OBLIGATIONS AND CONTRACTS

OBLIGATIONS

Quasi-Delict Crime
1.
1. affects private concern; 1 1. affects public interest;

2. the Civil Code by means of 2. the Penal Code punishes or correct the criminal act;
indemnification, merely repairs
the damage incurred;
3. include all acts in which any kind 3. not as broad, punished only if there is a law clearly
of fault or negligence intervenes. covering them.
Rights of the creditor:
In determinate obligations:
1. specific performance;
2. damages, exclusive or in addition to specific performance.
In generic obligations:
1. specific performance;
2. to ask that the obligation be complied with at the debtor’s expense;
3. damages.
Obligations of the debtor:
In determinate obligations:
1. specific performance;
2. take care of the thing with the proper diligence of a good father of a family;
3. to deliver all accessions and accessories of the thing even though they may not have been
mentioned;
4. to pay damages in case of breach of the obligation by reason of delay, fraud, negligence or
contravention of the tenor thereof.
In generic obligations:
1. deliver the thing which is neither of superior nor inferior quality;
2. damages in case of breach of the obligation by reason of delay, fraud, negligence or contravention of
the tenor thereof.

Breach of obligations
Kinds:
1. Voluntary – debtor or obligor is liable for damages. If the debtor or obligor in the performance of his
obligation is guilty of:
a. default (mora);
b. fraud (dolo);
c. negligence (culpa);
d. in any manner contravenes the nature thereof.
2. Involuntary – debtor or obligor is not liable for damages.

Effect of Breach
1. Obligation to Do (Positive Personal Obligation):
The Obligee can:
1. have the obligation performed or executed at the expense of the obligor; and at the same time
2. demand for damages by reason of the breach.
2. Obligation not to Do (Negative Personal Obligation):
1. to have the obligation undone at the expense of the obligor; and
2. to ask for damages
Delay
General Rule: There must be a demand (judicial/extra-judicial)before delay may be incurred
Exceptions:
(When demand not necessary)
1. obligation or law expressly so declares;
2. time is of the essence;
3. demand is useless as when obligor has rendered beyond his power to perform; and
4. there is acknowledgement of default.

Effect of Delay:

- the obligor/debtor can be held liable for damages, his liability subsists even if the thing which
constitutes the object of the obligation may have been lost or destroyed through a fortuitous event

Fraud (Dolo)
 must be present during the performance of the obligation and not fraud at the time of the birth of the
obligation (causal or incidental fraud)

Negligence (Culpa)
– consists in the omission of that diligence which is required by the nature of the circumstances of the
persons, of the time and of the place.

TEST: Diligence of a good father of a family

Distinctions :
Culpa Contractual Culpa
Aquilana

1. the negligence is merely an 1. the negligence is substantive and independent;

incident in the performance of an
obligation;
2. there is always a pre-existing 2. there may or may not be a pre-existing contractual
contractual relation; relation;

3. source of the obligation: the breach 3. source of the obligation: the negligent act or
of the contract; omission itself;

4. the existence of the contract and of 4. the negligence must be proved;

its breach is sufficient prima facie to
warrant recovery;

5. proof of diligence in the selection

and supervision of employees is
not available as defense. 5. proof of diligence in the selection and supervision of
the employees is available as a defense.

Fortuitous Event

Essential Characteristics:
1. cause is independent of the will of the debtor;
2. the event must be unforseeable or unavoidable;
3. occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal
manner;
4. debtor must be free from any participation in the aggravation of the injury resulting to the creditor.

General Rule: No liability in case of fortuitous event.

Exceptions:
1. when expressly declared by law;
2. when expressly declared by stipulation or contract;
3. when the nature of the obligation requires the assumption of risk;

Distinctions:
Suspensive Condition Resolutory Condition

1. if fulfilled, obligation arises or becomes 1. if fulfilled, obligation is extinguished;

effective;
2. if not fulfilled, juridical relation is consolidated;
2. if not fulfilled, no juridical relation is
created; 3. rights are already acquired, but subject to the threat or
3. rights are not yet acquired, but there is danger of extinction.
hope or expectancy that they will soon
be acquired.
Impossible Conditions

General Rule: shall annul the obligation which depends upon them.

