CHAPTER 4: Extinguishments of Obligations Doctrine of Estoppel

Section 1. – Payment or Performance Article 1235. When the obligee accepts the
performance, knowing its incompleteness or
Article 1232. Payment means not only the
irregularity, and without expressing any protest
delivery of money but also the performance, in
or objection, the obligation is deemed fully
any other manner, of an obligation.
complied with.
Payment – the fulfillment of the obligation by
Requisites:
the realization of the purposes for which it was
constituted.  Obligee knows that the performance is
incomplete or irregular
 May consist not only in the delivery of
money but also the giving of a thing (other  He accepts the performance without
than money), the doing of an act, or not expressing any protest or objection
doing of an act
Article 1236. The creditor is not bound to
Article 1233. A debt shall not be understood to accept payment or performance by a third
have been paid unless the thing or service in person who has no interest in the fulfillment of
which the obligation consists has been the obligation, unless there is a stipulation to
completely delivered or rendered, as the case the contrary.
may be.
Whoever pays for another may demand from the
Characteristics of Payment: debtor what he has paid, except that if he paid
without the knowledge or against the will of the
 Integrity – must be completely made
debtor, he can recover only insofar as the
 EXPN: payment has been beneficial to the debtor.

o Substantial performance performed in Persons from whom the Creditor must Accept
good faith. Art. 1234 Payment
o Estoppel Art. 1235
The creditor is bound to accept payment or
o Debt is partly liquidated and partly
performance from:
unliquidated
 The debtor
 Identity – must consist the performance of
 Any person who has an interest in the
the very thing due
obligation (Heirs, assignee, agents
 Indivisibility – must be in its entirety &representatives)

Doctrine of Substantial Performance  A third person who has no interest in the

obligation when there is stipulation that
Article 1234. If the obligation has been
he can make payment
substantially performed in good faith, the
obligor may recover as though there had been a Effect of Payment by a Third Person
strict and complete fulfillment, less damages
 If made without knowledge or against the
suffered by the obligee.
will of the debtor
Requisites:
 Payer can recover only insofar as
 There must be substantial performance the payment has been beneficial to
 Obligor must be in good faith the debtor

 If made with knowledge of the debtor

  Payer shall have the right of Article 1240. Payment shall be made to the
reimbursement and subrogation person in whose favor the obligation has been
constituted, or his successor in interest, or any
Subrogation
person authorized to receive it.
The substitution of one person or group by
Persons to whom Payment shall be made
another in respect of a debt or insurance
claim, accompanied by the transfer of any  The creditor or obligee (at the time
associated rights and duties. payment is to be made)

Article 1237. Whoever pays on behalf of the  His successor in interest

debtor without the knowledge or against the will
 Any person authorized to receive it
of the latter, cannot compel the creditor to
subrogate him in his rights, such as those arising Effect of Payment
from a mortgage, guaranty, or penalty.
Article 1241. Payment to a person who is
Subrogation Reimbursement incapacitated to administer his property shall be
The person who pays Has merely the right valid if he has kept the thing delivered, or
for the debtor is put to be refunded. insofar as the payment has been beneficial to
into the shoes of the him.
creditor.
Payment made to a third person shall also be
valid insofar as it has redounded to the benefit
Deemed Donation of the creditor. Such benefit to the creditor
need not be proved in the following cases:
Article 1238. Payment made by a third person
who does not intend to be reimbursed by the 1) If after the payment, the third
debtor is deemed to be a donation, which person acquires the creditor's rights;
requires the debtor's consent. But the payment 2) If the creditor ratifies the payment
is in any case valid as to the creditor who has to the third person;
accepted it.
3) If by the creditor's conduct, the
Free Disposal and Legal Capacity debtor has been led to believe that
the third person had authority to
Article 1239. In obligations to give, payment
made by one who does not have the free disposal
receive the payment.
of the thing due and capacity to alienate it shall
not be valid, without prejudice to the provisions To an Incapacitated Person
of article 1427 under the Title on "Natural GR: Not Valid
Obligations.
EXPN: he kept the thing paid or delivered, or
Free Disposal of the thing due was benefited by the payment
 Thing to be delivered must not be subject To A Third Person
to any claim or lien or encumbrance of a
third person GR: Not valid

Legal Capacity EXPN: payment has redounded to the benefit of

 Not incapacitated to enter into contracts the creditor (not presumed)
 Can make disposition of the thing due GR: Benefit needs to be proven

EXPN:
 1. Subrogation of the payer in the Application of Payment
creditor’s right
 Designation of the particular debt being
2. Ratification by the creditor
paid by the debtor who has two or more
3. Creditor’s estoppel
debts or obligations of the same kind in
favor of the same creditor to whom the
Payment to Third Person in Possession of
payment is made.
Credit
Payment by Cession
Article 1242. Payment made in good faith to any
person in possession of the credit shall release  Debtor cedes his property to his
the debtor. creditors so the latter may sell the same
and the proceeds realized applied to the
Garnishment - When Payment to the Debtor
debts of the debtor.
is not Valid
Tender of Payment
Article 1243. Payment made to the creditor by
the debtor after the latter has been judicially  Voluntary act of the debtor whereby he
ordered to retain the debt shall not be valid. offers to the creditor for acceptance the
immediate performance of the former’s
Very Prestation Due must be Complied with
obligation to the latter.
Article 1244. The debtor of a thing cannot
Consignation
compel the creditor to receive a different one,
although the latter may be of the same value as,  Act of depositing the object of the
or more valuable than that which is due. (To give obligation with the court or competent
specific thing) authority after the creditor has
unjustifiably refused to accept the same
In obligations to do or not to do, an act or
or is not in a position to accept it due to
forbearance cannot be substituted by another
certain reasons or circumstances.
act or forbearance against the obligee's will.
Dation in Payment
EXPN:
 Conveyance of ownership of a thing as an
 if the obligee / creditor consents
accepted equivalent of performance
 Waiver by the obligee / creditor
 Substitution is allowed by stipulation  Results in novation of the contract

Article 1245. Dation in payment, whereby

Special Forms of Payment property is alienated to the creditor in
satisfaction of a debt in money, shall be
Dation in Payment
governed by the law of sales.
 Alienation by the Debtor of a particular
Rule of the Medium Quality
property in favor of his creditor, with the
latter’s consent, for the satisfaction of the Article 1246. When the obligation consists in
former’s money obligation to the latter, with the delivery of an indeterminate or generic
the effect of extinguishing the said money thing, whose quality and circumstances have not
obligation been stated, the creditor cannot demand a thing
of superior quality. Neither can the debtor
deliver a thing of inferior quality. The purpose  That currency which if offered by the
of the obligation and other circumstances shall debtor in the right amount, the creditor
be taken into consideration. must accept in payment of a debt in money

Extra Judicial Expenses  Payment of check is conditional payment only

The debtor is benefited when the obligation is

 P1.00 and above – valid for any amount
extinguished.
 P0.25 and below P1.00 – valid for amount
 This rule does not apply to expenses not exceeding P50.00
incurred by creditor in going to the  P0.10 and less – valid for amount not
debtor’s domicile to collect debt. exceeding P20.00

Article 1247. Unless it is otherwise stipulated,

Article 1249. The payment of debts in money
the extrajudicial expenses required by the
shall be made in the currency stipulated, and if
payment shall be for the account of the debtor.
it is not possible to deliver such currency, then
With regard to judicial costs, the Rules of Court
in the currency which is legal tender in the
shall govern.
Philippines.
Complete vs. Partial Performance
The delivery of promissory notes payable to
Article 1248. Unless there is an express order, or bills of exchange or other mercantile
stipulation to that effect, the creditor cannot documents shall produce the effect of payment
be compelled partially to receive the prestations only when they have been cashed, or when
in which the obligation consists. Neither may the through the fault of the creditor they have
debtor be required to make partial payments. been impaired.

However, when the debt is in part liquidated and In the meantime, the action derived from the
in part unliquidated, the creditor may demand original obligation shall be held in the abeyance.
and the debtor may affect the payment of the
Extraordinary Inflation and Deflation
former without waiting for the liquidation of the
latter.  Inflation – Sharp sudden increase of
money or credit or both without
When partial performance is allowed:
corresponding increase in business
 When there is an express stipulation transactions. It causes a drop in the value
of money resulting in the rise of the
 When debt is in part liquidated and in
general price level.
part unliquidated
 Deflation- reduction in volume and
 When there are more than one
circulation of the available money or
prestations and are subject to different
credit, resulting in a decline of the general
terms or conditions
price level.
When it is evident that the prestations need not
Article 1250. In case an extraordinary inflation
be executed simultaneously but each successive
or deflation of the currency stipulated should
execution thereof must be complete
supervene, the value of the currency at the time
Legal Tender of the establishment of the obligation shall be
the basis of payment, unless there is an debtor who has various debts of the same
agreement to the contrary. kind in favor of one and the same
creditor.

