CHAPTER 1 BUSINESS LAW REVIEW

The Law on Obligations and Contracts

Is defined as a kind of positive law which deals with the nature and sources of obligations as well
as the rights and duties arising from agreements in contracts
ARTICLE 1156
An obligation is a juridical necessity to give, to do or not to do.
OBLIGATION
A legal duty, however created, the violation of which may become the basis of an action of law
KINDS OF OBLIGATIONS
CIVIL OBLIGATION
A juridical necessity to give, to do or not to do
It gives the creditor the right of action to compel the performance of obligation
NATURAL OBLIGATION
One which is based on equity and natural law (not on positive law) and gives no right of
action to compel its performance to but after voluntary fulfillment by the obligator, it
authorizes the retention of what has paid or delivered
ELEMENTS OF AN OBLIGATION (ACTIVE SUBJ/PASSIVE SUBJ/PRESTATION/JURIDICAL TIE)
1. ACTIVE SUBJECT (CREDITOR OR OBLIGEE)
The person who has the right to demand performance of the obligation
2. PASSIVE SUBJECT (DEBTOR OR OBLIGATOR)
The person who has the duty to perform the obligation He is the person from
whom the obligation is demandable.
3. PRESTATION
The subject matter of the obligation
4. JURIDICAL TIE
It is the reason why an obligation exists. It is the tie that binds the parties to an
obligation. It is also called legal tie, vinculum or vinculum juris.
SOURCES OF AN OBLIGATION
(LAW/CONTRACT/QUASI-CONTRACT/DELICT/QUASI-DELICT)
1. LAW
Reasonable rule of action, just and obligatory by competent authorities for
common observance and benefit
2. CONTRACT
Meeting of two minds between two person
3. QUASI-CONTRACT
A juridical relation which gives rise to the payment of indemnity for a certain
lawful, voluntary and unilateral act in order to prevent unjust enrichment
 4. DELICT
Generally, in delicts or acts or omissions punished by law, the guilty party is not
only criminally but also civilly liable because the commission of crime causes not
only moral evil against society but also material damage to the offended party

NEGOTIORUM GESTIO
The voluntary management of the abandoned property of business of another without
the knowledge and consent of the latter
SOLUTION ENDIBITI
Obligation to return what has been received by mistake when there is no right to the
thing received
OFFICIOUS MANAGER
Person who manages the property or business of another without authority

CHAPTER 2
OBLIGATION TO GIVE (REAL OBLIGATION)
An obligation to give may consist in the giving of a determinate or indeterminate thing.
 DETERMINATE OR SPECIFIC THING
A determinate or specific thing is one is particularly designated and physically
segregated from all others of the same class
 INDETERMINATE OR GENERIC
A thing, which still belongs to a class or genus, is an indeterminate or generic thing
 DILIGENCE OF A GOOD FATHER OF A FAMILY
In obligations to give (real obligations), the obligor has the incidental duty to take care
of the thing due with the diligence of a good father of a family pending delivery. The
phrase has been equated with ordinary care or that diligence which an average (a
reasonably prudent) person exercises over his own property.
OBLIGATION TO DO (POSITIVE PERSONAL OBLIGATION)
In an obligation to do, the debtor must do it properly in accordance with the agreement; he shall
be liable for damages
OBLIGATION TO NOT DO (NEGATIVE PERSONAL OBLIGATION)
When the obligation consists is not doing, and the obligor does what has been forbidden him, it
shall be undone at his expense