Exceptions:
1. pre-existing obligations;
2. if obligation is divisible;
3. in simple or renumenatory donation;
4. in testamentary disposition; and
5. in case of conditions not to do an impossible thing.
 In the foregoing, the obligations remains valid, only the condition is void and deemed to have not
been imposed.

Retroactivity of Effect of fulfillment of Condition:

1. In an obligation to give: retroacts to the day of the constitution of the obligation
2. In an obligation to do or not to do: the courts shall determine whether or not there will be a retroactive
affect or when retroactivity will take effect

Loss, Deterioration and Improvement (during the pendency of the condition)

1. LOSS
a. without debtor’s fault – obligation is extinguished
b. with debtor’s fault – debtor pays damages
2. DETERIORATION
a. without debtor’s fault – impairment to be borne by the creditor
b. with debtor’s fault – creditor may choose between the rescission of the obligation and its
fulfillment with indemnity for damages in either case
3. IMPROVEMENT
a. by the thing’s nature or by time – improvement shall inure to the benefit of the creditor
b. at the debtor’s expense – debtor shall have no other right than that granted to a usufructuary
Characteristics of Right to Rescind:
1. exists only in reciprocal obligations;
2. can be demanded only if plaintiff is ready, willing and able to comply with his own obligation, and the
other is not;
3. not absolute;
4. needs judicial approval in certain cases;
5. implied to exist, therefore, need not be expressly stipulated upon;
6. may be waived expressly or impliedly

When may Court Fix Term:

1. if the obligation does not fix a period, but from its nature and the circumstances it can be inferred that
a period was intended by the parties;
2. if the duration of the period depends upon the will of the debtor;
3. if the debtor binds himself when his means permit him to do so.

Debtor loses the right to make use of the period when:

1. after obligation has been contracted, he becomes insolvent, unless he gives guaranty or security for
the debt (the insolvency need not be judicially declared);
2. he does not furnish to the creditor the guaranties or securities he promised;
3. by his own act he has impaired said guaranties or securities after their establishment, and when
through fortuitous event they disappear, unless he gives new ones equally satisfactory;
4. debtor violates any undertaking, in consideration of which the creditor agreed to the period; or
5. debtor attempts to abscond.
 The term/period is presumed for the benefit of both the debtor and the creditor

Distinctions:
Facultative Obligations Alternative Obligations
1. fortuitous loss extinguishes the 1. fortuitous loss of all prestation will extinguish the
obligation; obligation
2. culpable loss obliges the debtor to 2. culpable loss of any object due will give rise to
deliver substitute prestation without liability to debtor
liability to debtor
3. choice pertains only to debtor; 3. choice may even pertain to creditor or 3rd
person.

4. only one object is due; 4. several objects are due;

5. may be complied with by substitution 5. may be complied with by fulfilling any of those
of one that was due; alternately due;

6. choice pertain only to debtor. 6. choice may pertain even to creditor or 3rd person.
 In alternative obligations, choice takes effect only upon communication of the choice to the other
party and from such time the obligation ceases to be alternative.

General Rule: Obligation is presumed joint if there is concurrence of 2 or more debtors and/or 2 or more
creditors in the same obligation

Exceptions:
1. when expressly stated to be solidary
2. when the law requires solidarity
3. when the nature of the obligation requires solidarity

When penalty may be reduced:

1. if the principal obligation has been partly complied with;
2. if the principal obligation has been irregularly complied with;
3. if the penalty is iniquitous or unconscionable even if there has been no performance.

MODES OF EXTINGUISHING OBLIGATIONS:

1. payment or performance;
2. loss of the thing due;
3. condonation or remission of the debt;
4. confusion or merger of rights of the creditor and debtor;
5. compensation;
6. novation;
7. annulment;
8. rescission;
9. fulfillment of the resolutory condition;
10. prescription.

