non-fulfillment of the
condition, which is characterized to be a FUTURE and UNCERTAIN event. (Art. 181)
Pure Obligation
It is one which does not contain any condition or term upon which the fulfillment of the
obligation is made to depend. It is immediately demandable by the creditors and the debtor
cannot be excused for not complying with his prestation.
Effects of happening of conditions

1. Suspensive Condition
Obligation shall only be effective upon the fulfillment of the condition (Art.1181).
What is acquired by the obligee upon the constitution of the obligation is mere hope or
expectancy, but is protected by law.
Before fulfillment of the condition

The demandability and acquisition or effectivity of the rights arising from
the obligation is suspended. Anything paid by mistake during such time may be
recovered.
After fulfillment of the Condition

The obligation arises or becomes effective. The obligor can be compelled
to comply with what is incumbent upon him
Effects of the fulfillment of a suspensive condition (batasnatin.com)

a. Real obligations:
General Rule:
Effects retroact to the day of constitution of the obligation.
Exception:
No retroactivity as to;
a. fruits
b. interests
Exception to the exception:

There may be retroactivity as to the fruits and interests in unilateral
obligations if such intention appears
b. Personal obligations
The court determines the retroactive effect of the condition fulfilled.
2. Resolutory Condition:
Obligation becomes demandable immediately after its establishment or
constitution. The rights are immediately vested to the creditor, but
always subject to the threat or danger of extinction by the happening of the resolutory
condition (Tolentino, 1987).
Before Fulfillment of the condition

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Preservation of creditor’s rights (Art. 1188, par. 1) also applies to

obligations with a resolutory condition. The creditor may, before the fulfilment of
the condition, bring the appropriate action for the preservation of his rights. This
does not
grant to the creditor any preference of credit but only the preservation of his
rights.
After Fulfillment of the condition

Whatever may have been paid or delivered by one or both of the parties
upon the constitution of the obligation shall have to be returned upon the
fulfillment of the condition. There is no return to the status quo. However, when
condition is not fulfilled, rights are consolidated and they become absolute in
character.
3. Potestative Condition
A condition which depends exclusively upon the sole will of one of the
contracting parties.
Exclusively upon the creditor’s will, the condition and obligation is valid
Exclusively upon the Debtor’s Will in case of a Suspensive Condition (Art. 1182)
Condition and obligation are void as it contravenes the principle of
mutuality of contract for being illusory.
Example:
I will pay you if when I want to.
Exclusively upon the Debtor’s Will in case of a Resolutory Condition (Art. 1179,
par 2)
Both the condition and obligation are valid because
the position of the debtor is exactly the same as the position of the creditor when
the condition is suspensive.
4. Casual Condition:
The fulfillment of the condition depends upon chance and/or upon the will of a
third person (Art. 1182)
Example:
Depends upon chance-I will give you Php 100,000 if I win the super lotto.
Depends upon 3rd person- I will give you Php 200,000 if XX pass the 2021
bar examination.
5. Mixed Condition:
The fulfillment of the condition depends partly upon the will of a
party to the obligation and partly upon chance and/or will of a third person. Both
conditions must happen before the obligation will arise.
Example:
I will give you Php 300,000 if I win the super lotto and XX pass the 2021 bar
examination.
6. Impossible Condition:
Two kinds of impossible condition (De leon, De Leon 2014)
a. Physically impossible condition-It refers to a condition that cannot exist or
cannot be done.
Example:
I will give you Php 30,000 if you will become a frog.
b. Legally impossible condition-a condition that is contrary to law, morals, good

customs, public order, or public policy. The conditions which are impossible,

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contrary to good customs, or public policy and those prohibited by law shall
annul the obligations which depends upon them (Art. 1183)
Example:
I will give you Php 50,000 if your son will deliver to Y 10 grams of shabu.
If pre-existing obligation, only the impossible condition is void, but not the
obligation.
Example:
Y borrowed from X Php 20,000 on July 30, 2020. On August 5, 2020 X informed
Y that he will pay accept the payment if she gives shabu.
The obligation to pay Php 20,000 is valid but the condition to give shabu is void.
If divisible obligation, that part which is

not affected by the impossible or unlawful condition shall be valid.
Example:
I will pay you Php 20,00 for your dog and will give you an additional Php 30,000
if you will give me a shabu.
The purchase of the dog for Php 20,000 is valid but not the giving of Php 30,000
for shabu.
If the condition is not to do an impossible thing, it shall be considered as not

having been agreed upon (Art1183, par. 2) as if there was no condition. Consequently, it
becomes pure and immediately demandable.
Example:
I will sell you my car if you will not give me a shabu.
If attached to a simple or remuneratory donation (Art. 727), or testamentary

disposition (Art. 873), condition is considered as not imposed while the obligation is
valid.
Example:
X donated Php 50,000 to Y on condition that she will contract a second marriage.
The obligation to donate is valid but the condition for a second marriage is void as
it is contrary to morals.
7. Positive Condition:
Obligation shall be extinguished as soon as the time expires or if it becomes
indubitable that the event will not take place (Art.1184)
Example:
a. As soon as time expires without the event taking place
Y oblige to give X Php 25,000 if he pass the bar in 2019. If X did not pass the
2019 bar examination the obligation to give Php 25,000 will be extinguished.
b. if it becomes indubitable that the event will not take place
Y oblige to give X Php 25,000 if he pass the bar in 2019. If year 2020 arrives and
X has not passed the bar it is evident that the event (pass the 2019 bar) will no
longer happen.
8. Negative Condition:
Obligation shall be rendered effective from the moment the time indicated
has lapsed, or if it has become evident that the event will not occur (Art.1185)
When no period has been fixed, the intention of the parties is controlling and the
time shall be that which the parties may have contemplated, taking into account the
nature of the obligation (Art 1185, par. 2).
Example:
X promise to give Y Php 20,000 if he has not finish college at age 25.
X is not liable to give Php 20,000 if Y finished college at age 24 or before.
X is liable to Y if Y at age 25 is still attending college.

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Effects of Loss, Deterioration, and Improvement in Real Obligations Pending the

Condition (Art. 1189)
Loss
There is loss when a thing perishes; goes out of commerce; disappears in such a way that
its existence is unknown or it cannot be recovered.
If the loss occurred without the debtors fault-The obligation is extinguish.