SOURCES OF LIABILITY FOR DAMAGES

(FRAUD/NEGLIGENCE/DELAY/CONTRAVENTION OF THE TENOR OF THE OBLIGATION)
 1. FRAUD
It is an intentional deception to evade the performance of an obligation. The
kind of fraud referred to herein is incidental fraud and the remedy of the injured
party is to demand for damages.
 CASUAL FRAUD
It refers to insidious words or machinations employed by one party to induce to
enter into contract, without which he would not have agreed to. The
Remedy of the injured party in case of casual fraud is to file action for the
annulment of the contract.
When a person has a duty under the law to reveal something but he did not disclose it,
he is considered guilty of fraud (fraud by concealment) and he shall be liable for
damages.
2. NEGLIGENCE
The omission of that diligence required by the nature of an obligation and corresponds
to the circumstances of the person, time and place
The general rule is: THERE IS NO LIABILITY FOR FORTUITOUS EVENT
 FORTUITOUS EVENT
Those events which could not be foreseen, or which foreseen, were inevitable
3. DELAY (OR DEFAULT)
It is the non-performance of the obligation after demand. Generally, the debtor incurs
no delay even if he fails to perform his obligation on the date agreed upon, unless the
creditor makes demand
The general rules is: NO DEMAND NO DELAY
4. CONTRAVENTION OF THE TENOR OF THE OBLIGATION
As previously discussed, the debtor must comply with what is incumbent upon him; otherwise,
he shall liable for damages. This is in accordance with the provisions that the contract binds both
contracting parties; and that the debtor must honestly and faithfully comply with what has been
agreed upon

CHAPTER 3
DIFFERENT KINDS OF OBLIGATION
 PURE OBLIGATION
 CONDITIONAL OBLIGATION
 OBLIGATION WITH A PERIOD
 JOINT OBLIGATION
 SOLIDARY OBLIGATION
 ALTERNATIVE OBLIGATION
 FACULTATIVE OBLIGATION
 DIVISIBLE OBLIGATION/ INDIVISIBLE OBLIGATION
 OBLIGATION WITH A PENAL CLAUSE
PURE OBLIGATION
One which is not subject to a period or condition and is demandable as once
An obligation is also demandable at once if it is subject to a resolutory condition or period.
CONDITIONAL OBLIGATION
One the demandability of which subject to a future and uncertain event or a part event
unknown to the parties
KIND OF CONDITION:
PROTESTATIVE CONDITION- once which is dependent upon the sole will of the debtor. It is void
and the obligation dependent upon it shall also be void.
OBLIGATION WITH A PERIOD
A period is a certain space of time which determines the effectivity or extinguished of an
obligation

DISTINCTIONS BETWEEN PERIOD AND CONDITION

a) Period is certain, while condition is uncertain;

b) Period is always future, while condition may refer to apart event unknown to the parties; and
c) Potestative period is valid, while potestative condition is void.

JOINT OBLIGATION and SOLIDARY OBLIGATION

Joint and Solidary obligations occur when there are several debtors or several creditors in one
and the same obligation.
JOINT
If there are several debtors or creditors in an obligation, it is always presumed that the
obligation is
In a joint obligation each of the debtors shall be liable only for his share of the debt and each of
the creditors is entitled only to his share of the credit.
The rule here is “TO EACH HIS OWN.”
Solidary obligation
When it is stipulated by the parties, when the law declares solidarity, and when the nature of
the obligation requires it (the code is SLN).
In a solidary obligation, the co-debtor’s act, fault, misfortune or benefit is the act, fault,
misfortune or benefit of all. In case the obligation has not been performed because of the
negligence or fault of a solidary debtor, the creditor can demand performance or payment of
damages from one or some or all of them.
ALTERNATIVE OBLIGATION (CREDITOR)
One where there are several prestations but the complete performance of one is sufficient
satisfaction of the obligation. The right of choice generally belongs to the debtor, but it may be
expressly granted to the creditor. The creditor cannot be compelled to accept part of one and
part of the other
FACULTATIVE OBLIGATION (DEBTOR)
One where there is only one prestation agreed upon but the debtor is given the right to render
another in substitution. In this kind of obligation, only the debtor has the right of choice, which
right cannot be transferred to the creditor
DIVISIBLE AND INDIVISIBLE OBLIGATIONS
Refer to the object or subject matter of the obligations.
DIVISIBLE- If the prestation is capable of partial performance
INDIVISIBLE- otherwise, the obligation is indivisible.
To repair a car is a divisible obligation; while to deliver a car is an indivisible obligation
OBLIGATION WITH A PENAL CLAUSE
One with an accessory obligation whereby the debtor assumes a greater liability in case of non-
performance if the principal obligation
Its purposes are:
a) to insure performance of an obligation
b) to substitute as indemnity for damages or interest; and
c) to penalize the debtor
EXTINGUISHMENT OF OBLIGATION
Civil obligations are extinguished by:

 Payment or performance;
 Loss of the thing due;
 Remission or condonation of debt;
 Merger or Confusion of rights
 Compensation; and
 Novation

The other causes for the extinguishment of obligations are annulment, rescission, fulfillment of
a resolutory condition and prescription.

