CHAPTER 4

Extinguishment of Obligations
2.​ Mutual desistance or
withdrawal of parties ​
CHAPTER 4​ (Art. 1308.)
-​ When both parties agree
General Provisions to cancel the obligation.
3.​ Arrival of a resolutory period
Article 1231. (par 2, Art. 1193.)
-​ The date or time that
Obligations are extinguished: automatically ends the
(1) By payment or performance; obligation.
(2) By the loss of the thing due; 4.​ Compromise agreements ​
(3) By the condonation or remission of (Art. 2028.)
the debt; -​ When parties settle their
(4) By the confusion or merger of the dispute by agreeing to
rights of creditor and debtor; new terms.
(5) By compensation; 5.​ Impossibility of fulfillment ​
(Art. 1266.)
(6) By novation.
-​ If performance becomes
​
legally or physically
​ Other causes of extinguishment of
impossible without the
obligations, such as annulment,
debtor’s fault.
rescission, fulfillment of a resolutory
6.​ Happening of fortuitous event
condition, and prescription, are governed (Art. 1174.)
elsewhere in this Code. (1156a)
Compromise agreements
Explanation: ●​ It is when both parties agree
●​ lists of different ways an to settle a dispute by making
obligation ends. reciprocal concessions (both
parties giving up something) to
Other Causes of Extinguishment of avoid or end a lawsuit.
Obligations ●​ Reciprocal Concession -
essential element of a
1.​ Death of a party in case of compromise agreement.
personal obligations ​
(par 1, Art. 1311.)
-​ If the obligation is Section 1.​
strictly personal, it is Payment or Performance
extinguished when the
person dies. Article 1232.
-​
Payment means not only the delivery of
-​ This applies when the money but also the performance, in any
obligation depends on other manner, of an obligation. (n)
the person’s unique skill,
talent, or qualification.
 Article 1233.
Explanation:
A debt shall not be understood to have
●​ Payment is the fulfillment or
been paid unless the thing or service in
performance of the prestation
which the obligation consists has been
agreed upon, whether by
completely delivered or rendered, as the
delivery of money, thing,
case may be. (1157)
service, or act.

Example: Explanation:
“A owes B ₱10,000. A also binds ●​ A debt is not considered paid
himself to paint the room of B.” unless the obligation is
➔​ If A paid the ₱10,000, then completely performed.
there is a payment. ●​ Partial payment is not enough
➔​ Then, if A painted the room of
B, there is a performance. Example:
“A owes B ₱10,000. A also binds
himself to paint the room of B.”
➔​ If A paid the ₱10,000, then
Receipt Voucher there is a payment. But if he
●​ Best ●​ Not paid only ₱5,000 in advance,
evidence of necessarily then there is no payment.
a fact of an evidence ➔​ Then, if A painted the room of
payment.​ of payment. ​ B, there is a performance. But if
he only performed partially,
●​ A written ●​ A
then there is no performance.
and signed documentar
acknowledge y record of a
ment that business
money or transaction Article 1234.
good has to keep track
been of payments. If the obligation has been substantially
received or performed in good faith, the obligor may
delivered. recover as though there had been a strict
and complete fulfillment, less damages
Requisites of payment: suffered by the obligee. (n)
1.​ Identity of the prestation
The very thing due must be ​ Explanation:
​ delivered or released. If the obligation is substantially
2.​ Integrity performed in good faith, it is treated
​ The prestation must be fulfilled ​ as if fully performed — but the debtor
​ completely. must deduct damages if there are
defects.

To apply Article 1234:

1.​ There must be substantial consists has been completely
performance​ delivered or rendered, as the
case may be.
2.​ It must be done in good faith​
Explanation:
3.​ The obligee may deduct damages​
●​ Even if incomplete, if the creditor
accepts without protest, it is
If there is bad faith (intentional considered fully complied.
violation), Article 1234 does NOT
Exceptions:
apply.
1.​ Obligation substantially
Substantial Performance
performed in good faith =
●​ means the obligation was recovery of payment as if
performed almost completely, with complete - any damages
only minor defects or slight suffered by obligee.
omissions. 2.​ Obligation is deemed fully
Good Faith complied with if the obligee
accepts the performance
●​ means honesty and absence of without protest.
intention to cheat, defraud, or
neglect the obligation. Example:​
“In their contract of sale, A obliged
Example:​
himself to deliver 10 chairs to B at
“A agreed to tailor 10 uniforms for B.
₱500 each. Thereafter, A only
All uniforms were delivered on time,
delivered 8 chairs due to a fortuitous
but one button was loose.”
event, B accepted the chairs and paid
➔​ This is substantial performance ₱4,000. A’s obligation is extinguished.”
➔​ A can still demand payment, minus
the cost of fixing the defect.
​
Article 1236.
​
The creditor is not bound to
Article 1235.
accept payment or performance by a third
When the obligee accepts the person who has no interest in the
performance, knowing its incompleteness fulfillment of the obligation, unless there
or irregularity, and without expressing is a stipulation to the contrary.
any protest or objection, the obligation is
Whoever pays for another may
deemed fully complied with. (n)
demand from the debtor what he has
paid, except that if he paid without the
General Rule: Principle of Integrity
knowledge or against the will of the
●​ A debt shall not be understood to
debtor, he can recover only insofar as the
have been paid unless the thing
or service in which the obligation
payment has been beneficial to the debtor. arising from a mortgage, guaranty, or
(1158a) penalty. (1159a)

Explanation: Explanation:
1)​ The creditor does not have to ●​ If a third person pays the
accept payment from someone debtor’s obligation without the
who is not part of the obligation debtor’s knowledge or against
and has no legal interest in it. his will, he cannot force the
Unless the contract says that creditor to transfer to him the
payment from anyone is allowed. creditor’s rights (like mortgage
2)​ If a third person pays someone or guaranty), even though he
else's debt, he can ask the debtor may ask reimbursement from
to reimburse him. But, ff paid the debtor.
without consent, recovery only if
the debtor benefited. Subrogation - reimbursement and all
creditors’ rights.
Example:
“A owed B ₱5,000. C, the debtor’s Example:
friend, wants to pay his obligation.” “A owes B ₱100,000 secured by a
➔​ B is not bound to accept C’s mortgage on her land. Then, C pays B
payment because he has no without A knowing.
interest in the fulfillment of ​
obligation (not a guarantor/ C wants to:
solidary debtor) ➔​ Be subrogated to B’s mortgage
➔​ If B accepted the payment of C, rights
the latter can recover the payment ➔​ Foreclose the land if A doesn’t pay
+ interest him
➔​ But if payment of C happened
without the knowledge of A or Under Article 1237:
against his will, C can only recover
➔​ C cannot force B to transfer the
the ₱5,000 (based on principle of
mortgage rights to him because
unjust enrichment)
he paid without A’s knowledge or
Unjust Enrichment - is when someone
against her will.
gets a benefit or money unfairly at
another person’s expense and has no
Article 1238.
right to keep it.
Payment made by a third person who
does not intend to be reimbursed by the
Article 1237. debtor is deemed to be a donation, which
Whoever pays on behalf of the debtor requires the debtor's consent. But the
without the knowledge or against the will payment is in any case valid as to the
of the latter, cannot compel the creditor to creditor who has accepted it. (n)
subrogate him in his rights, such as those
Explanation: Exception: (Article 1427)
●​ If a third person pays without ●​ If a minor voluntarily pays
expecting reimbursement, it is a money or delivers a thing, and
donation that needs the debtor’s the creditor spends it in good
consent, but the creditor’s right is faith, the minor may not recover
already satisfied once he accepts it.
the payment.
Example:
Example: “A, a minor, promised to deliver a
“A owes B ₱10,000. C pays B and bicycle to B. But the bicycle belonged
doesn’t want A to pay back.” to C, A’s sister.”
●​ This is considered donation ➔​ The delivery is not a valid
●​ A must agree for the donation payment because the bicycle is
to be valid not A’s
●​ But B’s credit is already paid ➔​ A is a minor, meaning she has no
and extinguished right to alienate property, so the
payment is not valid

Article 1239.
Article 1240.
In obligations to give, payment made by
one who does not have the free disposal Payment shall be made to the person in
of the thing due and capacity to alienate whose favor the obligation has been
it shall not be valid, without prejudice to constituted, or his successor in interest,
the provisions of article 1427 under the or any person authorized to receive it.
Title on "Natural Obligations." (1160a) (1162a)

General Rule: Explanation:

●​ Payment by an incapacitated ●​ Payment must be made to the
person is not valid creditor, his legal successor, or
someone authorized by him,
Explanation: otherwise it may not be valid.
●​ In obligations to give, payment is
not valid if the person delivering To whom the payment be made:
the thing has no authority or no 1.​ Creditor - person who is
legal capacity to transfer it. entitled to receive payment.
●​ Alienate - means to transfer 2.​ Successor - person who legally
ownership of a thing to another takes the place of the creditor.
person. (inheritance or assistance of a
●​ No Free Disposal - means you creditor)
don’t have the legal right and 3.​ Authorized Person - someone
authority to use or transfer the allowed by the creditor to
thing freely. receive payment. (lawyer,
agent, or representative)
 (2)​If the creditor later accepts or
approves (ratifies) the
Article 1241. payment, it becomes valid.
(Ratify)
Payment to a person who is incapacitated
(3)​If the creditor acted in a way
to administer his property shall be valid if
that made the debtor believe
he has kept the thing delivered, or insofar
the third person had authority,
as the payment has been beneficial to
the payment is valid.
him.
(Estoppel)

Payment made to a third person shall also

be valid insofar as it has redounded to the
Article 1242.
benefit of the creditor. Such benefit to the
creditor need not be proved in the Payment made in good faith to any
following cases: ​ person in possession of the credit shall
release the debtor. (1164)
(1) If after the payment, the third person
acquires the creditor's rights; Explanation:
(2) If the creditor ratifies the payment to ●​ If the debtor pays someone who
the third person; appears to be the creditor
(3) If by the creditor's conduct, the debtor because that person is in
has been led to believe that the third possession of the credit (ex.:
person had authority to receive the holding the promissory note),
payment. (1163a) and the debtor pays in good
faith, the payment is valid.
Explanation:
1)​ [Effect of payment to an Example:
incapacitated person]: “A owes B ₱20,000 evidenced by a
If payment is made to a person promissory note. C is holding the
who is legally incapacitated promissory note and presents it to A.
(like a minor or insane person), Therefore, A honestly believes C is
the payment is generally not entitled to collect, so A paid her.
valid. ​ Obligation extinguished. ”
But it may be valid if:
-​ Payment was kept
-​ Benefited the creditor
2)​ If payment is made to someone
who is not the creditor, it is valid Article 1243.
only if the creditor benefited
from it. Payment made to the creditor by
(1)​ This means the third person the debtor after the latter has been
later becomes the creditor judicially ordered to retain the debt shall
(through assignment). not be valid. (1165)
(Subrogation)
​ substituted by another act or forbearance
Explanation: against the obligee's will. (1166a)
●​ If a court orders the debtor not
to pay the creditor (ex.: because Explanation:
another person is claiming the 1)​ If the obligation is to give a
credit), and the debtor still pays specific thing, the debtor must
the creditor, then the payment deliver exactly what was
is not valid and may be agreed upon. Even if it has the
required to pay again same value or more.
Examples of Judicial Order: 2)​ Cannot substitute another act
●​ Preliminary attachment - without the creditor’s consent.
temporary court order issued at
the start of a case to secure Example:
property or credits while the “A is obliged to deliver B a specific
case is ongoing. phone. Thereafter, A want B to accept
●​ Final attachment - a court a different phone model that is more
order issued after judgment, expensive, and B declined.”
allowing property or credits to ➔​ B refuses → A cannot compel B
be used to satisfy the decision.
●​ Preliminary injunction - a
temporary court order directing Article 1245.
a person to stop doing
Dation in payment, whereby
something while the case is
property is alienated to the creditor in
ongoing.
satisfaction of a debt in money, shall be
●​ Final injunction - a permanent
governed by the law of sales. (n)
court order issued after final
judgment.
Explanation:
●​ Garnishment - a court order
directing a debtor to pay a third
●​ When the debtor gives property
person (usually the creditor of
to the creditor to settle a
the creditor).
money debt. Instead of paying
in cash, the debtor transfers
ownership of a property.
Article 1244.
Dation in Payment (dación en pago)
The debtor of a thing cannot
compel the creditor to receive a different -​ A mode of extinguishing an
one, although the latter may be of the obligation where the debtor
same value as, or more valuable than that delivers property to the creditor as
which is due. accepted equivalent of payment
of a monetary debt.
In obligations to do or not to do,
an act or forbearance cannot be Requisites for dacion en pago:
 1.​ Performance of the prestation obligation and other circumstances shall
in lieu of payment (animo be taken into consideration. (1167a)
solvendi) - Delivery of a thing
or real right to the creditor Explanation:
2.​ Difference between the ●​ This article applies when the
prestation due and that which obligation is to deliver a generic
is given in substitution - or indeterminate thing —
Something different must be meaning the object is described
offered only by its kind, not specifically
3.​ Agreement between debtor identified.
and creditor that the
obligation is immediately Rules:
extinguished - Debt is 1.​ The creditor cannot demand
immediately extinguished by superior quality
the substituted performance 2.​ The debtor cannot deliver
inferior quality
For dacion en pago to exist, the 3.​ The quality of the thing to be
following elements must concur: delivered is determined by:
●​ The purpose of the
a.​ existence of a money obligation
obligation - helps determine
b.​ to alienation to the creditor of a
what “reasonable quality” is.
property by the debtor with the
The intended use guides the
consent of the former; and
standard, even if no quality
c.​ satisfaction of the money
was stated
obligation of the debtor
Ex.: “A must deliver 10 steel
bars”
Example:
➔​ For constructing a
“A owes B ₱1,000,000. A cannot pay building = strong,
construction-grade
cash, so they both agreed that A will
steel
transfer her car with the same worth
➔​ Making small
to B.” decorations = light
steel is acceptable
➔​ B accepts the car = obligation
●​ The surrounding
extinguished.
circumstances - means the
court will look at factors like
Article 1246.
the price agreed upon, the
When the obligation consists in the nature of the parties’
delivery of an indeterminate or generic business, and their prior
thing, whose quality and circumstances discussions to determine what
have not been stated, the creditor cannot quality of the generic thing is
demand a thing of superior quality. reasonably expected.
Neither can the debtor deliver a thing of
inferior quality. The purpose of the
 Ex.: pay.​
➔​ High price = better quality
➔​ Low price = ordinary quality Extrajudicial Expenses - These are
expenses required to make the
Example:​
payment outside of court.
“A obliged himself to deliver a 2023
model car.” Example:
➔​ A must only deliver the stated “A owes B ₱100,000. To pay the debt, B
obligation transfers a parcel of land to A.”
➔​ B cannot demand a different ➔​ To complete the transfer, they’ll
year model car need:
●​ Notary fees
●​ Transfer taxes
Article 1247. ●​ Registration fees
Unless it is otherwise stipulated, the ➔​ All expenses are paid by B, unless
extrajudicial expenses required by the it is stipulated that A will shoulder
payment shall be for the account of the the expenses.
debtor. With regard to judicial costs, the ➔​ B refused to pay → A files a case
→ court decides who will pay
Rules of Court shall govern. (1168a)

General Rule:
●​ Extrajudicial expenses incurred Article 1248.
during payment are for the Unless there is an express stipulation to
account of the debtor. that effect, the creditor cannot be
compelled partially to receive the
Exception: prestations in which the obligation
●​ When it is otherwise stipulated consists. Neither may the debtor be
required to make partial payments.
What governs the judicial costs? However, when the debt is in part
●​ Rule 142 of the Rules of Court liquidated and in part unliquidated, the
Explanation: creditor may demand and the debtor may
●​ If paying a debt requires effect the payment of the former without
expenses (like transfer fees or waiting for the liquidation of the latter.
notary fees), the debtor pays (1169a)
for them, unless they agreed
otherwise. Explanation:
●​ If the case goes to court, the (1)​General Rule: Payment must be
Rules of Court (Rule 142) will complete
decide who pays the court ●​ Creditor cannot be forced to
costs. accept partial payment
●​ Debtor cannot be forced to
Judicial Costs - These are expenses make partial payments
incurred when the matter is brought to
court, and the court decides who will
 (2)​Exceptions: mercantile documents shall produce the
●​ Unless there is a stipulation effect of payment only when they have
●​ If part of the debt is already been cashed, or when through the fault of
determined (liquidated), and the creditor they have been impaired.
part is not yet determined
(unliquidated), the determined In the meantime, the action derived from
part can already be paid the original obligation shall be held in the
without waiting for the abeyance. (1170)
remainder to be computed.
Explanation:
Liquidated Debt - a debt whose Rules in Payment of Debts in Money
amount is already determined or can (1 & 2):
be easily computed. (1)​ If the parties agreed on a
specific currency, payment
Unliquidated Debt - when the amount must be made in that currency.​
is not yet determined. ​
If it is impossible to deliver that
Example: currency, payment shall be
“ABC Corp. owes ₱1,000,000 from XYZ made in Philippine legal
Corp., due on March 1, 2026, plus tender.
damages for defective goods Ex.: “A owes B $1,000.”
delivered on Feb. 25, 2026.” ➔​ A must pay in USD
➔​ (1) XYZ Corp. can refuse partial ➔​ If USD is unavailable or
payments unless stipulated. impossible, payment
➔​ (2) Partial payment is valid if may be made in PHP
expressed in the stipulation (legal tender) ​
➔​ (3) ₱1,000,000 A/P → liquidated
​ Damages → unliquidated (2)​Delivery of promissory notes,
➢​ XYZ Corp. can already demand bills of exchange, or mercantile
the ₱1,000,000 documents are not considered
➢​ ABC Corp. can already pay the as payment unless:
₱1,000,000. ●​ cashed or encashed
●​ not cashed due to the
creditor’s fault
Article 1249. Ex.: “A owes B ₱1,000.”
➔​ A paid by check
The payment of debts in money shall be
➔​ Obligation will only be
made in the currency stipulated, and if it
extinguished if B cashed
is not possible to deliver such currency,
the check
then in the currency which is legal tender
➔​ B forgot to deposit the
in the Philippines.
check → debt may be
considered paid​
The delivery of promissory notes payable
to order, or bills of exchange or other
 (3)​While waiting for the check or obligation was created, unless
note to be cashed, the creditor the parties agreed otherwise.
cannot yet sue on the original
debt, unless: Inflation - sharp increase in money,
●​ checks/notes are credit, or both.
dishonored (bounce)
●​ Instrument not cashed Extraordinary Inflation - an unusual
upon maturity without and extreme decrease in the
creditor’s fault purchasing power of money that was
●​ Creditor impaired the not foreseeable when the obligation
instrument (ex.: negligently was created.
failed to encash)
Extraordinary Deflation - an unusual
Ex.: “A gives B a check.”
and extreme increase in the
➔​ B must wait for the bank
purchasing power of money, also
to clear the check
unforeseeable.
➔​ B cannot file a case
unless the check Requisites of Extraordinary Inflation
bounces.
1.​ Official Declaration of
Legal Tender - it is the official extraordinary
currency (coins/bills) that a creditor inflation/deflation from BSP;
cannot refuse when offered as 2.​ Obligation was contractual in
payment.​ nature (ex.: contract of sale);
- In the Philippines, it is issued by 3.​ Parties expressly agreed to
Bangko Sentral ng Pilipinas: ​ consider the effects of the
​ - Philippine peso bills​ extraordinary
​ - Philippine peso coins inflation/deflation

Example:​
“In 2021, A borrowed ₱100,000 from B,
Article 1250. payable in 4 years.

In case an extraordinary inflation or In 2025, prices suddenly increased

deflation of the currency stipulated drastically, and the purchasing power
should supervene, the value of the of money drastically decreases.
currency at the time of the establishment (extraordinary inflation)”
of the obligation shall be the basis of
payment, unless there is an agreement to ➔​ In 2021: ₱100,000 can buy a car​
the contrary. (n) In 2025: ₱100,000 can only be a
downpayment for a car
Explanation: ➔​ As stated in Art. 1250. - A must
●​ If extreme inflation or deflation pay ₱300,000 to match the
happens, payment is based on original value of ₱100,000
the value of money when the
 (priced triple in 2025 → as stated in the contract, that
₱100,000x3= ₱300,000) place must be followed.
➔​ If the contract says: “A shall 2.​ Wherever the determinate
pay exactly ₱100,000 thing might be (No stipulation)​
regardless of inflation,” then A - payment must be made where
can only pay ₱100,000 that thing was located when the
contract was made.
3.​ At the domicile of the debtor​
- Payment shall be made at the
Article 1251. debtor’s residence (domicile). ​
- But if the debtor changes his
Payment shall be made in the place
domicile in bad faith or after he
designated in the obligation.
incurred a delay, additional
expenses shall be borne by the
There being no express stipulation and if
debtor.
the undertaking is to deliver a
determinate thing, the payment shall be Domicile - a person’s permanent legal
made wherever the thing might be at the residence.
moment the obligation was constituted.
Venue - the place where a civil action
In any other case the place of payment must be filed or instituted
shall be the domicile of the debtor.
Civil Action - a party sues another for
If the debtor changes his domicile in bad the enforcement or protection of a
faith or after he has incurred in delay, the right or redress of a wrong
additional expenses shall be borne by
Rule 4 - Venue of Actions
him.
Section 1. Venue of real actions​
These provisions are without prejudice to ​ - actions involving title to, ​
venue under the Rules of Court. (1171a) ​ possession of, or interest in real​
​ property​
Explanation: ​ - filed where the property is ​
●​ means that payment must be ​ located
made in the place agreed upon,
and if none is specified, then at Section 2. Venue of personal actions​
the location of the specific ​ - personal actions involve ​
thing (if determinate) or ​ money claims, damages, or ​
otherwise at the debtor’s ​ contracts (not land).​
domicile. ​ - filed where the plaintiff ​
​ resides, or the defendant ​
Place of payment of the obligation ​ resides at the choice of the ​
​ plaintiff
1.​ Place stipulated by the parties​
- where payment must be made Section 3. Venue of actions against
non-residents​
​ - If the defendant does not live ​ payment is made, the former cannot
​ in the Philippines, the case may ​ complain of the same, unless there is a
​ be filed where the plaintiff ​ cause for invalidating the contract.
​ resides or where the property is ​ (1172a)
​ located (if the action affects ​
​ property in the Philippines). Explanation:

Section 4. When Rule not applicable: (1)​ Debtor has multiple debt to one
creditor → debtor has the right
1.​ Where a specific rule or law to choose which debt his
provides otherwise payment will apply to, but he
2.​ Where the parties have validly in must state it at the time of
writing before the filing of the payment. Unless both parties
action on the exclusive thereof agree, or the term was for the
debtor’s benefit.​
Example:​ Ex.: “This payment is for
“A borrowed ₱100,000 from B. Their January.”​
contract didn’t state where the - Cannot be applied to debts
payment should be.” that are not yet due.​

➔​ Payment must be made at A’s

(2)​If the debtor does not specify
residence (monetary debt)
which debt the payment applies
➔​ If A moved to another city in bad
to and accepts a receipt where
faith, she must shoulder all
the creditor makes the
expenses​
application, the debtor can no
longer question it unless there is
Subsection 1.​ a valid ground to invalidate it.​
Ex.: “A paid B without saying
Application of Payments
anything. Then, B issued a
receipt ‘payment for the March
Article 1252. debt’, A cannot complain, unless
He who has various debts of the same it is fraud or mistake.”
kind in favor of one and the same
creditor, may declare at the time of Application of payment - act of
making the payment, to which of them choosing which debt a payment will be
the same must be applied. Unless the applied to when a debtor owes several
parties so stipulate, or when the debts of the same kind to the same
application of payment is made by the creditor.
party for whose benefit the term has been
Requisites of Application of Payment
constituted, application shall not be made
as to debts which are not yet due. 1.​ One debtor and one creditor
2.​ Two or more debts of the same
If the debtor accepts from the creditor a kind
receipt in which an application of the 3.​ All of the debts must be due
 4.​ Amount paid by the debtor debt among those due. (ex.:
must not be sufficient to pay all high interest, with penalty,
debts. secured by mortgage)
(2)​If the debts are equal in nature
and burden, the payment is
divided proportionately among
Article 1253. them.
Ex.: “A owes ₱25,000 and
If the debt produces interest, payment of
₱100,000, then paid ₱25,000 →
the principal shall not be deemed to have
₱5,000 and ₱20,000 is applied
been made until the interests have been
to each debt, respectively.”
covered. (1173)

Explanation:
●​ Principal is not considered paid Subsection 2.​
until the interest has been fully Payment by Cession
paid. Any payment will first be
applied to the interest.

