OBLIGATIONS AND CONTRACTS DEFINED

Obligation – A Juridical relation whereby a person may demand from another the
observance of a determinative conduct (giving, doing, not doing), and in case of breach,
may demand satisfaction from the assets of the latter.

Contract – Meeting of the mind between two persons whereby one binds himself, with
respect to the other, to give something or to render some service.

A contract necessarily gives rise to an obligation but an obligation does not always need to
have a contract.

OBLIGATIONS

General Provisions, Nature and Effects of Obligations

Juridical Necessity – enforce compliance; seek damages

To give, to do, and not to do

• Four essential requisites of an obligation

1. A passive subject (Debtor – to give; Obligor – to do)
2. An active subject (Creditor/Obligee)
3. Object (Prestation) – subject matter
4. Juridical tie (Vinculum) – Source of Obligation

Sources of Obligation
L LAW
- mposed by law. Obligations derived from law are not presumed.
C Contracts
-Have the force of law between the contracting parties and should be complied with in
good faith.
Q Quasi-Contracts
-Juridical relations based on the principle that no one shall be unjustly enriched or
benefited at the expense of another.
• Negotiorum Gestio – When a person voluntarily takes charge of the management
of a business or property of another that has been neglected or abandoned,
without any power from the latter, as a consequence of which, he is obliged to
continue the same until the termination of the affair or to require the owner to
substitute him
• Solutio indebiti – When a person unduly delivers a thing through mistake to
another who has no right to demand it.
A Acts or omissions punished by law
-If you commit a crime, you are liable both criminally and civilly for the consequence of
your acts or omissions such as restitution, reparation for damages caused and
indemnification for consequential damages
Q Quasi-delicts
-The fault or negligence of a person who, by his act or omission, independent from any
contractual relation, causes damage to another person
-3-year-old child was bitten by a dog of her neighbor. As a result, she died. Owner liable
Nature and Effect of Obligations
Generic Thing Specific Thing
Definition Generic refers to a class or genus and Specific is designated or physically
cannot be determined with segregated from others of the same
particularity class
Duties of • To deliver a thing which must • To deliver the thing which he has
debtor to neither be of superior nor inferior obligated himself to give
deliver quality • To take care of the thing with the
• To pay damages in case of breach proper diligence of a good father of
a family
• The ordinary care that an average
or reasonably prudent person
exercises over his property
• Another standard of care may be
required by law or by stipulation of
the parties
• To deliver all the accessions and
accessories
• To pay damages in case of breach
Remedies of • To ask for performance of the • To Give Determinate Thing
Creditors obligation • To compel specific performance
• To ask that obligation be complied • To recover damages
with by another at expense of
debtor
• To recover damages

To Do Not to Do
• To have the obligation performed at • Undone at his debtor expense
debtor’s expense • To recover damages
• If done in contravention of tenor of obli or
poorly done, be undone
• To recover damages

Rules on Fruits
Creditor has rights to the fruits from the time the obligation to deliver arises. Real rights (right
over a specific thing without any passive subject, directed against the whole word) acquired only
when delivered to him

Accessions and accessories

Accessions – fruits of a thing or additions to or improvement upon a thing
Accessories – joined to or included with the principal thing for better use or completion
• Even if not mentioned, accessories follow the principal
• But obligation to deliver accessions or accessories does not include the
principal

Legal Delay - From the time obligee judicially or extra-judicially demand fulfillment; not mere
notice. In reciprocal obligation, from the moment one party fulfills his obligation, delay by the
other begins.