 PAYMENT OR PERFORMANCE
Payment means not only the delivery of money but the performance in any manner of an
obligation

SPECIAL FORMS OF PAYMENT

 DATION IN PAYMENT
 PAYMENT BY CESSION
 APPLICATION OF PAYMENT
 TENDER OF PAYMENT AND CONSIGNATION
DATION IN PAYMENT
It is the alienation of property to the creditor in satisfaction of a debt in money. This is
governed by the law on sales.
Payment by cession
It is the transfer or assignment of all insolvent debtors’ properties to all his creditors, so
that from the proceeds thereof, the creditors may obtain payment of their credits.
Its requisites are:
 There must be two or more creditors;
 The debtor is insolvent, totally or partially;
 There must be consent from the creditors;
The distinctions between Dation in payment and payment by cession are:
Dation in payment
1. There is only one creditor;
2. Ownership of the property is transferred to the creditors;
3. Not all properties of the debtor are transferred;
4. Debtor is not insolvent; and
5. Debtor’s obligation is extinguished.
Payment by cession
1. There are two or more creditors;
2. Properties are only assigned to the creditors;
3. All properties of the debtors are transferred.
4. Debtor is insolvent; and
5. Debtor is released from liability up to the extent of the proceeds of the sales.
The purpose of the Insolvency Law (ActNo.1956, as amended) is to bring about an equitable
distribution of the insolvents assets among his creditors and to enable him to begin his
commercial and social life a new with the exempt property remaining with him.

APPLICATION OF PAYMENT
It is the designation of the debt to which payment should be applied when a debtor has several
debts of the same kind in favor of the same creditor.

Its requisites are:

1. There must be one debtor and one creditor;

2. There must be two or more debts of the same kind;
3. The debts to which the payment is applied must be due; and
4. The payment is not adequate to cover all the debts
TENDER OF PAYMENT AND CONSIGNATION
Tender of payment is the offer of payment made by the debtor to the creditor coupled
with a demand that the creditor accepts the same. To be valid it must comply with the
rules on payment.
Consignation refers to the deposit of the thing due in competent court when the
creditor refuses to accept, without just cause, the payment validity offered by the
debtor.
 Loss of the thing due
A thing is considered lost when it perishes, goes out of commerce, or disappears in such a
way that its existence is unknown or it can no longer be recovered. Only specific or
determinate things can be lost. If the specific thing is lost without the debtor’s fault of due
to fortuitous event, the obligation is extinguished except: (the Code is SLN)
 Condonation or remission of debt
It is the renunciation or waiver of the creditor’s right to collect payment. It is essentially
gratuitous and it may be express or implied. The cancellation of the promissory note or the
return of the check to the debtor is examples of implied remission
 Confusion or merger of rights
It is an extinguishment of an obligation where by one person the debtor and creditor of one and the
same obligation.
 Compensation
It takes place when two persons, in their own right, are creditors and debtors of each other. It may
be legal or voluntary; it may total or partial.
 Novation
It is the change of the obligation by another resulting in its extinguishment.

It may be charged of modified:

a) By changing the object or principal condition;

b) By substitution (change of debtor);or

c) By subrogation (change of creditor)

CHAPTER 4
Article1305 A contract is a meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service.
CHARACTERISTICS OF A CONTRACT

(1) Mutuality of Contracts

Its validity and performance cannot be left to the will of only one of the parties.
(2) Autonomy of Contracts
Parties are free to stipulate terms and provisions in a contract, as long as these terms and
provisions are not contrary to law, morals, good customs, public order and public policy.

IMPORTANT DISTINCTIONS BETWEENOBLIGATION AND CONTRACT

1. Obligation is the effect of contract; while contract is the cause(juridical tie) of an obligation; and
2. There can be an obligation without a contract, but there can be no contract without obligation.