If the loss is with debtor’s fault-The obligation is converted into one of indemnity for
damages.
Example:
X oblige to deliver to Y his dog named Xander on or before September 30, 2020.
X is not liable if the dog died without his fault.
X is liable if the dog died because it was hit by a truck when it went out of the house. Y
can ask for damage due to failure to deliver the dog.
Deterioration
A thing deteriorates when its value is reduced or impaired.
If the things deteriorates without the debtors fault – The impairment is to be borne by the
creditor.
If the thing deteriorates with debtor’s fault- The creditor may choose between bringing an
action for rescission of the obligation OR bringing an action for specific performance
with damages in either case.
Example:
X allowed Y to use his car for a trip to Vigan on August 15, 2020.
X is not liable if the side mirror was damaged because it was hit by a drunk driver.
X is liable if the side mirror was damaged when he drove the car while under the
influence of alcohol.
Improvement
There is improvement of a thing when its value is increased or enhanced by nature or by
time at the expense of the debtor or creditor.
If the improvement is at the debtor’s expense, the debtor shall ONLY have usufructuary
rights.
Usufruct refers to the legal right of using and enjoying the fruits or profits of something belonging
to another. (Merriam-Webster dictionary)
If the improvement of the thing is by the thing’s nature or by time it shall inure to the
benefit of the creditor.
Example:
X parked his tricycle near the side of the street and did not use it because it needs repair.
Y repaired, painted and installed a stereo in the tricycle, the improvement belongs to X
but Y can be allowed to use the tricycle.
II. Reciprocal Obligation

Obligations which are established from same cause, such that one obligation is
correlative to the other. It is performed simultaneously, so that the performance of one is
conditioned upon the fulfilment of the other.
Example:
X sold his car to Y for Php 500,000. If X deliver the car, Y needs to pay the agreed
amount of Php 500,000.
In case one party does not comply with his obligation the aggrieved party may choose
between two (2) remedies:

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a. Specific performance with damages.

Specific performance is doing what was promised instead of paying damage for not doing what was
promised.
b. Action for rescission of the obligation also with damage.
Rescission – refers to an action to cancel the agreement or contract when the other party did not
comply with his legal obligation.
The aggrieved party may choose only one of the remedies, not both, except when specific
performance become impossible, the aggrieved party may also seek rescission.
Example:
X agreed to sell his house and lot to Y for 2M. Y will convert the house as
warehouse for his upcoming raw materials delivery on September 5, 2020. They agreed
that the sale will be on August 30, 2020.
If X did not comply with his obligation to sell the house, Y can file an action for
specific performance to compel X to deliver or sell the house.
If X cannot deliver the house because it was already sold to W, Y can still avail
rescission as the remedy because X can no longer sell the house as it was already sold to
another.
However, if both parties have committed a breach of obligation, the liability will be
shouldered by the first infractor to be determined by the courts. However, if it
cannot be determined who was the first infractor, the contract shall be deemed extinguished and
each shall bear his own damages (Art.1192).
III. Obligations with a Period

Obligation with a period
It refers to one whose effects or consequences are subjected in one way or another to the
expiration or arrival of said period or term. (De Leon, De Leon 2014)
Period or Term
Interval of time, which either suspends demandability or produces extinguishment. The
period must be: future, certain, and possible (Tolentino, 1987).
A period of one (1) year = twelve (12) calendar months

A period of one (1) month = thirty (30) days
A period of one (1) day = twenty-four (24) hours
Fortuitous event does not interrupt the running of the period. It only relieves the
contracting parties from the fulfilment of their respective obligations during the period.
Kinds of Period
1. Ex die - period with a suspensive effect. Obligation becomes demandable after the
lapse of the period.
2. In diem - period with a resolutory effect. Obligation is demandable at once but is
extinguished upon the lapse of the period. (Art. 1193)
Difference between term/period and conditions

1. Term/Period
It refers to the interval of time which is future and uncertain.
Condition
This pertains to fact and event which is future and uncertain.
2. Term/Period
Term or period must necessarily come although it may not be known when.
Condition
The condition may or may not happen.
3. Term/Period

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This have an influence upon the time of demandability or extinguishment of an obligation

Condition
Have an influence upon the very existence of the obligation.
4. Term/Period
Has no retroactive effect unless the parties agreed otherwise.
Condition
Has retroactive effect.
5. Term/Period
The obligation is not affected when it is left exclusively to the will of the debtor.
Condition
The obligation is affected when it is left exclusively to the will of the debtor.
Benefit of the Period

Creditor
Creditor may demand the fulfillment or performance of the obligation at any time but the
obligor cannot compel him to accept payment before the expiration of the period.
Example:
X borrowed Php 20,000 at 10% interest from Y payable within three months from
the date of loan with stipulations that the period of payment is the only time X can pay
but Y can also compel X to pay within a month from the loan date.
The period is for the benefit of Y, the creditor. Y can demand payment after a
month but X can only pay three months from loan date even if he wants to settle early his
obligation.
Debtor
Debtor may oppose any premature demand on the part of the creditor for the performance
of the obligation, or if he so desires, he may renounce the benefit of the period by performing his
obligation in advance.
Example:
X borrowed Php 10,000 from Y payable three months from date of loan. The three
months period to pay is intended for the benefit of X. Y cannot compel X to pay within
the period.
When courts may fix the period

General rule
The court is not authorized to fix a period for the parties (De Leon, 2003). (Art. 1197)
except when no period was fixed or when the period depends upon the will of the debtor.
Under Art. 1197, an action can be made to ask the courts to fix the term within which the
debtor must comply with his obligation. In such situation, the fulfillment of the obligation
cannot be demanded until after the court has fixed the period and such period has arrived.
Instances Debtor Loses Right to Use Period (Art. 1198)

The obligation cannot be demanded before the lapse of the period. However, in the
situations below, even if the period has not expired, the obligation is converted into a pure
obligation and therefore becomes immediately due and demandable. (Tolentino,1987).
1. Debtor becomes insolvent, unless he gives a guaranty or security for his debt, after the
obligation is contracted.
2. Debtor fails to furnish the guaranties or securities promised;
3. Debtor by his own acts impaired said guaranties or securities after their establishment,
and when through a fortuitous event they disappear, unless he immediately gives new one
equally satisfactory;
4. Debtor violates any undertaking, in consideration of which the creditor agreed to the
period

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5. Debtor attempts to abscond

6. By law or stipulation
7. Parties stipulate an acceleration clause.
Acceleration clause is a clause in the contract which provides that in case of non-payment or any
portion of the loan when due, the entire obligation shall become due and demandable.
Example:
On July 25, 2020, X borrowed Php 1M to Y at 10% interest payable monthly at
Php 100,000 per month with acceleration clause in case of non payment of at least two
monthly instalments.
IV. Alternative and Facultative Obligations

Alternative Obligation (Art. 1199)
It is one where several prestations are due but the performance of one is sufficient.
General rule
The right to choose the prestation belongs to the debtor.
Limitation on the right to choose