Payment or Performance

General Rule: creditor is not bound to accept payment or performance by a third person
Exceptions:
1. when made by a third person who has an interest in the fulfillment of the obligation
2. contrary stipulation
Rights of the third person who paid the obligation of another:
1. payment with the knowledge and consent of debtor –
a. can recover entire amount paid;
b. can be subrogated to all of the rights of the creditor
2. payment without the knowledge or against the will of debtor – can recover only insofar as payment
has been beneficial to the debtor;

Rules in Monetary Obligation:

1. payment in cash - must be made in the currency stipulated, if not possible, then in the legal tender in
the Philippines
2. payment in check or other negotiable instrument – not considered payment, they are not considered
legal tender and may be refused by the creditor
Exceptions:
a. when the document has been cashed;
b. when it had been impaired through the fault of the creditor

Application of Payment – designation of the debt to which the payment must be applied when the
debtor has several obligations of the same kind in favor of the same creditor
Dation in Payment – property alienated by the debtor to the creditor in satisfaction of the debt in money;
the transmission of the ownership of a thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation
 governed by the law on Sales

Payment in Cession – debtor abandons all of his property for the benefit of his creditors in order that
from the proceeds thereof, the latter may obtain payment of their credits

Distinctions:
Dation in Payment Payment in Cession
1. one creditor; 1. plurality of creditors;

2. not necessarily in state of 2. debtor must be partially or relatively insolvent;

financial difficulty;
3. thing delivered which is 3. universality of property of debtor is what is ceded;
considered as equivalent of
performance;

4. payment extinguishes 4. merely releases debtor for net proceeds of things

obligation to the extent of the ceded or assigned, unless there is contrary intention.
value of the thing delivered as
agreed upon, proved or
implied from the conduct of
the creditor.
Consignation – deposit of the object of the obligation in a competent court in accordance with the rules
prescribed by law after refusal or inability of the creditor to accept the tender of payment

General Rule: Consignation shall produce effects of payment only if there is a valid tender of payment

Exceptions:
1. creditor is absent or unknown, or does not appear at the place of payment;
2. creditor incapacitated to receive payment at the time it is due;
3. when 2 or more persons claim the right to collect;
4. when the title of the obligation has been lost; or
5. when , without just cause he refuses to give a receipt.

Effect of loss

1. In Determinate Obligations to Give: will extinguish the obligation if thing is lost.

Except:
a. when by law, obligor is liable even for fortuitous event;
b. when by stipulation, obligor is liable even for fortuitous event;
c. when the nature of the obligation requires the assumption of risks;
d. when the loss of the thing is due partly to the fault of the debtor;
e. when the loss of the thing occurs after the debtor incurred in delay;
f. when debtor promised to deliver the same thing to 2 or more persons who do not have the same
interests;
g. when the debt of a certain and determinate thing proceeds from a criminal offense.
2. In Generic Obligations to Give: obligation is not extinguished, the genus of the thing cannot perish.
Exception: in case of a generic obligation whose object is a particular class or group with specific or
determinate qualities (limited generic obligations)
3. In Obligations To Do: obligation is extinguished when prestation becomes legally or physically
impossible
Confusion or Merger of Rights – merger of the characters of the creditor and the debtor in one and the
same person by virtue of which the obligation is extinguished

Compensation – extinguishment in the concurrent amount of the obligation of those persons who are
reciprocally debtors and creditors of each other

Distinctions:
Compensation Payment

1. takes effect by operation of law; 1. takes effect by acts of the parties;

2. capacity to give and to acquire essential;

2. capacity to give and to acquire not
necessary;

Compensation Confusion

1. two persons who are mutual debtors and 1. one person where qualities of debtor and
creditors of each other; creditor are merged;

2. only one obligation.

2. there must be at least two obligations.

