The Law on Obligations & Contracts

I. Obligations
- A juridical necessity to give, to do, or not to do (Article 1156 of the NCC)
➔ Requisites/elements of an obligation
1. Passive subject (Debtor or Obligor)
- The person who has to comply with the obligation (has to give, to do, or
not to do)
2. Active subject (Creditor or Obligee)
- The person who can compel the debtor/obligor to comply with his
obligation and has the right to sue if the passive subject does not comply
3. Object or Prestation
- The conduct required in an obligation
4. Legal tie
- It is also called the juridical tie or efficient cause or vinculum juris
➔ Sources of Obligation
1. Law (ex: obligation to pay taxes)
2. Contracts : meeting of the minds (ex: contract of carriage)
3. Quasi-contract : negotiorium gestio (when someone voluntarily manages the
business of another and he benefits from it, the other party should reimburse him
for any expense/s and solutio indebiti (the person who mistakenly receives
payment shall return it)
4. Quasi-delict : there shall be no contract, there is fault or negligence, there is
damage caused, there must be an act or omission, and a proximate cause
(damages caused by an act, something done, or omission, something that was not
done)
5. Delict : crimes or acts or omissions punished by law

➔ Real Obligation
- Obligation to give
- Level of care required is the diligence of a good father of a family unless agreed
by parties otherwise
- When the creditor has real rights over the thing, he also has the rights to the fruits
of it as well

- Different kinds of fruits:

1. Natural : Spontaneous products of soil or young of animals (ex: mangoes
growing in the backyard)
2. Industrial : Products of cultivation or labor (ex: mangoes from a mango
orchard)
3. Civil : from a juridical or legal relation (ex: owner-renter relationship)
 - Debtor is also obliged to deliver the accessions and accessory
- Determinate thing : It is unique and irreplaceable
- Generic thing : The thing is replaceable
➔ Personal Obligation
- Obligation to do (Article 1167)
- You cannot force somebody to do something against his will
- Creditor’s remedy is to make another person to do it, assuming that it won’t
require the specialty of the debtor
- If the person does it poorly, the creditor can have it undone
- If it is a negative personal obligation, it shall also be undone AT THE EXPENSE
of the debtor
➔ Delay
- Article 1169
- General Rule: Legal delay is only present when there is a demand by the creditor
Except: even if there is no demand, there is already delay
1. Law : if the law already says so (ex: paying of taxes on time)
2. Stipulation : agreement states that “without the need of demand”
3. Time is of the Essence Contract : time is very crucial reason why the
persons entered into an agreement (ex: delivering of a cake for a birthday)
4. Demand Would be Useless : if, for example, the thing is destroyed due to
debtor’s fault

➔ Article 1170: If there is fraud, negligence, delay, or breach of contract, debtor will be
liable for damages
➔ Article 1171: Parties cannot agree that if one of them commits fraud, the other cannot sue
the person

➔ Article 1173: When a person fails to follow the diligence of a good father of a family, it
is omission ; Unless stated, the diligence required is the diligence of a good father of a
family

➔ Article 1175 : Usury is no longer existent in the country

** usury is setting an interest above the sealing set by the government
** General Rule: Persons can agree on the interest rate UNLESS the court reduces it

➔ Article 1176 : If the creditor issues a receipt without referring to the interest, whether it
has been paid or not, there is a presumption that the interest has already been paid ;
Paragraph 2 states that if the creditor issues a receipt for a later installment, there is a
presumption that the earlier installments have already been paid as well.
** all presumptions under Article 1176 are disputable or rebuttable (can be argued or
proven otherwise) presumptions
➔ Different Kinds of Obligations:
1. Pure Obligation : demandable at once ; has no period and/or condition
2. Obligations with a condition (fulfillment) : future or past event + uncertain
- Suspensive: Obligation is suspended until condition is fulfilled
- Resolutory: Obligation is demandable until condition is fulfilled
- Impossible Conditions : Physically Impossible (against the laws of nature)
or Legally Impossible (against the laws of the State)
- Obligations with impossible conditions are void
- Other ways of classifying a condition:
1. Potestative : Dependent upon the will of the debtor or creditor **if
it is solely dependent upon the will of the debtor, it is void**
2. Casual : Dependent upon chance or third person
3. Mixed : Dependent upon chance and third person
- Article 1186 : If debtor prevents the condition from happening, it is as if it
has already been fulfilled
- Article 1189 : Real obligations with a suspensive condition
1. Loss + F.E. = Obligation extinguished
2. Loss + D.F. = Damages
3. Deteriorate + w/o D.F. = C will bear or absorb deterioration
4. Deteriorate + D.F. = Cancel/Rescind + Damages or Fulfillment +
Damages
5. Improve + w/o D.P. = C will enjoy improvement
6. Improve + D.P. = Usufructuary Rights (debtor can enjoy while the
thing is his)