The debtor cannot choose those prestations which are void as ff:
(a) impossible,
(b) unlawful, or
(c) which could not have been the object of the obligation.
Exception
The right may be exercised
a. by the creditor when expressly granted to him (Art. 1205), or
b. by a third person when the right is given to him by a common agreement, (Art. 1306)
Effect, Choice
Choice shall produce no effect except from the time it has been communicated. Notice of
selection or choice may be in any form provided it is sufficient for the other party to know that
the selection has been made. Creditor’s concurrence is not needed when choice has been
communicated by the debtor to the creditor.
The effect of the notice is to limit the obligation to the object or prestation selected. (Art.
1210)
Example:
X obliged himself to give Y an Iphone SE or a samsung galaxy A70. X informed
Y that he chose the samsung galaxy A70. X is obliged to deliver the samsung galaxy A70
he cannot change it without the consent of Y.
Effect of Loss of object, debtor’s choice

All objects lost
Fortuitous event – Debtor is released from the obligation
Debtor’s fault-Creditor shall have the right to indemnity for damages based on the value of
the last thing which disappeared or service which become impossible.
Example:
X obliged himself to give Y an Iphone SE or a samsung galaxy A70. If a typhoon flooded
X house together with the Iphone SE and Samsung galaxy A70, the obligation of X is
extinguished.
On a trip to Boracay, X lost the Iphone SE to a thief and the Samsung galaxy was
damaged when he step on it. X needs to pay Y the value of Samsung galaxy A70 as it was
the last thing which disappeared.
Some were lost

Fortuitous event- Debtor to deliver that which he shall choose from among the remainder.
Debtor’s fault- Debtor to deliver that which the creditor shall choose from among the

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remainder without damages.

Example:
X obliged himself to deliver to Y an Iphone SE, a Samsung galaxy A70 and a Huawei P40
pro. On a trip to Boracay, X carried all the phones and Samsung galaxy A70 was lost. Y can
choose from Iphone SE or the Huawei P40 pro.
One remains
Fortuitous event-Debtor to deliver that which remains.
Debtor’s fault - Debtor to deliver that which remains.
Effect of Loss of object, creditor’s choice

All objects lost
Fortuitous event – Debtor is released from the obligation.
Debtor’s fault-Creditor may claim the price/value of any of them with indemnity for
damages.
Some were lost
Fortuitous event- Debtor to deliver that which he shall choose from among the remainder.
Debtor’s fault- Creditor may claim any of these subsisting without a right of damages.
One remains
Fortuitous event-Creditor may claim any of those subsisting without a right to damages or
price/value of the thing lost with right to damages.
Debtor’s fault – Creditor may claim the remaining thing without a right to damages or the
price/value of the thing lost with right to damages.
FACULTATIVE OBLIGATION (Art. 1206)

It is an obligation where only one prestation is due but the debtor may substitute another .
Only one prestation has been agreed upon but the debtor may
render another in substitution
(De Leon, 2003)
Example:
X promise to give Y and Iphone Pro Max but may give a Huawei P40 pro as a substitute.
It is only the Iphone Pro Max that is due.
Effect of Loss of Substitute

Before Substitution is Made
If the loss of substitute is due to bad faith or fraud of the obligor, the obligor is liable.
If the loss of substitute is due to negligence of the obligor, the obligor is not liable.
After Substitution is Made

The loss or deterioration of the substitute on account of the obligor’s delay, negligence or
fraud, obligor is liable because once substitution is made, the obligation is converted into
a simple one with the substituted thing as the as the object of the obligation.
Distinction between facultative and alternative obligation

In facultative obligation one object due, in alternative obligations several objects are due;
In facultative obligations delivery of another object or performance of another prestation

in substitution of that which is due is considered compliance of the obligation, whereas alternative
obligations delivery of one of the objects or by the performance of one of the prestations which is
alternatively due is considered as compliance of the obligation;
In facultative obligation, the right of choice pertains only to the debtor, in alternative
obligation, the right of choice may pertain to the creditor or even to a third person;
The loss or impossibility of the object or prestation which is due without any fault of the
debtor is sufficient to extinguish the obligation in facultative obligation, whereas in the alternative

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obligation, the loss or impossibility of all the objects or prestations which are due without the fault
of the debtor is necessary to extinguish the obligation;
The culpable loss of the object which the debtor may deliver in substitution before the
substitution is effected does not give rise to any liability on the part of the debtor in facultative
obligation; whereas in alternative obligation, the culpable loss of any of the objects which are
alternatively due before the choice is made may give rise to a liability on the part of the debtor.
V. Joint and Solidary Obligations
Joint Obligations
One where a concurrence of several creditors, or of several debtors, or of several
creditors and debtors, by virtue of which, each of the creditors has a right to demand, and each of
the debtors is bound to render compliance with his proportionate part of the prestation which
constitute the object of the obligation (Obligacion Mancomunada). In other words, It is one
where the whole obligation is to be paid or fulfilled proportionately by the different debtors
and/or to be demanded proportionately by the different creditors. (De Leon, De Leon 2014)
Example:
X and Y owe A,B,C,D the amount of Php 500,000. X and Y are joint debtors and
A,B,C,D are joint creditors. A may demand only Php 125,000 from X. B,C,D can also
demand Php 125,000 from Y.
Presumption:
Obligation is presumed joint if there is a concurrence of several creditors, of several
debtors, or of several creditors and debtors in one and the same obligation (Art. 1207).
Exceptions:
1. When the obligation expressly stated that there is solidarity.
2. When the law requires the obligation to be solidary.
3. When the nature of the obligation requires liability to be solidary.
4. When the nature or condition is imposed upon heirs or legatees, and the testament
expressly makes the charge or condition insolidum.
5. When the solidary responsibility is imputed by a final judgment upon several
defendants.
Principal Effects of Joint Liability

1. Demand by one creditor upon the debtor, produces the effects of default only with
respect to the creditor who demanded and the debtor on whom the demand was made, but not
with respect to others;
Example:
X and Y jointly owed, W and Z joint creditors, Php 500,000. If W demand X to pay and
X failed to do so, X will be considered in default as far as W is concerned. X and Y
cannot be considered in default as far as Z is concerned since there is no demand made by
Z.
2. Interruption of prescription by the judicial demand of one creditor upon a debtor, does
not benefit the other creditors nor interrupt the prescription as to other debtors.
3. Vices of each obligation arising from the personal defect of a particular debtor or
creditor does not affect the obligation or rights of the others;
4. Insolvency of a debtor does not increase the responsibility of his co-debtors, nor does it
authorize a creditor to demand anything from his co-debtors;
5. Defense of res judicata is not extended from one debtor to another.