No demand from creditor necessary in following cases

L • When obligation or law expressly so declares
T • Time is of the essence (controlling motive)
U • When demand would be useless
 Kinds of Delay
S • Mora solvendi – delay on the part of debtor
A • Mora acccipiendi – delay of creditor
U • Compensatio more – delay in reciprocal obligation

Effects of Delay
I • Liable for interest and damages
F • Liable even for fortuitous event when the obligation is to delivery a determinate thing

Fortuitous Events
Any event which cannot be foreseen or which though foreseen is inevitable, independent
of the will or from aggravation of the debtor, rendering impossible the fulfillment of obligation

No person shall be responsible for fortuitous events, except:

L • Where expressly specified by law or stipulated in contract
A • When nature of the obligation requires assumption of risk
D • When debtor incurs delay
T • When debtor promises to deliver same thing to two or more persons
C • When obligation to deliver arises from criminal offense
G • When obligation is generic

Fraud (deceit or dolo) - Deliberate or intentional evasion of the normal fulfillment of an

obligation. Demandable in all obligations. Waiver of future fraud is void
I • Dolo incidente (Incidental Fraud) - committed in the performance of pre-existing
obligation, remedy is damages
C • Dolo causante (Causal Fraud) – Fraud employed at the time of the execution of a
contract in order to secure consent, remedy is annulment bec of vitiation of consent

Negligence (culpa) - Omission of that diligence which is required by the nature of the obligation,
but no malice. Can be regulated by the Court depending on circumstance. Waiver of future
negligence allowed
C Culpa contractual – Negligence in the performance of contractual obligation
o Pre-existing contract
o Liable for damages based on breach of contract
o Proof of contract and breach is enough for recovery of damage
o Negligence of employee conclusive presumption of employer’s negligence
o Proof of due diligence in the selection of employee not a defense
A Culpa aquiliana – Negligence between parties not so related by any pre-existing contract
o Obligation for damages based on quasi delict
o No pre existing contract
o Negligence must be proved for recovery of damage
o Negligence of employee prima facie presumption of employer’s negligence
o Due diligence in the selection and supervision of employee is a valid defense

Presumptions
P Receipt of principal without reservation as to interest = presumption of interest paid
I Receipt of later installment of debt without reservation of prior ones = presumption that
prior ones paid

Remedies to satisfy claim

E Exhaust property of debtor
S Subrogated to rights and actions of debtors, except those inherent to person
I Impugn all of acts by debtor done to defraud creditor
 DIFFERENT KINDS OF OBLIGATIONS

Pure and Conditional Obligations

Pure Obligations
• One whose effectivity or extinguishments •
does not depend upon the fulfillment or
nonfulfillment of a condition or upon the
expiration of a term or period
• Characterized by Immediate Demandability
Conditional Obligations
Effectivity is subordinated to the fulfillment
or non-fulfillment of a future or uncertain
fact or event
a. Future and uncertain event or
b. Past event and unknown to the
parties

Suspensive v. Resolutory
Suspensive Resolutory
• In suspensive condition, fulfillment give • In resolutory condition, fulfillment
rise to an obligation – acquisition of rights extinguishes obligation – loss of rights
acquired

Casual, Potestative, Mixed

Causal
• Depends on chance or will •
of third party (Valid)
Potestative Mixed
Depends on the will of one • If suspensive condition
of the contracting parties depends on will of debtor,
the obligation is void
• If resolutory condition
depends on will of debtor,
the obligation is valid
• If depends on will of
creditor, it is valid

Impossible Conditions
P • Physically Impossible or legally impossible
T • If “to do”, whole obligation is void
N • If “not to do”, obligation is valid, as if not written
D • If divisible, part not affected by impossible condition is valid

Positive v. Negative
Positive Condition Negative Condition
• (event will happen) extinguished • (event will not happen) effective
• As soon as time expires without the event • As soon as time expired without event
taking place taking place
• As soon as it becomes indubitable that the • As soon as it becomes evident the event
event will not take place cannot occur

Reciprocal v. Unilateral
Reciprocal condition Unilateral condition
• If reciprocal, the fruits are deemed • If unilateral, fruits and interest belongs to
mutually compensated debtor

Condition deemed fulfilled when obligor prevents its fulfillment

Creditor may before the fulfillment of the condition bring appropriate actions for the preservation
of the rights.

Debtor may recover what he has paid by mistake before the fulfillment of condition.

