OBLIGATION AND CONTRACTS LECTURE

CLASSIFICATION OF STATE LAW

LAWS • As to purpose
• Enacted by congress o Substantive law
• Obligatory to all citizens - laws that give right or give rise to
• Regulates the conduct of humans. obligation.
- Every act of congress is considered as a
TYPES OF LAWS substantive law.
• Divine: based on religion o Procedural law: laws that guides
• Natural: based on reason; the idea of the procedures in court.
justice and fairness. (Example: Rules of Court)
• Moral: rules governing what is right and • As to subject matter
wrong o Public
• Physical - laws that govern the relations of the
• State: laws that are promulgated by the humas in relation for the state.
legislature. - Example: Criminal Law and International
Law.
SOURCES OF LAWS:
• Constitutions: The supreme law of the o Private
land - regulates the relationship between
• Legislations: laws promulgated by the private individuals.
congress Civil Law- deals with issues in
• Executive order: a rule or order issued by property, marriage, death, and
the president obligation and contracts.
• Judicial Decisions: decisions of the
supreme court THE CONCEPT OF OBLIGATIONS IN GENERAL

COURTS: LAW ON OBLIGATION AND CONTRACTS

Regular: -deals with the relations of private individuals or
• Supreme Court private entities.
• Court of Appeals
• Regional Trial Court - The law of obligations and contracts is the
• Municipal Trial Court body of rules which deals with the nature and
sources of obligations and the rights and duties
Special Courts arising from agreement and the particular
• Sandiganbayan contracts.
• Court of tax appeals
As defined by Article 1156 New Civil Code
Quasi-Judicial -a juridical necessity to give, to do, or not to do.
• COMELEC
• LTFRB SOURCES OF OBLIGATIONS(ART.1157)
• NLRC
1. Law
BASIC LEGAL PRINCIPLE 2. Contracts
1. The ignorance of the law excuses no one 3. Quasi-Contracts
from compliance therewith. 4. Acts of omissions punished by law; and
2. If there is no law or if the law is unclear, 5. Quasi-Delicts
the judge or court should nonetheless
render judgement.
3. In case of doubt, it is presumed that
legislators intend right and justice to
prevail. LAW
-A rule of conduct, just, obligatory, -Whoever by act or omission causes damage to
promulgated by legitimate authority, and of another, there being fault or negligence, is
common observance and benefit obliged to pay for the damage done. Such fault
-The law between both parties must be or negligence, if there is no pre-existing
complied with good faith. contractual relation between the parties, is
-can be oral or written called a quasi-delict.
-all contracts must not be contrary to the law. -obligation to reimburse someone for the
commission of Quasi-Delict.
CONTRACTS -also known as criminal neglkigence
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 OBLIGATION
some service The term obligation is derived from the Latin
word obligation which means tying or binding.
QUASI-CONTRACTS It is a tie or bond recognized by law by virtue of
-Certain awful, voluntary, and unilateral acts which one is bound in favor of another to render
give rise to the juridical relation of quasi- something - and this may consist in giving a
contract to the end that no one shall be unjustly thing, doing a certain act, or not doing a
enriched or benefitted at the expense of certain act. An obligation "to do" includes all
another. kinds of work or service: while an
-involves two people but cannot be considered obligation "to give" is a prestation which consists
as a contract since the it is made without an in the delivery of a movable or an immovable
actual agreement between two parties. thing in order to create a real right, or for the use
- No one must be unjustly enriched himself or of the recipient, or for its simple possession, or in
herself of the expense of others. order to return it to its owner. An obligation is a
juridical relation whereby a person (called the
KINDS OF QUASI-CONTRACTS creditor) may demand from another (called the
debtor) the observance of a determinative
Negotiorum Gestio conduct (the giving, doing, or not doing), and
- voluntarily takes charge of the agency or in case of breach, may demand satisfaction
management of the business or property of from the assets of the latter.
another, without any power from the latter, is
obliged to continue the same until the According to Arias Ramos, obligation is nothing
termination of the affair and its incidents, or to more than the duty of a person (debtor or
require the person concerned to substitute him, obligor) to satisfy a specific and demandable
it the owner is able to do so. claim of another person (creditor or oblige)
which if breached is enforced in court.
Solution Indebiti
-If something is received when there is no right REAL OBLIGATION
to demand it, and it was unduly delivered Refers to the obligation of the debtor or obligor
through mistake, the obligation to return it arises ‘to give’ or to deliver a thing, moveable, or
-‘mistaken payments’ immovable, to the creditor or oblige for the
- any person who received a payment by purpose of transferring ownership or for the use
mistake is obliged to return it. or possession of the recipient.

ACTS OR OMISSIONS PUNISHED BY LAW KINDS OF REAL OBLIGATION

Delict DETERMINATE OR SPECIFIC REAL OBLIGATION
-a violation of the law; especially, a wrongful The obligation of the debtor or obligor to deliver
act or omission giving rise to a claim for a determinate or specific thing to the creditor or
compensation oblige. A thing is determinate when it is
- every person who is criminally liable are also particularly designated or physically
civilly liable. segregated from all others of the same class.

QUASI-DELICT
 WHAT ARE THE OBLIGATIONS OF SOMEONE The obligation of the debtor or obligor to deliver
OBLIGED TO GIVE A DETERMINATE THING? an indeterminate or generic thing to the
creditor or oblige. A thing is indeterminate when
I. TO TAKE GOOD CARE OF THE THING WITH THE it is designated merely by its class or genus
DILIGENCE OF A GOOD FATHER OF A FAMILY. without any particular designation or physical
segregation from all others of the same class.
Diligence of a good father of a family means an
ordinary care. Just like a father of a family, it is a DUTIES OF DEBTOR TO DELIVER A GENERIC
care that an average person would do in taking THING
care of his property.
-Deliver a thing of equal quality as agreed
II. TO DELIVER THE THING. upon.
-To be liable of damages in case of fraud,
Delivery is placing the thing in the possession or negligence, or delay in the performance of the
control of the active subject (obligee) by the obligation
passive subject (obligor) either actually or
constructively.
REMEDIES FOR FAILURE TO COMPLY
III. TO DELIVER THE FRUITS OF THE THING. a. Demand specific performance of
fulfillment+ damages
The creditor has a right to the fruits of the thing b. Demand rescissions or cancellation +
from the time the obligation to deliver the thing damages
arises. However, such creditor has no real right
over the thing unless such it has been delivered
PERSONAL OBLIGATION
to him.
-is the obligation to do and not to do. The
IV. ANSWER FOR DAMAGES IN CASE OF NON-
obligation to do is known as positive personal
FULFILLMENT OF BREACH obligation while the obligation not to do is
called negative personal obligation
REMEDIES FOR FAILURE TO COMPLY
KINDS PERSONAL OBLIGATION
a. Demand a specific performance of
fulfillment of the obligation with a right to a. POSITIVE PERSONAL OBLIGATION
indemnity for damages
b. NEGATIVE PERSONAL OBLIGATION
b. Demand rescission or cancellation of the
obligation also with a right to recover
POSITIVE PERSONAL OBLIGATION
damages
c. Demand payment of damages only,
where it is only feasible remedy. -Obligation not to do.

RIGHTS OF THE CREDITOR (OBLIGEE) - this is the obligation of the debtor or obligor to
perform some work or service for the creditor or
obligee.
a. Personal right - a right that may be enforce
by one person on another, such as the right of a
creditor to demand delivery of the thing and its
fruits from the debtor.
WHAT CONSTITUTES FAILURE TO COMPLY?
b. Real right - a right or power over a specific
thing which is enforceable against the whole a. Fails to perform an obligation to do
world. It is acquired by the creditor from the b. Perform contrary to the terms
delivery of the thing and its fruits unto him. c. If he/she performs the obligation poorly

INDETERMINATE OR GENERIC REAL OBLIGATION REMEDIES FOR FAILURE TO COMPLY

1. If the debtor fails to comply with his obligation indemnification for damages. But where the
to do, the creditor has the obligation can still be performed at the expense
right: of the debtor notwithstanding his failure or
a. To have the obligation performed by refusal to do so, the court is not authorized to
himself, or by another, unless merely grant damages to the creditor
personal considerations are involved, at the
debtor's expense; and Art. 1168, NCC. When the obligation consists in
b. To recover damages not doing, and the obligor does what has been
2. In case the obligation is done in forbidden him, it shall also be undone as his
contravention of the terms of the same or is expense.
poorly done, it may be ordered (by the court
upon complaint) that it be undone if it is still Art. 1169, NCC. Those obliged to deliver or to do
possible to undo what was done. something incur in delay from the time the
oblige judicially or extrajudicially demands from
NEGATIVE PERSONAL OBLIGATION them the fulfillment of their obligation.

-obligation not to do However, the demand by the creditor shall not

be necessary in order that delay may exist:
- this is the obligation of the debtor or obligor not
to perform some act in favor of the creditor or 1. When the obligation or the law expressly so
obligor. declare; or
2. When from the nature and the circumstances
WHAT CONSTITUTES FAILURE TO COMPLY? of the obligation it appears that the designation
or the time when the
a. Performed what he is forbidden to do. thing is to be delivered or the service is to be
rendered was a controlling motive for the
establishment of the contract; or
REMEDIES FOR FAILURE TO COMPLY
3. When demand would be useless, as when the
obligor has rendered it beyond his power to
a. Demand that what was done be undone
perform. In reciprocal obligations, neither party
at the expense of the debtor expenses +
incurs in delay if the other does not comply or is
damages
not ready to comply in a proper manner with
b. Recover damages
what is incumbent upon him. From the moment
one of the parties fulfills his obligation, delay by
PERFORMANCE BY A THIRD PERSON the other begins
Compelling performance by debtor is
prohibited Default – delay which amounts to virtual non
-A personal obligation to do, like a real fulfilment of the obligation.
obligation to deliver a generic thing, can be
performed by a third person. While the debtor Delay – non-fulfilment of the obligation within a
can be compelled to make the delivery of a specific time
specific thing, a specific performance cannot
be ordered in a personal obligation to do
because this may amount to involuntary
Kinds of Default (Mora)
servitude which, as a rule, is prohibited under
our Constitution.
a.Mora solvendi – default on the part of the
debtor a. Mora solvendi ex re – default of
Indemnification of creditor for damages
debtor in real obligation.
-Where, however, the personal qualifications of
the debtor are the determining motive for the
b. Mora solvendi ex persona – default on the
obligation contracted, the performance of the
part of the debtor in positive personal
same by another would be impossible or would
obligation.
result to be so different that the obligation could
not be considered performed. Hence, the only
feasible remedy of the creditor is
NOTE: No mora in negative personal obligation - demandable in all kinds of obligation – means
and in natural obligation. that it can be claimed in obligation arising from
law, contract, quasi contract, crime, and quasi-
1. Mora accipiendi – default on the part of the delict.
creditor – only when he unjustifiably refuses to
accept the performance of the obligation or KINDS OF DOLO:
delivery of the thing.
I. AS TO TIME
2. Compensatio Morae – both the creditors
and debtor are in default. a.Future fraud – cannot be waived being
contrary to law and public policy.
Effect if both are in default? It is as if there is no
default. b. Past fraud – can be waived – an act of
forgiveness.
ARTICLE 1170.
II. AS TO MEANING
Grounds for liability: (Basis for claim of
damages) a. Dolo incidente (incidental fraud) – fraud in
the fulfilment of the obligation.
1. Fraud (deceit or dolo) Article 1171–
deliberate or intentional evasion of the normal Article 1171 should be understood in this
fulfilment of the obligation. concept.

2. Negligence (culpa) Article 1172 – voluntary b. Dolo causante (causal fraud) – fraud in
act or omission there being no malice, which obtaining consent – effect? It will make the
effectively prevents contract voidable.

the normal fulfilment of the obligation. ARTICLE 1172.

3. Delay (mora) – Article 1169 – Negligence (culpa) – voluntary act or omission

there being no malice, which effectively
4. Contravention of the tenor of the obligation prevents the normal fulfilment of the obligation.
– violation of the terms and conditions of the
obligation. - demandable in all kinds of obligation – means
that it can be claimed in obligation arising from
E.g. Contract of carriage – the passenger was law, contract, quasi contract, crime, and quasi-
not able to reach his destination safely – can delict.
claim for damages.
- future negligence can be waived except gross
negligence, or when the negligence amounts
to bad faith – being contrary to public policy.

DOLO (DOLO) CULPA (NEGLIGENCE)

ARTICLE 1171.
1. deliberate 1. voluntary but no
intention to cause deliberate intent to
damage cause damage.
1. When expressly declared by law.