Example:

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A and B are joint debtors of C and D, joint creditors, for Php 1M. If C sued A for non-
payment and the case was settled by payment of A. The decision in the case will not
extend to B as he can be required to pay the amount of Php 500,000.
Joint Divisible Obligation

Each creditor can demand only payment of his proportionate share of the credit, while
each debtor can be liable only for the payment of his proportionate share of the debt. (Art 1208)
In case of breach of obligation, by one of the debtor, the damages due may be borne by him
alone.
Presumption:
Credit or debt shall be presumed to be divided into as many equal shares as there are
creditors or debtors.
Joint creditor cannot act in representation of the other’s, neither can a joint debtor be
compelled to answer for the liability of others.
Joint Indivisible Obligation

No creditor can act in representation of the other; no debtor can be compelled to answer
for the liability of the others. (Art. 1209)
If there are two or more debtors, the fulfillment of or compliance with the obligation
requires the concurrence of all the debtors, although each for his own share and for the
enforcement of the obligation
In case of breach
Where one of the joint debtors fails to comply with his undertaking, the obligation
can no longer be fulfilled or performed. Consequently, it is converted into one of indemnity for
damages.
Example :
X, Y and Z owe a particular lot to D, due on or before September 1, 2020. A week
after the lapse of the period, D demands X to deliver the lot but X is not ready to comply
with the demand. Y and Z must each contribute their share in the value of the lot and
deliver the amount to D.
In this situation since the lot is an indivisible object failure to comply with the
demand the obligation becomes a money obligation.
X who is unable to comply will later on settle his obligation to Y or Z, whoever

paid, for 1/3 the value of the lot, which is actually X share, plus interest and damages.
If anyone of the debtors, X,Y and Z does not comply with his part of the joint
indivisible obligation, the obligation is converted into one for damages. The creditor
cannot ask for a rescission or for a specific performance because there is no cause of
action for the other debtors who are willing to fulfill their promises.
In case of insolvency of one of the debtors

The other debtors shall not be liable for the share of the insolvent debtor. To hold the
other debtors liable will destroy the joint character of the obligation.
Solidary Obligation
An obligation where there is concurrence of several creditors, or of several debtors, by
virtue of which, each of the creditors has the right to demand, and each of the debtors is bound to
render, entire compliance with the prestation which constitutes the object of the obligation.
Difference between Indivisibility and Solidarity

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The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does
solidarity itself imply indivisibility. (Art. 1211)
Indivisibility refers to the prestation which constitutes the object of the obligation while
solidarity refers to the legal tie, subject or parties of the obligation.
Indivisibility does not require plurality of subjects while in solidarity, plurality of subject
is indispensable.
The indivisibility of the obligation is terminated upon breach of the obligation which will
then be converted into one of indemnity for damages. Upon breach of the obligation, the
solidarity of the debtors remains.
Kinds of Solidary Obligations

1. Active (solidarity among creditors):
Each creditor has the authority to claim and enforce the rights of all, with the resulting
obligation of paying everyone of what belongs to him.
2. Passive: (solidarity among debtors):

Each debtor can be made to answer for the others, with the right on the part of the debtor
- payor to recover from the others their respective shares.
Example:
X,Y and Z are solidary debtors to A,B and C for Php 2M. If A demanded X to pay,
X, being a solidary debtor, needs to pay the entire Php 2M. X can run after Y and Z for
their share in the obligation.
3. Mixed: Solidarity among creditors and debtors

Solidarity is not destroyed by the fact that the obligation of each debtor is subject to
different conditions or periods. The creditor can commence an action against anyone of the
debtors for the compliance with the entire obligation minus the portion or share which
corresponds to the debtor affected by the condition or period.
Example
X, Y and Z owe Php 1.2M to A,B, and C. X and Y debt is payable on or before
September 15, 2020 while Z debt is due on October 15, 2020. On September 16, 2020
any of the creditors may go after X and Y for the payment of Php 800,000 (1.2M-400,000
share of Z) but not against Z whose debt is not yet due.
Defenses Available to a Solidary Debtor (Art.1222)

1. Those derived from the nature of the obligation
2. Those personal to him
3. Those pertaining to his own share
4. Those personally belonging to other co-debtors but only as regards that part of the debt for
which the latter are responsible.
Effects of Demand to Solidary Debtors

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 (Art.
1216) The creditor may proceed with anyone of the solidary debtors or all simultaneously. A
creditors right to proceed against the surety exists independently of his right to proceed against
the principal.
Effects of Payment by the debtor

Full 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 (Art. 1217) The
solidary debtor who made the payment shall have the right to claim from his co-debtors the share
which corresponds to them with interest unless barred by prescription or become illegal (Art.
1218)

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Example:
A,B and C was adjudged by the court in 2009 liable to pay 1M for their debt with
interest plus damages to X, Y and Z. C paid the judgment award. He demanded payment
of the shares of A and B in 2020. C can no longer recover from A and B as it is already
barred by prescription. Action upon a judgment must be brought within ten (10) years
from the time the cause of action accrues.
VI. Divisible and Indivisible Obligations

A. Divisible Obligations
One which is susceptible of partial performance; that is, the debtor can
legally perform the obligation by parts and the creditor cannot demand a single performance of
the entire obligation (Tolentino, 1987). A divisible obligation is one that requires the giving of
definite things and the same can be partially performed. (Business law.ph, Del Puerto 2020)
B. Indivisible Obligations
One which cannot be validly performed in parts (Tolentino, 1987). An indivisible
obligation is one that requires the giving of definite things and the same cannot be partially
performed. (Business law.ph, Del Puerto 2020)
Example:
X obliged himself to deliver a boat to Y. Since the boat is not physically
divisible, even if X and Y agree to make the obligation divisible, the same would
not be possible as the boat by itself cannot be delivered one parts after the other,
hence, it is not susceptible of partially performance.
Divisibility / indivisibility refers to the performance of the prestation and not to the thing
which is the object thereof. The thing may be divisible, yet the obligation may 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 (Art.1225,par. 2).
Example:
X oblige himself to construct the house of Y in 30 days. The obligation of X to
construct the house cannot be fulfilled at one time.
When there is plurality of debtors and creditors, the effect of divisibility / indivisibility
of the obligation depend upon whether the obligation is joint or solidary.
A joint indivisible obligation give rise to indemnity for damages from the time anyone
of the debtors does not comply with is undertaking.
(Art. 1224)
Effect
Creditor cannot be compelled to receive partially
the prestation in which the obligation consists; neither may the debtor be required to make the
partial payment (Art. 1248), UNLESS:
a. The obligation expressly stipulates the contrary.