Effects of the fulfillment of a condition retroacts to the day of the constitution of the obligation
Rule on loss or deterioration, improvements before the fulfillment of condition

• Lost – when perished, go out of commerce, or disappear in such a way that its existence
unknown or cannot be recovered
E • If without the fault of debtor, the obligation is extinguished
P • If lost thru fault of debtor, obliged to pay damages
I • When deteriorate without fault of debtor, creditor bores the impairment
R • When deteriorate with fault of debtor, creditor may rescind or fulfillment with damages
I • When improved by nature, or by time, inure to the benefit of creditor
R • When improved by debtor, no right to be indemnified, but may remove such
improvement, or set off against damage

Remedies in reciprocal obligation

P • Specific Performance or Rescission
D • With damages in either case
• Alternative remedy not cumulative – can choose one but not both
• After action for specific performance impossible, option for rescission
• Injured party must resort to judicial rescission
o Except where automatic rescission expressly stipulated
o Or where there is no performance yet
• Power of the court to fix period
• Subject to right of good faith third party
• Substantial breach not slight breach
• Where both parties have breach, liability of first infractor equitably tempered; where
first infractor not known, both parties bear own damages

Obligations with a Period

P • Demandability or extinguishments subject to expiration of a term or period
• Term or period – future and certain event
• Rules on loss, deterioration, improvements of conditional obligation applicable
• If paid or delivered before period arrives, debtor may recover the thing, with fruits and
interests
• Established for the benefit of both debtor and creditor, unless otherwise stated
• Court may fix period
o If obligation does not fix a period
o Depends on will of debtor
o “When means permit” not condition, but period
o Period fixed by court cannot be changed

Debtor loses right to make use of the period

I • Debtor becomes insolvent, unless he gives guaranty or security
G • When debtor does not furnish guaranties or securities promised
I • When guaranties or securities impaired or disappear
V • When debtor violates an undertaking
A • When debtor attempts to abscond

Alternative Obligations
• Alternative – several objects or prestations but performance of one sufficient
• Facultative – One object or prestation but debtor may substitute.

Must completely perform one of them

Right of choice to debtor, unless expressly granted to creditor

 Except those impossible, unlawful, which could not have been the object of the
obligation or only one prestation is practicable

Choice no effect until communicated, irrevocable once communicated

Debtor may rescind the contract with damages if thru creditor’s acts debtor cannot make
a choice

If lost due to fortuitous event

T • If two or more objects remain, the obligation subsists
O • If only one object remain, it becomes simple obligation
N • If none remains, obligation is extinguished

If lost due to fault of debtor

 When right of choice belongs to debtor
R • If 2 or more objects remain, debtor can choose from remaining, not liable for
damages
S • If only one remain, simple obligation to deliver remaining
I • If none remains, debtor indemnify damages based on value of last object

 When right of choice belongs to creditor

C • If alternative object still remain, creditor can choose the one lost and ask value of
object lost and damages; if creditor choose the remaining object, debtor cannot be
liable for damages
I • If none remains, debtor to indemnify for damages based on the price of the object
chosen by the creditor plus consequential damages

Facultative Obligation
D • Right of choice only to debtor
S • If lost before substitution, debtor not liable
L • Debtor liable for loss due to his fault once substitution has been made
F • If after substitution, it is lost thru fortuitous event, obligation extinguished, debtor not
liable

Joint and Solidary Obligations

Joint Obligation – Each of creditor has right to demand, and each debtor is bound to render
compliance, with his proportionate part of the prestation
D • Default rule in obligation is JOINT
R • Joint creditor cannot act in representation of the other creditors
A • Joint debtor cannot be compelled to answer for liability of other debtors
P • “Jointly”, “We promise to pay”, “Pro rata”, “proportionately”

Solidary Obligation – Each creditor has a right to demand, and each debtor is bound to render
compliance, with the entire prestation; but as to co-debtor he is liable only for his share

Instances when obligation is solidary:

S • When obligation expressly states so
L • When law requires solidarity:
o If 2 or more heirs take possession of estate
o Partners in partnership
o If principal allowed agent to act as though he has full power
o If 2 or more appointed an agent for common undertaking or transaction
o 2 or more bailees to whom a thing is loaned
o 2 or more officious managers, unless management was assumed to save
thing from imminent danger
o 2 or more persons liable for quasi delict
o 2 or more payees when there has been payment of what is not due
o Principal, accomplices, and accessories of a felony
N • When nature of obligation requires solidarity
o Ex. Accident fr “Kabit” system