Fraud (deceit or dolo) – deliberate or intentional

KINDS OF CULPA:
evasion of the normal fulfilment of the
obligation.
1. Culpa-contractual – (contractual E.g.
negligence) – negligence in the performance
of a pre-existing obligation. when the thing to be delivered and was lost is a
generic thing (genus nonquam peruit)
2. Culpa-acquilana – (torts or quasi-delict) –
negligence as a source of an obligation -when the debtor is in default, when the
debtor is in bad faith.
NOTE: Both 1 and 2 are found in the Civil Code.
2. When expressly stipulated in a contract that
3. Culpa criminal – criminal negligence – or the debtor is liable even in cases of caso
that which results in the commission of a crime fortuito.
or delict.
3. When the nature of the obligation requires
the assumption of risk.

ARTICLE 1173. E.g. Contract of Insurance – the insurer assumes

the risk of loss
Kinds of Diligence under the Civil Code.
ESSENTIAL CHARACTERISTICS OF A FORTUITOUS
Under the Civil Code the following kinds of EVENT
diligence are required.
1. the cause must be independent of the will of
1. that agreed upon by the parties the debtor – no participation for the loss.

2. in the absence of (a), that required by law 2. impossibility of foreseeing or impossibility of

avoiding it, even if foreseen.
e.g. common carriers – extra-ordinary
diligence to transport passenger. 3. occurrence must be such as to render it
impossible for the debtor to fulfil his obligation in
- passenger to observe ordinary a normal manner.
diligence.
4. the obligor must be free from any
3. in the absence of (b), that expected of a participation in the aggravation of the injury to
good father of a family (bonus pater familias). the creditor.

ARTICLE 1174. E.g. Loss of stolen cellphone because of

lightning – liable for the loss.
Fortuitous Event – events which cannot be
foreseen or if foreseen are inevitable.

e.g. earthquake, lightning, war Article 1175

NOTE: Tire blow-out, defective brakes – not Usury Law – already considered as “legally
considered as fortuitous event. inexistent” by Central Bank Circular No. 905,
December 12, 1982.
GENERAL RULE:
Legal rates of interest:
No liability for fortuitous event.
12% per annum – interest for use of money. 6%
Exceptions: per annum – interest for unpaid damages.

1. The debtor is liable for fortuitous event in the Read: Medel v. Court of Appeals, 299 SCRA 481
following cases:
 ARTICLE 1176. This is immediately demandable since
there is no term that must expire or a
PRESUMPTIONS: condition that must happen for the
obligation to be demandable.
1. Receipt of the Principal shall give rise to the • EXAMPLES:
presumption that the interest has been paid. • (1) I promise to give you P5,000.
Reason? Under Article 1253, CC interest This is immediately
precedes payment of the principal. • demandable since there is no term
that must expire or a
2. Receipt of later instalment shall give rise to • condition that must happen for the
the presumption that the earlier instalments obligation to be
have been paid. • demandable.

E.g. If the creditor receives the 3rd instalment it WHEN HIS MEANS PERMIT HIM (1180)
is presumed that the 1st and 2nd instalments ART. 1180. When the debtor binds himself to pay
have been paid. (NOTE: it must be specified when his means permit him to do so, the
that the receipt must be for the payment of a obligation shall be deemed to be one with a
particular instalment due). period, subject to the provisions of Article 1197.
If debtor will pay when his means permit him to
ARTICLE 1177. do so, or words of similar import, such as:
• When I can afford
Rights of Creditors: • When I am able to
• When I have money"
1. Exact payment
Period defined: it is a future and certain event
2. Exhaust debtor’s properties generally by upon the arrival of which the obligation subject
attachment to it either arises or is extinguished. It may also
be considered as a space of time which has an
influence on obligation as a result of a juridical
• if the law provides otherwise
act and either suspends their demand ableness,
• if the contract provides otherwise.
or produces their extinguishment.
• if the obligation is purely personal
WHEN IS THE OBLIGATION DEMANDABLE
Since the time for payment (not the payment)
depends upon the will of the debtor, immediate
performance cannot been forced. The right of
the creditor is to go to court and let the court fix
the date of the payment. The creditor in this
case is not demanding payment, he is only
asking the court to fix the date for payment.
Once fixed by the court, the obligation
PURE AND CONDITIONAL OBLIGATION becomes demandable on the date fixed.
Decided cases considered obligation with a
PURE OBLIGATION (ART.1179) period

• Not subject to any condition CONDITIONAL OBLIGATION

• contrasted more often with conditional
obligation. • One whose consequences are subject in
• t is considered as pure obligation if there one way or the other to the fulfillment of
is no condition or no specific date a condition.
mentioned.
CONDITION
EXAMPLES:
• ‘1 promise to give you P5,000. ‘
 • A future and uncertain event is one • Debtor becomes creditor, Creditor
whose consequences are subject in one becomes the debtor.
way or another to the fulfillment of a • The obligation is demandable at once
condition. but it shall be extinguish upon happening
• There is a condition imposed in its of the condition.
performance. • It effects flow, but over it, hovers the
possibility of termination.
CHARACTERISTICS OF CONDITIONAL
OBLIGATION Example:

a. Future and uncertain- In order to I will lend you this car until you have your own
constitute an event a condition, it is not car.
enough that it be future; it must also be
uncertain. You may demand the delivery of the car now
b. Past but unknown- a condition may refer but you must return it when you already have
to a past event unknown to the parties. If your own car.
it refers to a future event, both its very
occurrence and the time of such RULES
occurrence must be uncertain; otherwise,
it is now a condition. A condition must not • Impossible conditions, contrary to law,
be impossible. shall ANNUL obligation.
c. The condition must be possible of • The obligation not to do an impossible
performance. thing is considered not agreed upon.
• The condition that happens to
2 TYPES OF CONDITIONS (ART.1181) determinate, extinguishes obligation.
• The condition that happens in
SUSPENSIVE CONDITION indeterminate time obligation only
effective at arrival.
• The fulfillment of condition will give rise to • The condition is fulfilled if debtor prevents
an obligation. fulfillment.
• Condition then Obligation • The effect of conditional obligation ,
• No fulfillment of condition- No obligation once fulfilled; to give; to retroact to the
• The demandability of the obligation is day of constitution of obligation
suspended until the happening of the
condition. OBLIGATION WITH PERIOD (ART.1993)
• The existence of the obligation is a mere
hope. • A kind of obligation wherein its
performance is subject to a term or
period, and can only be demandable
when that period expires.
Example: • Such period is 'a day certain' which must
necessarily come, although it may not
I will give you the car if you pass the bar exams. be known when.
• A day certain means that it is sure to
You may not demand the delivery of my car not happen. May also be suspensive or
until you pass the BAR examinations. resolutory
"I will pay you on December 25, 2019.*
RESOLUTORY CONDITIONS "I will pay you when I hate the money,
"I will lend you my laptop until December 30,
• The fulfillment of condition will extinguish 2019”
the obligation.
• Obligation then condition. MEANING OF OBLIGATION WITH A PERIOD
-An obligation with a period is one whose
effects or consequences are subjected in one
way or another to the expiration or arrival of said b) Resolutory period (in diem). - The
period or term. obligation is valid up to a day certain
and terminates
MEANING OF PERIOD OR TERM
-A period is a future and certain event upon the Alternative and Facultative Obligations;
arrival of which the obligation (or right) Art. 1199. A person alternatively bound by
subject to it either arises or is terminated. It is a different prestations shall completely perform
day certain which must necessarily come one of them.
(like the year 2010; next Christmas), although it
may not be known when, like the death of a The creditor cannot be compelled to receive
person. (par. 3, Art. 1193.) part of one and part of the other undertaking.
Alternative and Facultative Obligations;
PERIOD AND CONDITION DISTINGUISHED
1.As to fulfillment. -A period is a certain event Simple obligation. - one where there is only one
which must happen sooner or later at a date (1) prestation.
known beforehand, or at a time which cannot EXAMPLES:
be determined, while a condition is an a. D obliged himself to deliver a piano to C.
uncertain b. D promised to repair the car of C.
event: Compound obligation. - one where there are
2. As to time. - A period refers only to the future, two (2) or more prestations. It may be:
while a condition may refer also to a past a. Conjunctive obligation. - one where
event unknown to the parties; there are several prestations and all of them are
3. As to influence on the obligation. - A period due; or
merely fixes the time for the efficaciousness of b. Distributive obligation. - one where two
the obligation. If suspensive, it cannot prevent (2) or more of the prestations is due. It may be:
the birth of the obligation in due time; if i. Alternative obligation. - one where
resolutory, it does not invalidate the fact that several prestations are due but the
the obligation existed. On the other hand, a performance of one is sufficient (Art. 1199.); or
condition causes an obligation either to arise or il. Facultative obligation. - one where only
to cease; one prestation is due but the debtor may
4. As to effect, when left to debtor's will. - A substitute another.
period which depends upon the will of the
debtor empowers the court to fix the duration MEANING OF ALTERNATIVE OBLIGATION
thereof (par. 2, Art. 1197.), while a condition -Alternative obligation is one wherein various
which depends upon the sole will of the debtor prestations are due but the performance of one
invalidates the obligation (Art. 1182.); and of them is sufficient as determined by the
5. As to retroactivity of effects. -Unless there is an choice which, as a general rule, belongs to the
agreement to the contrary .the arrival of a debtor.
period does not have any retroactive effect, -Art. 1206. When only one prestation has been
while the happening of a condition has agreed upon, but the obligor may render
retroactive effect. another in substitution, the obligation is called
facultative.
Like a condition (see Art. 1183.), a period must -The loss or deterioration of the thing intended
be possible. If the period is impossible (e.g., as a substitute, through the negligence of the
February 30 because it will never come; obligor, does not render him liable. But once the
construction of a building within 24 hours substitution has been made, the obligor is liable
because it is too short), the obligation is void. for the loss of the substitute on account of his
delay, negligence or fraud.
Kinds of period or term
a) Suspensive period (ex die). - The MEANING OF FACULTATIVE OBLIGATION
obligation begins only from a day certain -A facultative obligation is one where only one
upon the arrival of period; and prestation has been agreed upon, but the
obligor may render another substitution.
ALTERNATIVE AND FACULTATIVE NUMBER OF MEANING OF JOINT AND SOLIDARY
PRESTATIONS DISTINGUISHED OBLIGATIONS
1. Joint obligation or one where the whole
1. Number of prestations. - In the first, several obligation is to be paid or fulfilled
prestations are due but compliance with one proportionately by the different debtors and/ or
is sufficient, while in the second, only one (1) is to be demanded proportionately by the
prestation is due although the debtor is allowed different creditors.(Art. 1208.)
to substitute it; 2. Solidary obligation or one where each one of
2. Right of choice. – In the first, the right of the debtors is bound to render, and/or each
choice may be given to the creditor or third one of the creditors has a right to demand from
person, while in the second, the right to make any of the debtors, entire compliance with the
the substitution is given only to the debtor; prestation. (Art. 1207.)
3. Loss through a fortuitous event. –
In the first, the loss of one or more of the DIVISIBLE AND INDIVISIBLE OBLIGATIONS;
alternatives through a fortuitous event does not Art. 1223. The divisibility or indivisibility of the
extinguish the obligation, while in the econd, things that are the object of obligations in which
the loss of the thing due through his fault makes there is only one debtor and only one creditor
him liable; does not alter or modify the provisions
b) In the first, where the choice belongs to the of Chapter 2 of this Title
creditor, the loss of one alterative through the
fault of the debtor gives rise to liability, while in
the second, the loss of the substitute before the MEANING OF DIVISIBLE AND INDIVISIBLE
substitution through the fault of the debtor does OBLIGATIONS
not render him 1. A divisible obligation is one the object of
which, in its delivery or performance, is capable
JOINT AND SOLIDARY OBLIGATIONS; of partial fulfilment.
Art. 1207. The concurrence of two or more 2. An indivisible obligation is one the object of
creditors or of two or more debtors in one and which, in its delivery or performance, is not
the same obligation does not imply that each capable of partial fulfilment.
one of the former has a right to demand, or that
each one of the latter is bound to render, entire KINDS OF DIVISION
compliance with the prestation. There is a (1) Qualitative division or one based on quality,
solidary liability only when the obligation not on number or quantity of the things which
expressly so states, or when the law or the are the object of the obligation.
nature of the obligation requires solidarity. (2) Quantitative division or one based on
-Art. 1208. If from the law, or the nature or the quantity rather than on quality.
wording of the obligations to which the (3) Ideal or intellectual division or one which
preceding article refers, the contrary does not exists only in the minds of the parties.
appear, the credit or debt shall be presumed to
be divided into as many equal shares as there KINDS OF INDIVISIBILITY
are creditors or debtors, the credits or debts • Legal indivisibility. - where a specific
being considered distinct from one another, provision of law declares as indivisible,
subject to the Rules of Court governing the obligations
multiplicity of suits. • Conventional indivisibility. - where the will
of the parties makes as indivisible,
KINDS OF OBLIGATIONS ACCORDING TO THE obligations which, by their nature, are
NUMBER OF PARTIES. divisible (Ibid.); and
Individual obligation. - one where there is only • Natural indivisibility. - where the nature of
one (1) obligor or one (1) oblige; and the object or prestation does not admit
Collective obligation. One where there are of division, e.g., to give a particular car,
two(2)or more debtors and/or two(2)or more to sing a song, etc. (Ibid., par. 1.)
creditors. It may be joint or solidary.
POTESTATIVE VS CASUAL VS MIXED
ART. 1182. When the fulfillment of the condition (1) If the suspensive condition depends
depends upon the sole will of the debtor, the upon chance or upon the will of a third
conditional obligation shall be void. If it person, the obligation subject to it is
depends upon chance or upon the will of a valid.
third person, the obligation shall take effect (2) When the fulfillment of the condition
in conformity with the provisions of this Code. does not depend on the will of the
obligor, but that on a third person who
POTESTATIVE CASUAL MIXED can in no way be compelled to carry it
A condition A condition A condition out, and it is found by the court that the
suspensive in that depends that depends obligor has done all in his power to
nature and upon chance partly upon comply with his obligation, his part
which or upon the the will of one of the contract is deemed complied
depends will of a third of the parties with and he has a right to demand
upon the sole person. and partly performance of the contract by the
will of one of upon chance other party.
the or upon the
contracting will of a third MIXED CONDITION
parties. person
A condition This is a valid This is also a The obligation is valid if the suspensive
suspensive in obligation valid condition depends partly upon chance and
nature and obligation. partly upon the will of a third person.
which
depends Impossible and Illegal (1183)ART. 1183.
upon the sole Impossible conditions, those contrary to
will of one of good customs or public policy and those
the prohibited by law shall annul the obligation
contracting which depends upon them. If the
parties obligation is divisible, that part thereof which is
Facultative not affected by the impossible or unlawful
Obligation condition shall be valid. The condition not to
do an impossible thing shall be considered as
not having been agreed upon
a. Potestative on the part of the debtor, If
suspensive - the obligation is void. Even if the POSSIBLE IMPOSSIBLE
condition is fulfilled, the obligation is not One is capable of One is not capable of
demandable. Both condition and obligation fulfillment in its nature fulfillment in its nature
is void. and by law and by law
Such as "if you can
b. Potestative on the part of the debtor, If swim across the
resolutory - the obligation is valid. Pacific Ocean," or
due to operation of
c. Potestative on the part of the creditor - the law, such as "if you kill
obligation is valid whether the condition is X." In this case, the
suspensive or resolutory. obligation and the
condition are void.
Casual condition. Note: if the condition
(1) If the suspensive condition depends upon is not to do an
chance or upon impossible thing, it
the will of a third person, the obligation subject shall be deemed as
to it is valid. not having been
agreed upon. Thus,
CASUAL CONDITION. the obligation is
immediately
demandable.
 Example: obligation to giveP10,000.00 is valid but the
obligation to give a car is void because it is
D is to give CP50,000 if dependent upon an impossible condition.
C does not swim
across the Pacific If the condition is negative, that is, not to do the
Ocean. impossible, just disregard the condition, but the
obligation remains.
TWO KINDS OF IMPOSSIBLE CONDITIONS
Example: I will give you P10,000 if you cannot
(1) Physically impossible conditions. — make a circle that is at the same time a square.
when they, in the nature of things, cannot
exist or cannot be done; and POSITIVE CONDITION (1184)