3. Obligations with a period (arrival) : future event + certain

- Suspensive: Obligation is suspended until period arrives
- Resolutory: Obligation is demandable until period arrives
- Article 1180 : When a debtor will pay when his means permit him to do
so, it is an OBLIGATION WITH A PERIOD
- Article 1196: If it has not been established, it is presumed that the period is
for the benefit of both the creditor and debtor ; Not in all cases, creditor
needs to wait for the period to arrive, the exceptions are:
1. Debtor attempts to abscond (escape)
2. Debtor becomes insolvent, unless he has a guarantee
4. Alternative & Facultative
I. Alternative
- Several prestations are due, but compliance with one will extinguish the
obligation
- General Rule: Debtor has the choice unless stipulated
- Debtor’s Choice:
 1. Some lost + D.F. = C chooses remainder
2. All lost + D.F. = Damages
3. All lost + F.E. = Obligation Extinguished
4. All lost + C.F. = Rescind + damages / choose others + damages /
lost thing = extinguished without damages
- Creditor’s Choice:
1. Some lost + F.E. = C chooses remainder
2. Some lost + D.F. = C + lost item + damages / c + remainder +
damages
3. All lost + D.F. = C chooses price of any + damages
4. All lost + F.E. = Obligation Extinguished

II. Facultative
- One prestation but debtor can give a substitute; Debtor has the right of
choice
- Before Substitution:
1. P + Lost + F.E. = Obligation Extinguished
2. P + Lost + D.F. = Damages
3. S + Lost = D delivers principal
- After Substitution:
1. S + Lost + F.E. = Obligation Extinguished

5. Joint & Solidary

I. Joint
- Joint = it should be divided equally among debtors
- If the problem does not state what kind of obligation it is, there is always a
presumption that it is joint
II. Solidary
- Creditor can collect the entire amount even to only one debtor
- ‘solidarily’, ‘jointly and/or severally’, ‘in solidum’
6. Divisible & Indivisible
- Refers to the prestation or object
- Legally indivisible : law (ex: paying taxes in whole)
- Physically indivisible: not susceptible to partial performance (ex: giving a
car)
- Conventionally indivisible : by agreement / stipulation of parties (ex:
giving money in full amount)
- Indivisibility does not automatically mean that it is a solidary obligation
7. Obligations With a Penal Clause
- Obligations with a penalty
- Non-compliance leads to payment of penalty
 - General Rule: payment of penalty does not extinguish the obligation
unless stipulated by parties
- Creditor does not have to prove that he suffered damages
- General Rule: if there is a penalty, you cannot sue for damages and interest
- Exceptions:
1. If debtor refuses to pay the penalty
2. If debtor commits fraud
3. If there is a stipulation
- If the principal obligation is void, everything that follows is void
- If the penal clause is void, the principal obligation is valid/remains