“Solidarily”, “Jointly and severally”, in solidum, together and/or separately, “I promise to pay”

Creditors and debtors need not be bound in the same manner and by the same periods and
conditions

Not same as indivisible obligation

V • Solidary refers to vinculum; Indivisibility refers to prestation
P • Solidary requires plurality of subjects
L • In solidary, all debtors liable for breach of obligation; In indivisibility, only debtor guilty
of breach of obligation is liable for damage
I • In indivisible obligation, other debtors not liable for insolvency; if solidary debtor
becomes insolvent, the co-debtors bore his debt in proportion

Solidary creditors may do whatever may be useful to others, but not anything which may be
prejudicial to the others

A solidary creditor cannot assign his rights without the consent of the others, except if to co-
creditors

Debtor must pay to the creditor who made demand, if none demanded, then he may pay any
one of the solidary creditor

Novation, compensation, confusion or remission of a solidary creditor shall extinguish the

obligation but the creditor who did these acts shall be liable to the other creditors

No re-imbursement if payment made after obligation prescribed or illegal

Remission of the whole obligation obtained by a solidary debtor does not entitle him to
reimbursement from his co-debtors

Defenses available to solidary debtors

N • Derived from nature of obligation
o Payment, fraud, prescription, remission, illegality, non performance of
condition
P • Personal to the debtor
o Insanity, incapacity, mistake, violence, minority
O • Personal to the other solidary debtors
o Partial defense

Obligations with a Penal Cause

A • With accessory undertaking in case of breach of obligation
o To insure performance
o To liquidate the amount of damage to be awarded
o To punish the obligor in case of breach
P • No need to prove actual damage
S • Shall substitute for damages and interest, except
o When there is stipulation to the contrary
o When obligor is sued for refusal to pay agreed penalty
o When obligor is guilty of fraud

When court may reduce penalty

P • If principal obligation partly complied with
I • If principal obligation irregularly complied with
U • If penalty is iniquitous or unconscionable
 EXTINGUISHMENTS OF OBLIGATIONS

Modes of Extinguishing Obligations

P • Payment or performance
L • Loss of the thing due
C • Condonation or remission
M • Confusion or merger of the rights of creditor and debtor
C • Compensation
N • Novation
D • Death of a party in personal obligation
A • Annulment or Rescission of contract
R • Arrival of Resolutory period or fulfillment of resolutory conditon
I • Impossibility of fulfillment
P • Prescription

1. Payment

General Provisions Payment

• Complete Delivery of money, performance of obligation
• If substantially performed in good faith, obligor may recover as though there had
been complete fulfillment less damages
• Third party cannot compel creditor to accept payment or performance, except
S • When there is stipulation to the contrary
T • When third person has an interest in the fulfillment of obligation

Rights available to third party who pays:

If payment made with the consent of the debtor

R • Recover from debtor the entire amount
S • Subrogated to all the rights of creditor

If payment made without the knowledge or against the will of debtor

B • he can recover only insofar as payment has been beneficial to the debtor

To whom payment must be made (1240)

P • To the person in whose favor obligation has been constituted
S • His Successor in interest
A • Any person authorized to receive it
T • Third person provided it has redounded to benefit of creditor
P • Possessor of the credit

Payment to third person. Presumption of benefit in the following case:

A • If after payment, third person acquires creditor’s rights
R • If creditor ratifies payment to third party
C • If creditor’s conduct led debtor to believe that the third person had authority to receive
payment

Payment must be in Legal Tender

F • Foreign currency may be used as currency of contract
P • Promissory notes, bills of exchange, checks not legal tender. They produce effect of
legal tender only when encashed or impaired thru the fault of creditor
I • In case of extraordinary inflation or deflation, the basis is the value of currency at the
time obligation is established

Applications of Payments
D • The right belongs to the debtor, but if he does not exercise it, creditor may do it
R • If creditor issues a receipt designating the debt to be applied, debtor can accept or
reject
O • Where neither debtor nor creditor made a choice, it shall be applied on the debt which
is most onerous
P • If similar nature and burden, payment shall be applied proportionately