Example:
X and Y owe A and B Php 2M payable in 4 installments. A and B can make partial
payment of the loan because the obligation expressly state the prestation can be done
partially.
b. The different prestations constituting the objects of the obligation are subject to
different terms and conditions.
Example:

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A and B owe X and Y Php 1M and 100K of Jasmine rice. The Php 1M is payable on
or before September 5, 2020 while the delivery of Jasmine is on or before September
15, 2020. The obligation to pay and obligation to deliver cannot be simultaneously
done due to different period for compliance.
c. The obligation is in part liquidated and in part unliquidated.

Unliquidated Obligations refers to an obligation incurred but not paid for, such as an account payable
for items ordered or received but not yet paid for. (business dictionary.com)
VII. Obligations with a Penal Clause

Penal Clause:
An accessory undertaking to assume greater liability in case of breach of the obligation
(De Leon, 2003) Accessory because it is attached to the principal obligation in order to ensure
fulfilment of the obligation. The enforcement of the penalty can be demanded by the
creditor only when the non-performance is due to the fault or fraud of the debtor.
Example:
A owes B Php 200,000 payable on or before August 30, 2020. They agreed that a
penalty of 10,000 will be imposed for failure to pay the loan on due date. B can recover
the penalty of Php 10,000 (This is in addition to the principal obligation of Php 200,000)
in case A was unable to pay the loan on its due date.
If the principal obligation is void, penal clause shall also be void. However, the nullity of
the penal clause does not carry with it the nullity of the principal obligation (Art.1230).
Example:
X owe Y Php200,000 due on August 30, 2020. It is stipulated that in case of
breach of the obligation a penalty of Php 10M per day shall be imposed. The principal
obligation is valid and can stand by itself. Y can still collect Php 200,000 from X but the
penalty is void because it is excessive, unreasonable and thus may be set aside.
Example:
X obliged himself to deliver 20k of shabu to Y on September 3, 2020 with penalty
of Php 10,000 for failure to deliver on the stipulated date. Since the principal obligation
to deliver shabu is void, as it is contrary to law, the Php 10,000 penalty shall also be void.
Purposes of Penalty
1. To insure the performance of the obligation.
2. To liquidate the amount of damages to be awarded to the injured party in case of
breach of the principal obligation (compensatory).
3. To punish the obligor in case of breach of the principal obligation (punitive).
Effects of Penalty
1. The penalty shall substitute the indemnity for damages and payment of interest in case
of non-compliance (Art. 1226), UNLESS:
a. There is a stipulation to the contrary
b. The obligor refuses to pay the penalty
c. The obligor is guilty of fraud
2. Debtor cannot exempt himself from the performance of the principal obligation by
paying the stipulated penalty unless this right has been expressly reserved from him (Art 1227)
3. Creditor cannot demand the fulfillment of the principal obligation and demand the
satisfaction of the penalty at the same time unless the right has been clearly granted to
him (Art. 1227).
a. If creditor has chosen fulfillment of the principal obligation and performance
thereof become impossible without his fault, he may still demand the satisfaction of the
penalty.
b. If there was fault on the part of the debtor, creditor may demand not only
satisfaction of penalty but also the payment of damages.
c. If creditor chooses to demand the satisfaction of the penalty, he cannot
afterwards demand the fulfilment of the obligation.

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When Penalty may be Reduced Art. 1229:

1. If the principal obligation has been partly complied with.
2. If the principal obligation has been irregularly complied with.
3. If the penalty is iniquitous or unsconscionable even if there has been no performance.
Extinguishment of Obligations
I. Payment or Performance
II. Loss of the thing due or impossibility of Performance
III. Condonation or remission of the debt
IV. Confusion or Merger of rights
V. Compensation
VI. Novation
I. Payment or Performance
Payment means not only delivery of money but also performance, in any manner, of the
obligation. (Art. 1232)
SPECIAL FORMS OF PAYMENT

They are considered special because these are not the ordinary way to extinguish an
obligation.
A. Application of Payment (Art. 1252)

Is the designation as to which debt the payment should be applied for a debtor who owes
several debts to the same creditor.
Requisites
a. Plurality of debts
b. Debts are of the same kind
c. Debts are owed to the same creditor and by the same debtor
d. All debts must be due
e. Payments made is not sufficient to cover all debts.
Rules on Application
1. Preferential right of debtor -debtor has the right to select which of his debts he is
paying.
2. The debtor makes the designation at the time he makes the payment
3. If not, the creditor makes the application, by so stating in the receipt that the issues,
unless there is cause for invalidating the contract.
4. If neither the creditor nor debtor exercises the right to apply, or if the application is not
valid, the application is made by operation of law.
5. If debt produces interest - payment not deemed applied to the principal unless interests
are covered.
6. When no application can be inferred from the circumstances of payment, it is applied
to: to the most onerous debt of the debtor; or if debts due are of the same nature and burden, to
all the debts in proportion
7. Rules of application of payment may not be invoked by a surety or solidary guarantor.
Effects
a. Payment of debt designated as to corresponding amount
Example:
X owe Y several debts amounting to Php 5M as follows:
a. Php 500,000 due on August 30, 2020;
b. Php 1.5M payable on or before July 30, 2020;
c. Php 2.5M payable on August 15, 2020 at 5% interest.

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On August 30, 2020, X paid Y Php 2M. The payment can be applied to the Php 500,000
and Php 1.5M loan. It cannot be applied to the Php 2.5M loan because B cannot compel
Y to receive partial payment and also the debt is not yet due.
B. Payment by Cession (Art. 1255)

Act whereby a debtor abandons all his property to his creditors, so that the latter may
apply the proceeds (of its sale) to their credits.
Requisites
a. Plurality of debts
b. Plurality of creditor
c. Partial insolvency of the debtor
d. Abandonment of the totality of the debtor’s properties for the benefit of the creditors
e. Acceptance by the creditors
Effects
a. Assignment liberates debtor up to the amount of the net proceeds of the sale of his
assets.
Example:
X owes several debts to Y totalling Php 5M which are all due. X offered Y his
property in Tagaytay on condition that the proceeds thereof will be applied to the
payment of his debts. If the property was sold for Php 5.5M, Y needs to return to X
the remaining Php 500,000 and the debts considered paid. However, if the property
was sold for Php 4M, X still owe Y Php 1M.
b. Assignment does not vest title to the property in the creditor, who are only authorized
to sell it.
Example:
In the example above, the property remains to be owned by X. Y was only given
the power to sell the land so that the proceeds of the sale can be applied to X debts.
C. Dation in payment (Art. 1245)