➔ Modes of Extinguishing Obligations: PLC3N+

1. Payment or Performance
- General Rule: payment must be complete or regular (Article 1233)
- Exceptions:
1. Substantial Performance + Good Faith (Article 1234)
2. C accepts (does not object) incomplete/irregular payment + knows
(Article 1235)
- C cannot be compelled to accept partial payment unless stipulated (Article
1232 & 1248)
- C cannot be compelled to accept payment from 3rd person unless
stipulated (Article 1236)
- Payment should be made to: C himself, authorized 3rd person, or
successor in interest (heir/assignee) (Article 1240)
- Payment to incapacitated person is valid if kept/he benefits from it (Article
1241)
- C cannot be compelled to accept a different thing (Article 1244)
- Payment must be made in the currency unless stipulated otherwise (Article
1249)
- Payment in checks will only extinguish obligation if it has been cashed
(Article 1249, Par. 2)
- Payment must be made in the place agreed upon (Article 1251)
- If Real + G.T. + Does not deliver = Ask somebody else to do it
- Personal + No performance + not SRT = Ask somebody else to do it +
Damages
- Personal + No performance + SRT = Damages
- Special forms of payment:
1. Dacion en pago
- Does not necessarily involve several creditors
- D does not have to be insolvent
- Creditors becomes owners of the thing
- Involves only specific properties
 2. Payment by cession
- Involves several creditors
- D is insolvent
- C acquires the right to sell
- Involves all of D’s properties

3. Application of payments
- rules:
● Apply the money to the debt that is due
● Apply the money to the debt of the same kind &
quality
● Apply the money to the more onerous/burdensome

4. Tender of payment & Consignation

- Act of offering the payment physically
- Consignation is depositing the payment to the courts
- Instances when Tender of Payment is not necessary for
Consignation to take place:
1. Creditor is absent
2. Creditor is incapacitated to receive
3. Creditor, without just cause, refuses to give receipt
4. 2 or more persons claim the right to the payment
5. Title is lost
2. Loss of the Thing Due
- rules:
1. Real + S.T. + F.E. = Obligation Extinguished
2. Real + S.T. + D.F = D liable for damages
3. Real + G.T. + F.E/D.F. = D gives same kind and quality
4. Personal + Impossible + F.E. + SRT = Obligation Extinguished
5. Personal + Impossible + D.F. + SRT = D liable for damages
6. Personal + Impossible + F.E. + not SRT = Obligation Extinguished
7. Personal + Impossible + D.F.. + not SRT = D liable for damages +
ask somebody else to do it
- Article 1165: If D does not deliver the specific thing:
1. Specific performance + Damages
2. Cancellation/Rescission + Damages
3. Damages only

3. Condonation or Remission
- The debtor owes the creditor something and the creditor says that the debtor
doesn’t have to pay it anymore
- Important that the condonation has to be accepted by the debtor/obligor
- Condonation can be made expressly or impliedly
 - Presumptions:
I. Art. 1272 - If a private document which evidences the debt is found in
possession of the debtor, there is a presumption that it has been voluntarily
given by the creditor
II. If the document was voluntarily given, there is a presumption that the
debt was condoned or remitted.
III. Art. 1274 - If there is a principal obligation and a pledge is involved,
and the pledge is found in possession of the debtor, it is presumed that the
creditor agreed to the obligation without a pledge (only pledge is remitted)

4. Confusion or Merger
- The creditor becomes the debtor
- The qualities of a debtor and the qualities of a creditor are merged into one person

5. Compensation
- The debtor and creditors are principal debtors and creditors of each other in two
different obligations
- If the two amounts are exactly the same, total compensation occurs (two
obligations are extinguished)
- If two amounts are not exactly the same, partial compensation occurs (only excess
amount will be paid for)
- Can also be in fungible or consumable things (rice, corn, flour)
- For consumable things, they have to be of the same kind
- Art. 1279: There will be compensation just as long as
1. The two obligations involve prestations of the same kind
2. The two obligations are already due (unless stipulated by the parties)