ELEMENTSOFCONTRACT

1. NATURAL ELEMENTS
Those which are inherent in some contracts, such as warranty against eviction and against
defects in a contract of sale
2. ESSENTIAL ELEMENTS
Those which must be present in order that there will be a valid contract the essential
elements are consent, object and cause or consideration
3. ACCIDENTAL ELEMENTS
Those matters stipulated by the parties to modify the effects of a contract, such as payment
of interest in a contract of loan (ex: payment of interest/ condition/ penalties/ interest/
other charger)
STAGES OF CONTRACT
1. PREPARATION or conception is the bargaining stage. The offer and counter offer occur
in this stage. It is the stage when the parties are preparing to enter into contract
2. PERFECTION OR BIRTH is the meeting of the minds between the parties regarding the
object and cause of the contract. Here, the acceptance of the offer must be absolute. If
the acceptance is qualified, it only constitutes a counter-offer.
3. CONSUMMATION, TERMINATION OR DEATH is the time when the parties have
performed their respective obligations and there is nothing more to be done

OPTION MONEY- those are the guarantee money

EARNEST MONEY- it is the partial payment

Consent- conformity of will

Object- subject matter

Cause- reason of the contract

CHAPTER 5
BASIC PRINCIPLE OF CONTRACT

FREEDOM OR LIBERTY TO CONTRACT

Means that the parties are free to agree on any terms and conditions they may deem
convenient. This is not absolute. Its limitations are law, morals, good customs, public
order and public policy

OBLIGATORY FORCE

Means that the contract must bind both parties; its validity and compliance cannot be
left to the will of one of them

PERFECTION OF MERE CONSENT

It is the general rule and this contract is called consensual contract. Contract which is
perfected only by delivery is called real contract. There are also contracts which, must
be in writing to be valid and enforceable, like the contract of partnership when
immovable property is contributed to the common fund and contract of sale involving a
parcel of land

MUTUALITY OF CONTRACT

Means that both parties are mutually bound by what they have agreed upon and they
must comply with their agreement with honesty and good faith.

RELATIVITY OF CONTRACT

Means that a contract is binding between the parties, their heirs and assigns

CLASSIFICATION OF CONTRACT
1. CONSENSUAL CONTRACT- is one which is perfected by mere consent of the parties, like sale
and lease (mere contract with consent)
2. REAL CONTRACT is one which is perfected only by delivery, such as deposit, loan
commodatum and pledge; (on delivery)
3. PRINCIPAL CONTRACTS is one the existence of which is not dependent upon any other
contract and it can stand alone itself, like sale and barter;
4. ACCESSORY CONTRACT is one which cannot stand alone by itself and its existence depends
only upon another contract, like pledge, mortgage and guaranty;
5. PREPARATORY CONTRACT is one the perfection of which is not an end but merely a means
by which other contracts may be made, like agency and partnership.
6. ONEROUS CONTRACT is one where there is an exchange of valuable consideration between
the parties, like sale, mortgage, and lease;
7. GRATUITOUS CONTRACT is one which is free or where one of the parties does not give a
valuable consideration, like donation, reward and commodatum;
8. UNILATERAL CONTRACT is one where only one party has an obligations to perform, like
sale, agency and loan;
9. BILATERAL CONTRACT is one where both parties have obligations to perform, like sale,
agency and lease;
10. NOMINATE CONTRACT is one which has a particular name or designation under the Civil
Code, like sale, agency and loan;
11. INNOMINATE CONTRACT is one which has no name or particular designation under the law,
like an agreement between two persons, where by one will repair the house of the other in
consideration of the other’s obligation to give him a second hand car;
12. COMMUTATIVE CONTRACT is one where there is an exchange of consideration between
the parties, which is generally equivalent in value, like sale and lease;
13. ALEATORY CONTRACT is one wherein the performance of the obligation by one or both
parties is dependent upon chance, like gambling and insurance;
14. ORAL CONTRACT is one which is established by word of mouth;
15. WRITTEN CONTRACT is one whose terms and conditions are embodied in a document;
16. EXPRESS CONTRACT is one where the terms and conditions are agreed upon by the parties
orally or in writing; and
17. IMPLIED CONTRACT is one which is establishes based on the conduct of the parties.