Requisites of Application of Payments

Place where the Obligation shall be Paid
 There must be one (1) debtor and one (1)
 The order is successive and exclusive
creditor
Article 1251. Payment shall be made in the  There must be two (2) or more debts
place designated in the obligation.  The debts must be of the same kind
 The debts to which payment made by the
There being no express stipulation and if the
debtor has been applied must be due
undertaking is to deliver a determinate thing,
 The payment made must not be sufficient
the payment shall be made wherever the thing
to cover all the debts.
might be at the moment the obligation was
constituted.
Rules on Application of Payments
In any other case the place of payment shall be
 The debtor has the first choice
the domicile of the debtor.
 His choice must be indicated at the
If the debtor changes his domicile in bad faith
time of making payment
or after he has incurred in delay, the additional
expenses shall be borne by him.  The right to make the application once
exercised is irrevocable unless the creditor
These provisions are without prejudice to venue
consents to the change
under the Rules of Court.
 If the debtor does not apply payment, the
Subsection 1. – Application of Payments
creditor may make the designation by
Article 1252. He who has various debts of the specifying in the receipt which debt is being
same kind in favor of one and the same creditor, paid
may declare at the time of making the payment,
 If the creditor has not also made the
to which of them the same must be applied.
application , or if the application is not valid,
Unless the parties so stipulate, or when the
the debt which is most onerous to the
application of payment is made by the party for
debtor among those due, shall be deemed to
whose benefit the term has been constituted,
have been satisfied
application shall not be made as to debts which
are not yet due.  If the debt due are of the same nature and
burden, the payment shall be applied to all
If the debtor accepts from the creditor a
of them proportionately
receipt in which an application of the payment is
made, the former cannot complain of the same, More Onerous
unless there is a cause for invalidating the
Article 1254. When the payment cannot be
contract.
applied in accordance with the preceding rules,
Application of Payment or if application cannot be inferred from other
circumstances, the debt which is most onerous
 Designation of the debt to which should
be applied the payment made by the
to the debtor, among those due, shall be deemed Object Does not Extends to all
to have been satisfied. involve all the the property
properties of of the debtor
If the debts due are of the same nature and the debtor subject to
burden, the payment shall be applied to all of execution
them proportionately. Ownership Creditor Creditors only
becomes the acquire the
Interest Paid Ahead of Principal
owner of their right to sell
Article 1253. If the debt produces interest, thing paid the thing and
payment of the principal shall not be deemed to apply the
have been made until the interests have been proceeds to
covered. their credits
proportionately
GR: The rule is mandatory Novation Yes No
EXPN: subject to agreement or waiver Substitute form of payment

Subsection 2. Payment by Cession Subsection 3. Payment by Cession

Article 1255. The debtor may cede or assign his Article 1256. If the creditor to whom tender
property to his creditors in payment of his of payment has been made refuses without just
debts. This cession, unless there is stipulation to cause to accept it, the debtor shall be released
the contrary, shall only release the debtor from from responsibility by the consignation of the
responsibility for the net proceeds of the thing thing or sum due.
assigned. The agreements which, on the effect
Consignation alone shall produce the same effect
of the cession, are made between the debtor
in the following cases:
and his creditors shall be governed by special
laws. (1) When the creditor is absent or unknown, or
does not appear at the place of payment;
Requisites of Payment by Cession
(2) When he is incapacitated to receive the
 There must be two or more creditors payment at the time it is due;
 The debtor must be (partially) insolvent (3) When, without just cause, he refuses to give
 The assignment must involve all the a receipt;
properties of the debtor (4) When two or more persons claim the same
 The cession must be accepted by the right to collect;
creditor (5) When the title of the obligation has been
lost.
Dation in Payment vs. Payment by Cession
Dation in Payment by
Payment Cession Tender of Payment
Number of May be one Plurality of  The definitive act of offering to the
creditor creditor creditors creditor what is due him together with
Financial Not Debtor must the demand that the creditor accepts the
Condition necessarily in be partially or
same
of the state of relatively
debtor insolvency insolvent Consignation
  Act of depositing the object of the Article 1259. The expenses of consignation,
obligation with the court or competent when properly made, shall be charged against
authority after the creditor has the creditor.
unjustifiably refused to accept the same
When Consignation Deemed Properly Made
or is not in a position to accept it due to
certain reasons or circumstances  When the creditor accepts the thing or
sum deposited without objection, as
Requisites of a Valid Consignation
payment of the obligation
 Existence of a valid debt which is due
 When the creditor questions its validity,
 Valid prior payment by the debtor and
and the court, after hearing, declares that
refusal without justifiable reason by the
it has been properly made
creditor to accept it
 Previous notice of consignation to persons  When the creditor neither accepts nor
interested in the fulfillment of the questions the validity of the consignation,
obligation and the court, after hearing, orders the
 Consignation of the thing or sum due cancellation of the obligation
 Subsequent notice of consignation made to
Withdrawal by the Creditor
the interested parties
Article 1260. Once the consignation has been
Prior Notice and Compliance with provisions on duly made, the debtor may ask the judge to
Payment order the cancellation of the obligation.
Article 1257. In order that the consignation of
Before the creditor has accepted the
the thing due may release the obligor, it must
consignation, or before a judicial declaration
first be announced to the persons interested in
that the consignation has been properly made,
the fulfillment of the obligation.
the debtor may withdraw the thing or the sum
The consignation shall be ineffectual if it is not
deposited, allowing the obligation to remain in
made strictly in consonance with the provisions
force.
which regulate payment.
When Debtor may Withdraw the Thing or Sum
Consignation must be with Proper Judicial Deposited as a Matter of Right
Authority and Second Notice
 Before the creditor has accepted the
consignation
Article 1258. Consignation shall be made by
 Before a judicial declaration that the
depositing the things due at the disposal of
consignation has been properly made.
judicial authority, before whom the tender of
 The obligation shall continue to be in
payment shall be proved, in a proper case, and
force
the announcement of the consignation in other
cases.  All expenses are paid by the debtor
The consignation having been made, the
Effect of Withdrawal if with Authority of the
interested parties shall also be notified thereof.
Creditor

Creditor Bears Expenses

Article 1261. If, the consignation having been Effect of Loss of the Thing/Object of the
made, the creditor should authorize the debtor Obligation
to withdraw the same, he shall lose every
1. Requisites in Determinate Obligation to
preference which he may have over the thing.
Give
The co-debtors, guarantors and sureties shall be
released.  The thing lost must be determinate
 Without the fault of the debtor
Section 2. – Loss of the Thing Due
 Before the debtor has incurred delay
Article 1231. Obligations are extinguished:
GR: The obligation is extinguished when the
(1) By payment or performance;
object is extinguished or destroyed
(2) By the loss of the thing due;
EXPNs:
(3) By the condonation or remission of
 When the law so provides
the debt;
 When the stipulation so provides
(4) By the confusion or merger of the
 When the nature of the obligation
rights of creditor and debtor;
requires the assumption of risk
(5) By compensation;
 When the obligation to deliver a specific
(6) By novation.
thing arises from crime

Other causes of extinguishment of obligations,

Loss of a Generic Thing to Give
such as annulment, rescission, fulfillment of a
resolutory condition, and prescription, are
Article 1263. In an obligation to deliver a
governed elsewhere in this Code.
generic thing, the loss or destruction of
Article 1262. An obligation which consists in anything of the same kind does not extinguish
the delivery of a determinate thing shall be the obligation.
extinguished if it should be lost or destroyed
without the fault of the debtor, and before he GR: The obligation is not extinguished because a
has incurred in delay. generic thing never perishes
EXPN:
When by law or stipulation, the obligor is liable
 In case of generic obligations whose
even for fortuitous events, the loss of the thing
object is a particular class or group with
does not extinguish the obligation, and he shall
specific or determinate qualities
be responsible for damages. The same rule
 In case the generic thing has already
applies when the nature of the obligation
been segregated or set aside, in which
requires the assumption of risk.
case, it has become specific
When a thing is considered loss
An Obligation to Do
 It disappears in such a way that its
existence is unknown
Article 1266. The debtor in obligations to do
 It goes out of commerce
shall also be released when the prestation
 It perishes
becomes legally or physically impossible without
 Its existence is unknown or if known, it
the fault of the obligor.
cannot be recovered
Types of impossibility to perform an obligation EXPN:
to do
 In case loss is due to earthquake, flood,
 Legal Impossibility – act stipulated to be storm or other natural calamity
performed is subsequently prohibited by
EXPN to EXPN: Still liable when
law
 Debtor incurred in delay; or
 Physical Impossibility – act stipulated
could not be performed by the obligor  Debtor promised to deliver the thing to
due to reasons subsequent to the two or more persons with different
execution of the contract. interests.

Partial Loss Difficulty of Performance

Article 1264. The courts shall determine Article 1267. When the service has become so
whether, under the circumstances, the partial difficult as to be manifestly beyond the
loss of the object of the obligation is so contemplation of the parties, the obligor may
important as to extinguish the obligation. also be released therefrom, in whole or in part.

Effects: Requisites:

 Due to the Fault or Negligence of the  Event or change in circumstances could

Debtor – Creditor has the right to not have been foreseen at the time of
demand the rescission of the obligation the execution of the contract
or to demand specific performance, plus  Such event makes the performance
damages, in either case. extremely difficult but not impossible
 The event must not be due to the act of
 Due to Fortuitous Event:
any of the parties
o Substantial Loss – Obligation is  The contract is for a future prestation
extinguished

o Unsubstantial Loss – the debtor Debt which Proceeds from a Criminal Offense
shall deliver the thing promised in its
Article 1268. When the debt of a thing certain
impaired condition
and determinate proceeds from a criminal
When the Thing is Lost in the Possession of offense, the debtor shall not be exempted from
the Debtor the payment of its price, whatever may be the
cause for the loss, unless the thing having been
Article 1265. Whenever the thing is lost in the
offered by him to the person who should receive
possession of the debtor, it shall be presumed
it, the latter refused without justification to
that the loss was due to his fault, unless there is
accept it.
proof to the contrary, and without prejudice to
the provisions of article 1165. This presumption GR: Debtor shall not be exempted from the
does not apply in case of earthquake, flood, payment of his obligation regardless of the
storm, or other natural calamity. cause of the loss.