Delivery and transmission of ownership of a thing by the debtor to the creditor as an
accepted equivalent of the performance of the obligation (dacion en pago). A conveyance of
ownership of a thing as an accepted equivalent of performance. (8 Manresa 314)
Example:
X owe Y Php 3M. X can offer his property in Baguio as payment for the loan. If Y
agrees then the Php 3M loan is considered paid even if the property was sold below Php
3M.
Requisites
a. Should not be prejudicial to other creditors.
b. Should not constitute pactum commissorium
Pactum commissorium- it refers to the automatic appropriation by the creditor of the thing
pledged or mortgaged upon the failure of the debtor to pay the principal obligation.
Effects
a. Extinguishment of debt as an equivalent of the performance of the obligation.
Dation in payment and Payment by cession
a. Dation in payment is in favor of only one creditor while in Payment by cession

there are various creditors.
b. Payment by Dation in payment extinguishes the obligation to the extent of the value
of the thing delivered, unless the parties agree that the obligation be totally
extinguished. In Payment by cession, it extinguishes credits only up to the extent of
proceeds from sale of assigned property, unless otherwise agreed upon.

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c. In dation in payment there is a transfer of ownership of thing alienated to the creditor

while in payment by cession only possession and administration with authorization to
convert property to cash with which the debt should be paid.
d. In dation in payment, the debtor is not necessarily in a state of financial difficulty
while in payment by cession presupposes insolvency of the debtor.
e. In dation in payment, there is assignment of only some specific thing whereas in
payment by cession the assignment involves all the property of the debtor.
D. Tender of payment and consignation

A. Tender of payment:
It refers to an offer of immediate performance of the obligation made by the debtor to the
creditor.
Requisites: (De Leon, De Leon 2014)

a. Tender of payment must comply with the rules or with the terms required by the contract
in making such tender.
b. It must be in legal tender, unconditional and for the whole amount due.
c. It must be actually made
B. Consignation:
Deposit of the object of obligation in a competent court in accordance with the rules
prescribed by law, whenever the creditors unjustly refuses payment or because of some
circumstances which render direct payment to the creditor impossible or not advisable.
Requisites
a. There is a debt due.
b. Consignation is made because of some legal cause.
c. Previous notice of consignation was given to those persons interested in the
performance of the obligation.
d. Amount of the thing due was placed at the disposal of the court
e. After the consignation has been made, the persons interested were notified thereof.
Effects
If accepted by the creditor or declared properly made by the court:
a. The debtor is released in same manner as if he had performed the obligation at the
time of consignation
b. Accrual of interest is suspended from the moment of consignation.
c. Deterioration or lost of the thing or amount consigned occurring without the fault of
the debtor, must be borne by the creditor from the moment of deposit.
d. Any increment or increase in the value of the thing after consignation inures to the
benefit of the creditor.
Example:
X owe Y Php 2M. A week prior to the due date, X tender payment to Y for Php 2M but Y
refuse on ground that an interest should be paid by X for the loan. The interest was not
part of the agreement. X can deposit the Php 2M in court and once approved by the court
X is released from his obligation to Y as the consignation is considered as performance of
the obligation.
II. Loss or Impossibility

A. Loss
A thing is lost when it perishes, goes out of commerce or disappears in such a way that its
existence is unknown or it cannot be recovered (Art. 1189, par. 2)
Effects of Loss
Obligation to Deliver a Specific Thing

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26
The obligation is extinguishment if the thing was destroyed w/o fault of the debtor and
before he has incurred delay.
Example:
X obliges himself to deliver to Y 200K of bangus from his fishpond on or before
August 15, 2020. On August 16, 2020, a typhoon hit and all the bangus on X fishpond
was washed away. X is liable even if the loss of the bangus was due to fortuitous event
because he had already incurred in delay as he did not make the delivery on or before
August 15, 2020, the period agreed upon between the parties.
Obligation to Deliver a Generic Thing

Loss of a generic thing does not extinguish an obligation, Exceptions
a) If generic thing is delimited (delimited generic thing.) complete destruction shall
extinguish the obligation
Example:
200 kilos of bangus in the fishpond. If all bangus in the fishpond perishes, the
obligation is extinguish
b) If generic thing has been segregated or set aside, hence, it has become specific.
Example:
200 cavans of Jasmine Rice in Tagaytay warehouse set aside for X.
Partial loss
Art. 1264: Partial loss due to a fortuitous event does not extinguish the obligation. The
thing due shall be delivered in its present condition, without any liability on the part of the
debtor, unless the obligation shall be extinguished when the part lost was of such extent as to
make the thing useless.
Example:
X sold to Y the Bangus in his fishpond. If a typhoon washed away some of the
Bangus, whatever remains from the fishpond shall be delivered to Y.
X sold to Y his Toyota Alfard. Prior to delivery a dump truck hit the garage of X
damaging the car to such extent that it can no longer be used. X obligation is extinguish
due to the accident. Y can recover damage from the owner of the dump truck.
B. Impossibility of Performance (Arts. 1266-1267, CC)

When prestation becomes legally or physically impossible (by fortuitous event or force
majeure), the debtor is released. Impossibility must have occurred without fault of debtor, and
after the obligation has been constituted.
Partial Impossibility
1. Courts shall determine whether it is so important as to extinguish the obligation.
2. If debtor has performed part of the obligation when impossibility occurred, creditor
must pay the part done as long as he benefits from it.
3. If debtor received full payment from creditor, he must return excess amount
corresponding to part which was impossible to perform.
Doctrine of Unforeseen Events

When the service has become so difficult as to be manifestly beyond the contemplation of
all the parties, the obligor may be released in whole or in part (De Leon, 2003)
Example:
X a sculptor was commissioned by Y to do a wood sculpture of a famous celebrity
in two months time. A month after the agreement, X suffered an accident which resulted
in the amputation of both his arms. In this situation, X can no longer do the sculpture as
has lost the use of his arms. X will be released from the obligation.
Requisites:
1. Event could not have been foreseen at the time of the constitution of the contract.
2. Event makes performance extremely difficult but not impossible.

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3. Event not due to any act of the parties.