(2) Legally impossible conditions. — when they ART. 1184. The condition that some event
are contrary to law, morals, good customs, happen at a determinate time shall extinguish
public order, or public policy. the obligation as soon as the time expires or if it
has become indubitable that the event will not
WHERE SUSPENSIVE CONDITION DEPENDS UPON take place.
WILL OF DEBTOR
POSITIVE CONDITION NEGATIVE CONDITION
Conditional obligation void. — to do an This is a condition This is a condition that
impossible or illegal thing. Both the obligation that some event some event will not
and the condition are void. The reason behind happen at a happen at a
the law is that the obligor knows his obligation determinate time. determinate time.
cannot be fulfilled. He has no intention to Here, the obligation Here, the obligation
comply with his obligation. In conditional is extinguished as becomes effective as
testamentary dispositions and in simple and soon as the time soon as the time
remunerator donations, the rule is different. expires or it has indicated has elapsed
become or it has become
Example: I’ll give you P10,000 if you will make a indubitable that the evident that the event
dead man alive event will not take will not occur
place.
Conditional obligation valid. — If the condition
is negative, that is, not to do an impossible EFFECT IF PERIOD OF FULFILLMENT IS NOT FIXED
thing or illegal thing, it is disregarded and
the obligation is rendered pure and valid. Both Article 1185, paragraph 2 states that if no time
the condition and the obligation are valid. has been fixed, the condition shall be deemed
Actually, the condition is always fulfilled when it fulfilled at such time as may have probably
is not to do an impossible thing so that it is the been contemplated, bearing in mind the
same as if there were no condition. The nature of the obligation. This rule will apply
negative condition may be not to give an if the period fulfillment is not stated.
impossible thing.
NEGATIVE CONDITION (1185)
Example: I will give you P10,000 if you will not kill
X. ART. 1185. The condition that some event will not
happen at a determinate time shall render the
Only the affected obligation void. — If the obligation effective from the moment the
obligation indivisible, the part thereof not time indicated has elapsed, or if it has
affected by the impossible condition shall be become evident that the event cannot occur.
valid. If no time has-been fixed, the condition shall be
deemed fulfilled at such time as may have
EXAMPLE: “I will give you P10,000.00 if you sell my probably been contemplated, bearing in
land, and a car, if you kill Pedro.” The mind the nature of the obligation.
The above provision speaks of a negative (2) The obligor actually prevents the
condition that an event will not happen at a fulfillment of the condition; and
determinate time.
(3) He acts voluntarily. The law does not
The obligation shall become effective and require that the obligor acts with malice or
binding: fraud as long as his purpose is to prevent the
fulfillment of the condition. He should not be
(1) from the moment the time indicated has allowed to profit from his own fault or bad faith
elapsed without the event taking place; or ( to the prejudice of the obligee. In a reciprocal
obligation like a contract of sale, both parties
2) from the moment it has become evident that are mutually obligors and also obligees.
the event cannot occur, although the time
indicated has not yet elapsed. If no time CONSTRUCTIVE FULFILLMENT OF RESOLUTORY
is fixed, the circumstances shall be CONDITION.
considered to determine the intention of the
parties. This rule may also be applied to a Article 1186 applies also to an obligation
positive condition subject to a resolutory condition with respect
to the debtor who is bound to return what he
Summary: When an obligation is has received upon the fulfillment of the
demandable if the condition is positive condition

a. When it becomes indubitable, clear and Effect when the debtor voluntarily prevents
evident that the event will not take place. fulfillment of the condition .

b. When the time expires without the event When the debtor voluntarily prevents the
taking place. fulfillment of the condition, the condition is
deemed fulfilled. The obligation therefore, is
Summary: When an obligation is effective. This is called constructive or presumed
demandable if the condition is negative. fulfillment.

a. When the time has elapsed without the REQUISITES OF CONSTRUCTIVE FULFILLMENT.
prohibited event taking place.
a. The fulfillment is prevented by the debtor.
b. When it becomes clear or evident that the b. The prevention is voluntary on the part of
prohibited event cannot occur, although the the debtor.
time indicated has not yet elapsed.
Example: D obliges himself to sell his parcel of
Constructive Fulfillment (1186) land to C if C could pass the 2011 CPA
ART. 1186. The condition shall be deemed Examination. By means of threat or intimidation,
fulfilled when the D prevented C from taking the examination. In
obligor voluntarily prevents its fulfillment here, even if C did not pass the examination,
D is obliged to sell his land because he
CONSTRUCTIVE FULFILLMENT (1186) voluntarily prevented the fulfillment of the
condition. The logic of the law is that “one must
ART. 1186. The condition shall be deemed not profit by his own fault.
fulfilled when the obligor voluntarily prevents its
fulfillment RETROACTIVITY, AS TO FRUITS AND INTEREST
(1187)
Constructive fulfillment of suspensive condition
There are three (3) requisites for the ART. 1187. The effects of a conditional
application of this article: obligation to give, once the condition has been
fulfilled, shall retroact to the day of the
(1) The condition is suspensive; constitution of the obligation. Nevertheless,
when the obligation imposes reciprocal
prestation upon the parties, the fruits and
interests during the pendency of the conditions • If unilateral, the debtor as a rule will get
hall be deemed to have been mutually the fruits and interest.
compensated. If the obligation is unilateral, the
debtor shall appropriate the fruits and interests • If reciprocal, the fruits and interest
received, unless from the nature and during the pendency of the condition
circumstances of the obligation it should be are deemed mutually compensated
inferred that the intention of the person although unequal.
constituting the same was different. In
obligations to do and not to do, the courts shall
determine, in each case, the retroactive
effect of the condition that has been PAYMENT BEFORE THE CONDITION IS FULFILLED
complied with. (1188)

EFFECT OF FULFILLMENT OF SUSPENSIVE ART. 1188. The creditor may, before the
CONDITION fulfillment of the condition, bring the
appropriate actions for the preservation of his
General Rule: The effect of the fulfillment of the right. The debtor may recover what during the
suspensive condition retroacts to the day sometime he has paid by mistake in case of a
of the constitution of the obligation. suspensive condition.