GR: It is presumed that loss is due to debtor’s

fault. The obligation is not extinguished.
EXPN: The thing having been offered by debtor heirs may uphold it by proving that the delivery
to the person who should receive it, the latter of the document was made in virtue of payment
refused without justification. of the debt.

Creditor’s Right of Action  Presumption of implied remission

 Rebuttable by contrary evidence
Article 1269. The obligation having been
 In joint obligation, pertains only to the
extinguished by the loss of the thing, the
debtor in possession of the document.
creditor shall have all the rights of action which
 In solidary, it pertains to the whole
the debtor may have against third persons by
obligation
reason of the loss.
 Such presumption is applicable only to
Section 3. – Condonation or Remission of Debt private document

Article 1270. Condonation or remission is

Requisites:
essentially gratuitous, and requires the
 The document evidencing the credit must
acceptance by the obligor. It may be made
have been delivered by the creditor to
expressly or impliedly.
the debtor
One and the other kind shall be subject to the  The document must be a private
rules which govern inofficious donations. document
Express condonation shall, furthermore, comply  The delivery must be voluntary
with the forms of donation.
Presumption of Voluntary Delivery
 The gratuitous abandonment by the
 In turn, gives rise to presumption of
creditor of his right against the debtor.
payment, only when it is known that
Thus, a form of donation.
indeed there is no payment should there
Requisites: be a presumption of remission.

 Must be gratuitous
Article 1272. Whenever the private document
 Acceptance by the debtor
in which the debt appears is found in the
 The parties must have legal capacity
possession of the debtor, it shall be presumed
 Must not be inofficious
that the creditor delivered it voluntarily, unless
 Formalities provided by law on donations
the contrary is proved.
must be complied with if condonation is
express
Effect of Renunciation of the Principal Debt
 An existing demandable debt at the time on the Accessory Obligation
the remission is made  Accessory follows the principal

Article 1271. The delivery of a private

Article 1273. The renunciation of the principal
document evidencing a credit, made voluntarily
debt shall extinguish the accessory obligations;
by the creditor to the debtor, implies the
but the waiver of the latter shall leave the
renunciation of the action which the former had
former in force.
against the latter.

If in order to nullify this waiver it should be When the Thing Pledged is Found in the
claimed to be inofficious, the debtor and his Possession of the Debtor
  Only the accessory obligation of pledge is  Merger in the person of guarantor merely
presumed remitted, not the obligation extinguishes the guaranty, not the principal
itself. obligation

Article 1274. It is presumed that the accessory Confusion in Joint and in Solidary Obligation
obligation of pledge has been remitted when the
thing pledged, after its delivery to the creditor, Article 1277. Confusion does not extinguish a
is found in the possession of the debtor, or of a joint obligation except as regards the share
third person who owns the thing. corresponding to the creditor or debtor in whom
the two characters concur.
Section 4. – Confusion or Merger of Rights
 Joint Obligation – confusion will extinguish
Article 1275. The obligation is extinguished only the share corresponding to the creditor
from the time the characters of creditor and or debtor in whom the two characters
debtor are merged in the same person. concur.
 Solidary Obligation – shall extinguish the
 The meeting in one person of the whole obligation subject to a claim of
characters of creditor and debtor with reimbursement by the one who pays from
respect to the same obligation. his co-debtors for the shares which
corresponds to them.
Requisites:
 Must take place between the principal Section 5. – Compensation
debtor and creditor
 Must be complete Article 1278. Compensation shall take place
when two persons, in their own right, are
Reasons: creditors and debtors of each other.
 If a debtor is his own creditor,
enforcement of the obligation becomes  Extinguishment to the concurrent amount
absurd since a person cannot claim of the debts of two persons, who, in their
payment from himself own right, are debtors and creditors of
 Purposes for which the obligation may each other
have been created are deemed realized
Compensation Confusion
Effect of Merger – Principal, Guarantor NCC Arts. 1278- NCC Arts. 1275-
1279 1277
Article 1276. Merger which takes place in the Two persons who are One person where
person of the principal debtor or creditor mutual debtors and qualities of debtor
benefits the guarantors. Confusion which takes creditors of each and creditor are
other merged
place in the person of any of the latter does not
At least two One obligation
extinguish the obligation.
obligations
There is indirect There is impossibility
 Merger in the person of the principal debtor
payment of payment
and creditor extinguishes the obligation
Requisites of Compensation  Partial as to the larger debt
Article 1281. Compensation may be total or
Article 1279. In order that compensation may partial. When the two debts are of the same
be proper, it is necessary: amount, there is a total compensation.

(1) That each one of the obligors be bound Voluntary Compensation

principally, and that he be at the same time a  This is an exception to Art. 1279 3rd par.
principal creditor of the other; Article 1282. The parties may agree upon the
(2) That both debts consist in a sum of money, compensation of debts which are not yet due.
or if the things due are consumable, they be of
the same kind, and also of the same quality if Judicial Compensation
the latter has been stated;  The claimant must prove his right for
(3) That the two debts be due; (Expn: Art. 1282 damages
Voluntary Compensation) Article 1283. If one of the parties to a suit
(4) That they be liquidated and demandable; over an obligation has a claim for damages
(5) That over neither of them there be any against the other, the former may set it off by
retention or controversy, commenced by third proving his right to said damages and the amount
persons and communicated in due time to the thereof.
debtor.
Compensation on Rescissible and Voidable
Article 1290. When all the requisites mentioned Obligation
in article 1279 are present, compensation takes  These are valid obligations until they are
effect by operation of law, and extinguishes judicially rescinded or annulled
both debts to the concurrent amount, even Article 1284. When one or both debts are
though the creditors and debtors are not aware rescissible or voidable, they may be
of the compensation. compensated against each other before they are
judicially rescinded or avoided.
Compensation Benefits
The Guarantor When there is Assignment of Rights
Article 1285. The debtor who has consented to
Article 1280. Notwithstanding the provisions of the assignment of rights made by a creditor in
the preceding article, the guarantor may set up favor of a third person, cannot set up against
compensation as regards what the creditor may the assignee the compensation which would
owe the principal debtor. pertain to him against the assignor, unless the
assignor was notified by the debtor at the time
 Extinguishment (totally or partially) of the he gave his consent, that he reserved his right
principal obligation, extinguishes (totally or to the compensation.
partially) the guaranty (which is merely an
accessory) If the creditor communicated the cession to him
 This is an exception to Art. 1279 1 par.
st
but the debtor did not consent thereto, the
latter may set up the compensation of debts
Total and Partial Compensation previous to the cession, but not of subsequent
 Total as to the smaller debt ones.
 Neither can compensation be set up against a
If the assignment is made without the creditor who has a claim for support due by
knowledge of the debtor, he may set up the gratuitous title, without prejudice to the
compensation of all credits prior to the same provisions of paragraph 2 of article 301.
and also later ones until he had knowledge of the
assignment. Article 1288. Neither shall there be
compensation if one of the debts consists in civil
When Compensation Takes place Before the liability arising from a penal offense
assignment
 GR: Debts are extinguished to the Rules of Application of Payment
concurrent amount Article 1289. If a person should have against
him several debts which are susceptible of
When Compensation Takes place After the compensation, the rules on the application of
assignment payments shall apply to the order of the
 Assignment with consent of the debtor - compensation.
1 par
st

 Assignment with the knowledge but  The debtor has the first choice
without consent of the debtor - 2 par
nd
 His choice must be indicated at
 Assignment without the knowledge of the the time of making payment
debtor – 3 par.
rd

 The right to make the application once

Where Debts are Payable at Different Places exercised is irrevocable unless the
Article 1286. Compensation takes place by creditor consents to the change
operation of law, even though the debts may be
payable at different places, but there shall be  If the debtor does not apply payment,
an indemnity for expenses of exchange or the creditor may make the designation by
transportation to the place of payment. specifying in the receipt which debt is
being paid
Covered:
 Expenses of monetary exchange in case  If the creditor has not also made the
of money debts application , or if the application is not
 Expenses of transportation in case of valid, the debt which is most onerous to
things to be delivered the debtor among those due, shall be
deemed to have been satisfied
 Indemnity shall be paid by the person who
raises the defense of compensation  If the debt due are of the same nature
and burden, the payment shall be applied
When Legal Compensation is not allowed to all of them proportionately
Article 1287. Compensation shall not be proper
when one of the debts arises from a depositum Section 6. – Novation
or from the obligations of a depositary or of a Not an absolute but only a relative extinction of
bailee in commodatum. an obligation which is only modified.
Article 1291. Obligations may be modified by: Article 1293. Novation which consists in
(1) Changing their object or principal conditions; substituting a new debtor in the place of the
(2) Substituting the person of the debtor; original one, may be made even without the
(3) Subrogating a third person in the rights of knowledge or against the will of the latter, but
the creditor. not without the consent of the creditor.
Payment by the new debtor gives him the rights
 The total or partial extinction of an mentioned in articles 1236 and 1237.
obligation through the creation of a new one
which substitutes it. Kinds of Substitution
Not presumed  Expromision – when a third person of his
 Must be clearly and unmistakably own initiative and without knowledge or
established: against the will of the original debtor
o By express agreement assumes the latter’s obligation with the
o Acts of equivalent import consent of the creditor.
o Incompatibility of the two  The old debtor shall be released
obligations from the obligation, otherwise,
there is no novation
Dual Function:  Delegacion – when the creditor accepts a
 To extinguish or modify an existing third person to take the place of the
obligation debtor at the instance of the latter. The
 Substitute a new one in its place creditor may withhold approval.