Example:
Article 1255.
“A owed ₱100,000 with an interest of The debtor may cede or assign his
₱10,000. She paid ₱10,000 first, so it property to his creditors in payment of his
goes to the interest. ₱100,000 debts. This cession, unless there is
principal remains.” stipulation to the contrary, shall only
release the debtor from responsibility for
the net proceeds of the thing assigned.
Article 1254. The agreements which, on the effect of
the cession, are made between the debtor
When the payment cannot be applied in
and his creditors shall be governed by
accordance with the preceding rules, or if
special laws. (1175a)
application can not be inferred from
other circumstances, the debt which is
Explanation:
most onerous to the debtor, among those
due, shall be deemed to have been ●​ In payment by cession, the
satisfied. debtor transfers property to
creditors, and he is released only
If the debts due are of the same nature up to the amount the property
and burden, the payment shall be applied earns unless otherwise agreed.
to all of them proportionately. (1174a)
Cession or assignment - when a
Explanation: debtor transfers his property to his
(1)​ If it is unclear which debt the creditors so it can be sold and the
payment applies to, the proceeds used to pay his debts.
payment will go to the most
Requisites of Payment by Cession
burdensome (most onerous)
 1.​ Two or more creditors can deposit the money or thing
2.​ Debtor must be partially or in court (consignation). Then,
relatively insolvent the debtor is released from
3.​ Acceptance of cession by the obligation.
creditors
Tender of payment - act of offering
Effects of payment by cession the creditor what is due to him, with
the demand that the creditor must do
This cession, unless stipulated to the
the same.
contrary, shall only release the debtor
from the responsibility of net proceeds
Consignation - act of depositing the
assigned.​
thing due with the court

Subsection 3.​
Article 1257.
Tender of Payment and
Consignation In order that the consignation of the
thing due may release the obligor, it must
first be announced to the persons
interested in the fulfillment of the
Article 1256. obligation. The consignation shall be
If the creditor to whom tender of ineffectual if it is not made strictly in
payment has been made refuses without consonance with the provisions which
just cause to accept it, the debtor shall be regulate payment. (1177)
released from responsibility by the
consignation of the thing or sum due. Explanation:
Consignation alone shall produce ●​ Before making consignation,
the same effect in the following cases: the debtor must notify the
(1) When the creditor is absent or persons interested (like the
unknown, or does not appear at the place creditor) that he will deposit the
of payment; payment.
(2) When he is incapacitated to receive ●​ Consignation will be invalid if it
the payment at the time it is due; is not done according to the
(3) When, without just cause, he refuses legal rules on payment.
to give a receipt;
(4) When two or more persons claim the Example:
same right to collect; “A pays ₱50,000 to B, which the latter
(5) When the title of the obligation has refuses to accept.”
been lost. (1176a) Before depositing in court, A must:
➔​ Notify the creditor about
Explanation: consigning
(1)​If the debtor offers to pay but ➔​ Properly deposit money in court
the creditor refuses to accept
without valid reason, the debtor
Article 1258. Article 1260.
Consignation shall be made by Once the consignation has been duly
depositing the things due at the disposal made, the debtor may ask the judge to
of judicial authority, before whom the order the cancellation of the obligation.
tender of payment shall be proved, in a
proper case, and the announcement of Before the creditor has accepted the
the consignation in other cases. consignation, or before a judicial
declaration that the consignation has
The consignation having been been properly made, the debtor may
made, the interested parties shall also be withdraw the thing or the sum deposited,
notified thereof. (1178) allowing the obligation to remain in
force. (1180)
Explanation:
Explanation:
●​ Consignation is done by (1)​Effect if Consignation has
depositing the thing or money been duly made: After valid
due in court (judicial authority). consignation is made, the
If there was a prior tender of debtor may ask the court to
payment, it must be proved. If declare that the obligation is
tender was not required (under cancelled
Article 1256), the announcement (2)​Before the creditor accepts the
of consignation must be shown. consignation or before the
●​ Debtor must again notify the court declares it valid, the
interested parties that the debtor may withdraw the
deposit has been done. money or thing deposited; then
the obligation continues.
Rationale for Consignation:
●​ Avoid the performance of an
obligation becoming more
Article 1261.
onerous to the debtor by
reasons that is not his fault If, the consignation having been made,
the creditor should authorize the debtor
to withdraw the same, he shall lose every
preference which he may have over the
Article 1259.
thing. The co-debtors, guarantors and
The expenses of consignation, when sureties shall be released. (1181a)
properly made, shall be charged against
the creditor. (1179) Explanation:
●​ If consignation has already
Explanation: (General Rule) been made and the creditor
●​ If consignation is properly allows the debtor to withdraw
made, the creditor pays the the deposit, certain effects
expenses. happen:
1.​ Obligation remains
 2.​ Creditor lose every -​ Law says so even for
preference over the thing fortuitous events
(mortgage, pledge, -​ Stipulation so provides
property right) -​ Nature of the obligation
3.​ Co-debtors, guarantors, requires the assumption
and sureties are released of risk
from liabilities. -​ Fault of the debtor
-​ After debtor incurred in
delay
-​ Delivery of the same
Section 2.​
thing to two or more
Loss of the Thing Due
persons who don’t have
the same interest
Article 1262. -​ Arises from crime
An obligation which consists in the
delivery of a determinate thing shall be
extinguished if it should be lost or Article 1263.
destroyed without the fault of the debtor, In an obligation to deliver a generic
and before he has incurred in delay. thing, the loss or destruction of anything
of the same kind does not extinguish the
When by law or stipulation, the obligor is obligation. (n)
liable even for fortuitous events, the loss
of the thing does not extinguish the Explanation:
obligation, and he shall be responsible for ●​ Loss of the generic thing does
damages. The same rule applies when the not extinguish the obligation
nature of the obligation requires the because it can be replaced.
assumption of risk. (1182a)
Effect of fortuitous loss in a generic
General Rule: obligation
●​ The obligation to deliver a ●​ Genus nunquan perit
determinate thing is ●​ Generic thing does not perish,
extinguished if it should be lost therefore it can always be
or destroyed. replaced. Thus, a fortuitous
event is not an excuse.
Explanation:
(1)​ Obligation to deliver a specific
thing is extinguished when:
Article 1264.
(Requisites)
-​ Lost or destroyed The courts shall determine whether,
-​ Without debtor’s fault under the circumstances, the partial loss
-​ Before debtor has of the object of the obligation is so
incurred delay important as to extinguish the obligation.
(2)​Obligation to deliver specific (n)
thing remains if: (Exceptions)
Explantion: ●​ Thing lost in debtor’s
●​ If there is only partial loss of possession shall be presumed
the thing, the court will decide by law as his fault, unless there
whether loss is serious enough is proof to the contrary.
to extinguish the obligation ●​ If the obligor delays, or has
promised to deliver the same
General Rule: thing to two or more persons
●​ Partial loss of the object of the who do not have the same
obligation does not extinguish interest, he shall be liable for
the obligation any fortuitous event until the
effect of delivery
Exception:
●​ When the court determine how Exception:
important the lost part is as to ●​ Presumption does not apply in
extinguish the obligation the case of fortuitous event

Example: Example:
“Two tires and the engine of a “A must deliver a specific thing, but
motorcycle was lost through a was lost in his house.”
fortuitous event, the court will decide ➔​ Law presumes negligence
if the things lost are important to ➔​ A must prove it was not his fault
extinguish the obligation.” ➔​ If lost through a fortuitous
event, presumption does not
apply
Article 1265.
Whenever the thing is lost in the
Article 1266.
possession of the debtor, it shall be
presumed that the loss was due to his The debtor in obligations to do shall also
fault, unless there is proof to the be released when the prestation becomes
contrary, and without prejudice to the legally or physically impossible without
provisions of article 1165. This the fault of the obligor. (1184a)
presumption does not apply in case of
earthquake, flood, storm, or other natural Explanation:
calamity. (1183a) ●​ If it becomes impossible to
perform, the obligation is
Explanation: extinguished.
●​ If the thing is lost while in the
debtor’s possession, the law Physically Impossible - act can no
presumes that the loss was his longer be done in reality
fault. Thus, evidence is needed Legally Impossible - law prohibits the
to avoid liability. performance

General Rule: Example:

“A bounds himself to construct a obligation is extinguished due to
building in favor of B, but an extraordinary difficulty.”
ordinance bans construction in that
specific area. Hence, the obligation is
extinguished.” Article 1268.
When the debt of a thing certain and
determinate proceeds from a criminal
Article 1267. offense, the debtor shall not be exempted
When the service has become so difficult from the payment of its price, whatever may
be the cause for the loss, unless the thing
as to be manifestly beyond the
having been offered by him to the person who
contemplation of the parties, the obligor
should receive it, the latter refused without
may also be released therefrom, in whole justification to accept it. (1185)
or in part. (n)
Explanation:
Explanation: ●​ If the obligation to deliver a
●​ If performance becomes specific thing arises from a
extraordinarily difficult beyond criminal offense, the debtor is
what the parties contemplated, not released from the
the debtor may be released obligation even if the thing is
wholly or partially. lost for any reason.
●​ Obligation “TO DO”
Effect if Obligation Proceeds from a
Doctrine of unforeseen events Criminal Offense
●​ When an unforeseen and
extraordinary event makes General Rule:
performance extremely ●​ The debtor shall not be
difficult, the debtor may be exempted from the payment of
released under the doctrine of the price of the determinate
unforeseen events. thing, whatever the cause for
the loss, even if caused by
Rebus sic stantibus fortuitous event.
●​ contract is binding only as long
as the circumstances remain Exception:
the same as when the parties ●​ If the creditor (rightful owner)
entered into it. unjustifiably refuses to accept
●​ Basis of the Doctrine of the thing when offered, the
unforeseen events debtor is released from liability
if it is later lost.
Example:
“A agrees to construct a room for B, Example:​
for ₱100,000. After the contract, an “A stole a specific ring.”
unexpected war happened. Hence, the ●​ Before returning it, the ring was
destroyed by a fire.
 ➔​ A must still pay for the value, Article 1270.
as it arose from a crime
Condonation or remission is essentially
●​ If A offered to return it and the
gratuitous, and requires the acceptance
owner refused without reason,
by the obligor. It may be made expressly
and it was later lost:
or impliedly.
➔​ A may be released

One and the other kind shall be subject to

the rules which govern inofficious
Article 1669. donations. Express condonation shall,
The obligation having been extinguished furthermore, comply with the forms of
by the loss of the thing, the creditor shall donation. (1187)
have all the rights of action which the
debtor may have against third persons by Explanation:
reason of the loss. (1186) (1)​Condonation is gratuitous (free)
and must be accepted by the
Explanation: debtor. The creditor voluntarily
●​ If the obligation is extinguished forgives the debt without
due to loss, the creditor may receiving payment. It can be
exercise the debtor’s rights made expressly (clearly stated)
against any third person or implied (shown by action).
responsible for the loss. (2)​Both express and implied
condonation must follow the
Right of action - right to bring a rules on inofficious donations. If
specific case to court the condonation is express, it
must also follow the formal
Example: requirements of donation.
“A must deliver a specific car. Before
delivery, a third person negligently Condonation or remission - act of
damages the car.” liberality, where the creditor cancels
➔​ Obligation is extinguished due the obligation without receiving any
to loss (not debtor’s fault) equivalent.
➔​ Creditor can sue the third
person for the damages Example:
“B (creditor) tells A (debtor) in writing:
‘I forgive your debt to me.’”
SECTION 3.​ ➔​ This is express condonation
➔​ Must follow the rules of
Condonation or Remission of
donation (Art. 725-773)
the Debt ●​ If B voluntarily returns the signed
promissory note to A:
➔​ May be implied condonation
 Requisites of condonation or instrument, donor must be
remission notified.
1.​ Must be gratuitous
2.​ Must be accepted by the debtor Kinds of Condonation or Remission
3.​ Obligation must be demandable 1.​ As to form
4.​ Parties must have capacity a.​ Express
5.​ Condonation must not be -​ When it is made in
inofficious accordance with the
6.​ Condonation must comply with the formalities prescribed by
forms of donation, if an express law for donations.
condonation b.​ Implied
-​ Can be deduced from the
Inofficious Donations - donation that acts of the obligee
exceeds the portion of property the 2. As to extent
donor can freely give, thereby a.​ Total
prejudicing the legitime of compulsory -​ When the entire obligation
heirs. is extinguished
b.​ Partial
Forms of donation -​ Refers only to the principal
A.​ Donation of a movable or accessory obligation or
●​ Oral donation - May be made an aspect thereof which
orally, but this requires the affects the debtor, as for
simultaneous delivery of the instance solidarity.
thing or the document 3. As to constitution
representing the right a.​ Inter vivos
donated. -​ Constituted by agreement
●​ Written donation - May be of the obligee and obligor,
made orally, but this requires which partakes the nature
the simultaneous delivery of of a donation inter vivos
the thing or the document -​ Take effect during the
representing the right lifetime of donor
donated. b.​ Mortis Causa
B.​ Donation of an immovable -​ Constituted by last will and
●​ Formal Requirement - Must testament, which partakes
be made in a public document, the nature of a donation
specifying the property mortis causa.
donated and the value of the -​ Take effect upon death of
charges which the donee must donor
satisfy.
●​ Acceptance - must be made in Article 1271.
the same deed of donation or
The delivery of a private document
in separate public document.
evidencing a credit, made voluntarily by
If made in separate
the creditor to the debtor, implies the
renunciation of the action which the ●​ If the debt document is found
former had against the latter. with the debtor, it is presumed
the creditor voluntarily returned
If in order to nullify this waiver it it, unless proven otherwise.
should be claimed to be inofficious, the
debtor and his heirs may uphold it by Example:
proving that the delivery of the document “A lend B ₱50,000 with a signed
was made in virtue of payment of the promissory note. Later, A voluntarily
debt. (1188) return the note to B.”
➔​ Implies that debt was forgiven
Explanation: If B stole it:
(1)​ If the creditor voluntarily gives ➔​ Presumption does not apply
the private document (like a
promissory note) to the debtor,
it is presumed that the debt was Article 1273.
forgiven
The renunciation of the principal debt
(2)​If someone claims that the
shall extinguish the accessory
forgiveness was inofficious, the
obligations; but the waiver of the latter
debtor can defend himself by
shall leave the former in force. (1190)
proving that documents was
returned because debt wsa
Explanation:
paid, not forgiven
●​ Forgiving the principal debt
extinguishes the accessory
Example:
obligations, but waiving the
“A lend B ₱50,000 with a signed
accessory does not extinguish
promissory note. Later, A voluntarily
the principal debt.
return the note to B.”
➔​ Implies that debt was forgiven
Example:
But if A’s heirs claim it as inofficious
“A owes B ₱300,000, payable over 2
donation,
years, with interest at 1.2% per month.”
➔​ B can prove he paid the
➔​ A only paid the accessory
₱50,000
obligation (interest), amounting
to ₱86,400. → A still has the
obligation to pay ₱300,000.
Article 1272. ➔​ If what was paid was the
Whenever the private document in which principal obligation, the
the debt appears is found in the accessory obligation would be
possession of the debtor, it shall be void.
presumed that the creditor delivered it
voluntarily, unless the contrary is proved.
(1189) Article 1274.
It is presumed that the accessory
Explanation:
obligation of pledge has been remitted
when the thing pledged, after its delivery 3.​ Merger must be complete and
to the creditor, is found in the possession definite.
of the debtor, or of a third person who
owns the thing. (1191a) Confusion or merger - meeting in the
same person of the qualities of
Explanation: creditor and debtor with respect to
●​ If the thing pledged (given as one and the same obligation.
security) is found back in the
possession of the debtor or the Example:
creditor, it is presumed that the “A owes B ₱100,000. Later, A becomes
obligation was forgiven B’s heir.”
➔​ A will inherit B’s rights as
Example: creditor, making A both debtor
“A borrowed from B, and pledged his and creditor
watch as security. The watch was ➔​ Obligation extinguished
delivered to B. Later, the watch is
returned to A’s possession.”
➔​ Law presumes that the pledge Article 1276.
was remitted (cancelled)
Merger which takes place in the person of
the principal debtor or creditor benefits
the guarantors. Confusion which takes
Section 4.​ place in the person of any of the latter
Confusion or Merger of Rights does not extinguish the obligation. (1193)

Explanation:
●​ Merger in the principal debtor
Article 1275.
or creditor extinguishes the
The obligation is extinguished from the obligation and benefits
time the characters of creditor and debtor guarantors, but merger in a
are merged in the same person. (1192a) guarantor does not extinguish
the principal obligation.
Explanation:
●​ An obligation is extinguished Example:
when the same person becomes “A owes B ₱100,000 and C as
both the creditor and the guarantor.”
debtor. ➔​ If A will inherit B’s rights as
Requisites of confusion or merger creditor, making A both debtor
1.​ Merger of the characters of the and creditor → obligation
creditors and debtors must be extinguished → C is released
in the same person ➔​ If C becomes the creditor →
2.​ Merger must take place in the principal obligation still exists
person of either the principal
creditor or the principal debtor
 Article 1277. ●​ Compensation occurs when two
persons personally owe each
Confusion does not extinguish a joint
other, allowing their debts to
obligation except as regards the share
cancel out.
corresponding to the creditor or debtor in
whom the two characters concur. (1194)
Example:
“A owes B ₱20,000; B owes A ₱15,000”
Explanation:
➔​ Both compensates each other
●​ In a joint obligation, merger
➔​ A now only owes B ₱5,000
extinguishes only the share of
the person who becomes the
Kinds of Compensation
creditor and debtor.
1.​ As to cause
Example:
a.​ Legal
“A, B, C jointly owe D ₱150,000
- by operation of law (ipso jure)​
(₱50,000 each).”
- happens when all legal
If A becomes D’s heir:
requirements are present​
➔​ A’s share is extinguished
Ex.: “Both A and B owe each
➔​ B and C are still liable for their
other ₱100 → debts
share
automatically cancelled.”
b.​ Voluntary or Conventional​
- happens because the parties
Section 5.​ agree to offset their debts.​
Compensation Ex.: “A’s debt is not yet due, but
both agreed to cancel their
debts.”
c.​ Judicial​
Compensation Confusion - declared by court​
-​ Two persons, -​ One person Ex.: “A sues B for his debt and
who are merged the proves it in court → court
creditors and qualities of a orders compensation.”
debtors of debtor and d.​ Facultative​
each other creditor - Only one party may choose to
-​ At least two -​ Only one
apply compensation.​
obligations obligation
Ex.: “A lends B her laptop
(commodatum), A also owes B
₱200.”
➔​ B cannot refuse to return
Article 1278.
the laptop
Compensation shall take place when two ➔​ But, A may apply
persons, in their own right, are creditors compensation
and debtors of each other. (1195) 2.​ As to effect
a.​ Total​
Explanation: - two debts are equal​
 Ex.: “₱100 vs ₱100 → (3)​Two debts be due​
extinguished” Ex.: “A’s debt is due next year,
b.​ Partial ​ no compensation yet.”
- two debts are unequal​ (4)​Amount must be determined
Ex.: “₱1,000 vs ₱100 → ₱100 and legally collectible​
extinguished, ₱900 remains.” Ex.: “A owes B a fixed debt of
₱100,000 that will mature
tomorrow, and later on caused
Article 1279 B uncertain damages (not yet
computed).” (Art. 1248)
In order that compensation may be
(5)​There must be no garnishment,
proper, it is necessary:
retention, or legal dispute by a
third person​
(1) That each one of the obligors be
Ex.: “A’s debt was garnished by
bound principally, and that he be at the
another creditor →
same time a principal creditor of the
compensation cannot happen
other;
(debt is being claimed by a
(2) That both debts consist in a sum of
third party).”
money, or if the things due are
●​ Requires that parties must be
consumable, they be of the same kind,
principal debtor-creditors of each
and also of the same quality if the latter
other
has been stated;
(3) That the two debts be due;
Claim is liquidated - amount and
(4) That they be liquidated and
time of payment is fixed.
demandable;
(5) That over neither of them there be any
retention or controversy, commenced by
third persons and communicated in due Debt Claim
time to the debtor. (1196) -​ Amount -​ Right to
actually demand a
Explanation: ascertained payment
For legal compensation to happen, it
is necessary:
(1)​Each person must be personally
bound and at the same time a
Article 1280.
principal creditor of the other​
Ex.: “A and B owes each other.” Notwithstanding the provisions of the
(2)​Both debts must be: money or preceding article, the guarantor may set
consumable things of the same up compensation as regards what the
kind and quality (if stated)​ creditor may owe the principal debtor.
Ex.: “A and B owes each other 1 (1197)
sack of rice of the same class.”
Explanation:
 ●​ the guarantor may use Article 1282.
compensation if the creditor
The parties may agree upon the
owes something to the principal
compensation of debts which are not yet
debtor.
due. (n)
●​ Guarantor’s liability depends on
the principal obligation. If the
Explanation:
principal debt can be paid by
●​ Parties may agree to
compensation, guarantor
compensate their debts even if
benefits.
the debts are not yet due

Right of guarantor to set up

Voluntary or Conventional - happens
compensation
because the parties agree to offset
●​ Guarantor may set up
their debts.
compensation

Example:
Example:
“A owes B ₱100,000 due next month,
“A owes B ₱100,000. C is A’s guarantor.
vice versa.”
But B also owes A ₱100,000.
➔​ Both agreed to compensate
B sues C”
and cancel their obligation,
➔​ C raised compensation
even though debts are not yet
➔​ Debt extinguished
due

Requisites of conventional
Article 1281. compensation
Compensation may be total or partial. 1.​ Each party can dispose of the
When the two debts are of the same credit they seek to compensate
amount, there is a total compensation. (n) 2.​ They agree to the mutual
extinguishment of their credits
As to effect
1.​ Total​
- two debts are equal​
Legal Conventional
Example: ​ Compensation Compensation
“₱100 vs ₱100 → extinguished”
-​ By operation -​ Parties agree
2.​ Partial ​ of law when to
all requisites compensate
- two debts are unequal​
are present even in the
Example: ​ absence of
“₱1,000 vs ₱100 → ₱100 requisites
extinguished, ₱900 remains.”
Article 1283. B owes A ₱1,000 (valid contract)”
Before A files a case to annul her
If one of the parties to a suit over an
obligation,
obligation has a claim for damages
➔​ Compensation may take place
against the other, the former may set it off
➔​ Both debts extinguished
by proving his right to said damages and
the amount thereof. (n)

Explanation: Article 1285.