Exceptions: There shall be no retroactive effect 1. Creditor – he may bring the appropriate
with respect to the fruits and interests as follows: actions for the preservation of his right, such as
registering his claim with the Register of Deeds,
In reciprocal obligations, the fruits and interests if appropriate, to notify all third persons, or
shall be deemed to have been mutually asking the debtor to provide a security if the
compensated, i.e., each party shall keep the debtor is about to become insolvent.
fruits and interest received by him prior to the
fulfillment of the condition. 2. Debtor – he may recover what he has
paid by mistake.
Example: On May 1, 2011, S agreed to sell his
land to B and B agreed to pay the price Effects of payment before the condition is
of P50,000 if X finishes his Accounting degree fulfilled
on March 15, 2015. X finished his Accounting
degree stipulated. It was as ifS was entitled a. Payment by mistake – the debtor may
to the price and B to the land beginning recover under solution indebiti. In addition, he
on May 1, 2011. However, S shall keep the fruits may claim the fruits or legal interest if the
on the land and B the interest on the price creditor accepts payment in bad faith.
during the pendency of the condition
b. Payment of the debtor with knowledge
In unilateral obligations, the debtor keeps the of the condition – if the payment is made with
fruits and interests received before the knowledge of the pendency of the condition,
fulfillment of the condition the condition is deemed waived and the
debtor can no longer recover what has been
Example: On May 1, 2012, S promised to give B paid.
his land if B passed the Bar Examination on
February2015. B passed the Bar Examination as Effect when the debtor voluntarily prevents
stipulated. It was as if B was entitled to the land fulfillment of the condition
beginning on May1, 2012. However, S will keep
the fruits on the land during the pendency of The condition is deemed fulfilled if the
the condition. debtor voluntarily prevents its fulfillment;
hence, the obligation becomes immediately
RETROACTIVE EFFECTS AS TO THE FRUITS AND demandable. Here, there must be an intent on
INTERESTS. part of the debtor to prevent compliance with
the condition and actually prevents its (1) If the thing is lost without the fault of the
fulfillment. debtor, the obligation shall be extinguished;
(2) If the thing is lost through the fault of the
Example: D promised to give P10,000 to debtor, he shall be obliged to pay damages; it
C, a marathon athlete, if C finishes the is understood that the thing is lost when it
race during the athlete meet. However, on perishes, or goes out of commerce, or
the eve of the scheduled race, D put a disappears in such a way that its existence is
substance on the drink of C who experienced unknown or it cannot be recovered;
weakening after taking the drink, and hence, (3) When the thing deteriorates without
was not able to join the race. Here, D must give the fault of the debtor, the impairment is to
P10,000 to C since the condition is deemed be borne by the creditor;
fulfilled. (4) If it deteriorates through the fault of
the debtor, the creditor may choose between
When resolutory condition is fulfilled (1190) the rescission of the obligation and its fulfillment,
with indemnity for damages in either case;
ART. 1190. When the conditions have for their (5) If the thing is improved by its nature,
purpose the extinguishment of an obligation to or by time, the improvement shall inure to
give, the parties upon the fulfillment of said the benefit of the creditor; (
conditions, shall return to each other what they 6) If it is improved at the expense of the debtor,
have received. In case of the loss, he shall have no other right than that granted
deterioration or improvement of the thing, the to the usufructuary
provisions which, with respect to the debtor, are
laid down in the preceding article shall be Kinds of loss.
applied to the party who is bound to return. As Loss in civil law may be:
for obligations to do and not to do, the
provisions of the second paragraph of Article (1) Physical loss. — when a thing perishes as
1187 shall be observed as regards the effect when a house is burned and reduced to ashes;
of the extinguishment of the obligation. or
(2) Legal loss. — when a thing goes out of
Effects of fulfillment of resolutory condition. commerce (e.g., when it is expropriated) or
when a thing heretofore legal becomes
a. The obligation is extinguished illegal (e.g., during the Japanese
b. The parties should return or restore to each occupation, American dollars had become
other what they have received including impossible since their use was forbidden by the
the fruits and interest. belligerent occupant); or (3) Civil loss. — when
c. The rules in the preceding Article 1189 will a thing disappears in such a way that its
apply to whoever has got a duty to return in existence is unknown (e.g., a particular dog has
case of loss, deterioration or improvement of been missing for some time); or even if
the things. known, it cannot be recovered whether as
d. If the obligation is to do or not to do, the a matter of fact (e.g., a particular ring is
courts are given the power to determinate the dropped from a ship at sea) or of law (e.g., a
retroactivity of the fulfillment of the condition as property is lost through prescription)
stated in Article1187
Rules on Loss
Rules on Loss, Deterioration, and Improvement a. Loss without debtor’s fault – obligation
(1189) is extinguished
b. Loss due to debtor’s fault – obligation
ART. 1189. When the conditions have been is to pay damages
imposed with the intention of suspending the
efficacy of an obligation to give, the following Rules on Deterioration
rules shall be observed in case of the a. Without debtor’s fault – impairment shall
improvement, loss or deterioration of the be borne by the creditor, debtor is not liable
thing during the pendency of the condition: b. Due to debtor’s fault – creditor may
choose between
1. Rescission plus damages bound to C to give the car and pay
2. Fulfillment plus damages P20,000.00plus incidental damages, if any.

Rules on improvement of the thing: (5) Improvement of thing by nature or by

a. By nature or by time – it shall inure to the time. — A thing is improved when its value is
benefit of the creditor increased or enhanced by nature or by time
b. At the expense of the debtor – debtor’s or at the expense of the debtor or creditor.
right is that granted to a usufructuary. By (see Art. 1187.)
contract of usufruct, a person has a right
to enjoy the use and the fruits of EXAMPLE: Suppose the market value of
the thing belonging to another the car increased, who gets the benefit?
The improvement shall inure to the benefit
RULES IN CASE OF LOSS, ETC. OF THING of C. In as much as C would suffer in
DURING PENDENCY OF SUSPENSIVE case of deterioration of the car through a
CONDITION. fortuitous event, it is but fair that he should
be compensated in case of improvement of
(1) Loss of thing without debtor’s fault. — the car instead.
EXAMPLE: D obliged himself to give C
his car worth P100,000.00 if C sells D’s (6) Improvement of thing at expense of
property. The car was lost without the fault debtor. —
of D. The obligation is extinguished and D EXAMPLE: During the pendency of the
is not liable to C even if C sells the property. condition, D had the car painted and its
A person, as a general rule, is not liable for a seat cover changed at his expense. In this
fortuitous event. case, D will have the right granted to a
usufructuary with respect to improvements
(2) Loss of thing through debtor’s fault. — made on the thing held inusufruct.
EXAMPLE: In the same example, if the loss
occurred because of the negligence of D, C RESCISSION IN RECIPROCAL OBLIGATIONS
will be entitled to demand damages,i.e., (1191)
P100,000 plus incidental damages, if any.
ART. 1191. The power to rescind
(3)Deterioration of thing without debtor’s obligations is implied in reciprocal ones,
fault. — A thing deteriorates when its in case one of the obligors should not
value is reduced or impaired with or without comply with what is incumbent upon
the fault of the debtor. him. The injured party may choose
between the fulfillment and the
EXAMPLE: If the car figured in an accident, rescission of the obligation, with the
as a result of which its windshield was payment of damages.
broken and some of its paints were
scratched away without the fault of D, This remedy in case of breach of
thereby reducing its value to P80,000.00, C obligation should not be confused with
will have to suffer the deterioration of rescission in Article 1281, et seq. Under
impairment in the amount of P20,000.00. the former provision, a distinction existed
between rescission and resolution. In either
(3) Deterioration of thing through debtor’s case, He may also seek rescission, even after
fault he has chosen fulfillment, if the latter should
EXAMPLE: In this case, C may choose become impossible. The court shall
between: (a) Rescission(or cancellation) of decree the rescission claimed, unless
the obligation with damages; in the case Dis there be just cause authorizing the fixing of a
liable to pay P100,000.00, value of the period. This is understood to be without
car before its deterioration plus prejudice to the rights of third persons
incidental damages, if any; or (b) who have acquired the thing, in
Fulfillment of the obligation also with accordance with Articles 1385 and 1388 and
damages (see Art. 1191.); in this case, D is the Mortgage Law
 The liability of the first infractor or violator must
CONCEPT OF RESCISSION AS USED IN THIS be equitably tempered by the court because
ARTICLE the other party is likewise guilty of violating
his obligation. Be it noted that their
The power to rescind means the right to corresponding obligations remain to subsist.
cancel or to resolve the contract in case of
non-fulfillment of the obligation on the part If it cannot be determined which of the parties
of one of them. first violated the contract.

This is not the rescission referred to in Article The obligation of the parties is extinguished, and
1380, which involves damage or lesion, or each shall bear his own damages. The principle
injury to the economic interest of a person. is “to each his own”.
The rescission contemplated by this article is
the breach of faith committed by the person WHERE BOTH PARTIES GUILTY OF BREACH
who is supposed to comply with the
obligation. The above article contemplates two situations.
(1) First infractor known. — One party violated
ESSENTIAL FEATURES his obligation; subsequently, the other also
violated his part of the obligation. In this
a. The right to rescind is implied, so there is case, the liability of the first infractor should be
no need to stipulate it in the contract. equitably reduced. Thus, where a bank failed to
b. This right is not automatic or absolute. The release the entire approved loan (P80,000), but
injured party should apply to the court the borrower also failed to pay the partial loan
for a decree of rescission. release (P17,000) he receive dafter it fell due,
c. The court is given discretionary power to both are in default and their respective
fix a period, instead of rescinding the liability for damages shall be offset equitably,
obligation especially if the breach is slight or exclusive of the interest due on the overdue
casual. Neither will rescission take place if loan portion (P17,000) since the borrower
the object is in the possession of a derived benefit for its use (2) First infractor
third person who acted in good faith. cannot be determined. — One party violated
his obligation followed by the other, but it
EFFECT cannot be determined which of them was the
first infractor. The rule is that the contract shall
If the contract is rescinded, the obligatory be deemed extinguished, and each shall bear
relations of the parties are extinguished, his own damages. This means that the contract
as if no relation had ever been shall not be enforced. In effect, the court shall
created. The extinction is retroactive. not provide remedy to either of the parties, who
The rescission inequivalent to invalidating must suffer the damages allegedly sustained by
and unmaking the judicial tie, leaving them. “The above rules are deemed just. The
things in their own statues before the first one is fair to both parties because the
celebration of the contract. second infractor also derived, or thought he
would derive, some advantage by his own
BREACH OF OBLIGATIONS BY BOTH PARTIES act or neglect. The second rule is likewise
(1192) just because it is presumed that both at about
the same time tried to reap some benefit.”
ART. 1192. In case both parties have It has been held that when both parties
committed a breach of the obligation, the to a transaction are mutually negligent in
liability of the first infractor shall be the performance of their obligations, the fault of
equitably tempered by the courts. If it one cancel the negligence of the other and
cannot be determined which of the parties their rights and obligations maybe determined
first violated the contract, the same shall be equitably under the law proscribing unjust
deemed extinguished, and each shall enrichment.
bear his own damages.
Under Article 1192, “the liability of the
first infractor shall be equitably tempered by the the omission of an
courts’’ but it is for the courts, in the exercise of act.
their sound discretion, to decide what is AS TO NUMBER Conjunctive- there
equitable under the circumstances.19 In other are several
words, the mitigation of the damages to be conditions and all
awarded to the second infractor is subject must be fulfilled
to the discretion of the court, depending Disjuctive- there are
of what is equitable under the circumstances. only several
conditions and only
one or some of them
CLASSIFICATION OF CONDITIONS must be fulfilled
AS TO EFFECT Suspensive- the AS TO DIVISIBILITY Divisible- the
happening of which condition is
give rise to the susceptible of partial
obligation performance
Resolutory- the Indivisible- the
happening of which condition is not
extinguishes the susceptible of partial
obligation. performance.
AS TO FORM Express- the
condition is clearly
stated, and OBLIGATIONS WITH PENAL CLAUSE
Implied- the
condition is merely Art. 1226. In obligations with a penal clause, the
inferred penalty shall substitute the indemnity for
AS TO POSSIBILITY Possible- the damages and the payment of interests in case
condition is capable of non-compliance, if there is no stipulation to
of fulfillment, legally, the contrary. Nevertheless, damages shall be
and physically paid if the obligor refuses to pay the penalty or
Impossible- the is guilty of fraud in the fulfilment of the
condition is not obligation.
capable of fulfillment. -The penalty may be enforced only when it is
Legally or physically demandable in accordance with the provisions
AS TO CAUSE OF Potestetive- the of this Code.
ORIGIN condition depends
upon the will of one Meaning of principal and accessory obligations
of the contradicting 1. Principal obligation is one which can stand by
parties itself and does not depend for its validity
Casual- The condition and existence upon another obligation.
depends upon 2.Accessory obligation is one which is attached
chance or upon will to a principal obligation and, therefore, cannot
of a third person stand alone.

Mixed- the condition MEANING OF OBLIGATION WITH A PENAL

depends partly upon CLAUSE
chance and partly An obligation with a penal clause is one which
upon the will of a third contains an accessory undertaking to pay a
person. previously stipulated indemnity in case of
AS TO MODE Positive- the breach of the principal prestation, intended
condition consists in primarily to induce its fulfilment.
the performance of
an act. PURPOSES:
Negative- the 1. Funcion coercitiva o de garantia – to insure
condition consists in the performance of the obligation
2. Funcion liquidatoria – to liquidate the amount a. Subsidiary or alternative Penal Clause- when
of damages to be awarded to the injured party only the penalty can be enforced and
in case of breach of the principal obligation; b. Joint or cumulative penal Clause- when the
and principal obligation of the penal clause can be
3. Funcion estrictamente penal – in certain enforced.
exceptional cases, to punish the obligor in case
of breach of the principal obligation. EXCEPTIONS – additional damages may be
This is an accessory obligation attached to the recovered from the following acts:
principal obligation, which imposes an
additional liability in case of breach of the • If the debtor refuses to pay the penalty
principal obligation. • If the debtor is guilty of fraud in the
fulfillment of the obligation
It pushes the debtor to perform his obligation • If there is express stipulation that the other
faithfully and without delay – within the period damages or interests are demandable to
agreed upon, or else, he suffers a fixed civil the penalty in the penal clause
penalty without need of proving the damages
of the other party ART. 1227
The debtor cannot exempt himself from the
The penalty imposable is a substitute for the performance of the obligation by paying the
indemnity for: penalty, save in the case where this right has
a. damages been expressly reserved for him. Neither can the
b. payment of interest in case of breach of creditor demand the fulfillment of the obligation
obligation-unless the contrary is stipulated and the satisfaction of the penalty at the same
time, unless this right has been clearly granted
MEANING OF PENAL CLAUSE him. However, if after the creditor has decided
A penal clause is an accessory undertaking to require the fulfillment of the obligation, the
attached to an obligation to assume greater performance thereof should become
liability in case of breach, i.e., the obligation is impossible without his fault, the penalty may be
not fulfilled, or is partly or irregularly complied enforced.
with.
A debtor cannot evade from payment of his
PENAL CLAUSE AND CONDITION DISTINGUISHED principal obligation by choosing to pay the
1. The first constitutes an obligation although penalty stipulated, except when the debtor is
accessory, while the latter does not; and EXPRESSLY granted with the right to substitute
2. Therefore, the former may become the penalty for the principal obligation. – an
demandable in default of the unperformed obligation with penalty clause cannot be
obligation and sometimes jointly with it, while turned to facultative obligation unless expressly
the latter is never demandable. stipulated in the contract.