Article 1292. In order that an obligation may Article 1294. If the substitution is without the
be extinguished by another which substitute the knowledge or against the will of the debtor, the
same, it is imperative that it be so declared in new debtor's insolvency or non-fulfillment of the
unequivocal terms, or that the old and the new obligations shall not give rise to any liability on
obligations be on every point incompatible with the part of the original debtor.
each other.
Article 1295. The insolvency of the new debtor,
Requisites who has been proposed by the original debtor
 A previous valid obligation and accepted by the creditor, shall not revive
 Capacity and intention of the parties to the action of the latter against the original
modify or extinguish the obligation obligor, except when said insolvency was already
 The modification or extinguishment of existing and of public knowledge, or known to the
the obligation debtor, when the delegated his debt.
 The creation of a new valid obligation
Effect of Novation in Accessory Obligation
Kinds of Personal Novation  Exception to the rule that accessory
 Substitution – When the person of the follows the principal
debtor is substituted. Article 1296. When the principal obligation is
 Subrogation – When a third person is extinguished in consequence of a novation,
subrogated in the right of the creditor accessory obligations may subsist only insofar as
they may benefit third persons who did not give  Legal – when it takes place without
their consent. agreement but by operation of law.
 Not presumed except in the cases
Effect where the New Obligation is Void provided by law
 The second obligation being inexistent, it
cannot extinguish or modify the first. Article 1301. Conventional subrogation of a
Article 1297. If the new obligation is void, the third person requires the consent of the original
original one shall subsist, unless the parties parties and of the third person.
intended that the former relation should be
extinguished in any event. Reason:
 Debtor – he becomes liable under the new
Effect where the New Obligation is Void obligation to a new creditor
 A void novation cannot be novated  Old creditor – his right against the
because there in nothing to novate. debtor is extinguished
Article 1298. The novation is void if the original  New creditor – he may dislike or distrust
obligation was void, except when annulment may the new debtor
be claimed only by the debtor or when
ratification validates acts which are voidable. When Legal Subrogation is Presumed
 Subrogation is produced from payment.
Effect where the New Obligation is Void
 The efficacy of the new obligation Article 1302. It is presumed that there is legal
depends upon whether the condition subrogation:
which affects the old obligation is (1) When a creditor pays another
complied with or not. creditor who is preferred, even
Article 1299. If the original obligation was without the debtor's knowledge;
subject to a suspensive or resolutory condition, (2) When a third person, not interested
the new obligation shall be under the same in the obligation, pays with the
condition, unless it is otherwise stipulated. express or tacit approval of the
debtor;
Article 1300. Subrogation of a third person in (3) When, even without the knowledge of
the rights of the creditor is either legal or the debtor, a person interested in the
conventional. The former is not presumed, fulfillment of the obligation pays,
except in cases expressly mentioned in this without prejudice to the effects of
Code; the latter must be clearly established in confusion as to the latter's share.
order that it may take effect.
Effects of Legal Subrogation
Kinds of Subrogation  Except only for the change in the person
 Conventional – when it takes place by of the creditor, the obligation subsists in
express agreement of the original parties all respects as before the novation
(the debtor and the original creditor) and
the third person (the new creditor) Article 1303. Subrogation transfers to the
 Must be clearly established in order persons subrogated the credit with all the rights
that it may take place thereto appertaining, either against the debtor
or against third person, be they guarantors or and the limitations on contractual stipulation and
possessors of mortgages, subject to stipulation are therefore, legally binding and enforceable.
in a conventional subrogation.
Article 1306. The contracting parties may
Effects of Partial Subrogation establish such stipulations, clauses, terms and
Article 1304. A creditor, to whom partial conditions as they may deem convenient,
payment has been made, may exercise his right provided they are not contrary to law, morals,
for the remainder, and he shall be preferred to good customs, public order, or public policy.
the person who has been subrogated in his place
in virtue of the partial payment of the same Must not be contrary to
credit.  Law
 Morals
Title II - Contracts  Good Customs
Chapter 1 – General Provisions  Public Order
 Public Policy
Article 1305. A contract is a meeting of minds
between two persons whereby one binds himself, Nominate Contracts – has specific name
with respect to the other, to give something or Innominate Contract – no specific name or
to render some service. designation in law
 Do ut des – I give that you may give
Definition of Contracts  Do ut facias – I give that you may do
There must be at least two (2) persons/parties  Facto ut des – I do what you may give
 Facto ut facias – I do that you may do
Contracts vs. Obligations
Contract Obligation Article 1307. Innominate contracts shall be
One of the sources of Legal tie or relation regulated by the stipulations of the parties, by
obligations. itself that exists the provisions of Titles I and II of this Book, by
after a contract has the rules governing the most analogous nominate
been entered into.
contracts, and by the customs of the place.

Contract binds both contracting parties

Contacts vs. Agreement
Article 1308. The contract must bind both
Contract Agreement
contracting parties; its validity or compliance
Binding agreements Broader than a
cannot be left to the will of one of them.
enforceable through contract because it
legal proceedings in may not have all the
Determination of Performance by a Third
case the other party all the elements of a
does not comply with contract that create Person
his obligation under legally enforceable Article 1309. The determination of the
the agreement. obligations. performance may be left to a third person,
whose decision shall not be binding until it has
Limitations been made known to both contracting parties.
Valid contracts are those that meet all the legal
requisites for the type of agreement involved Inequitable Determination
Article 1310. The determination shall not be
obligatory if it is evidently inequitable. In such Requisites:
case, the courts shall decide what is equitable  Stipulation in favor of a third person
under the circumstances.  Stipulation is just part and not the whole
obligations of the contract
Persons Affected by a Contract  Contracting parties must have clearly and
Article 1311. Contracts take effect only deliberately conferred a favor upon third
between the parties, their assigns and heirs, person
except in case where the rights and obligations  Third person must have communicated his
arising from the contract are not transmissible acceptance
by their nature, or by stipulation or by provision  Neither of the contracting parties bears
of law. The heir is not liable beyond the value of the legal representation of the third
the property he received from the decedent. person

If a contract should contain some stipulation in Article 1312. In contracts creating real rights,
favor of a third person, he may demand its third persons who come into possession of the
fulfillment provided he communicated his object of the contract are bound thereby,
acceptance to the obligor before its revocation. subject to the provisions of the Mortgage Law
A mere incidental benefit or interest of a and the Land Registration Laws.
person is not sufficient. The contracting parties
must have clearly and deliberately conferred a Article 1313. Creditors are protected in cases
favor upon a third person. of contracts intended to defraud them.

Article 1314. Any third person who induces

GR: Contracts take effect only between the
another to violate his contract shall be liable for
parties, their assigns and heirs.
damages to the other contracting party.

Art. 1311 (2) – in contracts containing Article 1315. Contracts are perfected by mere
stipulation in favor of a third person. (stipulation consent, and from that moment the parties are
pour autrui) bound not only to the fulfillment of what has
Art. 1312 – in contracts creating real rights been expressly stipulated but also to all the
Art. 1313 – in contracts entered into to consequences which, according to their nature,
defraud creditors may be in keeping with good faith, usage and law.
Art. 1314 – In contracts which have been
Article 1316. Real contracts, such as deposit,
violated at the inducement of a third person
pledge and commodatum, are not perfected until
the delivery of the object of the obligation.
Persons Affected by a Contract
Stipulation pour autrui Obligatory Force of Contracts
 Clearly and deliberately conferring a
Requisites:
favor upon a third person who has a right
to demand its fulfillment provided he  It is perfected
communicates his acceptance to the
 It is valid
obligor before its revocation by the
obligee or the original parties.  It is enforceable
  When he is duly authorized by contract
 Consensual Contracts – perfected by mere or by law
consent  He must act within his power
 Real Contracts – perfected by delivery of
the thing subject matter of the contract
 Solemn Contract – requires compliance with Chapter 2 – Essential Requisites of Contracts
certain formalities prescribed by law, such
prescribed form being thereby an essential Article 1318. There is no contract unless the
element thereof following requisites concur:
(1) Consent of the contracting parties;
Stages in the Life of a Contract (2) Object certain which is the subject matter
 Preparation or negotiation of the contract;
 Perfection or birth (3) Cause of the obligation which is
 Consummation or termination established.