●​ A party in a lawsuit may set off The debtor who has consented to the
proven damages against the assignment of rights made by a creditor
claim of the other party in favor of a third person, cannot set up
against the assignee the compensation
Judicial - declared by court which would pertain to him against the
​ assignor, unless the assignor was notified
Example: by the debtor at the time he gave his
“A sues B for his debt of ₱10,000. consent, that he reserved his right to the
Then, B says A caused him ₱1,000 in compensation.
damages and proves it in court.”
➔​ court orders compensation If the creditor communicated the cession
➔​ Court may deduct ₱1,000 from to him but the debtor did not consent
₱10,000 → B only pays ₱9,000 thereto, the latter may set up the
compensation of debts previous to the
cession, but not of subsequent ones.
Article 1284.
If the assignment is made without the
When one or both debts are rescissible or
knowledge of the debtor, he may set up
voidable, they may be compensated
the compensation of all credits prior to
against each other before they are
the same and also later ones until he had
judicially rescinded or avoided. (n)
knowledge of the assignment. (1198a)
Explanation:
Explanation:
●​ Debts that are rescissible or
(1)​If the debtor agreed to the
voidable may still be
transfer of credit to a third
compensated while they remain
person, he cannot use
legally valid.
compensation against the new
creditor (assignee), unless he
Recssible - can be cancelled because
clearly reserved his right to
of damage or fraud
compensation when he gave
consent​
Voidable - can be annulled due to
Ex.: “A owes B ₱1,000, B owes A
defects (ex.: lack of consent)
₱1,000. B assigns C as the new
creditor”
Example:
“A owes B ₱1,000 (voidable contract)
 ➔​ A cannot use Article 1286.
compensation
Compensation takes place by operation of
➔​ Unless A reserved her
law, even though the debts may be
right to compensate​
payable at different places, but there shall
be an indemnity for expenses of exchange
(2)​Debtor was informed but did not
or transportation to the place of payment.
agree with the assignment, he
(1199a)
can compensate debt that
existed before the assignment,
Explanation:
but not the debts after​
●​ Compensation still happens
Ex.: Before: A owes B ₱2,000, B
even if payment places are
owes A ₱1,000
different, but expenses caused
➔​ B assigns C for A’s debt,
by the difference must be
which A did not agree
reimbursed.
➔​ A can compensate for the
₱1,000 (before)
Example:
➔​ A now only owes C ₱1,000
“A must pay B in Manila, and B must
After: B borrows ₱500 from A
pay A in Cebu.”
➔​ A cannot compensate for
➔​ Compensation can still happen
the ₱500 (after)​
➔​ If payment will be transferred,
cost of transfer, exchange rate,
(3)​If the assignment happened
or transpo must be paid.
without the debtor’s knowledge,
he may compensate debts before
and after the assignment. But
once the debtor learned about it, Article 1287.
no compensation will happen. Compensation shall not be proper when
Ex.: “B assigned C the debt of A, one of the debts arises from a depositum
without A knowing. But, B still or from the obligations of a depositary or
owes A ₱1,000, and later of a bailee in commodatum.
borrowed another ₱1,000.”
➔​ Before A learns the Neither can compensation be set up
assignment, she may against a creditor who has a claim for
compensate both debts support due by gratuitous title, without
prejudice to the provisions of paragraph 2
●​ This law protects: the assignee of article 301. (1200a)
and debtor’s good faith
Explanation:
Assignment of rights - transfer of (1)​Compensation is not allowed if
rights, likely contractual rights one debt comes from:
●​ Depositum
●​ Obligations of a
depository
 ●​ Obligations of a bailee in Article 1288.
commodatum (borrower
Neither shall there be compensation if
of a thing)
one of the debts consists in civil liability
Ex.: “A deposits her ring
arising from a penal offense. (n)
to B for safekeeping
(depositum), and lent her
Explanation:
car to B for free to use
●​ Compensation is not allowed if
(commodatum).
one of the debts comes from
➔​ Later, A owes B
civil liability due to a crime
₱100,000
➔​ B must return both
Debts Which Cannot Be
the ring and car to A
Compensated
➔​ B cannot
compensate the
1.​ Debts arising from contract of
monetary debt with
depositum
the ring and car​
-​ act of giving a thing to
another for safekeeping,
(2)​Compensation is also not
and must be returned
allowed if the debt is for
Ex.: “You cannot keep
support given by gratuitous
someone’s deposited
title (like child support)
jewelry just because they
Ex.: “A father must give
owe you money.”
₱15,000 monthly support to his
2.​ Debts arising from a contract
child. The child owes the father
of commodatum
₱5,000”
-​ borrowing/loan of a
➔​ Father cannot deduct the
thing for free of use, but
childs debt from the
must return it​
support
Ex.: “You cannot refuse
to return a borrowed
Commodatum - borrowing/loan of a
laptop by saying the
thing for free of use, but must return it
owner owes you money.”
3.​ Claims for support due by
Gratuitous - free, no payment or
gratuitous title
compensation
-​ support is necessary for
a person’s sustenance
Depositum - act of giving a thing to
and basic needs, and the
another for safekeeping, and must be
law protects it from
returned
being reduced​
Ex.: “A father cannot
deduct money owed to
him from the child’s
monthly support.”
 4.​ One of the debts consists in Article 1290.
civil liability arising from a
When all the requisites mentioned in
penal offense
article 1279 are present, compensation
-​ person who committed a
takes effect by operation of law, and
crime must fully pay the
extinguishes both debts to the concurrent
damages caused and
amount, even though the creditors and
cannot reduce the
debtors are not aware of the
obligation by offsetting
compensation. (1202a)
it with another debt.
Ex.: “A thief cannot
Explanation:
reduce the damages he
●​ If all the requisites of legal
owes by claiming the
compensation (under Article
victim owes him money.
1279) are present,
compensation happens
automatically by operation of
Article 1289. law. Debts are extinguished up
If a person should have against him to the amount they have in
several debts which are susceptible of common (concurrent amount)
compensation, the rules on the
application of payments shall apply to the Example:
order of the compensation. (1201) “A owes B ₱10,000, and B owes A
₱5,000.”
Explanation: ➔​ All requisites are present (both
●​ If a person has several debts debts are due, liquidated,
that can be compensated, the demandable, and between the
rules on application of same parties)
payments will determine which ➔​ Compensation will
debt will be compensated first. automatically happen, even if
●​ Rules on application of they are unaware
payments: Art. 1252 - 1254 ➔​ B’s debt is extinguished
➔​ Now, A only owes B ₱5,000
Example:
“A owes B ₱10,000 (loan with interest)
and another ₱5,000 (no interest).
Subsequently, B also owes A ₱5,000.”
➔​ Compensation is possible and
will most likely be applied to the
most onerous debt (the one
with interest).
Section 6
 agree that A will instead deliver
a laptop worth ₱10,000.
Section 6.​
Novation b. Personal or subjective – a
novation by substituting
ARTICLE 1291 the person of the debtor
or subrogating a third
Obligations may be modified by:
person to the rights of
the creditor.
1.​ Changing their object or
Example: A owes B ₱15,000.
principal conditions;
With B’s consent, C replaces A
2.​ Substituting the person of the
as the debtor and agrees to
debtor;
pay the amount.
3.​ Subrogating a third person in
​
the rights of the creditor.
FOUR ESSENTIAL
Explanation: REQUISITES
1. a previous valid
- Novation is the extinguishment obligation;
of an obligation by the 2. an agreement of all
substitution or change of the parties concerned to a
obligation with a new one. new contract;
3. the extinguishment of
- The old obligation is the old obligation; and
extinguished only when the 4. the birth of a valid new
new obligation is valid and obligation.
intended to replace the old
one. c. Mixed – both the object
and the parties are
Terminology changed at the same time.
· Novation – a legal Example: A owes B ₱20,000.
way of ending an Later, C becomes the new
old obligation by debtor and agrees to deliver a
creating a new motorcycle instead of paying
obligation that takes cash, with B’s consent.
it place.
2.​ As to Constitution
KINDS of NOVATION
a. Express (Explicit
1.​ ​ As to the subject declaration) – it happens
when the parties clearly
and expressly state that
a. Real or objective – a the old obligation is being
novation is made either by extinguished and replaced
changing the object or by a new one.
the principal conditions. Example: A owes B ₱10,000.
Example: A owes B ₱10,000 They later sign a written
payable in cash. Later, they agreement stating that “this
new obligation replaces and
 extinguishes the old one,” and obligations be on every point
A will now deliver a cellphone incompatible with each other.
instead of paying cash.

b. Implied (Material
incompatibility) – it
happens without an Explanation
express statement, but
– must be clearly stated or the
the old and new obligations
old and new obligations must
are so incompatible that
be totally incompatible.
they cannot exist together.
– ​ If there is no clear intent to
novate, both obligations may
3.​ ​ As to extent or effect still exist.

a. Total or extinctive – the In order that a novation can take place,

old obligation is the concurrence of the following requisites
completely extinguished are indispensable:
and replaced by a new one.
There must be a previous valid
The original obligation no
obligation;
longer exists.
1. There must be an
b. Partial or Modificatory agreement of the
Novation – when the old parties concerned to
obligation subsists to the a new contract;
extent that it remains 2. There must be the
compatible with the extinguishment of
amendatory agreement. the old contract; and
3. There must be the
4.​ ​ As to origin validity of the new
contract.
a. Legal – takes place by
operation of law.
TERMINOLOGY
b. Conventional – takes
place by stipulation of the · ​ Incompatible
parties. obligations –
obligations that
cannot exist at the
same time.
ARTICLE 1292
KINDS of NOVATION
In order that an obligation may be
extinguished by another which a. Express (Explicit
substitutes the same, it is imperative declaration) – it happens
that it be so declared in unequivocal when the parties clearly
terms, or that the old and the new and expressly state that
the old obligation is being
 extinguished and replaced has the right to choose whom
by a new one. to trust for payment.
Example: A owes B ₱10,000.
They later sign a written
agreement stating that “this
new obligation replaces and Terminology – meaning of the term
extinguishes the old one,” and
●​ Substitution of debtor – replacing
A will now deliver a cellphone
the original debtor with another
instead of paying cash.
person who will assume the
obligation.

b. Implied (Material KINDS OF PERSONAL NOVATION

incompatibility) – it
1.​ Substitution – it happens when
happens without an
the debtor is changed. A new
express statement, but
debtor takes the place of the
the old and new obligations
original debtor, and the original
are so incompatible that
debtor may be released from the
they cannot exist together.
obligation. The consent of the
Example: X owes Z ₱5,000
creditor is required.
payable on a certain date.
They later agree that A will
perform a service instead of Example: A owes B ₱10,000. C
paying money. Since payment agrees to take over the debt, and B
and service cannot exist agrees to the change.
together, implied novation ​ NOTE: C becomes the new
occurs. debtor, and A is released. This is
substitution.

ARTICLE 1293
2.​ Subrogation – when the creditor
Novation which consists in substituting is changed. A new creditor
a new debtor in the place of the original replaces the original creditor and
one, may be made even without the acquires all the rights of the old
knowledge or against the will of the creditor.
latter, but not without the consent of
the creditor. Payment by the new
EXAMPLE: A owes B ₱10,000. C
debtor gives him the rights mentioned
pays B the amount, and by
in Articles 1236 and 1237.
agreement or by law, C now has
the right to collect ₱10,000 from A.
NOTE: C becomes the new
Explanation: creditor.

– A new debtor can replace the KINDS OF SUBSTITUTION

original debtor, but the creditor
must agree to the substitution. 1.​ Expromision - a third person
– The consent of the creditor is voluntarily assumes the obligation
essential because the creditor
 without the initiative of the original - If the new debtor fails to
debtor, with the creditor’s consent. fulfill the obligation or is
insolvent, the original debtor is
not liable for the debt. The
Example: A owes B ₱50,000. creditor cannot claim from the
Without A’s knowledge, C goes to original debtor in this case.
B and offers to assume the debt. B
agrees to accept C as the new The law protects the original debtor, so he
debtor. cannot be released unless he agrees to
​ NOTE: C becomes the the substitution
debtor, and A is released. This is
expromisión because the Rule: if the substitution of the debtor is
substitution was initiated by C, not made without the knowledge or against
A. the will of the original debtor, the original
debtor remains liable.
2.​ Delegacion - the original debtor
proposes a new debtor, and the Example: A owes B ₱50,000.
creditor accepts the substitution.
​ B and C agree that C will
Example: A owes B ₱30,000. A pay instead of A, without A’s consent.
tells B that D will pay the debt on
​ A is still liable b to B.
A’s behalf. B agrees to accept D as
the new debtor.
​ NOTE: D becomes the new
debtor, and A is released. This is ARTICLE 1295
delegacion because the
substitution was proposed by A, The insolvency of the new debtor, who
the original debtor. has been proposed by the original
debtor and accepted by the creditor,
shall not revive the action of the latter
ARTICLE 1294 against the original obligor, except
when said insolvency was already
If the substitution is without the existing and of public knowledge, or
knowledge or against the will of the known to the debtor, when he
debtor, the new debtor’s insolvency or delegated his debt.
non-fulfillment of the obligations shall
not give rise to any liability on the part - Insolvency of the new debtor
of the original debtor.
Explanation:
- Substitution without debtor’s
consent. - Deals with novation by delegación

Explanation: - a legal situation where the original debtor

(person who owes a debt) proposes a
In expromision, once the original debtor is new debtor to take over the obligation,
substituted by a new debtor (with the and the creditor agrees. Once this
creditor’s consent), the original debtor is happens, the original obligation is
relieved of responsibility. extinguished — meaning the original
debtor is generally released from liability Terminology:
for that debt.
1.​ Delegado​
General rule:​ - form of novation by
- If the new debtor fails to pay because substitution of debtor where the
they are insolvent, the creditor cannot go original debtor proposes a new
back and sue the original debtor again — debtor to the creditor, with the
the action against the original debtor is not creditor’s consent
revived just because the new debtor can’t 2.​ Delegante​
pay.​ -, the original debtor
3.​ Delegacion​
- the new debtor}​
Scenario 1 (General Rule Applies) - Liable only after creditors
acceptance
Later, C becomes insolvent and can’t pay.​ 4.​ Delegatario​
- B cannot go after A anymore — - the creditor​
because the original obligation was - without the delegatarios consent,
extinguished when A successfully there is NO novation.
arranged for C to take over, and B
accepted. Nature of Novation

Exceptions (Limited Circumstances ●​ Subjective novation – change of

Where Original Debtor Can Be Held parties
Liable Again):​ ●​ Passive novation – change of
The creditor can revive the action against debt
the original debtor only if at the time of the
delegation:

1.​ The new debtor was already ARTICLE 1296

insolvent and that insolvency was
of public knowledge, or When the principal obligation is
2.​ The original debtor knew that the extinguished in consequence of a
new debtor was insolvent before novation, accessory obligations may
proposing him.​ subsist only insofar as they may
But if C was already bankrupt benefit third persons who did not give
and everyone knew about it their consent.
before A asked B to accept him as
the new debtor — or if A k - Effect on accessory obligations

Explanation:

Scenario 2 (Exception Applies)​ It is a relationship between principal and

- new C was insolvent — then:​ accessory obligations
- B could revive the action against
Explains what happens to accessory
A, because the original delegation was
obligations (like guaranty, mortgage,
unfair (A put B in a worse position
pledge) when the principal obligation is
knowingly or openly with knowledge of
novated.
C’s insolvency).
 - Accessory obligations depend - Novation requires consent
on the principal obligation.​ - A third person cannot be
So, when the principal prejudiced by an agreement he
obligation is extinguished by did not consent to.
novation, the accessory
obligations generally disappear
with it.

However, the law protects third

persons who: EXAMPLE:

· benefit from the accessory A owes B ₱100,000 secured by a

obligation, and guaranty of C.

· did not consent to the novation. A and B novate the obligation without C’s
consent.
General rule:
- The guaranty may still subsist
1.​ When the principal obligation is insofar as it benefits C,
extinguished by novation, because C is a third person
accessory obligations are also who did not consent.
extinguished.
2.​ Novation of an accessory
obligation does NOT extinguish
ARTICLE 1297
the principal obligation.
If the new obligation is void, the
Examples of Accessory
original one shall subsist. unless
Obligations:
the parties intended that the former
- Mortgage
relation should be extinguished in
- Pledge
any event.
- Guaranty
- Suretyship
- Penal clause
Simple Explanation:
Example:
● Sometimes, two people have a
A owes B ₱100,000 secured by a legal obligation (like a debt or a
mortgage.​ promise).
The loan is novated and ● They might agree to replace it
extinguished.​ with a new obligation (maybe
-The mortgage is also changing the terms or giving
extinguished. something different).
● If the new obligation turns out
Exception:
to be void (invalid for some
Accessory obligations may subsist only legal reason), the original
insofar as they benefit third persons obligation still exists.
who did not give their consent to the ● Exception: If the people
novation. involved clearly agreed that the
original obligation should end
 no matter what, then it won’t ARTICLE 1298
come back even if the new one
is void. The novation is void if the original
obligation was except when
● ​ In short: A failed new annulment may be claimed only by
agreement doesn’t erase the the debtor or when ratification
old one unless the parties validates acts which are voidable.
specifically said so. (1208a)

Terminologies & Meanings Simple Explanation:

● Obligation - A legal duty to do ● Novation: changing an

or not do something (e.g., pay old obligation into a
money, deliver new one (like replacing
goods,perform a service). a promise with a
● Void - Legally invalid or different promise).
unenforceable from the start. ● Rule: If the original
​ obligation is void (illegal
● Subsist - Continue to exist; or impossible), novation
remain in effect. is invalid because there
is nothing legal to
● ​ Former relation - The original replace.
obligation that existed before
the new one. ● ​ Exception: If the
​ original obligation is
voidable (valid but can
Example: be canceled by one
party), novation can be
1. X owes Z ₱50,000 (original obligation). valid because the
original obligation still
2. They agree to replace it with a new
has legal effect until
obligation: X will give Z a car instead of
canceled.
money.
Terminologies & Meanings
3. Later, it turns out that the car deal is
void (maybe the car doesn’t belong to X, ▪ Novation - Substituting
so the contract is invalid). an old obligation with a
new one. Could involve
4. Result: The original obligation to pay
changing the object, the
₱50,000 still exists.
debtor, or the terms.
▪ Void Obligation - An
obligation that never
Exception: If they had agreed that once had legal effect.
the car deal is made, the money debt is Examples: illegal
gone even if the car deal fails, then Juan contracts, impossible
wouldn’t have to pay the ₱50,000. obligations.
▪ Voidable Obligation -
​ An obligation that is
valid until canceled by a
 person entitled to annul Example:
it. Examples: contracts
made under fraud, A sells B a car under threat
threat, or mistake. (voidable).
▪ Annulment - The
legal action of canceling Later, they agree A will just pay
a voidable obligation. P100,000 instead.

▪ Ratification - Approval Novation is valid because the

by the party who could original obligation was voidable,
cancel, making the not void.
obligation fully valid
from the beginning.
ARTICLE 1299
Simple Explanation:
If the original obligation was
How it Works (General Rule and
subject to a suspensive or
Exception)
resolutory condition, the new
General Rule: obligation shall be under the same
condition, unless it is otherwise
If old obligation is void → novation stipulated.
is void.
Simple Explanation:
Reason: You cannot replace
something that never existed If you replace an obligation with a
legally. new one, the conditions of the
original obligation still apply, unless
you specifically agree otherwise.