Debts Not Susceptible to Compensation:

1. debts arising from contract of deposit;
2. debts arising from contracts of commodatum;
3. claims for support due by gratuitous title;
4. obligations arising from criminal offense;
5. certain obligations in favor of government.

Novation
– substitution or change of an obligation by another, resulting in the extinguishment or modification, either
by changing the object or principal conditions or by substituting another in place of debtor, or by
subrogating a third person in the rights of the creditor.

Two Forms of Substitution of Debtors:

1. Expromision – effected with the consent of the creditor at the instance of the new debtor even without
the consent or even against the will of the old debtor.
2. Delegacion – effected with the consent of the creditor at the instance of the old debtor with the
concurrence of the new debtor.

Two Forms of Subrogating a Third Person in the Rights of the Creditor:

1. Conventional Subrogation – takes place upon agreement of the original creditor, debtor and the third
person subrogating the original creditor.
2. Legal Subrogation – takes place by operation of law.
 Distinctions:
Conventional Subrogation Assignment of Rights

1. governed by Arts 1300 to 1304; 1. governed by Arts. 1624 to 1627;

2. debtor’s consent is required; 2. debtor’s consent not needed;

3. extinguishes the obligation and gives rise 3.transmission of right of the creditor to third person
to a new one without modifying or extinguishing the obligation;

4. defects and vices in the old obligation are not cured;

5. as far as the debtor is concerned, takes effect upon

4. defects and vices in the old obligation notification.
are cured;

5. takes effect upon moment of novation or

subrogation.

General Rule: Subrogation cannot be presumed

Except:
1. Creditor pays another creditor who is preferred, without debtor’s knowledge;
2. A 3rd person not interested in the obligation, pays with the express or tacit approval of the debtor;
3. When, even without the debtor’s knowledge, a person interested in fulfillment of the obligation pays,
without prejudice to the effects of confusion as to the latter’s share.

CONTRACTS

Stages in the life of a contract:

1. Preparation/Generation
2. Perfection/Birth
3. Consummation/Death
Characteristics of Contracts: (ROMA)
1. Relativity (Art. 1311)
2. Obligatoriness & Consensuality (Art. 1315)
3. Mutuality (Art. 1308)
4. Autonomy (Art. 1306)
Stipulation pour Autrui - stipulation in favor of a 3rd party.
Requisites:
1. The stipulation must be part, not whole of the contract;
2. the contracting parties must have clearly and deliberately conferred a favor upon a 3rd person;
3. the 3rd person must have communicate his acceptance;
4. neither of the contracting parties bears the legal representation of the 3rd party.
General Rule: Contracts (except real contracts) are perfected from the moment there is a
manifestation of concurrence between the offer and the acceptance regarding the object and the cause.
Except: Acceptance by letter or telegram which does not bind the offerror except from the time it came to
his knowledge.

Theories applied to perfection of contracts:

1. Manifestation theory - the contract is perfected from the moment the acceptance is declared or made;
2. Expedition theory - the contract is perfected from the moment the offeree transmits the notification of
acceptance to the offerror;
3. Reception theory - the contract is perfected from the moment that the notification of acceptance is in
the hands of the offerror;
4. Cognition theory - the contract is perfected from the moment the acceptance comes to the knowledge
of the offerror. This is the theory adopted in the Philippines.

Persons incapacitated to give consent:

1. Unemancipated minors;
Except:
 Contracts for necessaries;
 Contracts by guardians or legal representatives;
 Contracts where the minor is estopped to urge minority through his own misrepresentation;
 Contracts of deposit with the Postal Savings Bank provided that the minor is over 7 years of age.
2. Insane or demented persons unless the contract was entered into during a lucid interval;
3. Deaf-mutes who do not know how to write.