Kinds of penal clause The creditor cannot demand the stipulated

(1) As to its origin: fulfillment of the principal obligation and the
a. Legal penal clause. - when it is provided by penalty at the same time, except
law; and
b. Conventional penal clause. when it is a. when the creditor was clearly given the right
provided for by stipulation of the to enforce both the principal obligation and
parties. penalty;
b. when the creditor has demanded fulfillment
(2) As to its purpose: of the obligation but cannot be fulfilled due to
a. Compensatory penal clause. - when the the
penalty takes the place of damages; and 1. debtor’s fault – creditor may demand for
b. Punitive penal clause. - when the penalty is penalty
imposed merely as punishment for breach. 2. creditor’s fault – he cannot claim the penalty
3. fortuitous event – principal obligation and
(3) As to its demandability. Or effect: penalty are extinguished
 The nullity of the penal clause does not carry
ART.1228. with it that of the principal obligation. The nullity
Proof of actual damages suffered by the of the principal obligation carries with it that of
creditor is not necessary in order that the the penal clause.
penalty may be demanded. Because the penal clause is only an accessory
to the principal obligation, it cannot exist
• As long as the agreement or contract is alone.If the penal clause is void, the principal
breached. obligation remains enforceable.
• The mere non-fulfillment of the principal
obligation entitles the creditor to the The nullity of penal clause does not mean the
penalty stipulated. nullity of the principal.
• The purpose of the penalty clause is
precisely to avoid proving damages. For example: In case of non-payment of
P10,000, P1,000 per day as penalty shall be
ART 1229. imposed. It is a void contract but it is not an
The judge shall equitably reduce the penalty excuse that you don't have to pay the principal
when the principal obligation has been partly or which is P10,000.
irregularly complied with by the debtor. Even if
there has been no performance, the penalty EXTINHGUISHMENT OF OBLIGATIONS
may also be reduced by the courts if it is
iniquitous or unconscionable. GENERAL PROVISIONS

JUDICIAL REDUCTION OF PENALTY 1231. Obligations are extinguished:

a. by payment or performance
Principal obligation – partly complied with by b. by loss of the thing due
the debtor (but not in indivisible obligation, c. by condonation or remission
because it is tantamount to non-compliance) d. by confusion or merger of the rights of
creditor and debtor
Principal obligation – complied not in e. by compensation
accordance with the tenor of the agreement f. by novation
(refers to irregular performance)
Other causes of extinguishment of obligations,
Penalty – iniquitous or unconscionable such as annulment, rescission, fulfillment of a
-Judge’s power to reduce penalties are resolutory condition, and prescription, are
limited to private contracts. governed elsewhere in this Code.

INIQUITOUS OR UNCONSCIONABLE – when it is OBLIGATIONS EXTINGUISHED BY PAYMENT OPR

revolting to the conscience or common sense; PERFORMANCE (ART. 1232- ART 1251)
grossly disproportionate to the damages
suffered. 1232. Payment means not only the delivery of
money but also the performance, in any other
PENALTY NOT ENFORCEABLE: manner of an obligation.
a. Impossible performance of principal
obligation due to fortuitous events Payment means not only delivery of money but
b. Creditor prevented the debtor from fulfilling also the performance.
the obligation
c. Penalty is contrary to good morals or good By payment: the fulfillment of obligations to give
customs which includes specific/generic thing.
d. Both parties are guilty of breach of contract Performance: Obligation to do
e. Breach of contract by the creditor
f. None of the parties committed any willful or
culpable violation of the agreement It is the fulfillment of the prestation due that
extinguishes the obligation by the realization of
ART 1230. the purposes for which it was constituted.
 without just cause is a ground for consignation
It is a juridical act which is voluntary, licit and under Art 1256 (if a receipt has been issued by
made with the intent to extinguish an obligation payee, the testimony alone of payer would be
insufficient to prove alleged payments).
Requisites:
1. person who pays 1234. If the obligation has been substantially
2. the person to whom payment is made performed in good faith, the obligor may
3. the thing to be paid recover as though there had been a strict and
4. the manner, time and place of payment etc complete fulfillment, less damages suffered by
the obligee.
The paying as well as the one receiving should
have the requisite capacity In order that there may be substantial
performance of an obligation, there must have
Kinds: been an attempt in good faith to perform,
1. normal –when the debtor voluntarily performs without any willful or intentional departure
the prestation stipulated therefrom
2. abnormal – when he is forced by means of a
judicial proceeding either to comply with The non-performance of a material part of a
prestation or to pay indemnity contract will prevent the performance from
amounting to a substantial compliance

1233. A debt shall not be understood to have A party who knowingly and willfully fails to
been paid unless the thing or service in which perform his contract in any respect, or omits to
the obligation consists of has been completely perform a material part of it cannot be
delivered or rendered, as the case may be. permitted under the protection of this rule to
compel the other party to perform; and the
STATES 2 REQUISITES OF PAYMENT: trend of the more recent decisions is to hold that
a.) identity of prestation the percentage of omitted or irregular
- the very thing or service due must be delivered performance may in and of itself be sufficient to
or released. show that there has not been a substantial
-prestation must be fulfilled completely. performance
-does not allow partial or irregular payment
otherwise the obligation will not be The party who has substantially performed may
extinguished. (ART. 1248) enforce specific performance of the obligation
b.) integrity – prestation must be fulfilled of the other party or may recover damages for
completely their breach upon an allegation of
performance, without proof of complete
TIME OF PAYMENT fulfillment. The other party, on the other
The payment or performance must be on the hand, may by an independent action
date stipulated (may be made even on before he is sued, or by a counterclaim
Sundays or on any holiday, although some, like after commencement of a suit against him,
the Negotiable Instruments Law, states that recover from the first party the damages which
payment in such case may be made on the he has sustained by the latter’s failure to
next succeeding business day) completely fulfill his obligation

The burden of proving that the obligation has Obligor may recover as though there had been
been extinguished by payment devolves upon strict and complete fulfillment, less damage
the debtor who offers such a defense to the suffered by the oblige.
claim of the plaintiff creditor
1235 – When the oblige accepts the
The issuance of a receipt is a consequence of performance, knowing its incompleteness
usage and good faith which must be observed or irregularity, and without expressing any
(although our Code has no provision on this) protest or objection, the obligation is deemed
and the refusal of the creditor to issue a receipt fully complied with
Obligee must know the irregularity and accepts CREDITOR IS BOUND TO ACCEPT PAYMENT/
without expressing any protest or objection. PERFORMANCE

A person entering into a contract has a right to a. Debtor

insist on its performance in all particulars, b. Any person who has interest in the
according to its meaning and spirit. But if he obligation
chooses to waive any of the terms introduced c. Successor in the interest
for his own benefit, he may do so.
(ALL VALID PAYMENTS AND CANNOT BE REFUSED
But he is not obliged to accept anything else in BY THE CREDITOR)
place of that which he has contracted for and
if he does not waive this right, the other party ART 1237. Whoever pays on behalf of the debtor
cannot recover against him without performing without the knowledge or against the will of the
all the stipulations on is part. latter, cannot còmpel the creditor to subrogate
him in his rights, such as those arising from a
To constitute a waiver, there must be an mortgage, guaranty, or penalty.
intentional relinquishment of a known right. A
waiver will not result from a mere failure to Third person who has no interest in the fulfillment
assert a claim for defective of obligation when there is stipulation that he
performance/payment. There must have can make payment.
been acceptance of the defective
performance with actual knowledge if the WHO CAN PAY?
incompleteness or defect, under circumstances
that would indicate an intention to consider the The creditor can refuse payment
performance as complete and renounce any If debtor consent to payment
claim arising from the defect • REIMBURSEMENT- The debtor shall fully
reimburse 3rd person.
A creditor cannot object because of defects in • SUBROGATION- The 3rd person is
performance resulting from his own acts or subrogated to the rights of creditor.
directions. -The payor steps into the shoes of the
creditor
THE DOCTRINE OF ESTOPPEL -3rd person becomes entitles not only
Estoppel is a bar which precludes a person from, to recover what he has paid but also
denying or asserting anything contrary to that exercise all the rights which the creditor
which has been in contemplation of law, could have exercised.
established the truth either acts of judicial or
representation either express or implied. If debtor does not consent to payment (Art.
1237)
If one person speaks, acts or leads one to • The debtor shall reimburse 3rd person for
believe him and the latter reasonably relied on what has been beneficial to him
those acts, words and behavior the former • The 3rd person is not subrogated to the
cannot later on back out and hide behind the rights of creditor
clock of denial
BENEFICIAL REIMBURSEMENT
1236. The creditor is not bound to accept -Not entitled to subrogation
payment or performance by a third person who -can recover only payment to that extent that
has no interest in the fulfillment of the obligation, the debtor was benefitted.
unless there is a stipulation to the contrary. -recovery is only up to the extent or amount of
Whoever pays for another may demand from the debt at the time of payment..
the debtor what he has paid, except that if he
paid without the knowledge or against the will EXAMPLE:
of the debtor, he can recover only insofar as the D is indebted to C for P1M. As security, D
payment has been beneficial to the debtor pledged his car. 2 months before the debt
matures, D paid P100,000 to C which the latter
accepted. 1 month before the debt matures, X b.) conventional – when the authority has been
presented payment of P1M to C. given by the creditor himself (e.g., agent who is
appointed to collect from the debtor payment
1238. Payment made by a third person who made by the debtor to a wrong party does not
does not intend to be reimbursed by the extinguish the obligation as to the creditor
debtor is deemed to be a donation, which (void), if there is no fault or negligence which
requires the debtor’s consent/ but the can be imputed to the latter (even when the
payment is in any case valid as to the creditor debtor acted in utmost good faith, or through
who has accepted it. error induced by the fraud of the 3rd person). It
does not prejudice the creditor and the accrual
No one should be compelled with the of interest is not suspended by it.
generosity of other.
Payment to wrong person is considered NOT
Payment by a third person the third person VALID therefore payment is considered still not
intention of reimbursement is deemed a extinguished.
donation.
(MUST BE WITH DONOR’S CONSENT) it1241. Payment to a person who is
incapacitated to administer his property shall
If debtor does not consent to payment (Art. be valid if he has kept the thing delivered, or
1237) insofar as the payment has been beneficial to
him. Payment made to a third person shall also
• The debtor shall reimburse 3rd person for be valid insofar as it has redounded to the
what has been beneficial to him benefit of the creditor. Such benefit to the
• The 3rd person is not subrogated to the creditor need not be proved in the following
rights of creditor cases:
(1) If after the payment, the third person
ART.1239. In obligations to give, payment made acquires the creditor's rights.
by one who does not have the free disposal of (2) If the creditor ratifies the payment to the third
the thing due and capacity to alienate it shall person;
not be valid, without prejudice to the (3) If by the creditor's conduct, the debtor has
provisions of article 1427 under the Title on been led to believe that the third person had
“Natural Obligations”. authority to receive the payment. (1163a)