Example: In short: New promise → same condition,

unless changed.
A promises to sell B a stolen car
(illegal → void). Terminologies & Meanings

Later, A and B agree that instead ● Suspensive condition

of delivering the stolen car, A will - A condition that must
pay B P100,000. happen before the
obligation becomes
Novation is invalid because the due. ​
original obligation was illegal. Example:
“I will give you a bike if you
Exception: If the old obligation is voidable pass the exam.”
→ novation can be valid until annulled. ​
→ You only get the bike
Reason: Voidable obligations are legally after passing.
binding until canceled or ratified. ● Resolutory condition -
A condition that will end
an obligation if it
 happens. (legal subrogation) or by
​ agreement of the parties
Example: (conventional subrogation).
“I will lend you my bike, Legal subrogation does not
until I need it for a trip.” automatically exist unless the
→ The obligation ends if law clearly provides for it, while
the trip happens. conventional subrogation must
● Stipulate - To be clearly and expressly shown
specifically agree or set to be valid. Subrogation is
in the contract. never presumed and requires a
​ clear intention to transfer the
Example: creditor’s rights to another
Original promise: person.
“X will give Y a cell phone
**if Y passes the CPA
exam.” ● Subrogation – the transfer of
→ Suspensive condition: all the rights of the creditor to a
*passing the CPA exam* third person who replaces the
Change in promise: creditor.
“X will give Y a laptop ● Animus Novandi – the clear
instead of a cell phone.” intention to novate or replace
Result: an obligation; novation is never
The condition still applies. presumed.
Y gets the laptop only if
they pass the CPA exam. TYPES OF SUBROGATION
1.​ Conventional Subrogation​
● ​ NOTE: Condition sticks – Subrogation that happens by
unless they agree to agreement of the parties​
remove or change it. – Consent of the debtor is
required​
– The old obligation is
extinguished and a new obligation
ARTICLE 1300 is created​
– Can cure the nullity of the old
Subrogation of a third person in the obligation
rights of the creditor is either legal 2.​ Legal Subrogation​
or conventional. The former is not – Subrogation that happens by
presumed, except in cases operation of law​
expressly mentioned in this Code; – No agreement is required​
the latter must be clearly – Applies only in cases expressly
established in order that it may provided by law
take effect. (1209a)
CONVENTIONAL SUBROGATION AND
ASSIGNMENT OF RIGHTS,
- This article means that when a DISTINGUISHED
third person takes over the
rights of a creditor, it can 1. Conventional Subrogation
happen in two ways: by law
 - Conventional subrogation is the IMPORTANT DISTINCTION (Court
transfer of all the rights of the Rulings)
creditor to a third person who - The Supreme Court
replaces the original creditor. It consistently recognizes the
happens by agreement of the distinction between
parties. conventional subrogation and
assignment of credit.
- In assignment of rights, the
debtor’s consent is not
Key Points: necessary for legal effect.
- The debtor’s consent is - The assignment takes effect
necessary once the debtor has knowledge
- The old obligation is of it.
extinguished - In Aquintey v. Spouses Tibong,
- A new obligation is created the Court ruled that even
- The nullity of the old obligation without formal notice, if the
may be cured, making the new debtor comes to know of the
obligation valid assignment by any means, the
- There must be an agreement debtor is bound by it.
among the original creditor,
debtor, and new creditor Example:

2. Assignment of Rights Situation 1:

- Assignment of rights is an
agreement where the owner of X owes Y ₱100,000. Z decides to
a credit (assignor), through a pay Y on behalf of X. X, Y, and Z
legal cause such as sale, all explicitly agree that Z will now
donation, exchange, or dation step into the rights of Y and collect
in payment, transfers the credit the debt from X.
and its accessory rights to
another person (assignee), Explanation:
who can enforce it against the
debtor. Under Article 1300, subrogation
occurs when a third person takes
Key Points: over the rights of a creditor. Since
- The debtor’s consent is NOT all parties clearly agreed, this is
required conventional subrogation, which
- The same right is transferred extinguishes the old obligation and
from one person to another creates a new one in favor of Z.
- The obligation is not Legal subrogation, in contrast,
extinguished happens automatically by law in
- The nullity of the obligation is certain cases, but conventional
not cured subrogation always requires the
- What is required is notice or explicit intention of all parties.
knowledge of the assignment,
not consent Situation 2:
Z pays Y for X’s debt, but there is
no agreement between X, Y, and Z
that Z will take over Y’s rights.
Explanation: 1. The original creditor
2. The debtor
Even though Z paid the debt, 3. The new creditor
subrogation does not occur ● It is a new contract based on
because conventional subrogation mutual consent.
requires a clear agreement among ● Without a new contract, there is
all parties. Without their consent, Z no novation.
cannot assume the creditor’s ●
rights.
Example:
Note:
Situation:
● Subrogation is never
presumed; there must be clear X owes Y ₱200,000. Z agrees to
intention.​ pay Y, and X, Y, and Z all consent
that Z becomes the new creditor.
● Conventional subrogation
extinguishes the old obligation Explanation 1:
and creates a new one.​
Article 1301 requires the consent
● Legal subrogation occurs of the original creditor, the debtor,
automatically by law, without and the third party. Since all parties
agreement. agreed, the conventional
subrogation is valid, creating a new
ARTICLE 1301 obligation in favor of Z and
extinguishing the old obligation
Conventional subrogation of a third owed to Y.
person requires the consent of the
original parties and of the third
person. (n)
Situation 2:

- Article 1301 means that Z pays Y for X’s debt without X’s
conventional subrogation knowledge and without any
cannot exist without the agreement about taking over Y’s
consent of all parties involved. rights.
There must be an agreement
Explanation:
among the original creditor, the
debtor, and the new creditor. Conventional subrogation fails
This agreement creates a new here because consent of all parties
contractual relationship, so if is mandatory. Without X’s
no new contract is made, agreement, Z cannot legally step
novation does not take place. into Y’s position as creditor, and
the original obligation to Y remains
Key Rule:
enforceable.
● Novation by substitution of
creditor requires an agreement Note:
of three parties
● These parties are:
 ● Consent of all parties is ● Legal Subrogation – Legal
mandatory for conventional subrogation happens by
subrogation.​ operation of law, not by
​ agreement. It occurs because
of certain acts, such as
● Without agreement, the original payment by a creditor or an
obligation remains enforceable interested third person.
to the creditor.
TYPES of LEGAL SUBROGATION
1.​ Payment by a creditor who is not
preferred
ARTICLE 1302
- A creditor pays another
It is presumed that there is legal creditor who has priority
subrogation: - The paying creditor
1. When a creditor pays steps into the rights of
another creditor who is the preferred creditor
preferred, even without 2.​ Payment by a third person with
the debtor’s knowledge; debtor’s consent
2. When a third person,
not interested in the -The third person has no
obligation, pays with the interest in the obligation
express or tacit - Payment is made with
approval of the debtor; express or implied
3. When, even without the approval of the debtor
knowledge of the 3.​ Payment by an interested person
debtor, a person
interested in the - The payer has an
fulfillment of the interest in the obligation
obligation pays, without (example: guarantor or
prejudice to the effects mortgagor)
of confusion as to the - Even without the
latter’s share. (1210a) debtor’s knowledge,
subrogation still
happens
- Article 1302 explains the
situations where legal Example:
subrogation automatically
happens by law, even without Situation 1:
an agreement. When a person
X owes Y ₱500,000 secured by a
pays the debt under the
mortgage. X also owes Z ₱200,000
situations listed, the law
with no security. Z pays Y without
assumes that the payer takes
X’s knowledge.
the place of the creditor and
acquires the creditor’s rights. Explanation:

Z is legally subrogated to Y’s

rights. This means Z can now
 exercise all the rights Y had, Note:
including foreclosing the mortgage
if X defaults. ● Legal subrogation occurs
automatically by law, without
Situation 2: needing the debtor’s consent.​
​
X owes Y ₱500,000 secured by a
mortgage. Z pays Y with the ● The third party becomes
consent of X. entitled to all the rights of the
original creditor.​
​
Explanation:
● The original obligation is not
Z is legally subrogated to Y’s rights extinguished; only the creditor
because X consented. Z can is replaced.
enforce all the rights Y originally
had.
ARTICLE 1303
Situation 3:
Subrogation transfers to the persons
X owes Y ₱500,000 secured by a
subrogated the credit with all the rights
mortgage. G, the guarantor, pays Y
thereto appertaining, either against the
to settle the debt.
debtor or against third person, be they
Explanation: guarantors or possessors of mortgages,
subject to stipulation in a conventional
G is legally subrogated to Y’s subrogation. (1212a)
rights. The obligation of the
guarantee is extinguished. Since G When someone is subrogated, the credit
is an interested party, G can now (the right to collect a debt) is transferred to
recover from X what was paid. them, along with all the rights connected
to it, against the debtor or even third
Case Application: persons like guarantors or mortgage
holders—if there’s an agreement
In Cecilleville Realty vs. Spouses Acuña, (stipulation) in a conventional subrogation.
Cecilleville paid the debt of the Acuñas to
protect its mortgaged property. Even EXPLANATION:
though the debtors did not agree, the
Court ruled that: Imagine you lend your friend Gian
₱100,000. Later, his manager Lilieth pays
● Cecilleville was an interested Gian’s debt to you because Lilieth paid,
party she now steps into your shoes. Ana
● It was legally subrogated to the becomes the new creditor; She gets all
creditor’s rights the rights you had against Gian (like
● It stepped into the shoes of the asking him to pay, or going after his
creditor guarantor or property if needed).
● The obligation was not
extinguished, only the creditor This transfer of rights is called
changed subrogation.
ARTICLE 1304

A creditor, to whom partial payment has

been made, may exercise his right for the
remainder, and he shall be preferred to
the person who has been subrogated in
his place in virtue of the partial payment of
the same credit. (1213)

Sample Explanation.

You are the creditor → Someone owes

you ₱100. Ana pays ₱40 of that debt for
the debtor. Now, Ana has some rights (she
can ask the debtor for ₱40). But you, the
original creditor, still have the stronger
rihtt to collect the remaining ₱60. If the
debtor can only pay a little, you get paid
first before Ana.

EXPLANATION:

Juan owes you ₱1,000. Ana pays ₱300

for Juan. You can still demand ₱700 from
Juan.
CONTRACTS
 Contracts
●​ Perfected by agreement of parties.
●​ Ex., Contract of sale

CHAPTER 1​ b.​ Real

●​ Needs consent and delivery of the
General Provisions object
●​ Ex., Contract of commodatum
3.​ According to their form:
a.​ Common or informal
Article 1305. ●​ No special form required
●​ Ex., Contract of loan
A contract is a meeting of minds between two
b.​ Special or formal
persons whereby one binds himself, with respect
●​ Requires a particular form
to the other, to give something or to render some
●​ Ex., Contract of donation
service. (1254a)
4.​ According to their purpose:
a.​ Transfer of ownership
Essential Elements of a Contract
●​ Ex., Contract of sale
●​ Consent of the contracting parties;
b.​ Conveyance of use
○​ Meeting of minds
●​ Ex., Contract of Commodatum
●​ Object certain which is the subject
c.​ Rendition of services
matter of the contract;
●​ Ex., Contract of agency
○​ Specific thing or service
5.​ According to their subject matter:
●​ Cause of the obligation which is
a.​ Things
established
●​ Ex., Contract of sale
○​ Reason for the contract
b.​ Services
●​ Ex., Contract of agency
Example:
6.​ According to their vinculum which they
A hires B to design a logo for her business for
produce:
₱5,000
a.​ Unilateral
➔​ Consent
●​ Only one party has an
○​ A agrees to hire B, and B agrees to
obligation
design for A
●​ Ex., Contract of Commodatum
➔​ Object
b.​ Bilateral
○​ Logo design service to be done by
●​ Reciprocal obligations
B
●​ Ex., Contract of sale
➔​ Cause
7.​ According to their cause:
○​ A will pay B ₱5,000 in exchange for
a.​ Onerous
the service
●​ Compensation
●​ Ex., contract of sale
Classifications of Contracts
b.​ Gratuitous
1.​ According to their relation to other
●​ One gives without payment
contracts:
●​ Ex., contract of commodatum
a.​ Preparatory
8.​ According to risks involved:
●​ Made to prepare for another
a.​ Commutative
contract
●​ Value of the prestation is
●​ Ex., Contract of partnership
already known by both parties
b.​ Principal
●​ Ex., Contract of lease
●​ Can exist by itself and be fulfilled
b.​ Alegatory
by itself
●​ Depends upon the happening
●​ Ex., Contract of sale
of an uncertain event
c.​ Accessory
●​ Ex., Contract of insurance
●​ Consequence of another contract
9.​ According to their names:
●​ Ex.,Contract of sale
a.​ Nominate
2.​ According to their performance:
a.​ Consensual
 ●​ Has individuality and ​
regulated by special provisions
of law Article 1307.
●​ Ex., Contract of sale Innominate contracts shall be regulated by the
b.​ Innominate stipulations of the parties, by the provisions of Titles I
●​ Lacks individuality and is not regulated and II of this Book, by the rules governing the most
by special provisions of law analogous nominate contracts, and by the customs of
●​ Ex., Contract or Agreement the place. (n)

Contract of Adhesion Nominate contract

●​ Contract prepared entirely by one ●​ Has individuality and regulated by
party, while the other party only signs special provisions of law
it. The second party cannot change ●​ Ex., Contract of sale
the terms and has only two choices:
accept or reject. Innominate contract
●​ The other party just adheres to the ●​ Lacks individuality and is not regulated
contract by signing it, without by special provisions of law
negotiating. ●​ Ex., Contract or Agreement
●​ Ex., You apply for a mobile phone plan.
The company gives you a printed Kinds of Innominate Contracts
agreement. You cannot change 1.​ do ut des
anything — you just sign. ●​ I give that you give
○​ Both parties give something
2.​ do ut facias
Article 1306. ●​ I give that you do
○​ One gives, the other renders
The contracting parties may establish such
service
stipulations, clauses, terms and conditions as they
3.​ facio ut des
may deem convenient, provided they are not
●​ I do that you give
contrary to law, morals, good customs, public
○​ One renders service, the other
order, or public policy. (1255a)
gives something
4.​ facio ut facias
Explanation: ●​ I do that you do
●​ Where parties are free to agree on any ○​ Both parties render service
terms in a contract as long as they are
not illegal or unfair. Rules on Innominate Contracts
1.​ Stipulations of the parties;
Example: 2.​ The provisions of the Civil Code on
●​ Valid obligations and contracts.
➔​ A hires B to paint a house for ₱5,000. 3.​ The rules governing the most
They agree payment will be after analogous nominate contracts and
completion. 4.​ The customs of the place

●​ Not Valid Analogous to a deed of sale - the contract is

➔​ A hires B to steal a phone and pays similar to a sale, so the rules of sale may be
₱10,000. applied. (transfer of ownership, exchang for a
price/ equivalent)
Compromise agreement - a contract where
both parties give up something to avoid a
lawsuit or end a case already filed.

Public Policy - refers to what the State wants

to protect for the good of the public or society.
​ ​
Article 1308. Article 1310.
The contract must bind both contracting parties; The determination shall not be obligatory if it is
its validity or compliance cannot be left to the will evidently inequitable. In such case, the courts
of one of them. (1256a) shall decide what is equitable under the
circumstances. (n)
Expresses what is known in law as the principle
of mutuality of contracts. Explanation
●​ If the third person’s decision is clearly
Explanation unfair, the parties are not bound by it.
●​ Mutuality of Contracts - a contract The court will decide what is fair under
must bind both parties, and one party the circumstances.
alone cannot decide whether to follow it
or not. Example:
A hires B to bake 100 cupcakes.
Purpose of Mutuality Principle They agree C will check the quality
●​ To prevent one-sided contracts ➔​ C decides only 50 cupcakes are
●​ Does not depend on the will of only one acceptable, even though all meet the
person standard.
It cancels any contract where: ➔​ This decision is unfair → not binding
●​ Fulfillment depends only on one party ➔​ Court can decide what is equitable →
●​ Termination depends only on one all 100 cupcakes considered
party acceptable
●​ One party has uncontrolled power

Example: Article 1311.

A hires B to paint his house for ₱5,000,
Contracts take effect only between the
payable after completion.
parties, their assigns and heirs, except in case
➔​ B’s obligation: Paint the house
where the rights and obligations arising from the
➔​ A’s obligation: Pay ₱5,000 after
contract are not transmissible by their nature, or
completion
by stipulation or by provision of law. The heir is
The mutuality principle ensures that A cannot
not liable beyond the value of the property he
decide alone whether to pay or not.
received from the decedent.
➔​ So A cannot say:
"I will pay you ₱5,000 if I feel like it."
If a contract should contain some
stipulation in favor of a third person, he may
Article 1309. demand its fulfillment provided he communicated
his acceptance to the obligor before its revocation.
The determination of the performance may be left A mere incidental benefit or interest of a person is
to a third person, whose decision shall not be not sufficient. The contracting parties must have
binding until it has been made known to both clearly and deliberately conferred a favor upon a
contracting parties. (n) third person. (1257a)

Explanation Explanation
●​ Allows the parties to let a third person ●​ Contracts generally bind only the parties
decide how the contract should be involved, their assigns, and heirs, unless
performed. the contract says otherwise or the law
prohibits transfer
Example:
A hires B to deliver 100 cupcakes. They agree Relativity of contracts - a contract generally
that C (a baker expert) will decide if the affects only the parties who made it.
cupcakes meet the agreed quality.
 ●​ Third parties are not bound by it, nor 4.​ The third person must have
can they usually enforce it. communicated his acceptance to the
●​ Exceptions exist when the contract obliger before its revocation, and
expressly benefits a third person 5.​ Neither of the contracting parties bears
the legal representation of authorization
General Rule: of the third party.
●​ Contracts take effect only between the
parties, their assigns and heirs. For a third person to benefit from a contract
Exceptions (stipulation pour autrui):
1.​ Contracts are not transmissible by ●​ Incidental benefit is not enough
their nature; ○​ A third person cannot enforce the
2.​ Contracts are not transmissible by contract just because they happen
stipulation; or to gain something indirectly.
3.​ Contracts are not transmissible by ●​ Clear and deliberate intention is
provision of law. required
○​ The parties must explicitly intend to
Nature of Intrasmissible Rights - are rights favor the third person.
that cannot be transferred or inherited.
-​ These are rights personal to the Example:
holder and cannot be assigned to Effect on heirs:
anyone else. ➔​ A owes B ₱100,000 and dies, leaving
property worth ₱60,000 to his heir C.
Four EXCEPTIONAL cases to the principle of ➔​ B can claim only ₱60,000 from C.
relativity of contracts ➔​ Heir is not liable beyond the value of the
1.​ If a contract should contain some property inherited.
stipulation in favor of a third person,
he may demand its fulfillment provided Stipulation in favor of a third person
he communicated his acceptance to the (stipulation pour autrui):
obligor before its revocation. ➔​ A contracts with B: “I will pay ₱10,000 to
2.​ In contracts creating real rights, third C for services rendered to you.”
persons who come into possession of the ➔​ C accepts the benefit before A revokes
object of the contract are bound thereby. it.
3.​ Creditors are protected in cases of ➔​ C can now demand payment even
contracts intended to defraud them. though C was not originally a party to
4.​ Any third person who induces another the contract.
to violate his contract shall be liable for
damages to the other contracting party. Incidental benefit not enough:
➔​ A sells a car to B.
Stipulation pour autrui - a contract made for ➔​ C, a friend of B, happens to benefit from
the benefit of a third person. a side arrangement.
➔​ C cannot demand anything, because the
Requisites of stipulation pour autrui benefit was incidental, not deliberately
The requisites of a stipulation pour autrui or a conferred.
stipulation in favor of a third person are the
following:
1.​ There must be a stipulation in favor of a Article 1312.
third person.
In contracts creating real rights, third persons
2.​ The stipulation must be a part, not the
who come into possession of the object of the
whole, of the contract,
contract are bound thereby, subject to the
3.​ The contracting parties must have
provisions of the Mortgage Law and the Land
clearly and deliberately conferred a
Registration Laws. (n)
favor upon a third person, not a mere
incidental benefit or interest,
Explanation 2.​ Knowledge on the part of the third
●​ When a contract creates a real right person of the existence of a contract
(ownership, mortgage, usufruct, etc.), ●​ The second element, on the other
third persons who come into hand, requires that there be knowledge
possession of the object are bound by on the part of the interferer that the
the contract. contract exists.
○​ This means even people who are 3.​ Interference of the third person is
not parties must respect the without legal justification
contract regarding the object.
●​ Exceptions are governed by: Example:
○​ Mortgage Law Scenario:
○​ Land Registration Laws ➔​ A has a contract to supply 100 cakes to
B for ₱50,000.
Example: ➔​ C knows about the contract and
➔​ A mortgages a house to B. convinces A to sell the cakes to him
➔​ C buys the house without knowing instead for the same price.
about the mortgage. ➔​ A breaks the contract with B.
➔​ Under Article 1312, C is still bound by Result:
the mortgage, unless the Land ➔​ B can sue C for damages, because C
Registration Laws or Mortgage Law induced A to violate the contract.
provide otherwise. ➔​ C is liable even though he was not a
party to the original contract.

Article 1313.
Creditors are protected in cases of contracts Article 1315.
intended to defraud them. (n) Contracts are perfected by mere consent, and
from that moment the parties are bound not only
Example: to the fulfillment of what has been expressly
➔​ A owes B ₱100,000. stipulated but also to all the consequences which,
➔​ A sells his car to C for a very low price according to their nature, may be in keeping with
to avoid paying B. good faith, usage and law. (1258)
➔​ B can contest the sale in court
because it was intended to defraud Explanation
him. ●​ A contract is perfected (valid) the
moment the parties agree.

Article 1314.
Example:
Any third person who induces another to violate ➔​ A hires B to paint a house for ₱5,000.
his contract shall be liable for damages to the ➔​ Contract is agreed verbally → contract is
other contracting party. (n) perfected.
Tort interference - happens when a third party ➔​ B must paint the house properly (express
intentionally interferes with a valid contract obligation).
between two other parties, causing one of ➔​ B cannot intentionally leave parts
them to breach the contract. unpainted → good faith obligation
-​ Exception to the principle of (implicit obligation).
relativity of contracts

Elements of tort interference Article 1316.

The elements of tort interference are: Real contracts, such as deposit, pledge and
1.​ Existence of a valid contract commodatum, are not perfected until the delivery
●​ As regards the first element, the
of the object of the obligation. (n)
existence of a valid contract must be
duly established.
Stages in the life of a contract
 1.​ Preparation or Negotiation ○​ Pledge
●​ Starts when parties show interest in ■​ The creditor is given the right to
making a contract. retain the debtor’s movable
●​ Ends when there is agreement property, or have it held by a
(consent) on essential terms. third person, until the debt is
●​ Key point: Negotiation begins with an paid
offer c.​ Formal Contract or Solemn Contract
○​ If the offer is not accepted, no ●​ is one that the law requires to be in a
contract exists specific form in order to be valid and
●​ Ex., A offers to sell a car to B for enforceable
₱300,000. B negotiates price, A agrees. ●​ This may include:
2.​ Perfection or Birth of the Contract ○​ Written form
●​ Happens when parties agree on the ○​ Notarization
essential elements: ○​ Registration
○​ Consent
○​ Object Effect of perfection of the contract
○​ Cause ●​ The parties are bound not only to the
●​ Ex., A and B finally agree that B will fulfillment of what has been expressly
buy the car for ₱300,000. stipulated but also to all the
3.​ Consummation of the Contract consequences which, according to
●​ Parties fulfill their obligations. their nature, may be in keeping with
●​ Once fully performed, the contract is good faith, usage and law
extinguished.
●​ Ex., B pays ₱300,000, then A delivers Example:
the car. Scenario:
➔​ A and B enter into a written and
Effect of judicial approval of a contract notarized contract of sale for a car.
●​ When a compromise agreement ➔​ Perfection: The contract is perfected the
(settlement contract) is approved by moment both agree on the essential
the court, it becomes more than just terms (car, price, and consent).
a contract. Obligations after perfection:
➔​ A must deliver the car.
Classification of contracts according to their ➔​ B must pay the agreed price.
perfection: ➔​ Both must act in good faith and follow
a.​ Consensual Contract customs and laws.
●​ perfected by the mere agreement of ➢​ Ex., A cannot deliver a car with hidden
the parties. defects.
b.​ Real Contract ➢​ B cannot refuse payment without a
●​ require not only the consent of the valid reason.
parties for their perfection, but also
the delivery of the object by any one
party to the other. Article 1317.
●​ Example: No one may contract in the name of
○​ Commodatum another without being authorized by the latter, or
■​ One party delivers a unless he has by law a right to represent him.
non-consumable thing to
another to use for a certain
A contract entered into in the name of
time, who must return it after
another by one who has no authority or legal
use
representation, or who has acted beyond his
○​ Deposit
powers, shall be unenforceable, unless it is
■​ A person receives a thing
ratified, expressly or impliedly, by the person on
belonging to another, with the
whose behalf it has been executed, before it is
obligation to safely keep it and
revoked by the other contracting party. (1259a)
return it
General Rule: ​
●​ No one may contract in the name of ​
another.
​
Exceptions:
​
1.​ The person entering into a contract in ​
the name of another has been ​
authorized by the latter. ​
2.​ The person entering into a contract in
the name of another has by law a right
to represent him.