Unauthorized Contracts are Unenforceable Additional:

 Delivery in real contracts
Article 1317. No one may contract in the name
 Compliance with the formalities required
of another without being authorized by the
by law in formal contracts
latter, or unless he has by law a right to
represent him.
Classes of Elements of a Contract
A contract entered into in the name of another  Essential Elements – those without which
by one who has no authority or legal no contract can validly exist regardless
representation, or who has acted beyond his of the intentions of the parties.
powers, shall be unenforceable, unless it is  Common – those present in all
ratified, expressly or impliedly, by the person contracts, namely, consent, object,
on whose behalf it has been executed, before it and cause
is revoked by the other contracting party.  Special – present only in, or
peculiar to, certain specified
EXPN:
contracts
 Ratification by the person in whose name  Natural Elements – presumed to exist in
the contract was entered into or by his certain contracts unless the contrary is
duly authorized agent expressly stipulated by the parties
 Accidental Elements – exist only when
 The ratification may be express or
the contracting parties expressly
implied, but it must be clear so as not to
provided for them
admit of any doubt or vagueness

 The effects of ratification retroact to Section 1 – Consent

the moment of celebration of the  The concurrence of the wills of the
contract contacting parties with respect to the
object and cause, which shall constitute
the contract
When a Person is Bound by the Contract of
Another
Article 1319. Consent is manifested by the
meeting of the offer and the acceptance upon Article 1321. The person making the offer may
the thing and the cause which are to constitute fix the time, place, and manner of acceptance,
the contract. The offer must be certain and the all of which must be complied with.
acceptance absolute. A qualified acceptance Article 1320. An acceptance may be express or
constitutes a counter-offer. implied.

Acceptance made by letter or telegram does not

bind the offerer except from the time it came Elements of a Valid Offer and Acceptance
to his knowledge. The contract, in such a case, is  Definite – unequivocal
presumed to have been entered into in the place  Intentional
where the offer was made.  Complete - unconditional

Requisites of Consent - An acceptance departing from the

terms of the offer constitutes
 Legal capacity of the contracting parties
counter-offer
 Manifestation of the conformity of the
contracting parties
- Offer must be communicated and
 Parties’ conformity to the object, cause,
received by the offeree
terms and condition of the contract must
Article 1322. An offer made through an agent
be intelligent, spontaneous and free from
is accepted from the time acceptance is
all vices of consent
communicated to him.
 The conformity must be real
Article 1323. An offer becomes ineffective
Offer upon the death, civil interdiction, insanity, or
 Proposal made by one party (offerer) to insolvency of either party before acceptance is
another (offeree), indicating a willingness conveyed.
to enter into a contract
Article 1324. When the offerer has allowed the
offeree a certain period to accept, the offer
Offer
may be withdrawn at any time before acceptance
 Expression of willingness to contract on
by communicating such withdrawal, except when
certain terms, made with the intention
the option is founded upon a consideration, as
that it shall become binding as soon as it
something paid or promised.
is accepted by the person to whom it is
addressed. Option Contract

 One giving a person for a consideration a

Elements of an Effective Offer
certain period within which to accept the
 Definite – unequivocal
offer of the offerer.
 Intentional
 Complete - unconditional  Separate and distinct from the contract
which will be perfected upon acceptance
Acceptance of the offer.
 Manifestation by the offeree of his
assent to all the terms of the offer.
Article 1325. Unless it appears otherwise,  It is intelligent
business advertisements of things for sale are
 It is free and voluntary
not definite offers, but mere invitations to make
an offer.  It is conscious or spontaneous
Article 1326. Advertisements for bidders are
simply invitations to make proposals, and the
Mistake or Error
advertiser is not bound to accept the highest or
 False notion of a thing or a fact material
lowest bidder, unless the contrary appears.
to the contract
 Must be Mistake of Fact, and substantial
Article 1327. The following cannot give consent
to a contract:
Mistake of Fact
(1) Unemancipated minors;
 The substance of the thing which is the
(2) Insane or demented persons, and deaf-mutes
object of the contract
who do not know how to write.
 Conditions which have principally moved
one or both parties to enter into contract
 Unemancipated Minor - Those persons
 The identity or qualifications of one of
who have not reached the age of majority
the parties provided the same was the
(18 years) and are still subject to
principal cause of the contract
parental authority.
 Insane or demented persons – condition
Vices of Consent
must exist at the time of contracting.
 Error or mistake (Art. 1331)
Must be proven.
 Violence or force (Art. 1335)
 Deaf-mutes who do not know how to read
 Intimidation or threat or duress
and write – persons who are deaf and
 Undue influence (Art. 1337)
dumb
 Fraud or deceit (Art. 1338)

Article 1328. Contracts entered into during a

Article 1331. In order that mistake may
lucid interval are valid. Contracts agreed to in a
invalidate consent, it should refer to the
state of drunkenness or during a hypnotic spell
substance of the thing which is the object of
are voidable.
the contract, or to those conditions which have
 Lucid Interval – temporary period of
principally moved one or both parties to enter
sanity
into the contract.

Article 1329. The incapacity declared in article

Mistake as to the identity or qualifications of
1327 is subject to the modifications determined
one of the parties will vitiate consent only when
by law, and is understood to be without
such identity or qualifications have been the
prejudice to special disqualifications established
principal cause of the contract.
in the laws.

A simple mistake of account shall give rise to its

Article 1330. A contract where consent is given
correction.
through mistake, violence, intimidation, undue
influence, or fraud is voidable.
Mistake or Fraud
Characteristics of Consent
GR: when a person signs a document, the person or property of his spouse, descendants or
presumption is that so he does it with full ascendants, to give his consent.
knowledge and understanding of the contents of
the same. To determine the degree of intimidation, the
EXPN: age, sex and condition of the person shall be
borne in mind.
Article 1332. When one of the parties is unable
to read, or if the contract is in a language not A threat to enforce one's claim through
understood by him, and mistake or fraud is competent authority, if the claim is just or legal,
alleged, the person enforcing the contract must does not vitiate consent.
show that the terms thereof have been fully
explained to the former. Nature of Violence
 Requires the employment of force
Effect of Knowledge of Risk  Must be serious or irresistible
Article 1333. There is no mistake if the party
alleging it knew the doubt, contingency or risk Article 1336. Violence or intimidation shall
affecting the object of the contract. annul the obligation, although it may have been
employed by a third person who did not take
Mistake of Law part in the contract.
Article 1334. Mutual error as to the legal
effect of an agreement when the real purpose of Nature of Intimidation or Threat
the parties is frustrated, may vitiate consent.  It must produce a reasonable and well-
GR: Ignorance of the law excuses no one from grounded fear of an evil
compliance therewith.  The evil must be imminent and grave
EXPN: mistake on a doubtful question of law, or  The evil must be upon his person or
on the construction or application of law. property, or that of his spouse,
descendants or ascendants
Requisites:  It is the reason why he enters into
 The error must be mutual contract
 It must be as to the legal effect of an
agreement Undue Influence
 It must frustrate the real purpose of the  Influence of a kind that so overpowers
parties the mind of a party as to prevent him
from acting understandingly and
Violence or Intimidation voluntarily to what he would have done if
Article 1335. There is violence when in order to he had been left to exercise freely his
wrest consent, serious or irresistible force is own judgment and discretion
employed.
Article 1337. There is undue influence when a
There is intimidation when one of the person takes improper advantage of his power
contracting parties is compelled by a reasonable over the will of another, depriving the latter of
and well-grounded fear of an imminent and grave a reasonable freedom of choice. The following
evil upon his person or property, or upon the circumstances shall be considered:
the confidential, family, spiritual and other Dealer’s Talk – does not appear in the face of
relations between the parties, or the fact that the contract
the person alleged to have been unduly
influenced was suffering from mental weakness, Article 1340. The usual exaggerations in trade,
or was ignorant or in financial distress. when the other party had an opportunity to know
the facts, are not in themselves fraudulent.
Causal Fraud
Expression of Opinion – misrepresentation
 Fraud committed by one party before or
must refer to facts, not opinion
at the time of the celebration of the
contract to secure the consent of the Article 1341. A mere expression of an opinion
other does not signify fraud, unless made by an expert
and the other party has relied on the former's
Article 1338. There is fraud when, through special knowledge.
insidious words or machinations of one of the
Fraud by a Third Person – misrepresentation
contracting parties, the other is induced to
must refer to facts, not opinion
enter into a contract which, without them, he
would not have agreed to. Article 1342. Misrepresentation by a third
Article 1339. Failure to disclose facts, when person does not vitiate consent, unless such
there is a duty to reveal them, as when the misrepresentation has created substantial
parties are bound by confidential relations, mistake and the same is mutual.
constitutes fraud.
Misrepresentation Made in Good Faith – The
Article 1344. In order that fraud may make a
person making the false statement believed it to
contract voidable, it should be serious and
be true
should not have been employed by both
contracting parties. Article 1343. Misrepresentation made in good
Incidental fraud only obliges the person faith is not fraudulent but may constitute error.
employing it to pay damages.
Causal Fraud vs. Incidental Fraud Simulation of Contract
Basis Causal Fraud Incidental Article 1345. Simulation of a contract may be
Fraud absolute or relative. The former takes place
Gravity of Serious in Not serious when the parties do not intend to be bound at
Fraud character all; the latter, when the parties conceal their
Efficient cause Not the efficient
true agreement.
Efficient which induce the cause
Cause party to enter
into contract Article 1346. An absolutely simulated or
Effect on the Renders the Does not affect fictitious contract is void. A relative simulation,
Status of the contract voidable the validity of the when it does not prejudice a third person and is
Contract contract not intended for any purpose contrary to law,
Annulment with Contract remains
morals, good customs, public order or public
Remedies damages valid. Remedy is to
claim for damages.
policy binds the parties to their real agreement.