ESSENTIAL ELEMENTS OF CONTRACT

CONSENT is the meeting of the offer and the acceptance upon the thing and the cause which
are to constitute the contract

VICES OF CONSENT WHICH MAKE THE CONSENT DEFECTIVE

 INCAPACITY  INTIMIDATION
 MISTAKE  FRAUD
 VIOLENCE  UNDUE INFLUENCE
INCAPACITY

The incapacitated persons (minors, insane and deaf-mutes who do not know how to write)
cannot validly give consent to a contract, except if the objects involved are necessaries, such as
food, clothing, shelter, medicine and education according to the economic standing of the
family. If one of the parties to a contract is incapacitated, the contract is voidable, hence it may
be annulled
Mistake

Means wrong conception of a thing or lack of knowledge with respect to a thing. Such mistake
should refer to the substance of the thing which is the object of the contract, or to those
conditions which have principally moved one or both parties to enter into the contract. Mistake
as to the identity or qualifications of one of the parties will not vitiate consent, unless such
identity or qualifications have been the principal cause of the contract. A simple mistake of
account does not make a contract voidable but the injured party has the right to ask for its
correction

VIOLENCE AND INTIMIDATION

Vitiate consent because it is not freely and voluntarily given. Violence is committed when
serious or irresistible force is employed by one to wrest the consent of another. There is
intimidation when one of the contracting parties is compelled to give his consent by a
reasonable and well-grounded fear of an imminent and grave evil upon his person or property
or upon the person or property of his spouse, ascendants or descendants.

Violence or intimidation makes the contract voidable even if it is employed by a third person,
but a threat to enforce ones just and legal claim through competent authority is not considered
intimidation.

The two important distinctions between violence and intimidation are:

1. Violence is physical; intimidation is mental and emotional; and

2. Violence is actual and immediate; intimidate is remote.

FRAUD (DOLO CAUSANTE)

It refers to the insidious words or machinations employed by one of the contracting parties, which
induced another to enter into contract, which without them, he would not have agreed to. Failure to
disclose facts, when there is a duty to reveal them constitutes fraud.

UNDUE INFLUENCE

It occurs when a person takes improper advantage of his power over the will of another, depriving the
latter of a reasonable freedom of choice. The confidential, spiritual, family and other relations are taken
into consideration in determining undue influence. The fact that one of the parties to the contract is
suffering from mental weakness or ignorant or in financial distress may make the contract voidable on
the ground of undue influence

OBJECT is the subject matter of the contract. The objects of the contract may be things, rights or
services. Future things may be the object of a contract but not future inheritance
CAUSE OR CONSIDERATION is the essential and impelling reason why the parties enter into a
contract. It refers to the prestation to be performed by one in favor of the other, or the things/services
already delivered/rendered, or the liberality of the benefactor. It is an essential requisite of a contract
because generally, a person agrees to give something or render some service to another only if the
other will give or do something in exchange for it.

INTERPRETATION OF CONTRACT (meaning of the terms of a contract)

Interpretation of contract means the determination of the intention of the parties to a contract. It is
necessary only when the terms and stipulation in the contract are ambiguous and not clear. If the terms
of a contract clear and there is no doubt upon the intention of the parties, the literal meaning of its
stipulations shall control.

SIMULATION OF CONTRACT (does not express the true intent of the contract)

It is declaration of a fictitious agreement, deliberately made by the parties in order to produce the
appearance of a juridical act which does not exist or is different from their true agreement. It is feigning
that which is not true. It may be absolute or relative.

Absolutely simulated contract is purely fictitious and the parties do not intend to be bound by their
agreement. A contract which is absolutely simulated or fictitious is inexistent (void) because it lacks the
essential requisites of consent, object and cause.