Effect of an unauthorized contract

General Rule:
●​ A contract entered into in the name of
another by one who has no authority or
legal representation, or who has acted
beyond his powers, shall be
unenforceable.

Exceptions:
●​ If it is ratified, expressly or impliedly,
by the person on whose behalf it has
been executed, before it is revoked by
the other contracting party.

Example:
Unauthorized Contract (Unenforceable):
➔​ A signs a contract to sell B’s car without
B’s permission.
➔​ Result: The contract is unenforceable
because A had no authority to act on B’s
behalf.
Ratified Contract (Valid):
➔​ Later, B learns about the sale and says,
“I accept the sale of my car.”
➔​ Result: The contract is now valid and
enforceable, because B ratified it.
Acting Beyond Powers:
➔​ C is authorized to rent B’s apartment
for one month only, but rents it for six
months.
➔​ Result: The contract is unenforceable
for the extra five months unless B
ratifies the extended rental.

​
​
​
​
​
​
​
 CHAPTER 2​
warranty. (natural
element)
➔​ But both can agree for
Essential Requisites of the land to be sold with no
warranty
Contracts 3.​ Accidental elements
●​ Optional provisions added by the
parties to change how the contract will
Article 1318.
operate.
There is no contract unless the following ●​ If they are not included, the contract is
requisites concur: still valid
(1) Consent of the contracting parties; ●​ It is called “accidental” because it is
(2) Object certain which is the subject matter of not necessary, but only added by
the contract; agreement to control:
(3) Cause of the obligation which is established. ○​ When will the contract start
(1261) ○​ When will it end
○​ How it must be performed
Elements of a contract ●​ Examples:
1.​ Essential elements 1.​ Condition – uncertain event
●​ These elements are required. Without ●​ Contract depends on
these, there’s NO contract. something that may or may
a.​ Common (comunes) not happen
●​ Present in all contracts ●​ Ex., A will sell his car to be if B
○​ Ex., consent, object certain, gets approved for a loan
& cause (condition – may or may not
b.​ Special (especiales) happen)
●​ Present in only certain 2.​ Terms (period) – certain event
contracts ●​ Contract depends on a future
○​ Ex., delivery in real date that will surely arrive
contracts ●​ Ex., A will deliver the car to B
(deposit/commodatum) or on July 7 (period)
form in solemn ones (must 3.​ Mode – obligation attached to
be written) benefit
c.​ Extraordinary or peculiar ●​ Requirement imposed on a
(especialisimos) party receiving something
●​ Apply to only specific ●​ Ex., A donates ₱50,000 to B to
contracts be used for tuition only (mode)
○​ Ex., price in a contract of
sale
2.​ Natural elements Section 1​
●​ Presumed by the law, even if not
written in the contract. But parties
Consent
may exclude or modify them if they
desire.
Article 1319.
○​ Ex., warranty against eviction
implied in a contract of sale Consent is manifested by the meeting of
➔​ Seller guarantees buyer the offer and the acceptance upon the thing and
will not be disturbed in the cause which are to constitute the contract. The
ownership offer must be certain and the acceptance absolute.
○​ A sells land to B A qualified acceptance constitutes a counter-offer.
➔​ Even if not stated, the law
automatically includes Acceptance made by letter or telegram
does not bind the offerer except from the time it
came to his knowledge. The contract, in such a Explanation:
case, is presumed to have been entered into in the ●​ Acceptance is express when a person
place where the offer was made. (1262a) clearly says he agrees, and implied
when his actions show agreement.
Explanation: Since contracts are perfected by mere
●​ Consent exist when there is a meeting consent (consensual), a contract exists
of minds between the offer and once there is a meeting of the offer
acceptance about: and acceptance on the object and the
○​ Object cause. However, the acceptance must
○​ Cause be absolute. If the acceptance
●​ Offer must be certain changes the offer, it becomes a
○​ Must be clear and definite counter-offer and the original offer is
○​ Ex., A will sell his laptop for considered rejected.
₱20,000.
●​ Acceptance must be absolute Consent – formed when the offer and
○​ Must be exactly the same as acceptance meet on the object and the cause.
the offer. This is the moment the contract is perfected.
○​ If changed → it becomes a
counteroffer Offer – a proposal made by one person to
○​ Ex., A will sell his laptop for another to enter into a contract. To be valid:
₱20,000, then B agrees. ●​ Certain – the contract can exist just
(VALID) by the other party accepting it.
➔​ Unless B says: “I accept ●​ Definite – all essential terms (object,
for ₱18,000.” price, cause) are clear.
(COUNTEROFFER) ●​ Complete and intentional – the
●​ Acceptance by letter or message offeror really means it.
○​ If acceptance is sent by letter,
telegram, email, etc., the Policitacion – an imperfect promise; it is just
offerer is bound only when he an offer, not a binding commitment. No
learns about it. contract exists until there is absolute
○​ Ex., A sends an offer on July 7 acceptance.
➔​ B mails acceptance in
July 8 Counter offer – A qualified acceptance that
➔​ A read the letter in July changes or adds terms to the original offer.
10 ●​ Note: If the parties only exchange
➔​ Contract is perfected on offers and counter-offers → no
July 10 (when A knew) contract exists
●​ Place of contract
○​ Contract is considered made Acceptance by letter or telegram – only binds
where the offer was made. the offeror when it is actually known by them.
○​ Ex., A (Manila) sends offer
➔​ B (Batangas) accepts by Consent of Corporation – A corporation can
leter act only through its board of directors (or
➔​ A receives acceptance trustees). The board decides whether the
➔​ Contract place = Manila corporation enters into a contract that binds it.
(place of offer) ●​ Governed under Section 222 of the
Revised Corporation Code

Article 1320.
An acceptance may be express or
implied. (n)
​ ​
Article 1321. Article 1323.
The person making the offer may fix the An offer becomes ineffective upon the
time, place, and manner of acceptance, all of death, civil interdiction, insanity, or insolvency of
which must be complied with. (n) either party before acceptance is conveyed. (n)

Example: Example:
A: “I will sell my car for ₱300,000. Accept by A offers to sell his laptop to B.
email before Friday.” ➔​ Before B accepts, A dies
➔​ B accepts by email before Friday → ➔​ Offer is ineffective; no contract is
✔️ Valid acceptance formed.
➔​ B accepts by text → ❌ Not valid ➔​ But if B had already accepted before A
➔​ B accepts after Friday → ❌ Not valid died, the contract is valid and binding.
➔​ Acceptance must follow what the
offeror required.

Article 1324.

Article 1322. When the offerer has allowed the offeree

a certain period to accept, the offer may be
An offer made through an agent is withdrawn at any time before acceptance by
accepted from the time acceptance is communicating such withdrawal, except when the
communicated to him. (n) option is founded upon a consideration, as
something paid or promised. (n)
Explanation:
●​ The acceptance becomes effective Explanation:
once it is communicated to the agent, ●​ An offer can be withdrawn at any time
not when the offeror personally before it is accepted, even if the
receives it. offeree has been given a period to
decide.
Contract of agency – an agreement where
one person (the agent) binds himself to Example:
perform a service or act on behalf of another A offers to sell his bike to B and says: “You
(the principal) with the latter’s consent or have 3 days to accept.”
authority. ➔​ Before B accepts, A tells B: “I withdraw
my offer.”
Basis of a contract agency – acts performed ➔​ Offer is effectively withdrawn
by the agent within the scope of his authority ➔​ Exception: If B paid ₱500 for the
have the same legal effect as if the principal 3-day option, A cannot withdraw until
did them personally. the 3 days are over

Example: Option – a contract granting a privilege to buy

A (principal) hires B (agent) to sell a car on A’s or sell at a determined price within an agreed
behalf. time.
➔​ B sells the car following A’s instructions ー​ A preparatory contract giving one
➔​ The sale is legally binding on A, even party the right, for a fixed time and
though B did it. price, to buy, sell, or decide on a
principal contract, binding the grantor
to honor it if exercised, and must have
consideration

Negotiation – start with an offer.

 ー​ An imperfect promise (policitacion) is General Rule:
just an offer, not a binding contract. ●​ Business advertisements of things for
ー​ Public advertisements or solicitations sale are not definite offers, but mere
are usually invitations to make offers, invitations to make an offer
not actual contracts.
ー​ Until the contract is perfected, either Exception:
party can stop negotiations. ●​ If the business advertisements of
1.​ If the period is not itself founded things for sale appear to be a definite
upon or supported by a offer.
consideration – The offeror can
withdraw the offer anytime before Effect:
acceptance or before knowing of the ●​ Responding to an ad does not
acceptance, but must act in good faith automatically create a contract; it
to avoid liability for damages. only starts negotiations.
2.​ If the period has a separate
consideration – The offer cannot be Example:
withdrawn during the period. If A store advertises: “Laptops for sale, ₱30,000
withdrawn, the offeree cannot force each.”
the main contract but can claim ➔​ This is not a binding offer.
damages for breach of the option. ➔​ Customer B goes to buy → B makes
the offer, store can accept or reject
Option vs. Contract of Sale

Option Contract of Sale Article 1326.

●​ An unaccepted ●​ Immediately Advertisements for bidders are simply
offer that sets the establishes the invitations to make proposals, and the advertiser
terms and rights and
is not bound to accept the highest or lowest bidder,
conditions under obligations of
which the owner is both parties unless the contrary appears. (n)
willing to sell (or ●​ The contract is
contract). perfected at the Rule: (Explanation)
●​ The holder has a moment of ●​ Ads asking for bids are invitations to
fixed time to agreement, submit proposals, not binding offers
accept when the offer
●​ Acceptance must and acceptance
Effect:
be communicated meet
to the owner ●​ The advertiser is not obliged to accept
○​ Once accepted, the highest or lowest bid unless the ad
the option explicitly states otherwise
becomes a
binding contract Example:
○​ If not accepted
A company advertises: “We are accepting bids
within the time,
for catering services for our annual event.”
the owner is no
longer bound, ➔​ This is just an invitation to make
and the option proposals.
expires ➔​ The company does not have to
choose the cheapest or most
expensive bid unless the
advertisement clearly says it must.
Article 1325. ➔​ They can evaluate all bids and pick
the one that best suits their needs
Unless it appears otherwise, business
advertisements of things for sale are not definite
offers, but mere invitations to make an offer. (n)
 Example:
➔​ An emancipated minor can make
contracts for work or necessities.
Article 1327. (VALID)
The following cannot give consent to a ➔​ A public officer may be legally barred
contract: from entering into a government
(1) Unemancipated minors; contract (NOT ALLOWED)
(2) Insane or demented persons, and ​
​ deaf-mutes who do not know how to ​ Article 1330.
​ write. (1263a)​
A contract where consent is given
Persons incapacitated to give consent: through mistake, violence, intimidation, undue
1.​ Minors; influence, or fraud is voidable. (1265a)
2.​ Insane persons;
3.​ Demented persons; and Vices of Consent
4.​ Deaf-mutes who do not know how to write 1.​ Mistake
2.​ Violence
3.​ Intimidation
4.​ Undue influence
Article 1328. 5.​ Fraud
●​ The contract is voidable, meaning the
Contracts entered into during a lucid
affected party can choose to cancel it
interval are valid. Contracts agreed to in a state of
drunkenness or during a hypnotic spell are
Characteristics of Consent
voidable. (n)
1.​ It should be intelligent.
●​ Intelligence in consent is vitiated
Lucid interval – Contracts made during
by error.
periods of mental clarity by someone otherwise
2.​ It should be free.
insane are valid
●​ Freedom is vitiated by violence,
intimidation or undue influence.
Drunkness or hypnosis – Contracts made
3.​ It should be spontaneous.
while intoxicated or under hypnosis are
●​ Spontaneity is vitiated by fraud.
voidable, meaning they can be canceled by the
affected party
Concept of Voidable Contracts
●​ Voidable contracts are valid and
binding, but can be annulled due to:
Article 1329. ○​ Lack of capacity
○​ Defective consent (mistake, fraud,
The incapacity declared in article 1327 is duress, undue influence,
subject to the modifications determined by law, intimidation)
and is understood to be without prejudice to ●​ They remain effective until annulled and
special disqualifications established in the laws. can also be confirmed or ratified
(1264)
Vice of consent in a compromise agreement
Explanation: approved by the court
●​ People normally incapable of giving ●​ If a compromise agreement is approved
consent (like minors or insane persons) by the court, it becomes final and
can sometimes be allowed by law to executory
enter certain contracts. This does not ●​ A party claiming defective consent must
remove other legal restrictions that petition the court to nullify or set aside
may apply to them the judgment
Example: ○​ Miscalculating the total price
➔​ A person is tricked into selling land at of goods by ₱200 → just
a very low price → Voidable correct the amount; the
➔​ A contract is signed under threat of contract stands
harm → Voidable
➔​ A person is pressured by a relative to Mistake – defined as “a wrong action or
lend money → Voidable statement proceeding from faulty judgment.”

Mistake must be substantial

Article 1331. 1.​ Mistake should refer to the substance
In order that mistake may invalidate of the thing which is the object of the
consent, it should refer to the substance of the contract;
thing which is the object of the contract, or to 2.​ Mistake should refer to those
conditions which have principally
those conditions which have principally moved
moveć one or both parties to enter into
one or both parties to enter into the contract.
the contract; and
3.​ Mistake as to the identity or
Mistake as to the identity or
qualifications of one of the parties will
qualifications of one of the parties will vitiate
vitiate consent only when such identity
consent only when such identity or qualifications
or qualifications have been the
have been the principal cause of the contract.
principal cause of the contract

A simple mistake of account shall give

Effect of simple mistake of account:
rise to its correction. (1266a)
●​ A simple mistake of account shall give
rise to its correction.
Explanation:
1.​ A mistake only makes a contract
voidable if it involves: Mistake of Fact Mistake of Law
●​ The essential nature or
Occurs when one or Happens when one or
substance of the thing being both parties believe a both parties
contracted. fact exists when it misunderstand the law
●​ The main reason the parties actually does not, or or the legal effect of an
believe it does not exist act or contract
agreed to the contract when it actually does
○​ Ex., Buying a diamond thinking
it is real, but it’s fake → contract General Rule: Only a Effect: Does not make
can be annulled. mistake of fact (not of the contract voidable.
law or opinion) can
2.​ If you were mistaken about who the vitiate consent and Principle: Ignorance of
other party is or their credentials, the make the contract the law is no excuse
contract is voidable only if that voidable (Ignorantia legis
neminem excusat)
mistake was the main reason you
agreed. Ex., A buys a painting Ex., A sells land
○​ Ex., Hiring a lawyer thinking thinking it is an believing a law allows
they are licensed, and that original, but it’s them to sell without
actually a replica. → title registration, but
was why you hired them → Mistake of fact → the law actually
contract can be annulled. Contract voidable requires registration
○​ Counterexample, You thought ➔​ Effect: Contract is
still valid,
a seller was famous, but
because
they’re not → if that wasn’t the misunderstanding
main reason you bought, the law doesn’t
contract is still valid cancel it

3.​ Small errors in numbers, calculations,

or accounting do not void the contract.
They are simply corrected
​ Explanation:
●​ If both parties are mistaken about the
Article 1332. legal effect of their agreement, and
When one of the parties is unable to this mistake frustrates their real
purpose, consent can be vitiated.
read, or if the contract is in a language not
●​ Effect: The contract is voidable
understood by him, and mistake or fraud is
because the true intention of the
alleged, the person enforcing the contract must
parties is not achieved.
show that the terms thereof have been fully
explained to the former. (n)
Example:
A and B agree to a lease, thinking it
Explanation:
automatically transfers ownership after 5 years
●​ If one party cannot read or the
➔​ Later they find out it does not transfer
contract is in a language they do not
ownership.
understand, and they claim mistake or
➔​ Effect: The contract is voidable due to
fraud:
mutual mistake on its legal effect.
○​ The other party must prove
that the contract’s terms were
Requisites:
fully explained to them.
1.​ The mistake must be with respect to
the legal effect of an agreement
Example:
2.​ The mistake must be mutual; and
A signs a contract in English but only
3.​ The real purpose of the parties must
understands Filipino.
be frustrated
➔​ Later, A claims they were tricked or
misunderstood the terms.
➔​ B must show that each term was Article 1335.
clearly explained in a language A
understands. There is violence when in order to wrest
consent, serious or irresistible force is employed.

Article 1333. There is intimidation when one of the

There is no mistake if the party alleging contracting parties is compelled by a reasonable
it knew the doubt, contingency or risk affecting and well-grounded fear of an imminent and grave
the object of the contract. (n) evil upon his person or property, or upon the
person or property of his spouse, descendants or
Explanation:
ascendants, to give his consent.
●​ If a party knew about the risk, doubt,
or uncertainty regarding the contract’s To determine the degree of intimidation,
object, they cannot claim a mistake. the age, sex and condition of the person shall be
●​ Effect: The contract remains valid; no borne in mind.
voidable claim
A threat to enforce one's claim through
Example: competent authority, if the claim is just or legal,
A buys a piece of land knowing there might be does not vitiate consent. (1267a)
a boundary dispute
➔​ Later, A cannot claim mistake because Explanation:
they were aware of the risk 1.​ If someone uses physical force to make
another party agree to a contract, it is
considered violence, and the consent
Article 1334. obtained is not genuine, making the
contract VOIDABLE
Mutual error as to the legal effect of an
2.​ If someone is threatened with serious
agreement when the real purpose of the parties is
harm to themselves, their family, or their
frustrated, may vitiate consent. (n)
property, and that fear forces them to
 agree to the contract, it is considered Threat to enforce one’s just or legal claim –
intimidation, which also makes the If someone warns or threatens to use legal
contract VOIDABLE means (like filing a lawsuit) to enforce a
3.​ The severity of intimidation is measured rightful claim, this is not considered
based on the vulnerability of the person, intimidation
considering factors like age, sex, and ー​ Effect: Consent given under such a
personal condition threat is still valid, and the contract
4.​ If the “threat” is actually a legal warning remains binding
or demand (like going to court for a
lawful claim), it does not count as
intimidation, and the contract remains Article 1336.
VALID Violence or intimidation shall annul the
obligation, although it may have been employed
Violence – there is violence when in order to by a third person who did not take part in the
wrest consent, serious or irresistible force is
contract. (1268)
employed.
Explanation:
Requisites of violence:
●​ Violence or intimidation annuls the
1.​ The force employed to wrest consent
obligation even if it was done by a
must be serious or irresistible, and
third person
2.​ It must be the determining cause for the
○​ But the force or threat must be
party upon whom it is employed in
the main reason why the
entering into the contract.
party agreed to the contract.
○​ If the person would have
Intimidation – Occurs when someone gives
agreed even without the
consent because they fear serious and
threat, the contract is not
immediate harm. The fear must be reasonable
voidable
and well-grounded.
○​ It does not matter if the other
party in the contract did not
Requisites of intimidation:
participate
1.​ That the intimidation must be the
●​ Effect: The contract is voidable
determining cause of the contract, or
because consent was forced
must have caused the consent to be
given;
Example:
2.​ That the threatened act be uniust or
➔​ C threatens A to sign a contract with B,
unlawful:
and A signs because of the threat →
3.​ That the threat must be real and serious,
VOIDABLE.
there being an evident disproportion
➔​ C threatens A, but A signs anyway
between the evil and the resistance
because the deal is beneficial → VALID
which all men can offer, leading to the
choice of the contract as the lesser evil;
and 4. That it produces a reasonable and Article 1337.
well-arounded fear from the fact that
the person from whom it comes has the There is undue influence when a person
necessary means or ability to inflict the takes improper advantage of his power over the
threatened injury will of another, depriving the latter of a
reasonable freedom of choice. The following
Elements to consider in determining the circumstances shall be considered: the
degree of intimidation confidential, family, spiritual, and other relations
1.​ Age between the parties, or the fact that the person
2.​ Sex alleged to have been unduly influenced was
3.​ Condition suffering from mental weakness, or was ignorant
or in financial distress. (n)
Explanation: Example:
●​ Undue influence happens when ➔​ A sells land to B and lies that it has a
someone takes improper advantage clean title, but it is actually under
of their power over another person. dispute
●​ This removes the person’s freedom to ➔​ B agrees because of the lie.
choose, so consent is not truly ➔​ This is fraud, so the contract is
voluntary. VOIDABLE
●​ Effect: The contract is VOIDABLE
Causal Fraud (Dolo causante)
Circumstances may be considered ●​ Serious fraud used to obtain consent
1.​ The confidential, family, spiritual, and of the other party
other relations between the parties, ●​ Without the deceit, the other party
2.​ the fact that the person alleged to would not agree to the contract.
have been unduly influenced was ●​ Effect: Contract is VOIDABLE
suffering from mental weakness,
3.​ The fact that the person alleged to Incidental Fraud (Dolo incidente)
have been unduly influenced was ●​ Fraud that is not serious
ignorant, ●​ The other party would still agree even
4.​ The fact that the person alleged to without the deceit.
have been unduly influenced was in ●​ Effect: Contract is VALID, but
financial distress. damages may be claimed
●​ Note: The fraud referred to in this article is
Example: causal fraud
An elderly person is convinced by their
caregiver to transfer property to them.
Causal Fraud Incidental Fraud
➔​ The caregiver used their influence and
(Dolo causante) (Dolo incidente)
trust → Undue influence → Contract
VOIDABLE Those deceptions or Those which are not
misrepresentations serious in character
of a serious and without which
Article 1338. character employed the other party
by one party and would still have
There is fraud when, through insidious without which the entered into the
words or machinations of one of the contracting other party would contract.
parties, the other is induced to enter into a not have entered
contract which, without them, he would not have into the contract.
agreed to. (1269)
Dolo causante Dolo incidente refers
determines or is the only to some or
Explanation: essential cause of accident of the
●​ Fraud happens when one party uses the consent. particular
deceit, lies, or tricks to make the obligations.
other party agree to a contract
●​ The deception must be the reason why Effects: the nullity of Dolo incidente also
the other party gave consent. the contract and the obliges the person
indemnification of employing it to pay
●​ If there was no fraud, the person
damages. damages.
would not have agreed to the
contract.
●​ Effect: The contract becomes
VOIDABLE because consent is not Requisites of Causal Fraud
genuine In order that fraud may vitiate consent and be
a cause for annulment of contract, the
following must concur:
1.​ It must have been employed by one
contracting party upon the other
 2.​ It must have induced the other party ➔​ This is just exaggeration, not fraud →
to enter into the contract, valid contract
3.​ It must have been serious; and
4.​ It must have resulted in damage and
iniury to the party seeking annulment
Article 1341.
Example: A mere expression of an opinion does not
A sells a phone and lies that it is brand new, but signify fraud, unless made by an expert and the
it is used. other party has relied on the former's special
➔​ B buys only because of that lie → Dolo
knowledge. (n)
causante (VOID)
Explanation:
●​ Ordinary opinions are not fraud.
Article 1339. ●​ Exception: If an expert gives an
opinion and the other party relies on
Failure to disclose facts, when there is a their special knowledge, it can be
duty to reveal them, as when the parties are bound considered fraud.
by confidential relations, constitutes fraud. (n) ●​ Effect: Contract may be VOIDABLE if
reliance on the expert caused consent
Explanation:
●​ Fraud can exist even by silence if a General Rule:
party fails to disclose important facts. ●​ A mere expression of an opinion does
●​ This applies when there is a duty to not signify fraud
reveal, such as in confidential or trust
relationships. Exception:
●​ Effect: The contract is VOIDABLE ●​ Expression of an opinion signify fraud,
if made by an expert and the other
Example: party has relied on the former's special
A knows a house has serious structural damage knowledge.
but does not tell B.
➔​ Since A has a duty to disclose, the Example:
silence is fraud → contract VOIDABLE A mechanic (expert) tells B a car is in perfect
condition, knowing it is faulty
➔​ B buys the car based on this expert
opinion → fraud → contract
Article 1340. VOIDABLE
The usual exaggerations in trade, when
the other party had an opportunity to know the
Article 1342.
facts, are not in themselves fraudulent. (n)
Misrepresentation by a third person does
Explanation: not vitiate consent, unless such misrepresentation
●​ Normal sales talk or exaggerations has created substantial mistake and the same is
(like praising a product) are not fraud. mutual. (n)
●​ This is true when the other party had
the chance to check the facts. Explanation:
●​ Effect: The contract remains VALID ●​ False statements by a third party
generally do not make a contract
Example: voidable.
Seller says: “This is the best phone in the ●​ Exception: If the misrepresentation
world.” causes a serious (substantial) mistake
➔​ Buyer can still inspect or compare and both parties are affected (mutual
before buying. mistake), consent may be vitiated.
 ●​ Effect: Contract can be voidable in this Incidental fraud only obliges the person
special case employing it to pay damages. (1270)