The following may not acquire by purchase, even by public or judicial auction, in person
of though the mediation of another:
1. the guardian, with respect to the property of his ward;
2. agents, with respect to the property whose administration or sale may have been entrusted to them,
unless the consent of the principal has been given;
3. executor or administrator, the property of the estate under administration;
4. public officers and employees, with respect to the properties of the government, its political
subdivisions, GOCCs, that are entrusted to them;
5. judges, justices, prosecuting atty.’s, clerks of courts, etc., the property in custogia legis; and
6. any other person specially disqualified by law.

Simulation of a contract
Kinds of simulation:
1. Absolute - no real transaction is intended;
Effect: simulated contract is inexistent.
2. Relative - the real transaction is hidden;
Effect: the apparent contract is void, but the hidden contract is valid if it is lawful and has the
necessary requisites.
: as to third persons without notice - the apparent contract is valid on the principle of estoppel.

Effect of:
Absence of cause the contract confers no right and produces no
legal effect
Failure of cause does not render the contract void
Illegality of cause the contract is null and void
Falsity of cause the contract is void unless the parties can show
that there is another cause which is true and
lawful
 Lesion does not invalidate the contract unless:
 there is fraud, mistake or undue influence
 when the parties intended a donation or some
other contract.

Form of Contracts

Rules:

1. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the
essential requisites for their validity are present.
2. Contracts must be in a certain form when the law requires that a contract be in some form to be:
 valid;
 enforceable;
 for the convenience of the parties.
3. The parties may compel each other to reduce the verbal agreements to writing except:
 Solemn contracts such as the following:
a. Donations of real estate or of movables if exceeding Ps 5,000;
b. Transfer of large cattle
c. Stipulation to pay interest in loans
d. Sale of land through an agent (authority must be in writing)
e. Partnership to which immovables are contributed
f. Stipulation limiting carrier’s liability to less than extra-ordinary diligence
g. Contracts of antichresis
h. Sale of vessels

Note: in such case, if the contract is not in writing it is VOID

 Real contracts that require delivery for perfection.
 In contracts under the Statute of Frauds where the party sued makes a timely objection to the
absence of a written memorandum.

Reformation of instruments:
Requisites:
1. Meeting of the minds to the contract;
2. The true intention is not expressed in the instrument by reason of mistake, accident, relative
simulation, fraud, inequitable conduct (MARFI).
3. Clear and convincing proof of MARFI.
Cases when there can be no reformation:
1. Simple, unconditional donations inter vivos;
2. Wills;
3. When the agreement is void.
Classes of Defective Contracts: (RUVI)
1. Rescissible
2. Unenforceable
3. Voidable
4. Void or Inexistent

COMPARATIVE TABLE OF DEFECTIVE CONTRACTS:

VOID VOIDABLE RESCISSIBLE UNENFORCE-

ABLE
1. defect is caused 1. defect is caused 1. defect is caused 1. defect is caused
 by lack of by vice of consent by injury/ damage by lack of form,
essential either to one of authority, or
elements or the parties of to a capacity of both
illegality 3rd person parties
2. not cured by 2. cured by 2. cured by 2. not cured by
prescription prescription prescription prescription
3. cannot be ratified 3. can be ratified 3. need not be 3. can be ratified
ratified
4. not binding 4. binding until 4. binding unless 4. binding unless the
annulled rescinded defect is raised
against
enforcement.

RESCISSIBLE CONTRACTS

Contracts which may be rescinded:

1. those entered into by guardians where the ward suffers lesion of more than ¼ of the value of the
things which are objects thereof;
2. those agreed upon in representation of absentees, if the latter suffer lesion by more than ¼ of the
value of the things which are subject thereof;

3. those undertaken in fraud of creditors when

the latter cannot in any manner claim what are due them;
4. those which refer to things under litigation if they have been entered into by the defendant without the
knowledge and approval of the litigants and the court;
5. all other contracts especially declared by law to be subject to rescission;
6. payments made in a state of insolvency on account of obligations not yet enforceable;

Circumstances denominated as badges of fraud:

1. consideration of the conveyance is inadequate or fictitious;
2. transfer was made by a debtor after a suit has been begun and while it is pending against him;
3. sale upon credit by an insolvent debtor;
4. transfer of all his property by a debtor when he is financially embarrassed or insolvent;

5. transfer is made between father and son, where there are present some or any of the above
circumstances;
6. failure of the vendee to take exclusive possession of the property;

Distinctions:
RESCISSION RESOLUTION
(Art. 1191)
1. Action by the contracting parties even by a 1. Action only by the injured party;
3rd party;
2. based on lesion/fraud of creditors; 2. based on non-fulfillment of the obligation;
3. courts cannot grant periods for compliance 3. courts may grant periods

VOIDABLE CONTRACTS
Causes of extinction of action to annul:
1. Prescription
 the action must be commenced within 4 years from:
  the time the incapacity ends;
 the time the violence, intimidation or undue influence ends;
 the time the mistake or fraud is discovered.
2. Ratification
 Requisites:
a. there must be knowledge of the reason which renders the contract voidable;
b. such reason must have ceased;
c. the injured party must have executed an act which expressly or impliedly conveys an
intention to waive his right.
3. By loss of the thing which is the object of the contract through fraud or fault of the person who is
entitled to annul the contract.
UNENFORCEABLE CONTRACTS
Kinds of unenforceable contracts:
1. those entered into in the name of another by one without or acting in excess of authority;
2. those where both parties are incapable of giving consent;
3. those which do not comply with the Statute of Frauds.
Agreements within the scope of the Statute of Frauds:
1. Agreements not to be performed within one year from the making thereof;
2. Promise to answer for the debt, default or miscarriage of another;
3. Agreement in consideration of marriage other than a mutual promise to marry;
4. Agreement for the sale of goods, etc. at a price not less than Ps500.00
5. Contracts of lease for a period longer than one year;
6. Agreements for the sale of real property or interest therein;
7. Representation as to the credit of a 3rd person.
Modes of Ratification:
1. For contracts infringing the Statute of Frauds:
 expressly
 impliedly - by failure to object to the presentation of oral evidence to prove the contract, or by the
acceptance of benefits under the contract.
2. If both parties are incapacitated, ratification by their parents or guardians shall validate the contract
retroactively.

VOID OR INEXISTENT CONTRACTS

The following contracts are void:
1. Those whose cause, object or purpose is contrary to law, morals good customs, public order or public
policy;
2. Those whose object is outside the commerce of men;
3. Those which contemplate an impossible service;
4. Those where the intention of the parties relative to the principal object of the contract cannot be
ascertained;
5. Those expressly prohibited or declared void by law;
The following contracts are inexistent:
1. Those which are absolutely simulated or fictitious;
2. Those whose cause or object did not exist at the time of the transaction.

NATURAL OBLIGATIONS

Instances of Natural Obligations:

1. Performance after the civil obligation has prescribed;

2. Reimbursement of a 3rd person for a debt that has prescribed;
3. Restitution by minor after annulment of contract;
4. Delivery by minor of money or fungible thing in fulfillment of obligation;
5. Performance after action to enforce civil obligation has failed;
6. Payment by heir of debt exceeding value of property inherited;
7. Payment of legacy after will has been declared void.

ESTOPPEL - a condition or state by virtue of which, an admission or representation is rendered

conclusive upon the person making it and cannot be denied or disproved as against the person relying
thereon.

Kinds of Estoppel:
1. Estoppel in Pais (by conduct)
Types :
a. Estoppel by silence
b. Estoppel by acceptance of benefits
2. Technical Estoppel
Types:
a. Estoppel by deed
b. Estoppel by record
3. Estoppel by judgment
4. Laches
Distinctions:
Laches Prescription
1. concerned with effect of delay; 1. concerned with fact of delay;
2. question of inequity of permitting the claim 2. question or matter of time;
to be enforced; 3. statutory;
3. not statutory; 4. applies at law;
4. applies in equity;
5. based on a fixed time.
5. not based on a fixed time.