Relatively simulated contract is one where the parties only hide or conceal their true agreement. The
contract, in this case, is valid as to their true agreement

CHAPTER 6
REFORMATION

The process rewriting the instrument in order to express the true agreement of the parties
when what is embodied is different from their intention. In reformation, there is already a
meeting of the minds between the parties to a contract but their true intention is not
expressed in the document by reason of fraud, mistake, accident or inequitable conduct. If
mistake, fraud, accident or inequitable conduct prevented the meeting of the minds between
the parties, the proper remedy is not reformation but annulment of the contract.

This remedy is not allowed only before the contract has been enforced by the party who has
the right to ask for reformation. Wills, simple donation inter vivos no condition is imposed and
void contracts cannot reformed.

KINDS OF DEFECTIVE CONTRACTS

(RECISSIBLE/VOIDABLE/ENFOREABLE/VOID (INEXISTENT) CONTRACT)
The contract is valid when the three (3) essential elements of CONSENT, OBJECT AND CAUSE
are not defective.

Rescissible contracts

In rescissible contracts, there are no defects in the essential elements of a contract but damage
or injuries are suffered by another person

Rescission is the cancellation and contract and the return of the parties to their original
position as if no contract has been entered into. It is subsidiary remedy which will only be
allowed if the injured party has no other means to recover the damage done.

Voidable contract is one wherein the consent of one of the parties is defective because of
incapacity, mistake, violence, intimidation, fraud (dolo causante) and undue influence.

A voidable contract may be ratified, and once ratified it is cleansed of all its defects and the
right of action to annul it is extinguished. RATIFICATION is act or means by virtue of which
efficacy is given to a contract which suffers from a vice of curable nullity.

Void or inexistent contract - is one where the object or cause is defective (void) or where one,
some or all of the essential elements of a contract are missing (inexistent). This kind of contract
cannot be ratified and it cannot assail by a third person whose interests are not directly
affected.

CHAPTER 7
Voidable contract is one wherein the consent of one of the parties is defective because of
incapacity, mistake, violence, intimidation, fraud (dolo causante) and undue influence.

The following contracts are voidable or annullable, even though there may have been no
damage to the contracting parties:

(1) Those where one of the parties is incapable of giving consent to a contract;

(2) Those where the consent is vitiated by mistake, violence, intimidation, undue
influence or fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are
susceptible of ratification

Ratification extinguishes the action to annul a voidable contract.

 1. Confirmation - to cure a defect in a voidable contract. (paghanap ng pagkakamali sa
contract)

2. Ratification- to cure the defect of lack of authority in an authorized contract (entered

into by another). (pagbabago sa isang contract kung may mali )

3. Acknowledgment- to remedy a deficiency of proof (thus, an oral loan may be put in

writing, or when a private instrument is made a public instrument). (proof or katibayan
sa contract/ private intsruments)

Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification
if, with knowledge of the reason which renders the contract voidable and such reason having
ceased, the person who has a right to invoke it should execute an act which necessarily implies
an intention to waive his right.

KINDS OF RATIFICATION
1. Express ratification- when the ratification is manifested in words or in writing

2. Implied ratification- may take different forms: by silence or acquiescence, by acts

showing adoption or removal of the contract, by acceptance and retention of the
benefits flowing there from (with action or word or in action involve 3rd party)

Who can ratify? The injured party o dehado

Ratification does not require the conformity of the contracting party who has no right to bring
the action for annulment.

Ratification is a unilateral act by which a party waives the defect in his consent

MUTUAL RESTITUTION UPON ANNULMENT

If the contract is annulled, the parties, as a general rule, must restore to each other the subject
matter of the contract with its fruits and the price thereof with legal interest. Unless there are
fundamental reasons recognized by the law which will prevent such restitution

CONTRACTS NOT COVERED

If one of the contracting parties received some benefit, and he has not given anything for it to
the other, it is only equitable that he should return the amount by which he unjustly enriched.
EXTINGUISHMENT OF ACTION FOR ANNULMENT

If the person, who has a right to institute an action for annulment (Art. 1397.) will not be able
to restore the thing which he may be obliged to return in case the contract is annulled because
such thing is lost through his fraud or fault, his right to have the contract annulled is
extinguished. If the loss is not due to his fault or fraud. The action for annulment shall be
extinguished only if the loss is through the fault or fraud of the plaintiff.