4. Contract is for future prestation
III. Condonation or Remission of the Debt

Condonation:
An act of liberality, by virtue of which, without receiving any equivalent,
creditor renounces the enforcement of the obligation. The obligation is extinguished either in
whole or in such part on which remission refers.
Requisites
1. Debt must be existing and demandable
2. Renunciation must be gratuitous; without any consideration
3. Debtor must accept the remission
Effect
Art. 1273: Renunciation of the principal debt shall extinguish the accessory obligations
but remission of the latter leaves the principal obligation in force.
Example:
X owes Y Php 10,000 with 5% interest payable on or before August 30, 2020. If Y
condone the interest, X obligation to pay Php 10,000 remains. However, if Y condones
the Php 10,000 debt of X, the accessory obligation of paying interest is also extinguish.
IV. Confusion or Merger of Rights

Confusion:
It is the meeting in one person of the qualities of creditor and debtor of the same
obligation. In such a case, the obligation is extinguish as a person cannot claim payment for
himself.
Requisites
1. It should take place between principal debtor and creditor
2. It must be complete and definite
Parties must meet all the qualities of creditor and debtor in the obligation / in the part
affected.
Effects (Arts. 1275- 1277)

1. The obligation is extinguished from the time the characters of the debtor and creditor
are merged in the same person.
Example:
X issued a check for Php 100,000 to Y in payment of the items delivered to his
shop. Y endorses the check to W as payment for his services. W endorse the check to X in
payment of the clothing ordered from X. X the debtor before has now become the
creditor as a result thereof, the obligation is extinguish.
2. In joint obligations, confusion does not extinguish the obligation except as regards
the corresponding share of the creditor or debtor in whom the two characters concur.
Example:
X and Y jointly owe Z Php 2M for the raw materials delivered. Z bought clothes
on credit from X for Php 500,000 and from Y groceries for Php 500,000. Confusion arise
for Php 1M debt and only the remaining Php 1M remains.
3. In solidary obligations, confusion in one of the solidary debtors extinguishes the entire
obligation.
Example:
X and Y are solidary debtors of Z for Php 5M. Z purchased on credit from Y
Php 5M worth of groceries. Y then become a debtor and a creditor of Z at the same time.
The solidary obligation is fully extinguish.

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4. Obligation is not extinguished when confusion takes place in the person of subsidiary
debtor (e.g. guarantor), but merger in the person of the principal debtor shall benefit the former.
Example:
X Php 5M loan to Y was guaranteed by W. If Y loaned Php 5M to W, the
obligation will not be extinguished as W is not the principal debtor. If Y purchased the
house of X on credit for Php 5M, X then become a debtor and creditor at the same time of
Y, the obligation of W as guarantor as well as the obligation of X is extinguish.
V. Compensation
Compensation:
There is offsetting of two obligations which are reciprocally extinguished if they are
of the same value, or extinguished to the concurrent amount if of different values.
Example:
X owe Y Php 10,000 due on September 15, 2020. Y later on borrowed Php 5,000 from X
which is due on September 15, 2020. Compensation exists to the concurrent amount of
Php 5,000. X still owe Y Php 5,000.
Compensation and confusion

In compensation there are two obligations while there is only one obligation in confusion.
Compensation involves two persons who are mutually debtors and creditors of each others in two
obligations each arising from the same cause whereas in confusion there is only one person
whom the characters of the debtors and creditors meet.
Requisites
1. Each obligor is bound principally as creditor and debtor of the each other;
Example:
X owe Y Php 10,000 due on September 15, 2020. Y borrowed from X Php 5,000
due on September 15, 2020. Compensation can take place because X and Y are bound
principally as debtors and creditors of each other.
2. Both debts must consist in a sum of money, or if the things due are FUNGIBLE, must
be of the same kind & quality
Example:
If X owes Y Php 10,000 due on September 15, 2020 and Y owes X an Iphone SE
worth Php 25,000 due on September 15, 2020, no compensation can take place because
the debts do not consist in sum of money.
3. Both debts are due

4. Debts are liquidated and demandable
5. There must be no retention or controversy over either of the debts, commenced by 3rd
persons and communicated in due time to the debtor.
Example:
X owes Y Php 2M. Y owes X Php 1.5M. Y owes W Php 3M. Compensation
cannot takes place against X and Y if W commence an action to garnished the debt of X
to Y because a controversy exist over the debt of X to Y.
6. Compensation is not prohibited by law
Kinds
1. As to extent
a. Total: Debts are of the same amount
b. Partial: Amounts are not equal
2. As to origin
a. Legal: takes place by operation of law
b. Conventional: parties agree to compensate their mutual obligations even when
some requisite in Art. 1279 is lacking (Art. 1282).

lOMoARcPSD|13513977
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c. Judicial: decreed by court when there is counterclaim. Effective upon final

judgment.
d. Facultative: when it can be claimed by one of the parties who, however, has the
right to object to it.
Effects
1. Effects arise from the moment all the requisites concur.
2. Debtor claiming its benefits must prove compensation; once proven, effects retroact
from the moment when the requisites concurred.
3. Both debts are extinguished to the concurrent amount, even though the creditors and
debtors are not aware of the compensation.
4. Accessory obligations are also extinguished.
Compensation is prohibited in:

1. Contracts of depositum
Depositum- means deposit (Merriam-Webster dictionary)
2. Contracts of commodatum
Commodatum-refers to a gratuitous loan of a movable property which is to be returned
undamaged to the lender. (uslegal.com)
3. Future support due by gratuitous title
4. Civil liability arising from a penal offense
Example:
X owes Y Php 5M. Due to non-payment, Y destroyed the car of X. If a judgment
was rendered in favor of X and the court award X Php 3M damage, Y cannot compensate
the Php 3M damage awarded to X against the Php 5M obligation because compensation
is not allowed.
5. Obligations due to the government
6. Damage caused to the partnership by a partner
ASSIGNMENT OF CREDIT (Art. 1285):

An assignment of credit is the process of transferring the right of the assignor to the
assignee who would then have the right to proceed against the debtor. The assignment may be
done either gratuitously or onerously, in which case, the assignment has an effect similar to that
of a sale (Benjamin Rodriguez vs. Court of Appeals and Hadji Esmayaten, G.R. No. 84220
March 25, 1992;Nyco Sales Corp. vs. BA Finance Corp., G.R. No. 71694, August 16, 1991).
No effect and does not bind the debtor unless and until the latter is notified of the
assignment or learns of it.
Effects
With Debtor’s consent
Debtor’s consent to assignment of credit constitutes a waiver of compensation, unless he
reserved his right to compensation.
Example
X borrowed Php 40,000 from Y due on September 25, 2020. Y owe X Php 25,000
due on September 25, 2020. Y assigned his right to W on September 5, 2020 with the
consent of X. X reserved his right to compensation. On due date, X can set up
compensation against W for the debt of Y because he made the reservation of his right to
compensation. He will be liable to pay only Php 15,000 to W.
If X did not make reservation of his right to compensation, he is still liable to pay
W the amount of Php 40,000 but he can still collect the debt of Y amounting to
Php 25,000.
With Debtor’s knowledge but without consent

Debtor may setup compensation of debts (maturing) before the assignment of credit but
not of subsequent ones.
Example:

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X borrowed Php 50,000 to Y due on September 5, 2020.