Free disposal of the thing due • payment shall be considered as having

- The thing must be delivered and shall not benefited the incapacitated person if he
be subjected to any claim. made an intelligent and reasonable use
Capacity to alienate thereof, for purposes necessary or useful to
- Person not capacitated to enter into him, such as that which his legal
contracts. representative would have or could have
done under similar circumstances, even if at
(SHALL NOT BE VALID) the time of the complaint the effect of such
use no longer exists (e.g., taxes on creditor’s
ART. 1240. Payment shall be made to the person property, money to extinguish a mortgage
in whose favor the obligation has been on creditor’s property)
constituted, or his successor in interest, or any
person authorized to receive it. • the debtor is not released from liability by a
payment to one who is not the creditor nor
one authorized to receive the payment,
The authority of a person to receive payment for
even if the debtor believed in good faith
the creditor may be
that he is the creditor, except to the extent
that the payment inured to the benefit of
a.) legal – conferred by law (e.g.,guardian of
the creditor
the incapacitated, administrator of the estate
of the deceased)
• in addition to those mentioned above, 1244. The debtor of a thing cannot compel the
payment to a third person releases the creditor to receive a different one, although the
debtor: latter may be of the same value as, or more
valuable than that which is due. In obligations
a.) when, without notice of the assignment to do or not to do, an act or forbearance cannot
of credit, he pays to the original creditor be substituted by another act or forbearance
b.) when in good faith he pays to one in against the obligee's will. (1166a)
possession of the credit
Upon agreement of consent of the creditor, the
• Even when the creditor receives no benefit debtor may deliver a different thing or perform
from the payment to a third person, he a different prestation in lieu of that stipulated. In
cannot demand payment anew, if the this case there may be dation in payment or
mistake of the debtor was due to the fault of novation. The defects of the thing delivered
the creditor may be waived by the creditor, if he expressly
so declares or if, with knowledge thereof, he
1242. Payment made in good faith to any accepts the thing without protest or disposes of
person in possession of the credit shall release it or consumes it
the debtor. (1164)
1245. Dation in payment, whereby property is
• The person in possession of the credit is alienated to the creditor in satisfaction of a debt
neither the creditor nor one authorized by in money, shall be governed by the law of sales.
him to receive payment, but appears under (n)
the circumstances of the case, to be the
creditor. He appears to be the owner of the This is the delivery and transmission of ownership
credit, although in reality, he may not be the of a thing by the debtor to the creditor as an
owner (e.g., an heir who enters upon the accepted equivalent of the performance of
hereditary estate and collects the credits the obligation.
thereof, but who is later deprived of the
inheritance because of incapacity to The property given may consist not only of a
succeed) thing but also of a real right (such as a usufruct)

• It is necessary not only that the possession of Considered as a novation by change of the
the credit be legal, but also that the object where the debt is money, the law on sale
payment be in good faith shall govern; in this case, the act is deemed to
be a sale with the amount of the obligation to
the extent that it is extinguished being
1243. Payment made to the creditor by the considered as price difference between Dation
debtor after the latter has been judicially and Cession (see Art. 1255)
ordered to retain the debt shall not be valid.
(1165)
1246. When the obligation consists in the
The payment to the creditor after the credit has delivery of an indeterminate or generic
been attached or garnished is void as to the thing, whose quality and circumstances have
party who obtained the attachment or not been stated, the creditor cannot demand a
garnishment, to the extent of the amount of the thing of superior quality. Neither can the debtor
judgment in his favor. deliver a thing of inferior quality. The
purpose of the obligation and other
The debtor upon whom garnishment order is circumstances shall be taken into
served can always deposit the money in court consideration. (1167a)
by way of consignation and thus relieve himself
from further liability • If there is disagreement between the
debtor and the creditor as to the quality of
the thing delivered, the court should
decide whether it complies with the
 obligation, taking into consideration the In the meantime, the action derived from the
purpose and other circumstances of the original obligation shall be held in the
obligation abeyance. (1170)

• Both the creditor and the debtor may • LEGAL TENDER - means such currency
waive the benefit of this article which in a given jurisdiction can be used for
the payment of debts, public and private,
• see Art. 1244 and which cannot be refused by the
creditor
ART. 1247. Unless it is otherwise stipulated, the - That which a debtor may compel a
extrajudicial expenses required by the payment creditor to accept in payment of debt.
shall be for the account of the debtor. With
regard to judicial costs, the Rules of Court shall • So long as the notes were legal tender at
govern. (1168a) the time they were paid or delivered, the
person accepting them must suffer the loss
• This is because the payment is the debtor’s if thereafter they became valueless
duty and it inures to his benefit in that he is
discharged from the burden of the • The provisions of the present article have
obligation been modified by RA No. 529 which states
that payments of all monetary obligations
ART. 1248. Unless there is an express stipulation should now be made in currency which is
to that effect, the creditor cannot be compelled legal tender in the Phils. A stipulation
partially to receive the prestations in which the providing payment in a foreign currency
obligation consists. Neither may the debtor be is null and void but it does not invalidate
required to make partial payments. the entire contract, and R.A. 4100.

However, when the debt is in part liquidated • A check, whether a manager’s check or
and in part unliquidated, the creditor may an ordinary check is not legal tender and
demand and the debtor may effect the an offer of the check in payment of debt is
payment of the former without waiting for the not a valid tender of payment.
liquidation of the latter. (1169a)
ART. 1250. In case an extraordinary inflation or
• The creditor who refuses to accept partial deflation of the currency stipulated should
prestations does not incur delay except supervene, the value of the currency at the
when there is abuse of right or if good faith time of the establishment of the obligation
requires acceptance shall be the basis of payment, unless
there is an agreement to the contrary. (n)
• This article does not apply to obligations
where there are several subjects or where • The amount liable by the debtor is the
the various parties are bound under different equivalent amount of the obligations
terms and conditions currency today unless there is stipulation
that regardless of inflation and deflation
1249. The payment of debts in money shall be the debtor’s liability will stay as whats value
made in the currency stipulated, and if it is not upon making the contract.
possible to deliver such currency, then in the
currency which is legal tender in the Philippines. EXAMPLE:
The delivery of promissory notes payable to if 5k obligation and now value niya is 10k,
order, or bills of exchange or other mercantile debtor's obligation is 10k.
documents shall produce the effect of payment
only when they have been cashed, or when 1251. Payment shall be made in the place
through the fault of the creditor they have been designated in the obligation. There being no
impaired. express stipulation and if the undertaking is to
deliver a determinate thing, the payment
shall be made wherever the thing might
be at the moment the obligation was payment is made, the former cannot complain
constituted. In any other case the place of of the same, unless there is a cause for
payment shall be the domicile of the debtor. invalidating the contract. (1172a)

• If the debtor changes his domicile in bad Requisites:

faith or after he has incurred in delay, the 1. 1 debtor and 1 creditor only
additional expenses shall be borne by him. 2. 2 or more debts of the same kind
These provisions are without prejudice to 3. all debts must be due
venue under the Rules of Court.(1171a) 4. amount paid by the debtor must not be
sufficient to cover the total amount of all the
• Since the law fixes the place of payment at debts
the domicile of the debtor, it is the duty of
the creditor to go there and receive • It is necessary that the obligations must all be
payment; he should bear the expenses in due. Exceptions: (1) when there is a
this case because the debtor cannot be stipulation to the contrary; and (2) the
made to shoulder the expenses which the application of payment is made by the
creditor incurs in performing a duty party for whose benefit the term or period
imposed by law and which is for his benefit. has been constituted (relate to Art. 1196).
But if the debtor changes his domicile in
bad faith or after he has incurred in delay, • It is also necessary that all the debts be for
then the additional expenses shall be the same kind, generally of a monetary
borne by him character. This includes obligations which
were not originally of a monetary character,
• When the debtor has been required to but at the time of application of payment,
remit money to the creditor, the latter had been converted into an obligation to
bears the risks and the expenses of the pay damages by reason of breach or non-
transmission. In cases however where the performance.
debtor chooses this means of payment, he
bears the risk of loss. • If the debtor makes a proper application of
payment but the creditor refuses to accept
Domicile – is the place of a person’s habitual it because he wants to apply it to another
residence; the place where he has his true fixed debt, such creditor will incur in delay
permanent home and to which place he,
whenever he is absent, has the intention of EXAMPLE:
returning.
D is indebted to C. Below are the debts of D and
Residence – is only an element of domicile. It C with their due dates.
simply requires bodily presence as an inhabitant
in a given place. 1. June 30- 10,000 php
2. July 8- 12,000 php
SUBSECTION 1 3. July 5- give specific cat
APPLICATION OF PAYMENTS 4. July 12- 8,000 php with 12% annual
interest
ART 1252. He who has various debts of the same 5. July 13- 15,000 php secured by chattel
kind in favor of one and the same creditor, may mortagage
declare at the time of making the payment, to 6. July 15- 9,000 php
which of them the same must be applied.
Unless the parties so stipulate, or when the *Assuming ony July 14, D is ready to pay but only
application of payment is made by the party for up to 20,000 php.
whose benefit the term has been constituted,
application shall not be made as to debts which - remove number 3 and 6 since it is not in the
are not yet due.If the debtor accepts from the same kind and the debt is still not on due.
creditor a receipt in which an application of the
1253. If the debt produces interest, payment of (1) unsecured debt, (2) a debt secured with
the principal shall not be deemed to have mortgage of the debtor's property, (3) a debt
been made until the interests have been with interest, (4) a debt in which the debtor is
covered. (1173) solidarily liable with another. Partial payment
was made by the debtor, without specification
• Interest paid first before principal as to which the payment should be applied.The
most onerous is (4), followed by (2), then (3),
• Applies both to compensatory interest then (1). Consequently, payment shall be made
(that stipulated as earnings of the in that order
amount due under the obligation) and
to interest due because of delay or mora SUBSECTION 2:
on the part of the debtor PAYMENT BY CESSION
• SC held that this provision applies only in
the absence of a verbal or written 1255. The debtor may cede or assign his
agreement to the contrary (merely property to his creditors in payment of his debts.
directory, not mandatory) This cession, unless there is stipulation to the
contrary, shall only release the debtor from
ART. 1254. When the payment cannot applied responsibility for the net proceeds of the thing
in accordance with the preceding rules, or if assigned. The agreements which, on the effect
application cannot be inferred from other of the cession, are made between the debtor
circumstances, the debt which is most onerous and his creditors shall be governed by special
to the debtor, among those due, shall be laws. (1175a)
deemed to have been satisfied. If the debts
due are of the same nature and burden, the Cession is a special form of payment whereby
payment shall be applied to all of them the debtor abandons or assigns all his property
proportionately. (1174a) for the benefit of his creditors so that the latter
may obtain payment of their credits from the
As to which of 2 debts is more onerous is proceeds of the property.
fundamentally a question of fact, which courts
must determine on the basis of the Requisites:
circumstances of each case 1. plurality of debts
2. partial or relative insolvency of the debtor3.
Debts are not of the same burden (1st par.)– acceptance of cession by the creditors
Rules:
1. Oldest are more onerous than new ones Kinds of Cession:
2. One bearing interest more onerous than one
that does not 1. Contractual (Art. 1255)
3. secured debt more onerous than unsecured 2. Judicial (Insolvency Law)
one
4. principal debt more onerous than guaranty Must be initiated by debtors
5. solidary debtor more onerous than sole
debtor Requires two or more creditors, debtors
6. share in a solidary obligation more onerous to insolvent, cession accepted by creditors Such
a solidary debtor assignment does not have the effect of making
7. liquidated debt more onerous than the creditors the owners of the property of the
unliquidated debtor unless there is an agreement to that
effect.
Debts are of the same burden (2nd par.)– the
payment shall be applied to all of them pro rata DIFFERENCE BETWEEN DATION AND CESSION IN
or proportionately. PAYMENT

Example: debtor owes his creditor several PAYMENT BY CESSION DATION IN PAYMENT
debts, all of them due, to wit: Debtor must be Debtor may or may
insolvent not be insolvent
 Two or more creditors Plurality of creditors such a form that the creditor could have
not required immediately realized payment if he had
Affects all properties Affects only a specific accepted the tender, followed by a prompt
of debtor except property attempt of the debtor to deposit the means of
those exempted by payment in court by way of consignation, the
law. accrual of interest on the obligation will be
Right to sell passes to Ownership passes to suspended from the date of such tender. But
the creditor the creditor when the tender of payment is not
Obligation is Obligation is fully accompanied by the means of payment, and
extinguished up to extinguidhed the debtor did not take any immediate step to
the extent of the regardless of the make a consignation, then the interest is not
proceeds from the deficiency in suspended from the time of such tender.
property. proceeds from the
property. GENERAL REQUISITES OF VALID
Furthermore, the CONSIGNATION vs SPECIAL REQUISITES
creditor is not
required to sell the General Req : relative to payment (Arts. 1232 -
property. 1251)
Special Req : very nature of consignation (Arts.
1256 – 1258)
SUBSECTION 3
TENDER OF PAYMENT AND CONSIGNATION 1256. Special Requisites of consignation: [DLN-DN]
If the creditor to whom tender of payment has
been made refuses without just cause to accept 1. [D] There was a debt due
it, the debtor shall be released from 2. [L] The consignation of the obligation was
responsibility by the consignation of the thing or made because of some legal cause provided
sum due. Consignation alone shall produce the in the present article
same effect in the following cases: 3. [N] That previous notice of the consignation
has been given to persons interested in the
(1) When the creditor is absent or unknown, or performance of the obligation
does not appear at the place of payment; 4. [D] The amount or thing due was placed at
(2) When he is incapacitated to receive the the disposal of the court
payment at the time it is due; 5. [N] After the consignation had been made
(3) When, without just cause, he refuses to give the persons interested had been notified
a receipt; thereof
(4) When two or more persons claim the same
right to collect; If the reason for consignation is the unjust refusal
(5) When the title of the obligation has been lost. of the creditor to accept payment, it must be
(1176a) shown:

Tender of payment : manifestation made by the 1. That there was previous tender of payment,
debtor to the creditor of his desire to comply without which the consignation is ineffective
with his obligation; The act of the debtor of 2. That the tender of payment was of the very
offering to the creditor the thing or amount due thing due, or in case of money obligations that
legal tender currency was offered
Consignation : Deposit of the object or the 3. That the tender of payment was
amount due with the proper court after refusal unconditional and
or inability of the creditor to accept the tender 4. That the creditor refused to accept payment
of payment Tender of payment by certified without just cause
check is valid; a mere check would also be
valid for tender of payment if the creditor Exception to requirement for tender of payment:
makes no prompt objection, but this does not [AIR-TT]
stop the latter from later demanding payment
in cash When a tender of payment is made in
1. [A] When creditor is absent or unknown or creditors, the notice may be made by
does not appear at place of payment publication
2. [I] When he is incapacitated to receive
payment 1st paragraph of this article – pertains to the 3rd
3. [R] When he refuses to give receipt, without Special Requisite of Consignation ([N] Previous
just cause Notice)- Tender of Payment vs Previous Notice :
4. [T] When two or more persons claim same the former is a friendly and private act
right to collect manifested only to the creditor; the latter is
5. [T] When title of the obligation has been lost manifested also to other persons interested in
the fulfillment of the obligation.
• The 1st and 2nd Special Requisites of
Consignation are embodied in Article 2nd paragraph of this article – pertains to the
1256. General Requisites of Consignation (Arts. 1232-
• As to the 2 nd requisite ([L] – legal 1251), which must be complied with
cause) the following musst be present:
ART. 1258. Consignation shall be made by
(a)the tender of payment must have been depositing the things due at the disposal of
made prior to the consignation judicial authority, before whom the tender of
payment shall be proved, in a proper case, and
(b)that it must have been unconditional [e.g. the announcement of the consignation in other
where the debtor tendered a check for P3,250 cases. The consignation having been made, the
to the creditor as payment of a debt interested parties shall also be notified thereof.
conditioned upon the signing by the latter of a (1178)
motion to dismiss a complaint for legal
separation, such tender of payment is invalid.]
1st paragraph hereof - 4th Special Requisite of
(c) that the creditor must have refused to Consignation ([D] Disposal of the Court)
accept the payment without just cause [it is not - this is complied with if the debtor depostis the
necessary for the court where the thing or the thing or amount with the Clerk of Court
amount is deposited to determine whether the
refusal of the creditor to accept the same was 2nd paragraph hereof - 5th Special Requisite
with or without just cause. The question will be of Consignation ([N] Subsequent Notice)
resolved anyway in a subsequent proceeding. - this is to enable the creditor to withdraw the
Hence, the mere refusal of the creditor to goods or money deposited.
accept the tender of payment will be sufficient
(Manresa)] ART. 1259. The expenses of consignation, when
properly made, shall be charged against the
ART. 1257. In order that the consignation of the creditor. (1179)
thing due may release the obligor, it must first be
announced to the persons interested in the The consignation is properly made when:
fulfillment of the obligation. 1.) after the thing has been deposited in
court, the creditor accepts the
The consignation shall be ineffectual if it is not consignation without objection and without
made strictly in consonance with the any reservation of his right to contest it because
provisions which regulate payment. (1177) of failure to comply with any of the requisites for
consignation; and
The lack of notice does not invalidate the 2.) when the creditor objects to the
consignation but simply makes the debtor liable consignation but the court, after proper
for the expenses hearing, declares that the consignation has
been validly made
The tender of payment and the notice of
consignation sent to the creditor may be made *In these cases, the creditor bears the expenses
in the same act. In case of absent or unknown of the consignation
ART. 1260. Once the consignation has been duly consignation, and the relationship of debtor
made, the debtor may ask the judge to order and creditor is restored to the condition in which
the cancellation of the obligation. Before the it was before the consignation. But third persons,
creditor has accepted the consignation, or solidary co-debtors, guarantors, and sureties
before a judicial declaration that the who are benefited by the consignation are not
consignation has been properly made, the prejudiced by the revival of the obligation
debtor may withdraw the thing or the sum between the debtor and the creditor.
deposited, allowing the obligation to remain in
force. (1180) SECTION 2
Consignation has a retroactive effect and the LOSS OF THE THING DUE
payment is deemed to have been made at the
time of the deposit of the thing in court or when ART. 1262. An obligation which consists in the
it was placed at the disposal of the judicial delivery of a determinate thing shall be
authority extinguished if it should be lost or destroyed
without the fault of the debtor, and before he
The effects of consignation are: has incurred in delay.
1.) the debtor is released in the same manner as
if he had performed the obligation at the time When by law or stipulation, the obligor is liable
of the consignation because this produces the even for fortuitous events, the loss of the thing
same effect as a valid payment, does not extinguish the obligation and he shall
2.) the accrual of interest on the obligation is be responsible for damages. The same rule
suspended from the moment of consignation, applies when the nature of the obligation
3.) the deteriorations or loss of the thing or requires the assumption of risk.
amount consigned occurring without fault of
the debtor must be borne by the creditor,
because the risks of the thing are transferred to ART. 1263: In an obligation to deliver a generic
the creditor from the moment of deposit 4.) any thing, the loss or destruction of anything of the
increment or increase in value of the thing after same kind does not extinguish the obligation.
the consignation inures to the benefit of the (n)
creditor.
ART.1264. The courts shall determine whether,
When the amount consigned does not cover under the circumstances, the partial loss of the
the entire obligation, the creditor may accept object of the obligation is so important as to
it, reserving his right to the balance. If no extinguish the obligation. (n)
reservations are made, the acceptance by the
creditor of the amount consigned may be ART 1265. Whenever the thing is lost in the
regarded as a waiver of further claims under the possession of the debtor, it shall be presumed
contract that the loss was due to his fault, unless there is
proof to the contrary, and without prejudice to
ART. 1261. If, the consignation having been the provisions of article 1165. This presumption
made, the creditor should authorize the debtor does not apply in case of earthquake, flood,
to withdraw the same, he shall lose every storm, or other natural calamity. (1183a)
preference which he may have over the thing.
The co-debtors, guarantors and sureties shall be • 3rd paragraph of Art. 1165: when the
released. (1181a) obligor delays, or has promised to deliver
the same thing to two or more persons who
When the consignation has already been do not have the same interest, he shall be
made and the creditor has accepted it or it has liable for any fortuitous event until he has
been judicially declared as proper, the debtor affected the delivery
cannot withdraw the thing or amount
deposited unless the creditor consents thereto. • Hence, in cases where Art. 1165, par. 3 is
If the creditor authorizes the debtor to withdraw applicable, even if the debtor can prove
the same, there is a revival of the obligation, that the loss of the thing in his possession
which has already been extinguished by the was not through his fault or that it was
 through a fortuitous event, he shall still be ART. 1268. When the debt of a thing certain and
liable to the creditor for damages. determinate proceeds from a criminal offense,
the debtor shall not be exempted from the
1266. The debtor in obligations to do shall payment of its price, whatever may be the
also be released when the prestation cause for the loss, unless the thing having
becomes legally or physically impossible been offered by him to the person who should
without the fault of the obligor. (1184a) receive it, the latter refused without justification
LEGAL IMPOSSIBILITY : may either be – to accept it. (1185)
1. direct (when the law prohibits the
performance or execution of the work ART. 1269. The obligation having been
agreed upon, i.e. when it is immoral or extinguished by the loss of the thing; the creditor
dangerous) shall have all the rights of action which the
2. indirect (the law imposes duties of a superior debtor may have against third persons by
character upon the obligor which are reason of the loss. (1186)
incompatible with the work agreed upon,
although the latter may be perfectly licit, as ART. 1270. Condonation or remission is
where the obligor is drafted for military service essentially gratuitous and requires the
or for a civil function) acceptance by the obligor. It may be made
expressly or impliedly. One and the other kind
PHYSICAL IMPOSSIBILTY : examples – death of shall be subject to the rules which govern in
the debtor; when there is an accident... officious donations. Express condonation shall,
furthermore, comply with the forms of donation.
1267. When the service has become so difficult (1187)
as to be manifestly beyond the contemplation
of the parties, the obligor may also be released ART. 1271. The delivery of a private document
therefrom, in whole or in part. (n) evidencing a credit, made voluntarily by the
creditor to the debtor, implies the renunciation
DOCTRINE OF UNFORESEEN EVENT / DOCTRINE of the action which the former had against the
OF RELATIVE IMPOSSIBILITY(rebus sic stantibus) latter. If in order to nullify this waiver it should be
claimed to be in officious, the debtor and his
• It refers to obligation "to do" (personal heirs may uphold it by proving that the delivery
obligation) of the document was made in virtue of
• Parties are presumed to have the risk payment of the debt. (1188)
• It does not apply to aleatory contracts
(insurance contract) ART. 1272. Whenever the private document in
• Excludes highly speculative business (stock which the debt appears is found in the
exchange) possession of the debtor, it shall be presumed
• Monatory obligations are also excluded that the creditor delivered it voluntarily, unless
(governed by 1357) the contrary is proved. (1189)

Requisites: ART. 1273. The renunciation of the principal debt

1. event or change in the circumstances could shall extinguish the accessory obligations; but
have been foreseen of the time of the the waiver of the latter shall leave the former in
execution contract force. (1190)
2. it makes the performance of the contract
extremely difficult but not impossible ART. 1274. It is presumed that the accessory
3. the event must not be due to the act of any obligation of pledge has been remitted when
of the parties the thing pledged, after its delivery to the
4. the contract is for a future prestation. If the creditor, is found in the possession of the debtor,
contract is of immediate fulfillment, the gross or of a third person who owns the thing. (1191a)
inequality of the reciprocal prestation may be
involve desion or want of cause. SECTION 4
CONFUSION OR MERGER OF RIGHTS
ART. 1275. The obligation is extinguished from persons who in their own right are reciprocally
the time the characters of creditor and debtor debtors and creditors of each other. It is the
are merged in the same person. (1192a) offsetting of two obligations which are
reciprocally extinguished if they are of equal
Merger or confusion is the meeting in one value. Or extinguished to the concurrent
person of the qualities of creator and amount if of different values
debtor with respect to the same obligation. It
erases the plurality of subjects of the obligation. Kinds of Compensation:
Further, the purposes for which the obligation
may have been created are considered as fully As to their effects
realized by the merger of the qualities of debtor
and creditor in the same person. 1. compensation may be total (when the two
obligations are of the same amount);
Requisites of merger or confusion are: 2. or partial (when the amounts are not equal).
(1) It must take place between the creditor and
the principal debtor, As to origin
(2) the very same obligation must be involved, 1. it may be legal.
for if the debtor acquires rights from the creditor, 2. facultative.
but not the particular obligation in question in 3. conventional.
question there will be no merger, 4. or judicial.
(3) the confusion must be total or as regards the
entire obligation. • It is legal when it takes place by operation of
law because all requisites are present.
The effect of merger is to extinguish the
obligation • It is facultative when it can be claimed by
one of the parties, who, however, has the
right to object to it, such as when one of the
ART. 1276. Merger which takes place in the obligations has a period for the benefit of
person of the principal debtor or creditor one party alone and who renounces that
benefits the guarantors. Confusion which takes period so as to make the obligation due.
place in the person of any of the latter does not
extinguish the obligation. (1193) • It is conventional when the parties agree to
compensate their mutual obligations even
The extinguishment of the principal obligation if some requisite is lacking.
through confusion releases the guarantor’s
because the obligation of the latter is merely • It is judicial when decreed by the court in a
accessory. When the merger takes place in the case where there is a counterclaim.
person of a guarantor, the obligation is not
extinguished. Compensation vs. Payment:
In compensation, there can be partial
1277. Confusion does not extinguish a joint extinguishment of the obligation; in
obligation except as regards the share payment, the performance must be
corresponding to the creditor or debtor in whom completer, unless waived by the creditor.
the two characters concur. (1194) Payment involves delivery of action, while
compensation (legal compensation) takes
SECTION 5 place by operation of law without simultaneous
COMPENSATION delivery.