General Rule: Explanation:

●​ Misrepresentation by a third person ●​ Serious fraud: Must be significant and
does not vitiate consent used by only one party
○​ Effect: Makes the contract
Exception: VOIDABLE
●​ Misrepresentation by a third person ●​ Incidental fraud: Minor or accidental
vitiates consent, if the fraud
misrepresentation has created ○​ Effect: The contract remains
substantial mistake and the same is VALID, but the fraudster must
mutual. pay damages

Example: The Degree of Evidence Needed to Prove the

A and B enter into a contract based on C’s Existence of Fraud
false statement that a piece of land is fertile ●​ Standard: Clear and convincing
➔​ Both A and B relied on C’s statement, evidence
and it turned out to be false. ○​ Higher than ordinary civil
➔​ This may invalidate the contract due to cases (preponderance of
mutual mistake caused by a third evidence)
party ○​ Lower than criminal cases
(beyond reasonable doubt)
●​ Implication: Fraud must be clearly
and convincingly shown, not just
Article 1343. alleged.
Misrepresentation made in good faith is ●​ Burden of Proof: Lies on the plaintiff
not fraudulent but may constitute error. (n) or party claiming fraud

Explanation: Fraud vs. Bad faith

●​ If a party makes a false statement ●​ Fraud: Intentional deception to induce
honestly (without intent to deceive), it consent; requires clear and convincing
is not fraud. proof.
●​ However, it can still be considered a ●​ Bad Faith: Acting with dishonest
mistake (error) affecting consent. purpose or moral wrongdoing, not just
●​ Effect: Contract may be VOIDABLE negligence or poor judgment; can
only if the mistake is substantial involve fraudulent intent

Example: Example:
A sells a car, honestly believing the odometer Serious fraud:
reads 50,000 km, but it actually reads 80,000 ➔​ A lies about a land’s title to make B
km buy → contract voidable.
➔​ No fraud, but B may claim mistake → Incidental fraud:
contract VOIDABLE ➔​ A slightly exaggerates the condition of
a car → contract valid, A pays
damages

Article 1344.
In order that fraud may make a contract
voidable, it should be serious and should not have
been employed by both contracting parties.
 Two juridical acts involved in relative
simulation
1.​ Ostensible act
Article 1345. ●​ The contract that the parties
Simulation of a contract may be absolute pretend to have executed
or relative. The former takes place when the 2.​ Hidden act
parties do not intend to be bound at all; the latter, ●​ The true agreement between
the parties
when the parties conceal their true agreement. (n)

Example:
Explanation:
*similar example with art. 1345*
●​ Absolute simulation:
○​ Parties pretend to make a
contract but do not intend to
be bound at all. Section 2​
○​ Effect: The contract is NULL
Object of Contracts
●​ Relative simulation:
○​ Parties hide their true
agreement behind a fake Article 1347.
contract.
○​ Effect: The hidden real All things which are not outside the
agreement governs, but the commerce of men, including future things, may
apparent contract may be the object of a contract. All rights which are
mislead third parties. not intransmissible may also be the object of
contracts.
Example:
Absolute: No contract may be entered into upon
➔​ A and B sign a “sale” of land just for future inheritance except in cases expressly
show; no one intends to actually sell → authorized by law.
NULL contract
Relative: All services which are not contrary to
➔​ A sells land to B secretly for P1, but the law, morals, good customs, public order, or public
written contract says P10 → the true policy may likewise be the object of a contract.
sale at P1 is VALID (1271a)

Explanation:
1.​ All things that are not outside human
Article 1346.
commerce, meaning things that can
An absolutely simulated or fictitious legally be owned, sold, or transferred.
contract is void. A relative simulation, when it ○​ Future things can also be the
does not prejudice a third person and is not object of a contract.
intended for any purpose contrary to law, morals, ○​ Rights can be contracted if they
good customs, public order or public policy binds are transmissible
the parties to their real agreement. (n) 2.​ Contracts cannot be made on a
future inheritance unless the law
Explanation: specifically allows it.
●​ If a contract is completely fake 3.​ Contracts can include services as long
(absolute simulation), it is void. as they are legal, moral, and not
●​ If a contract hides the true agreement against public order or policy
(relative simulation) but does no harm
and doesn’t break the law, the parties Kinds of Object of Contracts
are bound by what they really agreed 1.​ Things
on ●​ Not outside the commerce of
men, including future things,
 may be the object of a
contract
●​ Ex., A contracts to sell B 100
sacks of rice to be harvested Article 1348.
next season (future thing Impossible things or services cannot be
allowed by law). the object of contracts. (1272)
2.​ Rights
●​ Not intranmissible may also be Example:
the object of contracts ➔​ A promises to sell B a square circle —
●​ Ex., A assigns to B his right to impossible, so contract is VOID.
receive rental income from a ➔​ A hires B to fly unaided to the moon
property — impossible service, so contract is
3.​ Services VOID
●​ Not contrary to law, morals,
good customs, public order, or
public policy may likewise be
the object of contracts Article 1349.
●​ Ex., A hires B to provide legal
consultancy for his business
The object of every contract must be
determinate as to its kind. The fact that the
Requisites: quantity is not determinate shall not be an
Article 1347, paragraph 2 of the Civil Code obstacle to the existence of the contract, provided
characterizes a contract entered into upon it is possible to determine the same, without the
future inheritance as VOID. The law applies need of a new contract between the parties. (1273)
when the following requisites concur:
1.​ The succession has not yet been Explanation:
opened; ●​ Object must be determinate as to its
2.​ The object of the contract forms part kind:
of the inheritance; and ○​ The thing or service in the
3.​ The promissor has, with respect to the contract must be clearly
object, an expectancy of a right which identifiable in type or nature
is purely hereditary in nature ●​ Quantity need not be determinate:
○​ If the amount or number is not
Future inheritance – Future inheritance is any fixed, the contract can still be
property or right not yet in existence or not yet valid as long as it can be
determinable at the time of the contract, which determined later without
a person may acquire later by succession. creating a new contract
-​ General rule: Contracts can cover
future things, but not future Example:
inheritance, unless the law specifically A agrees to sell B rice of a certain variety, but
allows it (e.g., inter vivos partition the exact number of sacks will be decided at
under Article 1080) harvest — VALID, because the type is clear
Requisites for a Contract on Future and quantity can be determined
Inheritance (Prohibited):
1.​ That the succession has not yet been
opened;
2.​ That the object of the contract forms Section 3​
part of the inheritance; and
3.​ That the promissor has, with respect to
Cause of Contracts
the object, an expectancy of a right
which is purely hereditary in nature.
 exchange of money for the painting, which
makes the contract VALID

Article 1350.
Article 1352.
In onerous contracts the cause is
understood to be, for each contracting party, the . Contracts without cause, or with
prestation or promise of a thing or service by the unlawful cause, produce no effect whatever. The
other; in remuneratory ones, the service or benefit cause is unlawful if it is contrary to law, morals,
which is remunerated; and in contracts of pure good customs, public order or public policy.
beneficence, the mere liberality of the benefactor. (1275a)
(1274)
Explanation:
Cause – refers to the reason or purpose why ●​ Contracts must have a lawful cause
the parties enter into it — the legal reason or purpose for
entering into the contract must exist
Cause vs. Consideration and be valid.
●​ often used interchangeably — both ●​ No cause or unlawful cause → the
refer to the reason why a party enters contract is void and produces no effect
into a contract.
Requisites of a valid contract
Onerous Contracts – ]what each party gives 1.​ Consent of the contracting parties
or promises in exchange for the other’s 2.​ Object certain which is th subject
prestation. matter of the contract; and
●​ Ex., Selling a car for money 3.​ Cause of the obligation which is
established
Remuneratory Contracts – the service or
Example:
benefit being paid for
A contracts with B to smuggle prohibited
●​ Ex., Paying someone to paint a house
goods.
➔​ Cause: to profit from illegal activity →
Gratuitous Contracts – the liberality or
unlawful → contract VOID
generosity of the benefactor
●​ Ex., Donating money without
expecting anything in return Article 1353.
The statement of a false cause in
Article 1351. contracts shall render them void, if it should not
be proved that they were founded upon another
The particular motives of the parties in
cause which is true and lawful. (1276)
entering into a contract are different from the
.
cause thereof. (n)
Explanation:
●​ If a contract states a false cause, it is
Cause vs. Motive
VOID.
Cause Motive ●​ Exception: If it can be proven that the
contract actually had a true and lawful
Essential reason for Particular reason of
cause, it may still be valid.
the contract a contracting party
which does not
affect the other Example:
party A contracts with B, claiming the payment is for
“consulting services” (false cause), but in
reality, it is a legal sale of goods → contract
Example:
valid, because the true lawful cause exists.
A sells a painting to B because A wants to raise
money to travel (motive) — the cause is the
 ➔​ If B tricked A into selling cheaply →
contract may be VOIDABLE due to
fraud
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. (1277) CHAPTER 3​
Explanation: Forms of Contracts
●​ Even if a contract does not explicitly
state its cause, the law presumes that
a lawful cause exists. Article 1356.
●​ The debtor (person obligated to
Contracts shall be obligatory, in whatever
perform) can challenge the contract by
form they may have been entered into, provided
proving that the cause is unlawful or
all the essential requisites for their validity are
nonexistent
present. However, when the law requires that a
contract be in some form in order that it may be
Example:
A lends money to B without mentioning the
valid or enforceable, or that a contract be proved
purpose in the contract
in a certain way, that requirement is absolute and
➔​ Law presumes the cause is a VALID indispensable. In such cases, the right of the
loan. parties stated in the following article cannot be
➔​ If B can show the loan was for illegal exercised. (1278a)
activity, the contract may be VOID
Explanation:
1.​ Contracts are valid and binding in any
Article 1355. form (oral or written) as long as the
essential requisites are present:
Except in cases specified by law, lesion or
consent, object, and cause
inadequacy of cause shall not invalidate a
○​ Ex., A orally agrees to sell a
contract, unless there has been fraud, mistake or phone to B → valid contract
undue influence. (n) 2.​ But if the law requires a specific form
(like written or notarized), that form
Explanation:
must be followed for the contract to be
●​ Lesion or inadequacy of cause =
valid, enforceable, or provable
when what one party gives or receives
○​ Ex., Sale of land must be in
is grossly unequal compared to what
writing → oral sale may not be
the other party gives.
enforceable
3.​ When the law strictly requires a form,
General Rule:
the parties cannot ignore it or demand
●​ Lesion or inadequacy of cause shall
enforcement without following the
not invalidate a contract.
required form.
●​ The formal requirement is
Exception:
mandatory
1.​ In cases specified by law;
2.​ When there has been fraud;
Forms of Contract (based on purposes)
3.​ When there has been a mistake; and
1.​ Form of validity of contract
4.​ When there has been undue influence.
●​ The required form is essential or for
validity
Example:
●​ If not followed → contract is VOID (no
A sells a car worth ₱500,000 to B for ₱100,000.
effect at all).
➔​ Mere disparity → contract still valid
○​ Ex., If not followed → contract
is void (no effect at all)
2.​ Form of enforceability of contract Example:
●​ Contract is valid, but cannot be A verbally sells land to B for ₱1,000,000
enforced in court if form is not ➔​ Sale already valid (meeting of minds)
followed ➔​ But law requires written document
●​ Contract is valid, but CANNOT BE ➔​ B can compel A to sign a written
ENFORCED IN COURT if form not contract.
followed ➔​ B may also file a case to enforce the
○​ Ex., Sale of land must be in sale at the same time
writing (Statute of Frauds).
➔​ If oral → valid, but cannot be
enforced in court if the other
party refuses Article 1358.
3.​ Form for greater efficacy or The following must appear in a public
convenience of contract document:
●​ Form is only to bind third persons or (1) Acts and contracts which have for ​
for convenience
​ their object the creation, transmission, ​
●​ Even if not followed → contract is still
​ modification or extinguishment of real ​
VALID AND ENFORCEABLE between
​ rights over immovable property; sales of ​
parties
​ real property or of an interest therein are ​
○​ Ex., Sale of land not registered
​ governed by articles 1403, No. 2, and ​
➔​ Valid between buyer and
​ 1405;
seller
(2) The cession, repudiation or ​
➔​ But not binding on third
​ renunciation of hereditary rights or of ​
persons (like another buyer)
​ those of the conjugal partnership of ​
​ gains;
Article 1357. (3) The power to administer property, or ​
​ any other power which has for its object ​
If the law requires a document or other ​ an act appearing or which should appear ​
special form, as in the acts and contracts ​ in a public document, or should ​
enumerated in the following article, the ​ prejudice a third person;
contracting parties may compel each other to (4) The cession of actions or rights ​
observe that form, once the contract has been ​ proceeding from an act appearing in a ​
perfected. This right may be exercised ​ public document.
simultaneously with the action upon the contract. (5) All other contracts where the amount ​
(1279a) ​ involved exceeds five hundred pesos must ​
​ appear in writing, even a private one. But ​
Explanation:
​ sales of goods, chattels or things in ​
●​ If the law requires a contract to be in a
​ action are governed by articles, 1403, No. ​
certain form (like written or notarized),
​ 2 and 1405. (1280a)
the parties can force each other to put
the contract in that form, once they
Explanation:
already agreed.
1.​ Contracts involving land or buildings
○​ The contract is already
must be in a public document.
perfected (valid)
●​ Includes: creation, transfer,
○​ But it still needs to be put into
modification, or extinguishment of
proper form
rights.
○​ Either party can compel the
○​ Ex., sale of land, mortgage of
other to complete the required
house, donation of land
form
2.​ Contracts involving inheritance rights
v=The contract is already perfected (valid)
or marriage property must be
But it still needs to be put into proper form
notarized
Either party can compel the other to complete
the required form
 ○​ Ex., waiving inheritance & If mistake, fraud, inequitable conduct, or
dividing conjugal property of accident has prevented a meeting of the minds of
spouses the parties, the proper remedy is not reformation
3.​ Authority to manage property must be of the instrument but annulment of the contract.
in public document
○​ Ex., SPA authorising someone Explanation:
to sell land & power to manage 1.​ If the parties agreed, but the written
business property contract does not reflect their true
4.​ If a right came from a notarized agreement because of mistake, fraud,
document, transferring it must also be inequitable conduct, or accident. One
notarized party can ask the court to correct the
○​ Ex., assigning rights from a document so it matches the real
notarized loan agreement agreement
5.​ All other contracts more than ₱500 2.​ If there was no meeting of minds at all,
must be in writing, even just a private the remedy is annulment, not
document (not necessarily notarized) reformation
○​ Ex., A lends B ₱10,000 verbally
➔​ Not written Example:
➔​ Contract is still valid 1.​ A and B agreed to sell land for ₱500,000
➔​ But better/must be written ➔​ But written contract says ₱50,000
for proof (typing mistake)
●​ Exception ➔​ Court may correct the document.
○​ Sales of goods, chattels, or things in 2.​ A thinks he is selling Lot 1, while B thinks
action follow the Statute of Frauds he is buying Lot 2
(Art. 1403 & 1405) instead ➔​ No meeting of minds
■​ Some sales must be written to ➔​ Contract annulled, not corrected
be enforceable
○​ Ex., A sells 100 sacks of rice to B
(not yet delivered) Article 1360.
➔​ Must be in writing to be
The principles of the general law on the
enforceable
reformation of instruments are hereby adopted
insofar as they are not in conflict with the
Public document – an instrument
provisions of this Code.
authenticated by a notary public or a
competent public official with the formalities
Explanation:
required by law.
●​ This article means that general rules
on reformation of instruments may still
be applied as long as they do not
CHAPTER 4​ contradict the Civil Code.
●​ Simply:
Reformation of Instruments ○​ Use Civil Code rules first
○​ If something is not covered →
apply general legal principles
Article 1359. ○​ But they must not conflict
with the Civil Code
When, there having been a meeting of
the minds of the parties to a contract, their true
Example:
intention is not expressed in the instrument
➔​ The Civil Code does not specify
purporting to embody the agreement, by reason of
procedure for reformation
mistake, fraud, inequitable conduct or accident,
➔​ So the court may apply general legal
one of the parties may ask for the reformation of
rules on how to correct the document
the instrument to the end that such true intention
may be expressed.
Reformation – is a remedy in equity where the
to determine ➔​ This does not
written document is corrected so it matches the intention create a new
the true intention of the parties when there is contract, it
an error or mistake only corrects
●​ The real agreement already exists the mistake
●​ Only the written instrument is wrong
●​ Court corrects the document, not
create a new contract
Article 1361.
Requisites of reformation
When a mutual mistake of the parties
In order that an action for reformation of
causes the failure of the instrument to disclose
instrument may prosper. the following
requisites must concur:
their real agreement, said instrument may be
1.​ There must have been a meeting of the
reformed.
minds of the parties to the contract:
2.​ The instrument does not express the true Explanation:
intention of the parties; and ●​ If both parties are mistaken and the
3.​ The failure of the instrument to express written contract does not show what
the true intention of the parties is due to they really agreed on, the court can
mistake, fraud, inequitable conduct, or reform (correct) the document to
accident. reflect their true agreement

Interpretation vs. reformation Example:

Parties agreed to sell 100 bags of rice.
Interpretation Reformation
➔​ Contract mistakenly says 10 bags.
●​ means finding ●​ a remedy where ➔​ Court can reform the contract to 100
the meaning of the written bags
the words used contract is
in a contract, corrected so it
especially if matches the Article 1362.
they are: real intention of
○​ unclear the parties If one party was mistaken and the other
○​ ambiguous ●​ The court: acted fraudulently or inequitably in such a way
○​ confusing ○​ does not that the instrument does not show their true
○​ not obvious create a new intention, the former may ask for the reformation
●​ It is the process contract
of the instrument.
of ○​ only fixes
understanding the written
what the document Explanation:
parties meant ○​ so the true ●​ If one party makes a mistake and the
based on the agreement other party acted fraudulently or
language used can be unfairly, causing the written contract
enforced not to show the true agreement, the
mistaken party can ask the court to
Example: Example:
Contract says: True agreement: reform (correct) the document
“Delivery will be ➔​ A sells land to
made soon.” B for Example:
Problem: ₱1,000,000 A agrees to sell land to B for ₱500,000.
What does soon Written contract ➔​ B, knowing the real price should be
mean? says: ₱700,000, writes ₱500,000 in the
➔​ 1 day, 1 ➔​ ₱100,000
contract to cheat A
week, or 1 (mistake)
month? ➔​ Court will ➔​ A can ask the court to reform the
➔​ Court will reform the contract to ₱700,000
interpret the document to
word "soon" ₱1,000,000
​ ​
Article 1363. Article 1365.
When one party was mistaken and the If two parties agree upon the mortgage or
other knew or believed that the instrument did not pledge of real or personal property, but the
state their real agreement, but concealed that fact instrument states that the property is sold
from the former, the instrument may be reformed. absolutely or with a right of repurchase,
reformation of the instrument is proper.
Explanation:
●​ If one party is mistaken and the other Explanation:
party knows or suspects the contract ●​ If parties agree to a mortgage or
does not reflect the true agreement pledge, but the contract wrongly says
but keeps silent, the mistaken party it’s a sale or a sale with repurchase,
can ask the court to reform (correct) the court can reform (correct) the
the document contract to reflect the real agreement

Example: Example:
A agrees to sell a car to B for ₱300,000 A agrees to pledge a piece of land to B as
➔​ B knows the price should be ₱350,000 security for a loan
but writes ₱300,000 in the contract ➔​ The written contract mistakenly says
and says nothing “sale with right to repurchase.”
➔​ A can ask the court to reform the ➔​ Court can correct the contract so it
contract to ₱350,000 shows a pledge, not a sale

Article 1364. Article 1366.

When through the ignorance, lack of There shall be no reformation in the
skill, negligence or bad faith on the part of the following cases:
person drafting the instrument or of the clerk or (1) Simple donations inter vivos wherein ​
typist, the instrument does not express the true ​ no condition is imposed;
intention of the parties, the courts may order that (2) Wills;
the instrument be reformed. (3) When the real agreement is void.