Acts Considered not Fraudulent Section 2. – Objects of Contracts

  The subject matter of the contract. It Section 3. – Cause of Contracts
can be a thing, right or service arising
 The essential reason or purpose which
from a contract
the contracting parties have in view at
the time of entering into the contract

Article 1347. All things which are not outside  Every contract is presumed to have a
the commerce of men, including future things, cause and such cause is lawful
may be the object of a contract. All rights which
are not intransmissible may also be the object of
contracts. Article 1350. In onerous contracts the cause is
understood to be, for each contracting party,
No contract may be entered into upon future
the prestation or promise of a thing or service
inheritance except in cases expressly authorized
by the other; in remuneratory ones, the service
by law.
or benefit which is remunerated; and in
All services which are not contrary to law, contracts of pure beneficence, the mere
morals, good customs, public order or public liberality of the benefactor.
policy may likewise be the object of a contract.
Kinds of Cause:
Article 1348. Impossible things or services
 Onerous contracts – the prestation or
cannot be the object of contracts.
promise of a thing or service by the other
Requisites:
 Remuneratory contracts – the service or
 Determinate as to kind (even if not benefit remunerated
determinate, provided it is possible to
 Gratuitous contracts – mere liberality of
determine the same without the need of
the donor or benefactor
a new contract)
Requisites, it must:
 Existing or the potentiality to exist
subsequent to the contract - Exist
- Be true
 Must be licit/lawful
- Licit/legal
 Within the commerce of man

 Transmissible Article 1352. Contracts without cause, or with

unlawful cause, produce no effect whatever. The
cause is unlawful if it is contrary to law, morals,
Article 1349. The object of every contract good customs, public order or public policy.
must be determinate as to its kind. The fact
Article 1353. The statement of a false cause in
that the quantity is not determinate shall not be
contracts shall render them void, if it should not
an obstacle to the existence of the contract,
be proved that they were founded upon another
provided it is possible to determine the same,
cause which is true and lawful.
without the need of a new contract between the
parties. 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.
Article 1355. Except in cases specified by law,
lesion or inadequacy of cause shall not invalidate As to the Objective and Psychological
a contract, unless there has been fraud, mistake kind of juridical or purely
or undue influence. reason in the reason of personal
contract contract reason
Rules relating to cause on contracts:

 Absence of cause – confers no right and As to the Legality or does not

legal effect illegality of affect the
produces no legal effects
to the cause affects existence or
 Failure of cause – does not render the contract the existence validity of the
contract void or validity of contract
the contract
 Illegality of cause – contract is null and
void As to the Cause is Motive
 Falsity of cause – contract is void; unless parties always the differs for
same for each each
the parties shows that there is another
contracting contracting
cause which is true and lawful
party party
 Lesion or inadequacy of cause – does not
invalidate the contract, unless:

 There is fraud, mistake or undue Chapter 3 – Form of Contracts

influence
 The manner in which a contract is
 When the parties intended a executed or manifested
donation or some other contracts
Article 1356. Contracts shall be obligatory, in
 In cases specified by law whatever form they may have been entered into,
provided all the essential requisites for their
validity are present. However, when the law
Motive vs. Cause requires that a contract be in some form in
order that it may be valid or enforceable, or
 Purely personal or private reason which a
that a contract be proved in a certain way, that
party has in entering into a contract
requirement is absolute and indispensable. In
such cases, the right of the parties stated in
the following article cannot be exercised.
Article 1351. The particular motives of the
parties in entering into a contract are different GR: Form is not required in consensual contracts
from the cause thereof.
EXPN: when the law requires a contract in
Basis Cause Motive writing for it’s:

 Validity (formal contracts)

As to Direct and Indirect or
proximate most remote  Enforceability (under Statutes of
reason in a proximate reason to a Frauds)
contract reason of a contract
contract  For the convenience of the parties
Article 1357. If the law requires a document or instrument fails to express such
other special form, as in the acts and contracts agreement or intention.
enumerated in the following article, the
contracting parties may compel each other to
observe that form, once the contract has been Article 1359. When, there having been a
perfected. This right may be exercised meeting of the minds of the parties to a
simultaneously with the action upon the contract, their true intention is not expressed in
contract. the instrument purporting to embody the
agreement, by reason of mistake, fraud,
Article 1358. The following must appear in a
inequitable conduct or accident, one of the
public document:
parties may ask for the reformation of the
(1) Acts and contracts which have for instrument to the end that such true intention
their object the creation, may be expressed.
transmission, modification or
If mistake, fraud, inequitable conduct, or
extinguishment of real rights over
accident has prevented a meeting of the minds
immovable property; sales of real
of the parties, the proper remedy is not
property or of an interest therein
reformation of the instrument but annulment of
are governed by articles 1403, No.
the contract.
2, and 1405;
 What is reformed is not the contract
(2) The cession, repudiation or renunciation of
itself, but the written instrument
hereditary rights or of those of the conjugal
embodying the contract
partnership of gains;

(3) The power to administer property, or any

other power which has for its object an act Requisites:
appearing or which should appear in a public
 Meeting of the minds to the contract
document, or should prejudice a third person;
 True intention is not expressed in the
(4) The cession of actions or rights proceeding
instrument by reason of:
from an act appearing in a public document.
 Mistake
All other contracts where the amount involved
exceeds five hundred pesos must appear in  Accident
writing, even a private one. But sales of goods,
 Relative simulation
chattels or things in action are governed by
articles, 1403, No. 2 and 1405.  Fraud

Chapter 4 – Reformation of Contracts  Inequitable conduct

 That remedy allowed by law by means of  Clear and convincing proof of the reasons
which a written instrument is amended or
Reformation of Instruments; When Allowed
rectified so as to express or conform to
their real agreement or intention of the Mutual Mistake
parties when by reason of mistake, fraud, Article 1361. When a mutual mistake of the
inequitable conduct, or accident, the parties causes the failure of the instrument
to disclose their real agreement, said Article 1367. When one of the parties has
instrument may be reformed. brought an action to enforce the instrument,
he cannot subsequently ask for its
Mistake and Fraud (on one side)
reformation.
Article 1362. If one party was mistaken and
Parties Entitled to Reformation
the other acted fraudulently or inequitably in
such a way that the instrument does not Article 1368. Reformation may be ordered
show their true intention, the former may at the instance of either party or his
ask for the reformation of the instrument. successors in interest, if the mistake was
mutual; otherwise, upon petition of the
Mistake and Concealment
injured party, or his heirs and assigns.
Article 1363. When one party was mistaken
 Either of the parties when the mistake is
and the other knew or believed that the
mutual
instrument did not state their real
agreement, but concealed that fact from the  In all other cases, the injured party
former, the instrument may be reformed.
 The heirs or successors in interest, in
Ignorance on the Part of the Third Person lieu of the party entitled

Article 1364. When through the ignorance,

lack of skill, negligence or bad faith on the
 The burden of proof is upon the party
part of the person drafting the instrument
who insist that the contract should be
or of the clerk or typist, the instrument does
reformed
not express the true intention of the parties,
the courts may order that the instrument be  The presumption is that an instrument
reformed. sets out the true agreement of the
parties
Mortgage, Pledge or Sale with Right of
Repurchase  The effect of reformation is retroactive
from the time of the execution of the
Article 1365. If two parties agree upon the
original contract
mortgage or pledge of real or personal
property, but the instrument states that the Chapter 5 – Interpretation of Contracts
property is sold absolutely or with a right of
 The determination of the meaning of the
repurchase, reformation of the instrument is
terms or words used by the parties in
proper.
their written contract
Cases when Reformation Not Allowed
Evident Intention of the Parties Prevails Over
Article 1366. There shall be no reformation Terms of the Contracts
in the following cases:
Article 1370. If the terms of a contract are
(1) Simple donations inter vivos wherein no clear and leave no doubt upon the intention of
condition is imposed; the contracting parties, the literal meaning of
its stipulations shall control.
(2) Wills;

(3) When the real agreement is void.

If the words appear to be contrary to the Interpretation of Obscure Words - Contracts
evident intention of the parties, the latter shall of Adhesion
prevail over the former.
 A written agreement should, in case of
Contemporaneous and Subsequent Acts doubt, be interpreted against the party
who has drawn it
Article 1371. In order to judge the intention of
the contracting parties, their contemporaneous Article 1377. The interpretation of obscure
and subsequent acts shall be principally words or stipulations in a contract shall not
considered. favor the party who caused the obscurity.