Y owe X Php 25,000 due on September 10, 2020.
X owes Y Php 25,000 due on September 15, 2020.
If X assigned his right to W on September 11, 2020 without the consent of Y, Y can set up
compensation of debts occurring before the assignment on September 11, 2020. Y cannot
set up compensation for debts occurring after the assignment because it is not yet due. On
September 11, 2020 Y is liable to pay X Php 25,000. On September 15, 2020, X will be
liable to pay Php 25,000.
Without debtor’s knowledge

Debtor may set up compensation of all credits (maturing) prior to the assignment and also
latter ones until he had knowledge of the assignment.
Example:
X borrowed Php 50,000 to Y due on September 5, 2020.
Y owe X Php 25,000 due on September 10, 2020.
X owes Y Php 25,000 due on September 15, 2020.
If X assigned his right to W on September 11, 2020 without the knowledge and consent
of Y. If on September 16, 2020 Y came to know about the assignment, Y can set up
compensation for debts before and after knowledge of the assignment. The knowledge of
assignment is the reckoning period and not the date when assignment was actually made.
VI. Novation
Novation refers to the extinguishment of an obligation by the substitution or change of
the obligation by a subsequent one which extinguishes or modifies the first either by:
i. changing the object or principal conditions, or
ii. by substituting the person of the debtor, or
iii. by subrogating a third person in the rights of the creditor.
It also refers to a juridical act of dual function which extinguishes an obligation, and at
the same time, creates a new one in lieu of the old.
Requisites
1. A previous valid obligation
2. Agreement of all the parties to the new obligation
3. Extinguishment of the old obligation
4. Validity of the new obligation
Express novation:
Parties must expressly disclose their intent to extinguish the old obligation by creating a
new one. Novation is not presumed.
Implied novation:
No specific form is required. There must be incompatibility between the old and the new
obligation or contract.
Test of Incompatibility
There is novation, when the old and new obligation can stand together, each one having
an independent existence. Incompatibility exists when the old and new obligation cannot stand
together, thus there is no novation. No incompatibility exists when they can stand together.
Subjective Novation
1. Substitution of the Debtor:
Consent of creditor is an indispensable requirement both in expromision and delegacion.
Expromision- refers to the act by which a creditor accepts a new debtor, who becomes bound instead of the
old, the latter being released.
Delegacion or that which takes place when the creditor accepts a third person to take place of the debtor at
the instance of the latter (studymode.com)

lOMoARcPSD|13513977
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2. Subrogation of a 3rd person in the rights of the creditor. Subrogation refers to the
substitution of one person (subrogee) in the place of the creditor (subroger) with reference to a
claim or right, giving the former all the rights of the latter, including the right to employ all
remedies to enforce payment. Subrogation may be:
a. Conventional subrogation: By agreement of all the parties;

Requisites:
The consent of the 3rd person, and of the original parties (Art.1301).
b. Legal subrogation:
This takes place by operation of law without agreement of the parties.
Legal subrogation is not presumed, except in the following circumstances:
1. When creditor pays another creditor who is preferred, even without the debtor’s
knowledge.
2. When a 3rd 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 the obligation.
Example:
A owes B Php 5M payable on or before September 10, 2020. W, guarantee the
debt. If W pays B Php 5M without the knowledge of A, W is subrogated in the rights of
B. W as guarantor has an interest in the loan as his payment will extinguish the guarantee
but the principal obligation still stands.
Effects
Total
1. Transfers to the person subrogated the credit with all the rights thereto
appertaining, either against the debtor or 3rd persons.
2. Obligation is not extinguished, even if the intention is to pay it.
3. Defenses against the old creditor are retained, unless waived by the debtor
Partial
A creditor, to whom partial payment has been made, may exercise his right
for the remainder, and shall be preferred to the person subrogated in his place in virtue of the
partial payment. Such creditor remains a creditor only up to the balance of the unpaid debt.
Example:
X owe Y Php 3M. Z pay Y Php 2.5M with the consent of X. Y remains a creditor only up
to Php 500,000.

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lOMoARcPSD|13513977

Module LAW ON Obligations and contracts

Accountancy (Bulacan State University)

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Law on Obligations and Contracts

PART I : LAW ON OBLIGATIONS (Article 1156 to Article 1304 NCC)

CHAPTER I: GENERAL PROVISIONS (Article 1156 to 1162)

ESSENTIAL ELEMENTS OF OBLIGATION

3. Object or Prestation- the conduct to be performed by the passive subject

B. From the viewpoint of subject matter

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C. From the affirmativeness and negativeness of the obligation -

D. From the viewpoint of persons obliged

b. Solutio Indebiti or undue payment.

(4) Act or omission punish by law or Delict

Extent of Civil Liability

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2. Reparation of damages caused; and

3. Indemnity for consequential damages (Art.104, Revised Penal Code-RPC). (Tolentino,

Enforcement of Civil Liability

This is a situation where after criminal action had been commenced,

(5) Quasi-delicts or torts

Difference between quasi-delict and crime

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CHAPTER I ASSESSMENT AND EVALUATION

CHAPTER II : NATURE AND EFFECTS OF OBLIGATIONS

Debtor’s Obligation in case of specific things

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Rights of Creditor in real obligation to give

2. Obligation to do: positive personal obligation

Remedies of creditor in positive personal obligation.

3. Obligation not to do: negative personal obligation

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Required Diligence (De Leon 2003)

Difference between fraud and negligence

There can be no delay in negative personal obligation.

Kinds of delay (mora)

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a. creditor – liable for damages

Rules in mora, delay or default

4. Contravention of the tenor

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Liability for Fortuitous Event

Requisites for Exemption

1. Accion subrogatoria- right of creditor to exercise all of the right and

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d. The debtor’s assets are insufficient;

It is not required that creditor’s claim is prior to acquisition of the right by

2. accion pauliana- Rescission, which involves the right of the creditor to

Determination of Liability for Interest

Forbearance is refraining from the enforcement of something (such as a debt, right, or

CHAPTER II ASSESSMENT AND EVALUATION

CHAPTER III: DIFFERENT KINDS OF OBLIGATIONS

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V. Joint and Solidary Obligations

Effects of happening of conditions

Before fulfillment of the condition

After fulfillment of the Condition

Effects of the fulfillment of a suspensive condition (batasnatin.com)