Explanation: Instruments that cannot be reformed

●​ If the written contract fails to show the 1.​ Simple donations inter vivos wherein no
true agreement because of ignorance, condition is imposed
carelessness, lack of skill, or bad faith ●​ Donations are essentially acts of pure
by the person who drafted it (or the liability
clerk/typist), the court can order the 2.​ Wills
contract to be corrected (reformed) ●​ A will may be revoked at any time
3.​ When the real agreement is void.
Example: ●​ A void agreement, in essence, is an
Parties agree to sell land for ₱1,000,000 agreement that did not exist from the
➔​ The clerk mistakenly types ₱100,000 in very beginning. Hence, there is nothing
the contract reformed.
➔​ Court can correct the contract to
₱1,000,000 to reflect what was really
agreed Article 1367.
When one of the parties has brought an
action to enforce the instrument, he cannot
subsequently ask for its reformation.
Explanation: instrument will follow specific court
●​ If a party already goes to court to rules set by the Supreme Court
enforce a contract as it is written, they
cannot later ask the court to reform
(correct) the contract
CHAPTER 5​
Example:
Interpretation of Contracts
A sues B to pay ₱100,000 under a contract
➔​ Later, A realizes the contract had a
mistake and wants it corrected to Article 1370.
₱120,000
➔​ A cannot ask for reformation after If the terms of a contract are clear and
filing the first lawsuit leave no doubt upon the intention of the
contracting parties, the literal meaning of its
stipulations shall control.
Article 1368.
Reformation may be ordered at the If the words appear to be contrary to the
instance of either party or his successors in evident intention of the parties, the latter shall
interest, if the mistake was mutual; otherwise, prevail over the former. (1281)
upon petition of the injured party, or his heirs and
assigns. Explanation:
●​ If the terms of a contract are clear,
Explanation: and there is no doubt about what the
●​ Mutual mistake: If both parties made parties meant, then you must follow
the same mistake in the contract, the exact wording of the contract
either party or their successors can ask ●​ If the words written conflict with the
the court to reform it real intention of the parties, the real
●​ Unilateral mistake: If only one party intention prevails over the literal words
was mistaken, then only the injured
party or their heirs/assignees can ask Interpretation – means finding the meaning
for reformation of the words used in a contract, especially if
they are:
Example: ○​ unclear
○​ ambiguous
●​ Mutual mistake:
○​ confusing
Both A and B agreed to sell 10,000 kg ○​ not obvious
of rice, but the contract says 1,000 kg.
➔​ Either A or B can ask the court to Plain Meaning Rule – If the words of the
correct it contract are clear and unambiguous, they
●​ Unilateral mistake: must be given their ordinary, literal
Only A was mistaken about the price, meaning.
while B knew it. – The court does not
➔​ Only A (or heirs) can request interpret beyond what is
reformation, not B written

Four Corners Rule – The meaning of the

Article 1369. contract must be determined only from the
The procedure for the reformation of document itself (“within the four corners” of
instrument shall be governed by rules of court to the paper)
be promulgated by the Supreme Court. ​ ​ – Courts cannot look at ​
​ ​ outside evidence if the ​
Explanation: ​ ​ contract is clear
●​ The process for asking the court to
reform (correct) a contract or written
Primidorial Consideration – refers to the main ​
factor that is given the highest importance
when deciding or interpreting an agreement or Article 1373.
rule If some stipulation of any contract
should admit of several meanings, it shall be
Example:
understood as bearing that import which is most
Contract states:
adequate to render it effectual. (1284)
A will sell his car to B for ₱300,000 on July 7.
➔​ The terms are clear
Explanation:
➔​ The court will follow exactly what is
●​ If a contract clause can be
written
understood in different ways, it
should be interpreted in the way that
Article 1371. makes the contract valid and
effective, not useless.
In order to judge the intention of the ●​ If there are multiple meanings,
contracting parties, their contemporaneous and choose the one that makes the
subsequent acts shall be principally considered. contract work
(1282) ●​ Avoid interpretation that makes the
contract void or ineffective
Explanation:
●​ To determine the true intention of the Example:
parties, the court looks at their actions A contract says: “A will deliver goods ‘soon.’”
before, during, and after the contract Possible meanings:
●​ These acts help explain what they ➔​ Tomorrow
really meant ➔​ Next week
➔​ Next year
Example: ➔​ Court will choose the meaning that makes
Contract says: “rent includes utilities” (unclear) the contract reasonable and workable
➔​ After signing, tenant pays electricity (e.g., within a normal business time like a
and water separately week or month), not one that makes it
➔​ Their actions show utilities were not impossible.
included

Article 1374.
Article 1372.
The various stipulations of a contract
However general the terms of a contract shall be interpreted together, attributing to the
may be, they shall not be understood to doubtful ones that sense which may result from
comprehend things that are distinct and cases that all of them taken jointly. (1285)
are different from those upon which the parties
intended to agree. (1283) Explanation:
●​ If a contract has several clauses, all of
Explanation: them must be read together as a
●​ Even if the terms of a contract are very whole, not separately
general, they apply only to what the ●​ If one part is unclear or doubtful, its
parties intended, not to other different meaning should be taken from the
things or situations overall context of the entire contract

Example: "Complementary-contracts-constructed-toge
Contract: A rents B’s “equipment.” ther" doctrine or No segregation principle –
➔​ But they only discussed construction an accessory contract where all parts of a
tools, not vehicles contract must be read and interpreted
➔​ “Equipment” does not include trucks, together, as if they are one complete whole,
since not intended not separate pieces.
– Each clause is connected and dependent on ​
the rest
Article 1376.
Example: The usage or custom of the place shall be
A contract states:
borne in mind in the interpretation of the
●​ Clause 1: A will deliver “equipment”
ambiguities of a contract, and shall fill the
●​ Clause 2: Equipment listed refers to
omission of stipulations which are ordinarily
construction tools only
established. (1287)
➔​ If Clause 1 is unclear, it will be interpreted
based on Clause 2 → meaning only
Explanation:
construction tools, not all equipment in
●​ If a contract is unclear or incomplete,
general.
the usage or custom of the place
where it was made can be used to
1.​ Clarify ambiguous terms
Article 1375. 2.​ Fill in missing details that are
normally part of similar
Words which may have different contracts
significations shall be understood in that which is ●​ Follow what is commonly practiced in
most in keeping with the nature and object of the that place or industry
contract. (1286) ●​ Customs help explain or complete the
contract when it is silent or unclear
Explanation:
●​ If a word in a contract has more than
one meaning, it should be interpreted Example:
in the way that best matches the “A hires B to build a house, but the contract
nature and purpose of the contract does not say who provides construction tools.”
●​ Consider the goal or purpose of the ➔​ In that locality, it is a common custom
agreement that the contractor provides tools.
➔​ So B (contractor) is expected to
Rationale: provide the tools
The reason for these rule is that it must be
presumed that the parties had intended an
effective act and not one that is impracticable Article 1377.
or illusory.
The interpretation of obscure words or
stipulations in a contract shall not favor the party
Example:
who caused the obscurity. (1288)
Contract: A hires B to provide “transport
services.”
Explanation:
●​ If a contract contains unclear or
The word “vehicle” could mean:
confusing words, the interpretation
●​ Car
should not benefit the party who
●​ Truck
caused the confusion.
●​ Motorcycle
●​ If you created the ambiguity, you
➔​ Since the contract is for delivery of
cannot benefit from it
goods, “vehicle” is understood as a truck,
because it best fits the purpose.
Example:
A prepares a contract and intentionally writes:
“Payment shall be made in a reasonable time”
(very unclear)
➔​ Later, A claims it means 3 years, while
B claims it means 1 month
 ➔​ The court will interpret the ambiguity 2.​ When doubts are cast upon the
against A, since A caused the unclear principal object of the contract
wording ●​ If it is impossible to know the
real intention of the parties, the
contract is void (no contract
exists).
Article 1378. ●​ Ex., A and B agree on “selling a
When it is absolutely impossible to settle property,” but it is unclear which
doubts by the rules established in the preceding property and nothing clarifies it.
articles, and the doubts refer to incidental ➔​ Since the object cannot be
determined → contract is void
circumstances of a gratuitous contract, the least
3.​ Article 1378 is applied when a contract
transmission of rights and interests shall prevail.
is still unclear even after using all
If the contract is onerous, the doubt shall be
other rules of interpretation
settled in favor of the greatest reciprocity of
●​ Protect the giver in donations
interests.
●​ Maintain balance in
exchanges
If the doubts are cast upon the principal
●​ But if the main subject is
object of the contract in such a way that it cannot
unclear, there is no valid
be known what may have been the intention or
contract at all
will of the parties, the contract shall be null and
void. (1289)
Article 1379.
Explanation:
1.​ When it is impossible to settle doubt: The principles of interpretation stated in
i.​ Gratuitous contract Rule 123 of the Rules of Court shall likewise be
(free/without payment) observed in the construction of contracts. (n)
●​ If the contract is a gift or
donation, choose the meaning Explanation:
that gives less burden or ●​ Not only the Civil Code rules apply
fewer obligations to the giver. ●​ Courts may also use rules on evidence
●​ Principle: less transmission of and interpretation from the Rules of
rights prevails Court
●​ Ex., A donates property to B, ●​ These help in understanding unclear
but terms are unclear about contracts
obligations
➔​ Choose the interpretation Example:
that is least burdensome If a contract is ambiguous, the court may:
to A (donor) ●​ Consider context
ii.​ Onerous contract (with ●​ Look at surrounding circumstances
payment/exchange) ●​ Apply legal rules on interpreting
●​ If the contract involves mutual written documents
exchange, choose the meaning ➔​ These come from Rule 123 (Evidence)
that ensures fairness and
balance between both parties
●​ Principle: greatest reciprocity DEFECTIVE CONTRACTS
of interests Kinds of Defective Contracts
●​ Ex., A sells goods to B, but 1.​ Rescissible contracts;
payment terms are unclear 2.​ Voidable contracts;
➔​ Interpretation should 3.​ Unenforceable contracts; and
4.​ Void and inexistent contracts
ensure fair exchange for
both A and B
 CHAPTER 6​
Example:
“A sells property that actually belongs to
another person’s inheritance”
Rescissible Contracts ➔​ The contract is valid, but it prejudices
the rightful owner
➔​ It may be rescinded
Article 1380.
Contracts validly agreed upon may be Article 1381.
rescinded in the cases established by law. (1290)
The following contracts are rescissible:
Explanation: (1) Those which are entered into by ​
●​ Even if a contract is validly made, it ​ guardians whenever the wards whom ​
can still be rescinded (cancelled) in ​ they represent suffer lesion by more than ​
certain cases provided by law ​ one-fourth of the value of the things ​
●​ Contract is valid at the start ​ which are the object thereof;
●​ But may be set aside later due to (2) Those agreed upon in representation ​
specific legal reasons (like damage or ​ of absentees, if the latter suffer the lesion ​
prejudice) ​ stated in the preceding number;
(3) Those undertaken in fraud of ​
Rescission – a legal remedy that cancels a ​ creditors when the latter cannot in any ​
valid contract because it causes damage or ​ other manner collect the claims due ​
prejudice to a party or even to a third person. ​ them; ​
– The contract is valid at the beginning ​ (4) Those which refer to things under ​
– But it causes injury, loss, or unfair ​ ​ litigation if they have been entered into ​
damage ​ by the defendant without the knowledge ​
➔​ So the law allows it to be ​ and approval of the litigants or of ​
rescinded (set aside) ​ competent judicial authority; ​
​ (5) All other contracts specially declared ​
Effect of Rescission ​ by law to be subject to rescission. (1291a)
●​ Return what was given (money,
property, etc.) Explanation:
●​ Bring both parties back to their ●​ These are valid contracts that can be
original situation rescinded (cancelled) because they cause
damage or prejudice.
Cancellation Rescission 1.​ Contracts by guardians (wards suffer
loss)
●​ General term ●​ Legal remedy ●​ If a guardian enters into a contract
●​ Refers to ●​ A specific legal and the minor/ward suffered lesion
ending or remedy under and loses more than 1/4 of the
terminating a the Civil Code
value, it can be rescinded.
contract ●​ Applies to a
●​ Usually used in valid contract ●​ Ex., Guardian sells a child’s
a general or that causes property worth ₱100,000 for
ordinary sense. damage or ₱60,000 → loss is more than 25% →
●​ May be due to: prejudice rescissible
○​ Agreement of ●​ Requires 2.​ Contracts for absentees
parties restoration
●​ Same rule as above, but applies to
○​ Breach (mutual return)
persons who are absent who
○​ Fulfilment of a of what was
condition given. suffered lesion and represented by
●​ Does not someone.
always require ●​ Ex., Representative sells absent
restoration of person’s land at a big loss →
what was given rescissible
3.​ Contracts in fraud of creditors
 ●​ Debtor transfers property to avoid Contracts involving Things under Litigation
paying debts, and creditors have no are Rescissible
other way to collect. 1.​ The defendant sells or transfers
●​ Ex., A gives his property to a friend property that is already under court
to avoid paying debts → rescissible dispute, and
4.​ Contracts involving property under 2.​ It is done without approval of the
litigation court or the other parties
●​ If the property is already in court ●​ Reason: This is to prevent bad faith or
dispute, and the defendant sells it fraud and protect the court’s authority.
without approval, the contract is So the property remains subject to the
rescissible. final court decision
●​ Ex., Land is under court case, but
defendant sells it secretly →
rescissible Article 1382.
5.​ Other cases provided by law Payments made in a state of insolvency for
●​ Any contract that the law obligations to whose fulfillment the debtor could
specifically allows to be not be compelled at the time they were effected,
rescinded.
are also rescissible. (1292)

Litigation – a legal dispute or case brought

Explanation:
before a court for resolution
●​ Payment can be rescinded if:
– There is a conflict or disagreement ​
○​ The debtor is insolvent (cannot
​ and the judge will decide the issue.
pay), and
○​ Debtor pays a debt that is not yet
Litignants – parties involved in a court case
due or cannot be demanded
(litigation)
– Plaintiff → the one who files the ​
Example:
​ case
A owes:
– Defendant → the one being sued
●​ B: ₱100,000 (due next year)
●​ C: ₱100,000 (due now)
Lesion – damage or financial loss suffered by
➔​ A only has ₱100,000 and is insolvent.
a party in a contract because the value they
➔​ But A pays B (not yet due) instead of C.
received is unfair or much less than what they
➔​ Payment to B can be rescinded because
gave.
it prejudices C

Rescissible Contracts – valid contracts that

can be cancelled (rescinded) because they Article 1383.
cause damage or prejudice to a party or a
third person The action for rescission is subsidiary; it cannot
be instituted except when the party suffering
Ward – a person (usually a minor or damage has no other legal means to obtain
someone incapable) who is placed under the reparation for the same. (1294)
care and protection of a guardian
Explanation:
Absentee – person who is not present and ●​ The action for rescission is subsidiary,
whose whereabouts are unknown or is away meaning it is a last resort remedy
for a long time, so someone else manages ●​ You can only ask for rescission if:
their affairs ○​ You suffered damage, and
○​ You have no other legal way to
Contracts in fraud of creditors – contracts recover or fix the damage
made to defeat or reduce creditors’ rights to
collect debts. Accion Pauliana – a legal action filed by a
creditor to rescind (cancel) a contract made in
fraud of creditors.
​ – to protect creditors Explanation:
​ – to recover property that the debtor ​ 1.​ Mutual Restoration
​ transferred to avoid paying debts. ●​ When a contract is rescinded:
○​ Both parties must return what
Example: they received
A is a creditor of B. B sells his property to avoid ○​ Thing + its fruits (e.g., rent,
paying A. produce)
➔​ If A can still collect the debt by other ○​ Price + interest
means → no rescission ●​ Rescission is allowed only if the
➔​ If A has no other way to collect → one asking for it can also return
rescission allowed what he received.
●​ Ex., A sells land to B. ​
​ If rescinded:
Article 1384. ➔​ A returns the money + interest
Contracts validly agreed upon may be ➔​ B returns the land + any
rescinded in the cases established by law. (1290) income earned
2.​ Protection of Third Persons
Explanation: ●​ Rescission cannot happen if:
●​ Rescission can only be carried out if ○​ The property is already with a
the party asking for it can return third person, and
what he has received ○​ That third person is in good
●​ You cannot rescind a contract if you faith (did not know of the
cannot restore the other party to their issue)
original condition ●​ Ex., B sells the land to C (who did
●​ There must be mutual restitution not know of the problem) → The
(both sides return what they received) contract cannot be rescinded
against C
Example: 3.​ Remedy if Rescission Not Possible
A sells land to B. If A wants rescission, he must: ●​ If rescission cannot be done
●​ Return the money because of a third person:
●​ B must return the land ○​ The injured party can instead
➔​ If A cannot return the money → rescission ask for damages from the
is not allowed one who caused the loss

Mutual Restitution – both parties must

Article 1385. return what they received from each other
when a contract is rescinded.
Rescission creates the obligation to
return the things which were the object of the
contract, together with their fruits, and the price Article 1386.
with its interest; consequently, it can be carried
Rescission referred to in Nos. 1 and 2 of
out only when he who demands rescission can
article 1381 shall not take place with respect to
return whatever he may be obliged to restore.
contracts approved by the courts. (1296a)
Neither shall rescission take place when
Explanation:
the things which are the object of the contract are
●​ Contracts under Article 1381 (1) and
legally in the possession of third persons who did
(2) (those involving wards and
not act in bad faith.
absentees) cannot be rescinded if
they were approved by the court.
In this case, indemnity for damages may
●​ If the court already reviewed and
be demanded from the person causing the loss.
approved the contract
(1295)
○​ It is presumed fair and valid
○​ No rescission allowed
 ●​ Reason: ○​A judgment already exists,
○​ The court acts as protector of orA writ of attachment has
the ward or absentee been issued against the debtor
○​ Its approval means the ○​ Even if:
contract is proper and ○​ The case is unrelated to the
justified property
Example: ○​ The creditor asking rescission
A guardian sells a minor’s property. is not the one who filed the
➔​ If court approved the sale → cannot case
be rescinded ●​ Ex., A loses a case and must pay ​
➔​ Even if later someone claims there was money.
loss Before paying, A sells property ​
to someone.
➔​ Presumed fraudulent
Article 1387. 3.​ Other proof of fraud
All contracts by virtue of which the ●​ Even without these presumptions:
debtor alienates property by gratuitous title are ○​ Fraud can still be proven
presumed to have been entered into in fraud of using evidence
creditors, when the donor did not reserve
sufficient property to pay all debts contracted Article 1388.
before the donation.
Whoever acquires in bad faith the things
Alienations by onerous title are also alienated in fraud of creditors, shall indemnify the
presumed fraudulent when made by persons latter for damages suffered by them on account of
against whom some judgment has been rendered the alienation, whenever, due to any cause, it
in any instance or some writ of attachment has should be impossible for him to return them.
been issued. The decision or attachment need not
refer to the property alienated, and need not have If there are two or more alienations, the
been obtained by the party seeking the rescission ​ first acquirer shall be liable first, and so on
successively. (1298a)
In addition to these presumptions, the
design to defraud creditors may be proved in any Explanation:
other manner recognized by the law of evidence. ●​ This article deals with liability of persons
(1297a) who receive property in fraud of
creditors.
Explanation: 1.​ Liability of bad faith acquirer
1.​ Gratuitous contracts (free) ●​ If a person acquires property in
●​ If a debtor gives property for free bad faith (he knows it was meant to
(donation) and: defraud creditors):
○​ He does not keep enough ○​ He must return the property,
property to pay his debts or
○​ The law presumes fraud ○​ If return is impossible, he
●​ Ex., A owes ₱500,000 ​ must pay damages to the
​ A donates his only property to ​ creditors
​ a friend ●​ Ex., A transfers property to C to
➔​ Leaves nothing to pay avoid paying debts. ​
debts ​ C knows about this fraud (bad
➔​ Presumed fraudulent faith).
2.​ Onerous contracts (with payment) ➔​ If C still has the property →
●​ Even contracts with payment are must return it
presumed fraudulent if: ➔​ If C already sold it → must
pay damages
2.​ Multiple transfers
 If the property was transferred to
CHAPTER 7​
●​
several people:
○​ The first buyer (first
acquirer) is liable first Voidable Contracts
○​ If he cannot be held liable →
next person is liable, and so on
Article 1390.

Article 1389. The following contracts are voidable or

annullable, even though there may have been no
The action to claim rescission must be damage to the contracting parties:
commenced within four years.
(1) Those where one of the parties is ​
For persons under guardianship and for ​ incapable of giving consent to a contract;
absentees, the period of four years shall not begin
until the termination of the former's incapacity, or (2) Those where the consent is vitiated by
until the domicile of the latter is known. (1299) mistake, violence, intimidation, undue
influence or fraud.
Explanation:
●​ This article sets the time limit for filing These contracts are binding, unless they
an action for rescission are annulled by a proper action in court. They are
susceptible of ratification. (n)
General Rule:
The action for rescission must be filed within 4 Explanation:
years. ●​ A contract is voidable or annullable
when:
Exception 1.​ One party is incapable of giving
1.​ For wards (under guardianship) consent, or
●​ The 4-year period starts only after 2.​ Consent is affected by mistake,
the incapacity ends violence, intimidation, undue
●​ Ex., when the minor becomes of influence, or fraud
age ●​ These contracts are:
2.​ For absentees ○​ Valid and binding at first
●​ The 4-year period starts only when ○​ Effective unless annulled by
their whereabouts or domicile the court
becomes known ○​ Can still be ratified
(confirmed)
Examples:
Ward: Void or Annulled Contracts
A minor’s property was sold unfairly. -​ These contracts are existing, valid, and
➔​ The 4 years starts when the minor binding
turns 18 -​ If there is a problem with a party’s
capacity or the party’s consent, they
Absentee: remain effective unless someone files a
A person is missing and later found. case in court to annul them.
➔​ The 4 years starts when his location is -​ They are also capable of ratification or
known confirmation, meaning the defect can
be cured.
 3.​ The person knows the defect
VOID VOIDABLE
●​ The person ratifying must know why
●​ No legal effect ●​ Valid until the contract was defective.
from the annuled ●​ Ex., A knows he was deceived but still
beginning ●​ Can be ratified accepts the contract.
●​ Cannot be ●​ Has defect in 4.​ The defect or problem already
ratified consent disappeared
●​ Illegal or lacks ●​ Ex., contract
●​ The cause of the defect must no longer
essential signed through
requisites intimidation exist.
●​ Ex., sale of ●​ Ex., Threats already stopped, or the
illegal drugs minor already became an adult.