Special Intent Prevails Over General Rules in Case Doubts Absolutely Impossible to
Settle
Article 1372. However general the terms of a
contract may be, they shall not be understood to Article 1378. When it is absolutely impossible
comprehend things that are distinct and cases to settle doubts by the rules established in the
that are different from those upon which the preceding articles, and the doubts refer to
parties intended to agree. incidental circumstances of a gratuitous
contract, the least transmission of rights and
Stipulations with Several Meanings
interests shall prevail. If the contract is
Article 1373. If some stipulation of any onerous, the doubt shall be settled in favor of
contract should admit of several meanings, it the greatest reciprocity of interests.
shall be understood as bearing that import which
If the doubts are cast upon the principal object
is most adequate to render it effectual.
of the contract in such a way that it cannot be
Interpretation of Various Stipulations of a known what may have been the intention or will
Contract of the parties, the contract shall be null and
void.
Article 1374. The various stipulations of a
contract shall be interpreted together,  Gratuitous Contracts – interpretation
attributing to the doubtful ones that sense should be made which would result in the
which may result from all of them taken jointly. least transmission of rights and interests

Interpretation of Words with Different  Onerous Contracts – doubts should be

Signification settled in favor of the greatest
reciprocity of interests
Article 1375. Words which may have different
significations shall be understood in that which  Principal object of the contract – the
is most in keeping with the nature and object of contract shall be null and void.
the contract.
Chapter 6, 7, 8, and 9
Usage or Custom Defective Contracts

Article 1376. The usage or custom of the place

shall be borne in mind in the interpretation of
Chapter 6 - Rescissible Contracts
the ambiguities of a contract, and shall fill the
omission of stipulations which are ordinarily Those validly agreed upon but nevertheless may
established. be set aside due to a particular economic
damage or lesion caused to either one of the (1) Those which are entered into by guardians
parties or to a third person. It may be set aside whenever the wards whom they represent suffer
in whole or in part, or up to the extent of the lesion by more than one-fourth of the value of
damage caused. the things which are the object thereof;

Requisites of Rescission: (2) Those agreed upon in representation of

absentees, if the latter suffer the lesion stated
 Art. 1380 – The contract must be validly
in the preceding number;
agreed upon.
(3) Those undertaken in fraud of creditors when
 Art. 1381 – there must be lesion or
the latter cannot in any other manner collect the
pecuniary prejudice to one of the parties or
claims due them;
to a third person
(4) Those which refer to things under litigation
 Art. 1380, 1381, and 1382 – the
if they have been entered into by the defendant
rescission must be based upon a case
without the knowledge and approval of the
especially provided by law
litigants or of competent judicial authority;
 Art. 1383 – there must be no other legal
(5) All other contracts specially declared by law
remedy to obtain reparation for the damage
to be subject to rescission.
 Art. 1385, par. 1 – the party asking for
Article 1382. Payments made in a state of
rescission must be able to return what he is
insolvency for obligations to whose fulfillment
obliged to restore by reason of the contract
the debtor could not be compelled at the time
 Art. 1385, par. 2 – the object of the they were effected, are also rescissible.
contract must not legally be in the
Article 1386. Rescission referred to in Nos. 1
possession of third person who did not act
and 2 of article 1381 shall not take place with
in bad faith
respect to contracts approved by the courts.
 Art. 1389 – the period for filing the action
for rescission must not have prescribed
Subsidiary Action
 Rescission – remedy granted by law to
the contracting parties and sometimes Article 1383. The action for rescission is
to third persons in order to secure subsidiary; it cannot be instituted except when
reparation of damages caused by them the party suffering damage has no other legal
by a valid contract, by means of the means to obtain reparation for the same.
restoration of things to their
Extent of Rescission - Partial
condition in which they were prior to
the celebration of said contract. Article 1384. Rescission shall be only to the
extent necessary to cover the damages caused.
Cases of Rescissible Contracts:

Article 1380. Contracts validly agreed upon may

be rescinded in the cases established by law. Obligation of Mutual Restitution

Article 1381. The following contracts are Article 1385. Rescission creates the obligation
rescissible: to return the things which were the object of
the contract, together with their fruits, and the Article 1389. The action to claim rescission
price with its interest; consequently, it can be must be commenced within four years.
carried out only when he who demands rescission
For persons under guardianship and for
can return whatever he may be obliged to
absentees, the period of four years shall not
restore.
begin until the termination of the former's
Neither shall rescission take place when the incapacity, or until the domicile of the latter is
things which are the object of the contract are known.
legally in the possession of third persons who did
Presumption of Fraud
not act in bad faith.
Article 1387. All contracts by virtue of which
In this case, indemnity for damages may be
the debtor alienates property by gratuitous title
demanded from the person causing the loss.
are presumed to have been entered into in fraud
Basis Rescissible of creditors, when the donor did not reserve
Origin of the defect Economic damage or sufficient property to pay all debts contracted
lesion to either one of before the donation.
the parties or to 3rd
persons; Alienations by onerous title are also presumed
Declaration by law fraudulent when made by persons against whom
Necessity of Damage/ Economic damage or some judgment has been rendered in any
Prejudice lesion to either one of instance or some writ of attachment has been
the parties or to 3rd issued. The decision or attachment need not
persons; refer to the property alienated, and need not
Declaration by law have been obtained by the party seeking the
Curability by Curable rescission.
Prescription
Legal Effect Valid and legally In addition to these presumptions, the design to
enforceable until defraud creditors may be proved in any other
judicially rescinded manner recognized by the law of evidence.
Remedy Rescission or
Liability of Purchaser in Bad Faith
rescissory action
Nature of Action Must be a direct Article 1388. Whoever acquires in bad faith
action the things alienated in fraud of creditors, shall
Who can File Action GR: Contracting indemnify the latter for damages suffered by
parties them on account of the alienation, whenever, due
EXPN: Defrauded to any cause, it should be impossible for him to
creditors
return them.
Susceptibility of Susceptible but not
Ratification of ratification proper If there are two or more alienations, the first
Susceptibility of Action for rescission acquirer shall be liable first, and so on
Prescription prescribes after 4 successively.
years
Chapter 7 - Voidable Contracts

Period of Filing for Rescission Voidable or annullable contracts - Possess all the
essential requisites of a valid contract but one
of the parties is incapable of giving consent, not necessary
or consent is vitiated by mistake, violence, Curability by Curable
intimidation, undue influence, or fraud. Prescription
Legal Effect Valid and legally
Characteristics of a Voidable Contract enforceable until
 Effective until set aside judicially annulled
Remedy Annulment of
 Can be confirmed contract
Nature of Action Direct action needed
 Can be assailed only by the party whose
Who can File Action Injured party
consent was defective or his heirs or
Susceptibility of Susceptible
assigns
Ratification
 Annulment – remedy provided by law, for Susceptibility of Action for Annulment
reason of public interest, for the Prescription
declaration of the inefficacy of a
contract based on a defect or vice in the Period of Filing Action for Annulment
consent of one of the contracting parties
in order to restore them to their original Article 1391. The action for annulment shall be
position in which they were before the brought within four years.
contract was executed. This period shall begin:
Article 1390. The following contracts are In cases of intimidation, violence or undue
voidable or annullable, even though there may influence, from the time the defect of the
have been no damage to the contracting parties: consent ceases.
(1) Those where one of the parties is incapable In case of mistake or fraud, from the time of
of giving consent to a contract; the discovery of the same.
(2) Those where the consent is vitiated by And when the action refers to contracts
mistake, violence, intimidation, undue influence entered into by minors or other incapacitated
or fraud. persons, from the time the guardianship ceases.
These contracts are binding, unless they are Ratification
annulled by a proper action in court. They are
susceptible of ratification. Article 1392. Ratification extinguishes the
action to annul a voidable contract.
Basis Voidable
 Ratification – that one voluntarily adopts
Origin of the defect Incapacity of one of or approves some defective or
the parties to give unauthorized act or contract which,
consent; without his subsequent approval or
Vitiated consent (by consent, would not be binding on him. It
mistake, violence, indicates an intention on the part of the
intimidation, undue ratifier to be bound to the provision of
influence, or fraud) the contract.
Necessity of Damage/ As to the other
Prejudice contracting party –
  It cleanses the contract from all its  The injured party himself provided
defects from the moment it was he is already capacitated
constituted (Art. 1396).
 In case the contract is voidable on the
 The contract thus becomes valid (Art. ground of mistake, etc., ratification can
1390) be made by the party whose consent is
vitiated.
 Hence, the action to annul is
extinguished. Conformity of Guilty Party

Kinds of Ratification Article 1395. Ratification does not require the

conformity of the contracting party who has no
Article 1393. Ratification may be effected
right to bring the action for annulment.
expressly or tacitly. It is understood that there
is a tacit ratification if, with knowledge of the Retroactive Effect of Ratification
reason which renders the contract voidable and
Article 1396. Ratification cleanses the contract
such reason having ceased, the person who has a
from all its defects from the moment it was
right to invoke it should execute an act which
constituted.
necessarily implies an intention to waive his
right.