Confusion/Merger and Compensation Distinguished

Confusion/Merger Compensation

1 Debtor and 1 Creditor 2 Debtors and 2 Creditors

Involves only 1 obligation Involves 2 obligations

6. Novation
- You have an old agreement and then the parties agree to a new one and the new
contract will replace the old contract
- Old obligation is extinguished and is replaced with a new obligation
- Art. 1291 Ways for obligations to be modified:
1. Change in object or principal condition
2. Substituting the person of the debtor
3. Subrogating a third person in the rights of the creditor
- If one of the parties do not agree, novation cannot take place
- Substitution of debtor
1. Expromision: Third person pays the obligation without the consent of the
debtor
Reimbursement can be asked for by 3rd person to the debtor
Third person does not enjoy the right of subrogation
2. Delegacion: Debtor told a third person to pay his obligation and he agreed
to it
Reimbursement can be asked for by 3rd person to the debtor
Third person does not enjoy the right of subrogation
- Dacion en pago can also be considered a novation
 - If the new obligation is void, the general rule is that the old obligation is still valid
unless stipulated or stated in the problem that the old obligation is extinguished
- If the old obligation is void and the new obligation is valid, both obligations will
be void because it cannot be cured
- Novation can be:
1. Expressed - parties clearly agreed that the old obligation will be
extinguished
2. Implied - although the parties did not clearly agree that the old obligation
will be extinguished, both obligations cannot exist side by side (both
obligations are incompatible with each other)

+ Fulfillment of a resolutory condition, arrival of a resolutory period, annulment, death of

a party in certain cases

II. Contracts
Article 1305: A contract is a meeting of minds between two or more persons whereby one binds
himself, with respect to the other, to give something or to render some service.

➔ Stages to the life of a contract:

1. Preparatory/Negotiation (Preliminary Stage)
- Parties try to agree on the terms of the contract.
2. Perfection
- When the parties have already agreed
- Types/Classifications of contracts depending on when they are perfected
● Consensual Contracts - perfected by mere consent, even without writing
(ex: sale, lease)
● Real Contracts - perfected by delivery (ex: depositum, commodatum)
● Solemn or Formal Contracts - perfected by compliance with formalities or
ceremonies or solemnities (ex: having a document notarized)
3. Consummation/Execution/Termination
- Compliance of the parties to their obligations

➔ Requisites/Elements of a Contract:
1. Consent
- Manifested by the meeting of the offer and acceptance
- The person who makes the offer is the offeror
- The person who receives the offer is the offeree
- Counter-offer: If the acceptance is conditional
- Before acceptance is made, if one of the parties die, becomes insane, civilly
interdicted, or insolvent, then the offer is ineffective
- If an offer is made through the agent, then the acceptance should also be made
through the agent.
2. Object
- Conduct required
- Must be
1. Within the commerce of men
2. Existing or future things
3. Legally and physically possible
4. Determinate or determinable
3. Cause or Consideration
- Different with motive
- Art. 1351: An illegal motive does not affect the validity of a contract
- Except when entered into to defraud (rescissible)
 ➔ Forms of Contracts:
- Art. 1356: Contracts may be in whatever form the may have been entered into except
when the law says that it has to be in writing
- Art. 1358: Notarized contracts/Public document & anything above 500 pesos should be in
writing.

➔ Reformation of Instruments:
- Art 1359: Correction of instrument/document when a mistake was committed in the
document
- There must be a valid contract first

➔ Interpretation of Contracts:
- If the contract is clear, it will be interpreted literally
- If the contract is unclear/ambiguous, the intention of the parties will be determined
(actions before, during, and after the contract has been perfected)
- Shall not be interpreted in favor of the party who made it unclear

➔ Characteristics of Contracts:
I. Article 1306: Autonomy of contracts - Parties can agree to whatever terms, conditions,
or clauses so long as they are not contrary to law, morals, good customs, public order, or
public policy (LMGPP).

II. Article 1308: Mutuality of contracts - Contract must be binding to both parties

III. Article 1311 Relativity of contracts - Generally, contracts only affect the contracting
parties. Parties can also assign their right to another person or if the party dies, it can be
their heirs.
EXCEPTION: stipulation pour autrui - if there is a stipulation that will benefit a 3rd person.

Nominate Contracts - Contracts that have special names under the law (ex: sale, lease,
depositum, commodatum, pledge)
Innominate Contracts - Contracts that do not have special names under the law

➔ Option Contract (Art 1327)

- Gives the buyer a period within which to make an acceptance (option period)
- Option money: Given for the enjoyment of the period so that the offer will not be
withdrawn anytime. Offeror is not bound by the option period if there is no option money.

➔ Art. 1325 - Business advertisements should be complete for it to be a definite offer.