Vices of Consent
1.​ Mistake – wrong understanding of Rescission Annulment
facts
●​ Ex., A buys fake gold believing it ●​ Basis is lesion ●​ The basis here is
is real ●​ Defect is external vitiated consent
2.​ Violence – Physical force is used or extrinsic or incapacity to
●​ Ex., A is beaten to force signing ●​ Action: subsidiary consent.
●​ Plaintiff may be a ●​ The defect here is
3.​ Intimidation – Threat or fear forces
party or a third intrinsic (in the
consent person meeting of the
●​ Ex., “Sign this or I’ll harm your ●​ There must be minds.)
family.” damage to the ●​ The action is
4.​ Undue Influence – Improper use of plaintiff principal.
power or relationship ●​ If plaintiff is ●​ Plaintiff must be
indemnified, a party to the
●​ Ex., Caretaker pressures old
rescission cannot contract (whether
patient to transfer property
prosper bound principally
5.​ Fraud – Deception used to obtain ●​ Compatible with or subsidiarily.)
consent the perfect ●​ Damage to the
●​ Ex., Seller lies about a car’s validity of the plaintiff is
condition contract immaterial.
●​ To prevent ●​ Indemnity here is
rescission, no bar to the
Ratification – the act of confirming,
ratification is not prosecution of
approving, ot curing a voidable contract for it
requires the action.
to be fully valid ●​ Here, a defect is
– After ratification, the defect is presupposed
removed and annulment is no longer possible ●​ To prevent
annulment,
Requisites of Ratification ratification is
required.

1.​ The contract has a defect that can still

be cured
●​ The contract must be voidable, not Rescission
void. 1.​ Rescission is based on damage, loss,
●​ Ex., Contract signed through or prejudice suffered by a party or
intimidation → can still be ratified. third person.
2.​ Ratification must be made by the ●​ Ex., Property sold at a very
proper person unfairly low price.
●​ The person whose consent was 2.​ The problem is outside the contract
affected must be the one to confirm it. itself, not in consent.
●​ Ex., If a minor entered the contract, ●​ Ex., Contract hurts creditors or
the minor must ratify it after becoming causes financial loss.
of age. 3.​ Rescission is a last resort remedy.
 ●​ It can only be used if: there is no
other legal remedy available. Article 1391.
4.​ The one filing rescission can be: one
The action for annulment shall be
of the contracting parties, or even a
brought within four years. This period shall
third person affected by the
begin:
contract.
In cases of intimidation, violence or ​
●​ Ex., A creditor may ask rescission.
​ undue influence, from the time the defect ​
5.​ The person asking rescission must
​ of the consent ceases.
prove: actual injury or prejudice.
●​ Without damage → no rescission.
In case of mistake or fraud, from the ​
6.​ If the damage was already paid or
repaired, → rescission is no longer
​ time of the discovery of the same.
needed.
7.​ The contract is valid from the start. And when the action refers to contracts
It is rescinded not because it is entered into by minors or other incapacitated
defective, but because it causes persons, from the time the guardianship ceases.
damage. (1301a)
8.​ Unlike voidable contracts, rescission
is not prevented by ratification. The Explanation:
issue is damage or prejudice, not ●​ An action to annul a voidable
defective consent. contract must be filed within 4 years.
●​ The 4-year period starts depending on
Annulment the defect involved:
1.​ Annulment happens when: consent ○​ Intimidation, Violence, or Undue
was defective, or a party could not Influence
legally give consent. ■​ The 4 years starts when the
●​ Ex., fraud intimidation mistake force, threat, or pressure ends.
minor entering a contract ■​ Ex., A was threatened into
2.​ The defect is inside the contract signing a contract in 2020
itself, specifically in the meeting of ➔​ Threats stopped in 2022
minds or consent. ➔​ 4 years counted from 2022.
3.​ Annulment is a direct remedy, not ○​ Mistake or Fraud
just a last resort. A person can ■​ The 4 years starts when the
immediately file an action for mistake or fraud is discovered
annulment. ■​ Ex., A discovers in 2025 that
4.​ Only a person involved in the the “gold” he bought is fake.
contract can ask for annulment. ➔​ 4 years counted from
Third persons generally cannot file it. discovery in 2025
5.​ Actual financial loss is not necessary. ○​ Minors or Incapacitated Persons
As long as consent was defective, the ■​ The 4 years starts when
contract may be annulled. guardianship or incapacity
6.​ Even if damages were already paid, ends
the action for annulment may still ■​ Ex., A minor entered a contract
continue. at 17
7.​ In annulment, there is already a ➔​ A turns 18 in 2026.
defect in consent or capacity. ➔​ 4 years counted from 2026
8.​ If the injured party ratifies or
confirms the contract → annulment
is no longer allowed.

Example:
➔​ Minor enters into a contract
➔​ Person signs because of threats
➔​ Person was deceived by fraud
 Action for annulment of contract vs. Action Example:
for nullity of contracts A was forced to sign a contract.
Later, after the threats stopped, A voluntarily
accepts the contract and continues following it.
Action for Action for nullity of
➔​ This is ratification
annulment of contracts
➔​ A can no longer file annulment
contract

●​ An action for ●​ An acttion for Effects of Ratification

annulment of declaration of 1.​ The action to annul a voidable contract
contract is a nullity of is extinguished; hence, the contract
court case asking contract is a becomes valid.
the court to court case ●​ After ratification:
cancel a asking the court ○​ the injured party loses the right
voidable to declare that a
to file an action for annulment
contract contract is void
●​ This happens from the ○​ the voidable contract can no
when: beginning longer be questioned on the
○​ a party cannot ●​ This happens ground of the defect
legally give when: 2.​ The contract is cleansed of its defect
consent, or ○​ Contract is from the beginning
○​ consent was illegal, or
●​ Ratification cleanses the contract of
affected by: ○​ Its cause,
its defect from the moment it was
■​ Mistake object, or
■​ Intimidation consideration is constituted
■​ Violence against: ●​ The contract is considered valid
■​ Undue ■​ Law from the beginning, not only from
influence ■​ Morals the time of ratification
■​ Fraud ■​ Good
●​ The contract is costumes
still valid and ■​ Public order Article 1393.
binding at first ■​ Public policy
●​ It stays valid ●​ A void contract Ratification may be effected expressly or
until the court has no legal tacitly. It is understood that there is a tacit
cancels it effect from the
ratification if, with knowledge of the reason which
●​ The contract may start
still be ratified ●​ It is considered renders the contract voidable and such reason
(confirmed) as if no contract having ceased, the person who has a right to
●​ The case must be existed invoke it should execute an act which necessarily
filed within 4 ●​ It cannot be implies an intention to waive his right. (1311a)
years ratified or
confirmed
Explanation:
●​ An action for
nullity is ●​ Express Ratification
imprescriptible ○​ The person clearly states that he
→ meaning it can accepts or confirms the contract
be filed anytime ○​ Ex., A says, “I confirm and accept
the contract.”
●​ Tacit (Implied) Ratification
○​ Ratification is implied through
actions
Article 1392. ○​ This happens when:
Ratification extinguishes the action to ■​ the person knows the defect,
■​ the defect already ended, and
annul a voidable contract. (1309a)
■​ the person acts in a way
showing acceptance of the
Explanation:
contract.
●​ When a voidable contract is ratified
(confirmed), the right to file a case for
annulment is lost.
Example: Explanation:
A was intimidated into signing a contract. ●​ When a voidable contract is ratified, it
After the threats stop, A continues paying and is treated as if it was valid from the
following the contract voluntarily very beginning
➔​ This is tacit ratification ●​ Ratification removes all defects
●​ The contract is considered clean from
the start (retroactive effect)
Article 1394.
Ratification may be effected by the Example:
guardian of the incapacitated person. (n) A minor signs a contract in 2024.
In 2026, after becoming of age, A ratifies it.
Explanation: ➔​ The contract is considered valid from
●​ If a contract is voidable because a 2024, not 2026.
person is incapacitated (like a minor or
insane person), the guardian may
ratify or confirm the contract for that
Article 1397.
person
●​ The ward can ratify provided he The action for the annulment of
becomes capacitated contracts may be instituted by all who are thereby
obliged principally or subsidiarily. However,
Example: persons who are capable cannot allege the
A 16-year-old enters into a contract. incapacity of those with whom they contracted;
The child’s guardian later approves or confirms nor can those who exerted intimidation, violence,
it. or undue influence, or employed fraud, or caused
➔​ The contract is ratified mistake base their action upon these flaws of the
contract. (1302a)

Explanation:
Article 1395.
●​ This article tells who can file an
Ratification does not require the action for annulment and who is not
conformity of the contracting party who has no allowed to use certain defects as a
right to bring the action for annulment. (1312) defense
○​ Who can file annulment
Explanation: ■​ An action for annulment can be
●​ Ratification only needs the approval of filed by anyone who is bound by
the person who has the right to the contract, whether:
annul the contract ★​ principal party (main
●​ The other party does not need to obligation), or
agree. ★​ subsidiary party (secondary
●​ The consent of the party who is in bad obligation, like guarantor)
faith is not required ●​ A. Limitations (Who cannot use
certain defenses)
Example: ○​ Capable persons cannot use
A minor signs a contract with B. incapacity
Only the minor (or guardian) can ratify the ■​ A person who is legally capable
contract. cannot claim:
➔​ B’s consent is not required ★​ “The other party was
incapable.”
■​ Ex., An adult cannot avoid a
Article 1396. contract by saying the other
Ratification cleanses the contract from party was a minor
all its defects from the moment it was constituted.
(1313)
 ●​ B. Wrongdoers cannot benefit from
their own fault
○​ A party who caused the defect Article 1398.
cannot use it as a ground for
An obligation having been annulled, the
annulment, such as:
contracting parties shall restore to each other the
■​ intimidation things which have been the subject matter of the
■​ violence contract, with their fruits, and the price with its
■​ undue influence interest, except in cases provided by law.
■​ fraud
■​ mistake they caused
In obligations to render service, the value
thereof shall be the basis for damages. (1303a)
○​ Ex., A forces B to sign a contract.
➔​ A cannot later ask annulment Explanation:
based on that intimidation. ●​ When a contract is annulled, both
parties must return what they
General Rule: received from each other
●​ Main Rule:
●​ The action for the annulment of
○​ Each party must give back:
contracts may be instituted by all who ■​ the thing received,
are thereby obliged principally or ■​ the fruits (income, benefits),
subsidiarily. and
■​ the price with interest (if money
was paid)
Requisites:
●​ When a voidable contract is annulled,
1.​ The plaintiff must have an interest in it is treated as if it never existed
the contract; and ○​ So the law requires:
2.​ The action must be brought by the ■​ both parties to return what
victim and not the party responsible they received
■​ to bring them back to their
for the defect.
original situation before the
contract
Exception:
●​ Even a stranger (not a party to the Example:
contract) can file annulment if: A sells a car to B for ₱200,000
Later, the contract is annulled
○​ the contract directly affects or
➔​ B returns the car + any benefits from
harms their rights, and it
○​ they can prove they will suffer ➔​ A returns the ₱200,000 + interest
real damage or prejudice.

Example:
Article 1399.
A creditor is trying to collect money from B
B transfers all his property to C to avoid When the defect of the contract consists
payment. in the incapacity of one of the parties, the
➔​ Even if the creditor is not part of the incapacitated person is not obliged to make any
transfer contract: restitution except insofar as he has been benefited
➔​ the creditor can file annulment (acción by the thing or price received by him. (1304)
pauliana) because he is prejudiced.
Explanation: Example:
●​ If a contract is annulled because one A sells a phone to B. The contract is annulled.
party is incapacitated (like a minor or B loses the phone because he was careless
insane person), the law gives special ➔​ B must:
protection to that person. ➔​ pay the value of the phone when it
●​ Main Rule: was lost
○​ The incapacitated person does ➔​ return any benefits from it (if any)
NOT have to return everything ➔​ pay interest
received in the contract.
○​ They only need to return what they
actually benefited from Article 1401.
●​ If they gained something useful or The action for annulment of contracts
kept value, they must return it shall be extinguished when the thing which is the
●​ If they lost or wasted it without object thereof is lost through the fraud or fault of
benefit, they are not required to return
the person who has a right to institute the
it
proceedings.

Example:
If the right of action is based upon the
A minor receives ₱10,000 from a contract and
incapacity of any one of the contracting parties,
spends:
the loss of the thing shall not be an obstacle to the
➔​ ₱6,000 on school (benefit)
success of the action, unless said loss took place
➔​ ₱4,000 on unnecessary things (no
through the fraud or fault of the plaintiff. (1314a)
benefit left)
➔​ The minor only returns the ₱6,000
Explanation:
(benefit received)
●​ This article explains when the right to
file annulment is lost (extinguished).
●​ General Rule: The action for
Article 1400. annulment is lost if:
○​ the thing involved in the contract
Whenever the person obliged by the is lost, and
decree of annulment to return the thing can not ○​ the loss happened because of the
do so because it has been lost through his fault, fault or fraud of the person who
he shall return the fruits received and the value of wants to file annulment
the thing at the time of the loss, with interest from ○​ Meaning: You cannot annul a
the same date. (1307a) contract if you caused the loss of
the object.
Explanation: ○​ Ex., A wants to annul a contract
●​ If a person is ordered by the court to and return a car. But A destroys
return something after annulment, but
the car through negligence.
the thing is lost because of their
fault, the law requires them to pay ➔​ A can no longer file annulment
instead. ➔​ because he caused the loss
●​ Main Rule: ●​ Exception: If annulment is based on
○​ If the thing cannot be returned incapacity (like a minor or insane
because it was lost due to the fault person):
of the person, they must: ○​ The loss of the object does NOT
■​ pay the value of the thing at the stop annulment
time it was lost ○​ UNLESS the loss was caused by
■​ return the fruits the fault or fraud of the
(benefits/income) received incapacitated person himself
■​ pay interest from the time of ○​ Ex., A minor enters a contract and
loss the item is later lost.
 ➔​ The minor can still ask for
annulment CHAPTER 8​
➔​ even if the item is gone
Unenforceable Contracts
■​ BUT if the minor himself
intentionally destroyed it:
➔​ annulment may be denied Article 1403.
The following contracts are
unenforceable, unless they are ratified:
Article 1402.
(1) Those entered into in the name of ​
As long as one of the contracting parties ​ another person by one who has been ​
does not restore what in virtue of the decree of ​ given no authority or legal ​
annulment he is bound to return, the other cannot ​ representation, or who has acted beyond ​
be compelled to comply with what is incumbent ​ his powers;
upon him. (1308)
(2) Those that do not comply with the ​
Explanation: ​ Statute of Frauds as set forth in this ​
●​ This article means “no one should be ​ number. In the following cases an
forced to return unless the other also agreement hereafter made shall be
returns.” unenforceable by action, unless the
●​ Main Rule: same, or some note or memorandum, ​
○​ If a contract is annulled: thereof, be in writing, and subscribed by
■​ both parties must return what the party charged, or by his agent;
they received evidence, therefore, of the agreement
■​ but one party cannot be forced cannot be received without the ​
to return if the other party has writing, or a secondary evidence of its
not yet returned his own contents: ​
obligation ​ (a) An agreement that by its ​
●​ It is a rule of mutual fairness ​ terms is not to be performed ​
●​ Both must return at the same time or ​ within a year from the making ​
not at all ​ thereof;
(b) A special promise to answer ​
Example: ​ for the debt, default, or ​
A sold a phone to B for ₱10,000. The contract is ​ miscarriage of another;
annulled (c) An agreement made in ​
➔​ B will not return the phone yet ​ consideration of marriage, ​
➔​ then A cannot be forced to return the ​ other than a mutual promise to ​
₱10,000
​ marry;
➔​ They must return simultaneously
(d) An agreement for the sale of ​
​ goods, chattels or things in ​
​ action, at a price not less than ​
​ five hundred pesos, unless the ​
​ buyer accept and receive part of ​
​ such goods and chattels, or the ​
​ evidences, or some of them, of ​
​ such things in action or pay at ​
​ the time some part of the ​
​ purchase money; but when a ​
​ sale is made by auction and ​
​ entry is made by the auctioneer ​
​ in his sales book, at the time of ​
​ the sale, of the amount and kind ​
 ​ of property sold, terms of sale, ​ ●​ Ex., A tells B: “If C cannot pay,
​ price, names of the purchasers ​ I will pay.”
​ and person on whose account ​ ➔​ Must be in writing
​ the sale is made, it is a sufficient ​
c.​ Agreement made in consideration
​ memorandum;
(e) An agreement for the leasing ​ of marriage
​ for a longer period than one ​ ●​ Agreements connected to
​ year, or for the sale of real ​ marriage (except promise to
​ property or of an interest ​ marry)
​ therein; ●​ Ex., A promises to give land to
(f ) A representation as to the ​
B if B marries C.
​ credit of a third person.
➔​ Must be in writing
(3) Those where both parties are d.​ Sale of goods worth ₱500 or more
incapable of giving consent to a contract ●​ Sale of movable property
costing at least ₱500 must be
Explanation:
written
●​ They are not void, but they cannot be
enforced in court unless they are ●​ Ex., A orally sells a laptop
ratified worth ₱20,000 to B
1.​ Unauthorized Contracts ➔​ Unenforceable unless:
●​ A person acts for another without ➔​ written, or
authority or goes beyond his
➔​ buyer already paid part,
authority
●​ Ex., A sells B’s car without B’s or

permission ➔​ buyer already received

➔​ The contract is the item.

unenforceable unless B e.​ Lease longer than 1 year or sale of

later approves it (ratifies it) real property

2.​ Contracts Covered by the Statute of ●​ Long-term lease or sale of land

Frauds must be written

●​ Certain agreements must be in ●​ Ex., Oral sale of land

writing to be enforceable in court. ➔​ Unenforceable without

●​ If not written they cannot be writing

enforced by action. f.​ Representation about another

a.​ Agreement not to be performed person’s credit

within 1 year ●​ Statements guaranteeing

●​ If the agreement cannot be another person’s financial

completed within one year, it reliability

must be written. ●​ Ex., A tells B: “C is financially

●​ Ex., A promises to work for B trustworthy; lend him money.

for 3 years ➔​ Must be in writing

➔​ Must be in writing 3.​ Both parties incapable of consent

b.​ Promise to answer for another’s ●​ If both parties cannot legally

debt consent, the contract is

●​ One person promises to pay unenforceable.

another person’s debt

Example: Statute of Frauds – a rule requiring certain
Two minors enter into a contract. kinds of contracts to be in writing so they can
➔​ Contract is unenforceable be enforced in court.

Unenforceable Contracts – a contract that is

Article 1404.
generally valid, but it cannot be enforced in
court because of a legal or technical defect Unauthorized contracts are governed by
article 1317 and the principles of agency in Title
-​ The following contracts are
X of this Book
unenforceable, unless they are ratified:
1.​ Unauthorized Contracts Explanation:
●​ Contracts made by a ●​ This article means that unauthorized
person: contracts are governed by:
○​ without authority, or ○​ Article 1317, and
○​ the rules on agency
○​ beyond the authority
●​ If a person makes a contract for
given another person without authority, the
●​ Ex., A sells B’s land without rules on agents and representatives
permission will apply
➔​ Unenforceable unless
Article 1317 Rule:
B approves it
No person may contract in the name of
2.​ Contracts that violate the another without:
Statute of Frauds ●​ authority, or
●​ Certain agreements must ●​ legal representation
be in writing ●​ If he does:
○​ the contract is unenforceable unless
●​ If only oral:
ratified
○​ cannot be enforced in
court. Example:
●​ Ex., oral sale of land & oral A sells B’s property without permission.
agreement not performable ➔​ The contract is governed by agency
within 1 year rules
3.​ Contracts where both parties ➔​ If B later approves it, the contract
cannot give consent becomes valid
●​ Both parties are legally
incapacitated
Article 1405.
●​ Ex., Two minors enter into a
contract Contracts infringing the Statute of
➔​ Unenforceable Frauds, referred to in No. 2 of article 1403, are
ratified by the failure to object to the presentation
of oral evidence to prove the same, or by the
Unauthorized Contract – Those entered into in acceptance of benefit under them.
the name of another person by one who has
been given no authority or legal Explanation:
representation, or who has acted beyond his ●​ Contracts that violate the Statute of
powers. Frauds can still become valid or
enforceable through ratification
1.​ Failure to object to oral evidence
 ●​ If a person does not object ➔​ B can require A to sign a public
when oral testimony is document
presented in court to prove the
contract, the contract is
Article 1407.
considered ratified.
●​ Ex., A oral agreement for sale In a contract where both parties are
incapable of giving consent, express or implied
of land is presented in court.
ratification by the parent, or guardian, as the case
➔​ B does not object to the
may be, of one of the contracting parties shall give
witness testimony the contract the same effect as if only one of them
➔​ B is considered to have were incapacitated.
ratified the contract.
2.​ Acceptance of benefits If ratification is made by the parents or
guardians, as the case may be, of both contracting
●​ If a person accepts benefits
parties, the contract shall be validated from the
from the contract, this also inception.
ratifies it.
●​ Ex., A orally agrees to sell Explanation:
goods to B ●​ This article talks about contracts where
both parties are incapacitated.
➔​ B receives and uses the
1.​ Only one side ratifies
goods ●​ If the parent or guardian of only
➔​ The contract becomes one party ratifies the contract:
enforceable ○​ the contract will be treated as if
only one party was
incapacitated
Parol Evidence – evidence of oral statements
○​ Meaning: the contract becomes
voidable, not unenforceable
●​ Ex., Two minors enter into a
Article 1406.
contract.
When a contract is enforceable under the
➔​ Only A’s parent approves it
Statute of Frauds, and a public document is
➔​ The contract is now treated as
necessary for its registration in the Registry of
Deeds, the parties may avail themselves of the if only B is incapacitated
right under Article 1357 2.​ Both sides ratify
●​ If the parents or guardians of both
Explanation: parties ratify the contract:
●​ If a contract is already valid and ○​ the contract becomes fully valid
enforceable under the Statute of
from the very beginning
Frauds, but the law requires it to be in
a public document for registration, the ●​ Ex., Two minors make a contract.
parties can demand that the contract ➔​ Later, both parents approve it
be put into the proper form ➔​ The contract is valid from the
●​ This follows Article 1357 start
●​ One parent/guardian ratifies → contract
Example:
becomes like a voidable contract
A sells land to B through a written private
●​ Both parents/guardians ratify →
agreement.
contract becomes fully valid from the
The sale is valid, but to register the land title, a
beginning
notarized deed is needed
​
Article 1408.
Unenforceable contracts cannot be
assailed by third persons.

Explanation:
●​ Only the parties involved in an
unenforceable contract can question
or attack it.
●​ Third persons or strangers cannot
assail it.
●​ An unenforceable contract affects
mainly the contracting parties, so
outsiders generally have no right to
challenge it.

Example:
A and B make an oral contract covered by the
Statute of Frauds
➔​ Only A or B may question its
enforceability
➔​ C, who is not part of the contract,
cannot attack it.

CHAPTER 9​
Void and Inexistent Contracts