CHAPTER 8
UNENFORCEABLE CONTRACTS

A written or oral agreement that will not been forced by courts. There are many different
reasons that a court may not enforce a contract. Contracts may be unenforceable because of
their subject matter, because one party to the agreement unfairly took advantage of the other
party, or because there is not enough proof of the agreement.

3 KINDS OF UNENFORCEABLEC ONTRACTS

1. Unauthorized Contracts or disauthorized contracts

-those entered into name of another person by one given no authority or legal
representation or who has acted beyond his power.

2. Those that fail to comply with the Statute of Frauds

- Statute of frauds established to prevent fraud and guard against mistakes. It requires
certain agreements to be in writing.

3. Those where both parties are incapable of giving consent.

Formulation of defective contracts

a. Both parties incapable of consent=unenforceable

b. One guardian or one party who has gained capacity ratifies the contract=voidable
c. Both parties ratify contract=valid

RIGHT OF THIRD PERSON TO ASSAIL AN UNENFORCEABLE CONTRACT

Strangers to a voidable contract cannot bring an action to annul the same (see Art. 1397)
neither can they assail a contract because of its unenforceability. The benefit of the Statute can
only be claimed or waived by one who is a party or privy to the oral contract, not by a stranger.
(Ayson vs. Court of Appeals, 97Phil.965[1953].) An action for rescission may be brought by a
third person.

CHAPTER 9
Void Contracts- are contracts where all of the requisites prescribed by law for contracts are
present, but the cause, object or purpose is contrary to law, morals, good customs, public order
or public policy, or they are prohibited by law, or they are declared by law to be void.

Inexistent Contracts- are those contracts which lack absolutely one or some oral of those
requisites which are essential for validity.

- Inexistent contracts, on the other hand, refer to those where one or some oral
of those requisites which are essential for validity are absolutely lacking

CHARACTERISTICS OF VOID CONTRACTS

a. The right to setup the defense of illegality cannot be waived, and may be considered
on appeal even if not raised in the trial court.
b. The action or defense for their declaration as inexistent does not prescribe
c. Thedefenseofillegalityofcontractsisnotavailabletothirdpersoswhoseinterests are not
directly affected
d. Cannot give rise to a contract; thus a contract which is the direct result of a previous
illegal contract is also void and inexistent
e. Generally produces no effect
f. They cannot be ratified
The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs,
public order or public policy;

(2) Those which are absolutely simulated or fictitious;

(3) Those whose cause or object did not exist at the time of the transaction;

(4) Those whose object is outside the commerce of men;

(5) Those which contemplate an impossible service;

(6) Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained;
 (7) Those expressly prohibited or declared void by law.

CHAPTER 10
OBLIGATIONS ARE CIVIL OR NATURAL

1. Civil obligations- give right of action to compel their performance.

2. Natural obligations- is not being based on positive law but on equity and natural law, do not
grant a right of action to enforce their performance, but after voluntary fulfillment by the
obligor, they authorize the retention of what has been delivered or rendered by reason thereof

Voluntary fulfillment -debtor complied with an obligation even if he knew that he could not
have been legally compelled to do so.

Natural law -is often contrasted with positive law, which consists of the written rules and
regulations enacted by government.

KINDS OF OBLIGATION

According to Sanction:

a. Civil Obligation- defined by Art.1156, and sanction is juridical process.

b. Natural Obligation- based on natural law and the motivation in fulfilling the obligation is
good conscience.

c. Moral Obligation- similar with natural obligations which are based on good conscience and
moral values.

CHARACTERISTICS OF NATURAL OBLIGATION

An obligation can be considered as a natural obligation if:

(a) it is based on moral or social grounds and cannot been force by positive (human
made) laws.
(b) it is voluntary, with the debtor having the knowledge that the obligation cannot
be enforce by the law.
(c) its performance cannot be prevented or invalidated by the court.
(d) it can be recognized by the court after its fulfillment; hence, the creditor has the
right to retain what has been done or delivered by the debtor who has no right to recover it