➔ Art. 1340 - Exaggerations in trade are not fraudulent.

➔ Types of Defective Contracts

1. Void Contracts
- Grounds:
1. Contrary to LMGPP
2. Simulated contracts
- Art. 1410: Cannot be cured and imprescriptible
- If a contract is illegal, you cannot go to court for it
- Even if parties agree to be paid for a lower minimum wage, they can still be sued
(Art. 1418)
2. Unenforceable Contracts - Cannot be enforced in a court of law
- Grounds:
 1. Person enters into contracts without authority or agent exceeded his/her
authority
2. Does not comply with the statute of frauds
- Contracts that have to be in writing because otherwise, it cannot
be enforceable
- Exception:
1. The contract has already been partially executed
2. There are signed documents that evidence the verbal
contract
- Statute of frauds (Art. 1403)
1. Terms is not to be performed within a year from the making
thereof
2. Special promise to answer for the debt, default, or
miscarriage of another
3. Agreement made in consideration of marriage, other than a
mutual promise to marry
3. Incapacitated + Incapacitated
- If it becomes Incapacitated + Capacitated = Voidable
- If it becomes Capacitated + Capacitated = Perfectly valid
3. Voidable Contracts -
- Art. 1392: If the contract is ratified, it is cleansed of all of its defects.
- Grounds:
1. Incapacitated Person enters into a contract with Capacitated Person
(Inc+Cap)
- Can be terminated within 4 years after the termination of the incapacity
- Incapacitated:
● Minors
- Except entered into:
I. Contracts of necessaries + reasonable amount
II. Pretends to be of legal age
III. Through a legal guardian (except if the minor
suffers a lesion of more than ¼, it becomes
rescissible)
● Drunk Persons
● Civil Interdicts
● Hypnotic Spell
● Deaf-Mutes who do not know how to write
● Insane/Demented
- Except
I. When entered into during a lucid interval
2. Vices of Consent/Consent was Vitiated:
● Mistake (Can be terminated within 4 years after discovery)
- Opinion
● Opinion + Non-Expert + False = mistake
● Violence (Can be terminated within 4 years after it ceases)
- Must be serious or irresistible
- Art. 1336: Can also render a contract voidable even if
employed by a 3rd person
● Intimidation (Can be terminated within 4 years after it ceases)
- Must be imminent or grave
- Upon the person or property of the other contracting party
or his/her spouse/ascendant/descendant
- The intimidation must be the reason why the person entered
into a contract
 - Can render a contract voidable even when done through a
3rd person
- Violence is not yet committed but is threatening to do it
immediately and creates fear in your mind
- Art. 1335
- Must be reasonable and well-grounded
● Undue Influence (Can be terminated within 4 years after it ceases)
- There is an asymmetrical relationship (teacher-student,
lawyer-client, doctor-patients, pastor-members of
congregation)
- Entered into the contract not out of fear but out of respect
- Art. 1337: The person has the power to influence the other
unduly
-
● Fraud (Can be terminated within 4 years after discovery)
- Use of insidious words or machinations
- Fooling someone to enter into a contract with you
- Causal fraud makes a contract voidable but incidental fraud
does not ; Incidental fraud makes a valid contract but the
party is entitled to sue for damage
- Opinion
● Opinion + Expert + False = fraudulent
4. Rescissible Contracts -
- Grounds:
1. If a guardian enters into a contract on behalf of a ward (minor/insane) and
the ward suffers a lesion of more than ¼ of the value of the property (Can
be rescinded/ratified 4 years after termination of incapacity)
2. If a representative enters into a contract on behalf of an absentee and the
absentee suffers a lesion of more than ¼ of the value of the property (Can
be rescinded/ratified 4 years after whereabouts are known/found in his
domicile)
3. Entered into a contract to defraud a creditor (Can be rescinded/ratified 4
years after discovery)
4. Thing is under litigations and no court approval is obtained and/or the
other party does not know about the contract (lawsuit pending) (Can be
rescinded/ratified 4 years after discovery)
- Innocent purchaser for value = if a third person buys and pays a
fair amount for the property, the law will protect the person & it
makes the contract valid
5. Others