Express – when the ratification is manifested in Party Entitled to Bring an Action to Annul
words or in writing
Article 1397. The action for the annulment of
Implied or Tacit – it may take diverse forms, contracts may be instituted by all who are
such as by silence or acquiescence; by acts thereby obliged principally or subsidiarily.
showing adoption or approval of the contract; or However, persons who are capable cannot allege
by acceptance and retention of the benefits the incapacity of those with whom they
flowing therefrom. contracted; nor can those who exerted
intimidation, violence, or undue influence, or
 Requisites:
employed fraud, or caused mistake base their
 Knowledge of the reason which renders action upon these flaws of the contract.
the contract voidable
GR: Duty of Mutual Restitution
 Such reason must have ceased
Article 1398. An obligation having been
 The injured party must have executed annulled, the contracting parties shall restore to
an act which necessarily implies an each other the things which have been the
intention to waive his rights. subject matter of the contract, with their
fruits, and the price with its interest, except in
Who may Ratify
cases provided by law.
Article 1394. Ratification may be effected by
In obligations to render service, the value
the guardian of the incapacitated person.
thereof shall be the basis for damages.
 When the contract is entered into by an
Expn: Restitution by an Incapacitated Person
incapacitated person:
Article 1399. When the defect of the contract
 The guardian
consists in the incapacity of one of the parties,
the incapacitated person is not obliged to make  It may be ratified
any restitution except insofar as he has been
 It cannot be assailed by third person
benefited by the thing or price received by him.
 May only be assailed by way of defense,
Effect of Loss of the Thing to be Returned
not by direct action
Article 1400. Whenever the person obliged by
 The defect of an unenforceable contract
the decree of annulment to return the thing
is of a permanent nature and it will exist
cannot do so because it has been lost through
as long as the contract is not duly
his fault, he shall return the fruits received and
ratified, the mere lapse of time cannot
the value of the thing at the time of the loss,
give efficacy to the contract.
with interest from the same date.
Kinds of Unenforceable Contracts
Extinguishment of Action for Annulment
Article 1403. The following contracts are
Article 1401. The action for annulment of
unenforceable, unless they are ratified:
contracts shall be extinguished when the thing
which is the object thereof is lost through the (1) Those entered into in the name of another
fraud or fault of the person who has a right to person by one who has been given no authority or
institute the proceedings. legal representation, or who has acted beyond
his powers;
If the right of action is based upon the
incapacity of any one of the contracting parties, (2) Those that do not comply with the Statute
the loss of the thing shall not be an obstacle to of Frauds as set forth in this number. In the
the success of the action, unless said loss took following cases an agreement hereafter made
place through the fraud or fault of the plaintiff. shall be unenforceable by action, unless the
same, or some note or memorandum, thereof, be
Effect where a Party Cannot Restore what he
in writing, and subscribed by the party charged,
is Bound to Return
or by his agent; evidence, therefore, of the
Article 1402. As long as one of the contracting agreement cannot be received without the
parties does not restore what in virtue of the writing, or a secondary evidence of its contents:
decree of annulment he is bound to return, the (Applicable only to completely executory
other cannot be compelled to comply with what contracts)
is incumbent upon him.
(a) An agreement that by its terms is not to
Chapter 8 - Unenforceable Contracts be performed within a year from the
making thereof;
Those that cannot be enforced or given effect (b) A special promise to answer for the debt,
in a court of law or sued upon by reason of default, or miscarriage of another;
certain defects provided by law until and unless (c) An agreement made in consideration of
they are ratified according to law. It is valid marriage, other than a mutual promise to
although it produces no legal effect. marry;
(d) An agreement for the sale of goods,
Characteristics of an Unenforceable Contract
chattels or things in action, at a price not
 It cannot be enforced by a proper action less than five hundred pesos, unless the
in court 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
How to Ratify Contracts Infringing Statute of
money; but when a sale is made by auction
and entry is made by the auctioneer in his Frauds
sales book, at the time of the sale, of the Article 1405. Contracts infringing the Statute
amount and kind of property sold, terms of Frauds, referred to in No. 2 of article 1403,
of sale, price, names of the purchasers
are ratified by the failure to object to the
and person on whose account the sale is
presentation of oral evidence to prove the same,
made, it is a sufficient memorandum;
or by the acceptance of benefit under them.
(e) An agreement for the leasing for a longer
period than one year, or for the sale of Right of a Party when a Contract is
real property or of an interest therein; Enforceable
(f) A representation as to the credit of a
third person. Article 1406. When a contract is enforceable
under the Statute of Frauds, and a public
(3) Those where both parties are incapable of document is necessary for its registration in the
giving consent to a contract. Registry of Deeds, the parties may avail
themselves of the right under Article 1357.
Basis Unenforceable
Ratification by the Parent/s or Guardian/s
Origin of the Entered without authority or
Article 1407. In a contract where both parties
defect in excess thereof;
non-compliance with Statute are incapable of giving consent, express or
of Frauds; implied ratification by the parent, or guardian,
Incapacity of both parties as the case may be, of one of the contracting
to give consent parties shall give the contract the same effect
Necessity of Not necessary as if only one of them were incapacitated.
Damage/
If ratification is made by the parents or
Prejudice
guardians, as the case may be, of both
Curability by Not curable
Prescription contracting parties, the contract shall be
Legal Effect Inoperative until ratified; validated from the inception.
not enforceable in court
Third Person
without proper ratification
Remedy Only personal defense Article 1408. Unenforceable contracts cannot
Nature of Action Indirect attack is allowed be assailed by third persons.
Who can File Contracting parties
Chapter 9 – Void or Inexistent Contracts
Action
Susceptibility of Susceptible Those which, because of certain defects,
Ratification generally produce no effect at all. They are
Susceptibility of Action for recovery; considered as an inexistent from its inception or
Prescription Specific performance or from the very beginning and cannot be ratified
damages prescribes:
or validated by lapse of time.
 10 years if based on
written contracts Characteristics of a Void or Inexistent
 6 years if unwritten Contract
  It produces no legal force and effect;

 It cannot be cured or validated by Imprescriptible

prescription (Art. 1409)
Article 1410. The action or defense for the
 The right to set up the defense of declaration of the inexistence of a contract
illegality cannot be waived. (Art. 1409) does not prescribe.

 The defense of illegality of contracts is Basis Void / Inexistent

not available to third persons whose Origin of the Void – Illegality of any of
interests are not directly affected (Art. defect essential requisites of a
1421) contract
Inexistent – Absence of any of
 Cannot give rise to a valid contract (Art. essential requisites of a
1422) contract
Necessity of
 Can be assailed either directly or
Damage/ Not necessary
collaterally.
Prejudice
Kinds of a Void or Inexistent Contract Curability by Not curable
Prescription
Article 1409. The following contracts are
Legal Effect None
inexistent and void from the beginning: Remedy Declaration of nullity of
(1) Those whose cause, object or purpose is contract
contrary to law, morals, good customs, public Nature of Can be attacked directly or
Action indirectly
order or public policy;
Who can File Contracting parties
(2) Those which are absolutely simulated or Action Third person cannot file unless
fictitious; their interest are directly
affected
(3) Those whose cause or object did not exist at
Susceptibility
the time of the transaction; of Ratification Not susceptible
(4) Those whose object is outside the commerce
of men; Susceptibility Action for Declaration of
of Prescription nullity or putting of defense of
(5) Those which contemplate an impossible nullity does not prescribe.
service;

(6) Those where the intention of the parties Where Contract is Illegal and the Acts
relative to the principal object of the contract Constitute a Criminal Offense
cannot be ascertained;
Article 1411. When the nullity proceeds from
(7) Those expressly prohibited or declared void the illegality of the cause or object of the
by law. contract, and the act constitutes a criminal
offense, both parties being in pari delicto, they
These contracts cannot be ratified. Neither can
shall have no action against each other, and both
the right to set up the defense of illegality be
shall be prosecuted. Moreover, the provisions of
waived.
the Penal Code relative to the disposal of
effects or instruments of a crime shall be the courts may, if the interest of justice so
applicable to the things or the price of the demands allow recovery of money or property
contract. delivered by the incapacitated person.

This rule shall be applicable when only one of the Recovery Where Contract is not Illegal
parties is guilty; but the innocent one may claim
Article 1416. When the agreement is not illegal
what he has given, and shall not be bound to
per se but is merely prohibited, and the
comply with his promise.
prohibition by the law is designed for the
Where Contract is Illegal But the Act does protection of the plaintiff, he may, if public
not Constitute a Criminal Offense policy is thereby enhanced, recover what he has
paid or delivered.
Article 1412. If the act in which the unlawful
or forbidden cause consists does not constitute Recovery of amount Paid in Excess of Ceiling
a criminal offense, the following rules shall be Price
observed:
Article 1417. When the price of any article or
(1) When the fault is on the part of both commodity is determined by statute, or by
contracting parties, neither may recover what authority of law, any person paying any amount in
he has given by virtue of the contract, or excess of the maximum price allowed may
demand the performance of the other's recover such excess.
undertaking;
Recovery of Additional Compensation -
(2) When only one of the contracting parties is Overtime
at fault, he cannot recover what he has given by
Article 1418. When the law fixes, or authorizes
reason of the contract, or ask for the
the fixing of the maximum number of hours of
fulfillment of what has been promised him. The
labor, and a contract is entered into whereby a
other, who is not at fault, may demand the
laborer undertakes to work longer than the
return of what he has given without any
maximum thus fixed, he may demand additional
obligation to comply his promise.
compensation for service rendered beyond the
Recovery Where Contract Entered into for time limit.
Illegal Purposes
Recovery of Amount of Wage less than
Article 1414. When money is paid or property Minimum Fixed
delivered for an illegal purpose, the contract
Article 1419. When the law sets, or authorizes
may be repudiated by one of the parties before
the setting of a minimum wage for laborers, and
the purpose has been accomplished, or before
a contract is agreed upon by which a laborer
any damage has been caused to a third person.
accepts a lower wage, he shall be entitled to
In such case, the courts may, if the public
recover the deficiency.
interest will thus be subserved, allow the party
repudiating the contract to recover the money Effect of Illegality Where Contract is
or property. Indivisible / Divisible

Recovery by an Incapacitated Person Article 1420. In case of a divisible contract, if

the illegal terms can be separated from the legal
Article 1415. Where one of the parties to an
ones, the latter may be enforced.
illegal contract is incapable of giving consent,
Raise Defense of Illegality

Article 1421. The defense of illegality of

contract is not available to third persons whose
interests are not directly affected.

Void Contract Cannot be Novated

Article 1422. A contract which is the direct

result of a previous illegal contract, is also void
and inexistent.