1278. Compensation shall take place when two Compensation vs. Merger:
persons, in their own right, are creditors and In compensation, there are at least two persons
debtors of each other. (1195) who stand as principal creditors and debtor of
each other, in merger, there is only one person
Compensation is a mode of extinguishing to the involved in whom the characters of creditor
concurrent amount, the obligations of those and debtor are merged. In merger, there is only
one obligation, while in compensation, there happened; (3) when the obligation cannot
are two obligations involved. be sued upon, as in natural obligation.
1279. In order that compensation may be • A debt is liquidated when its existence and
proper, it is necessary: amount is determined. Compensation can
only take place between certain and
(1) That each one of the obligors be bound liquidated debts
principally, and that he be at the same time a
principal creditor of the other; THE FIVE REQUISITES OF A LEGAL
(2) That both debts consist in a sum of money, COMPENSATION are enumerated in the
or if the things due are consumable, they be of Article. All requisites must be present
the same kind, and also of the same quality if before compensation can be effectual.
the latter has been stated;
(3) That the two debts be due; 1. That each of the obligators be bound
(4) That they be liquidated and demandable; principally and that he be at the same time a
(5) That over neither of them there be any principal creditor of the other. The parties must
retention or controversy, commenced by third be mutual creditor and debtor of each other,
persons and communicated in due time to the and their relationship is a principal one, that is,
debtor. (1196) they are principal debtor and creditor of each
other.
• For compensation to take place, the parties 2. That both debts consist in such a sum of
must be mutually debtors and creditors (1) in money, or if the things due are consumable,
their own right, and (2) as principals. Where they be of the same kind, and also of the same
there is no relationship of mutual creditors quality if the latter has been stated. >>When the
and debtors, there can be no debts consist of money, there is not much of a
compensation. Because the 1st requirement problem when it comes to compensation to the
that the parties be mutually debtors and concurrent amount. It is a matter of
creditors in their own right, there can be no mathematical computation. When the debt
compensation when one party is occupying consist of things, it is necessary that the things
a representative capacity, such as a are consumable which must be understood
guardian or an administrator. The 2nd as ‘fungible’ and therefore susceptible of
requirement is that the parties should be substitution. More than that they must be of the
mutually debtors and creditors as principals. same kind. If the quality has been states, the
This means that there can be no things must be of the same quality.
compensation when one party is a principal 3. That the two debts are due. >> A debt is ‘due’
creditor in one obligation but is only a surety when its period of performance has arrived. If it
or guarantor in the other is a subject to a condition, the condition must
• have already been fulfilled. However, in
• The things due in both obligations must be voluntary compensation, the parties may agree
fungible, or things which can be substituted upon the compensation of debts which are not
for each other. yet due.
• Both debts must be due to permit 4. That they be liquidated and demandable. >>
compensation. A debt is considered ‘liquidated’ when its
• Demandable means that the debts are amount is clearly fixed. Of if it is not yet specially
enforceable in court, there being no fixed, a simple mathematical computation will
apparent defenses inherent in them. The determine its amount or value. It is
obligations must be civil obligations, ‘unliquidated’ when the amount is not fixed
including those that are purely natural. An because it is still subject to a dispute or to
obligation is not demandable, therefore, certain condition. It is not enough that the debts
and not subject to compensation, in the be liquidated. It is also essential that the same
following cases: (1) when there is a period be demandable. A debt is demandable if it is
which has not yet arrived, including the not yet barred by prescription, and it is not
cases when one party is in a state of illegal or invalid.
suspension of payments; (2) when there is a 5. That over neither of them there be any
suspensive condition that has not yet retention or controversy, commenced by third
persons and communicated in due time to the parties should have the capacity to
debtor. >> A debt of a thing cannot be a dispose of the credits which they
subject of compensation if the same had been compensate, because the extinguishment of
subject of a garnishment of which the debtor the obligations in this case arises from their wills
was timely notified. When a credit or property and not from law
had been properly garnished of attached, it
cannot be disposed of without the approval of ART.1283. If one of the parties to a suit over an
the court. obligation has a claim for damages against the
other, the former may set it off by proving his
1280. Notwithstanding the provisions of the right to said damages and the amount thereof.
preceding article, the guarantor may set up (n)
compensation as regards what the creditor may
owe the principal debtor. (1197) Art. 1284. When one or both debts are
rescissible or voidable, they may be
The liability of the guarantor is only subsidiary; it compensated against each other before they
is accessory to the principal obligation of the are judicially rescinded or avoided. (n)
debtor. If the principal debtor has a credit
against the creditor, which can be Although a rescissible or voidable debt can be
compensated, it would mean the compensated before it is rescinded or annulled,
extinguishment of the guaranteed debt, either the moment it is rescinded or annulled, the
totally or partially. This extinguishment benefits decree of rescission or annulment is retroactive,
the guarantor, for he can be held liable only to and the compensation must be considered as
the same extent as the debtor. cancelled. Recission of annulment requires
mutual restitution; the party whose obligation is
Exception to the Rule On Compensation: Right annulled or rescinded can thus recover to the
of Guarantor to Invoke Compensation Against extent that his credit was extinguished by the
Creditor. The general rule is that for compensation, because to that extent he is
compensation to operate, the parties must be deemed to have made a payment.
related reciprocally as principal creditors and
debtors of each other. Under the present 1285. The debtor who has consented to the
Article, the guarantor is allowed to set up assignment of rights made by a creditor in
compensation against the creditor. favor of a third person, cannot set up against the
assignee the compensation which would
ART. 1281. Compensation may be total or pertain to him against the assignor, unless the
partial. When the two debts are of the assignor was notified by the debtor at the time
same amount, there is a total he gave his consent, that he reserved his right to
compensation. (n) the compensation.

Total Compensation—debts are of the same If the creditor communicated the cession
amount. to him but the debtor did not consent thereto,
Partial Compensation—Debts are not of the the latter may set up the compensation of
same amount; operative only up to the debts previous to the cession, but not of
concurrent amount. subsequent ones.

1282. The parties may agree upon the If the assignment is made without the
compensation of debts which are not yet due. knowledge of the debtor, he may set up the
(n) compensation of all credits prior to the same
and also later ones until he had knowledge of
Voluntary compensation is not limited to the assignment. (1198a)
obligations which are not yet due. The parties
may compensate by agreement any Assignment after Compensation: When
obligations, in which the objective requisites compensation has already taken place before
provided for legal compensation are not the assignment, inasmuch as it takes place ipso
present. It is necessary, however, that the jure, there has already been an extinguishment
of one of the other of the obligations. A at different places, but there shall be an
subsequent assignment of an extinguished indemnity for expenses of exchange or
obligation cannot produce any effect against transportation to the place of payment. (1199a)
the debtor. The only exception to this rule is This article applies to legal compensation and
when the debtor consents to the assignment of not to voluntary compensation.
the credit; his consent constitutes a waiver of
the compensation, unless at the time he gives
consent, he informs the assignor that he 1287. Compensation shall not be proper when
reserved his right to the compensation. one of the debts arises from a depositum or from
the obligations of a depositary or of a bailee in
Assignment before compensation. The commodatum. Neither can compensation be
assignment may be made before set up against a creditor who has a claim for
compensation has taken place, either because support due by gratuitous title, without prejudice
at the time of assignment one of the debts is not to the provisions of paragraph 2 of Article 301.
yet due or liquidated, or because of some other (1200a)
cause which impedes the compensation. As far
as the debtor is concerned, the assignment • The prohibition of compensation when one
does not take effect except from the time he is of the debts arises from a depositum (a
notified thereof. If the notice of assignment is contract by virtue of which a person
simultaneous to the transfer, he can set up [depositary] receives personal property
compensation of debts prior to the assignment. belonging to another [depositor], with the
If notice was given to him before the obligation of safely keeping it and
assignment, this takes effect at the time of the returning the same) or commodatum (a
assignment; therefore the same rule applies. If gratuitous contract by virtue of which one
he consents to the assignment, he waives of the parties delivers to the other a non-
compensation even of debts already due, consumable personal property so that the
unless he makes a reservation. latter may use it for a certain time and
return it) is based on justice. A deposit of
But if the debtor was notified of the assignment, commodatum is given on the basis of
but he did not consent, and the credit assigned confidence in the depositary of the
to a third person matures after that which borrower. It is therefore, a matter of
pertains to the debtor, the latter may set up morality, the depositary or borrower
compensation when the assignee attempts to performs his obligation. With respect to
enforce the assigned credit, provided that the future support, to allow its extinguishment
credit of the debtor became due before the by compensation would defeat its
assignment. But If the assigned credit matures exemption from attachment and
earlier than that of the debtor, the assignee execution. , and may expose the recipient
may immediately enforce it, and the debtor to misery and starvation. Common
cannot set up compensation, because the humanity and public policy forbid this .
credit is not yet due. Support under this provision should be
understood, not only referring to legal
If the debtor did not have knowledge of the support, to include all rights which have for
assignment, he may set up by way of their purpose the subsistence of the debtor,
compensation all credits maturing before he is such as pensions and gratuities.
notified thereof. Hence, if the assignment is
concealed, and the assignor still contracts new 1288. Neither shall there be compensation if one
obligation in favor of the debtor, such of the debts consists in civil liability arising from
obligation maturing before the latter learns of a penal offense.
the assignment will still be allowable by way of (n)
compensation. The assignee in such case would • If one of the debts consists in civil liability
have a personal action against the assignor. arising from a penal offense, compensation
would be improper and inadvisable
1286. Compensation takes place by operation because the satisfaction of such obligation
of law, even though the debts may be payable is imperative.
 Renunciation of Compensation.
• The person who has the civil liability arising Compensation can be renounces, either at
from crime is the only party who cannot set the time an obligation is contracted or
up the compensation; but the offended afterwards. Compensation rests upon a
party entitled to the indemnity can set up his potestative right, and a unilateral decision of
claim in compensation of his debt. the debtor would be sufficient renunciation.
Compensation can be renounced expressly of
Art. 1289. If a person should have against him impliedly.
several debts which are susceptible of
compensation, the rules on the application of No Compensation. Even when all the
payments shall apply to the order of the requisites for compensation occur, the
compensation. (1201) compensation may not take place in the
It can happen that a debtor may have several following cases: (1) When there is renunciation
debts to a creditor. And vice versa. Under these of the effects of compensation by a party; and
circumstances, Articles 1252 to 1254 shall apply. (2) when the law prohibits compensation.

(Unless otherwise indicated, commentaries are

1290. When all the requisites mentioned in sourced from the Civil Code book IV by
Article 1279 are present, compensation takes Tolentino).
effect by operation of law, and extinguishes
both debts to the concurrent amount, even SECTION 6
though the creditors and debtors are not aware NOVATION
of the compensation. HOW OBLIGATIONS ARE MODIFIED

• Legal compensation takes place from the 1291. Obligations may be modified by:
moment that the requisites of the articles (1) Changing their object or principal condition
1278 and 1270 co-exist; its effects arise on (2) Substituting the person of the debtor
the very day which all its requisites (3) Subrogating a third person in the rights of a
concur. creditor
Novation is the extinguishment of an
• Voluntary of conventional compensation obligation by a substitution or change of the
takes effect upon the agreement of the obligation by a subsequent one which
parties. extinguishes or modifies the first either by:

• Facultative compensation takes place 1. changing the object or principal conditions

when the creditor declares his option to 2. by substituting the person of the debtor
set it up.Judicial compensation takes 3. subrogating a third person in the rights of the
place upon final judgment. creditor

Effects of Compensation: Novation is a juridical act of dual function. At

the time it extinguishes an obligation it creates
• Both debts are extinguished to the a new one in lieu of the old
concurrent amount;
Classification of Novation as to nature
• interests stop accruing on the extinguished 1. Subjective or personal – either passive or
obligation of the part extinguished; active. Passive if there is substitution of the
• the period of prescription stops with debtor. Active if a third person is subrogated in
respect to the obligation or part the rights of the creditor.
extinguished; 2. Objective or real – substitution of the object
with another or changing the principal
• all accessory obligations of the principal conditions.
obligation which has been extinguished 3. Mixed – Combination of subjective and
are also extinguished. objective as to form
Express – parties declare that the old obligation
is substituted by the new

Implied – an incompatibility exists between the

old and the new obligation that cannot stand
together as to effect

1. Partial – when there is only a modification or

change in some principal conditions of the
obligation
2. Total – when the old obligation is completely
extinguished

Requisites of Novation:
1. A previous valid obligation
2. Agreement of all parties
3. Extinguishment of the old contract – may be
express of implied
4. Validity of the new one