Neither debtor nor creditor made a choice. Applied on debt most onerous:
O • Older debts more onerous than newer ones
I • One bearing interest more onerous than one that is not
S • Secured debt more onerous than unsecured
P • Debt as principal more onerous than debt as guarantor
S • Solidary obligation more onerous than sole debtor

Payment by Cession - Assignment or abandonment of all the properties of the debtor for the
benefit of his creditors in order that the latter may sell same and apply proceeds thereof to
pay debt
O • Cession does not make the creditors owners of the property
B • Unless stipulation to contrary, debtor still required to pay balance
I • Requires two or more creditors, debtors insolvent, cession accepted by creditors

Dacion en pago - Dation in payment is the transmission of the ownership of a thing by the
debtor to the creditor as an accepted equivalent of the performance of an obligation

Governed by law on sales

Dacion v. Cession
Dacion en pago Cession
• Dacion usually only one creditor • Cession requires two or more creditors
• Dacion does not require insolvency • Requires insolvency of debtor
• Dacion does not involve all the property of • Requires all the properties of debtor
debtor
• Dacion makes creditor owner of the • Not make creditors owners
property
• Dacion is a novation • Not a novation

Tender of Payment and Consignation

Tender of payment – The act of the debtor of offering to the creditor the thing or amount due

Consignation – Deposit of the object or the amount due with the proper court after refusal or
inability of the creditor to accept the tender of payment

Requisites of Consignation
D • Debt Due
T • Tender of payment by debtor and refusal by creditor to accept it without justifiable
reason
P • Previous notice of the consignation had been given to persons interested in fulfillment
of obligation
D • Thing or amount due has been deposited with judicial authority
S • Subsequent notice of consignation to interested parties

Exception to requirement for tender of payment:

A • When creditor is absent or unknown or does not appear at place of payment
I • When he is incapacitated to receive payment
R • When he refuses to give receipt, without just cause
T • When two or more persons claim same right to collect
L • When title of the obligation has been lost
Expenses of consignation for Creditor’s account - If creditor allows debtor to withdraw the
consignation, creditor lose preference over the thing. Co-debtor, guarantors, sureties shall be
released.

2. Loss of the Thing Due

Lost – when perished, go out of commerce, or disappear in such a way that its existence
unknown or cannot be recovered

Or becomes legally or physically impossible to perform, or so difficult as to be manifestly beyond

the contemplation of the parties

The obligation to deliver specific thing is extinguished if

F • Without the fault of debtor, and
D • Debtor not in delay

No person shall be responsible for fortuitous events, except:

L • Where expressly specified by law or stipulated in contract
A • When nature of the obligation requires assumption of risk
F • When debtor is at fault, partly
D • When debtor incurs delay
T • When debtor promises to deliver same thing to two or more persons
C • When obligation to deliver arises from criminal offense
G • When obligation is generic

In case of partial loss the court shall determine whether it is so important as to extinguish the
obligation

When the thing is in the possession of debtor, presumption is it is his fault. Except earthquake,
flood, storm or other natural calamity

Creditor shall have right to go against any third person responsible for the loss.

3. Condonation or Remission of Debt

Condonation - Act of liberality by virtue of which creditor abandons his right

G • Gratuitous
A • Accepted by debtor
D • Obligation must be demandable
C • Parties must be capacitated
I • Donation not inofficious
F • Forms in express condonation

Implied remission
D • Delivery of private document evidencing credit
P • If thing pledge is found in the possession of debtor or owner of thing
P • Renunciation of principal extinguish accessory obligation

4. Confusion or Merger of Rights

Creditor and Debtor merged in the same person

P • Between principal debtor and principal creditor
C • Complete and definite merger

Merger of debtor and creditor benefits the guarantor

Extinguish only the portion of the joint obligation corresponding to the creditor and debtor
merged

Merger of one solidary debtor with creditor extinguishes obligation

5. Compensation
Persons who in their own rights are debtors and creditors of each other extinguishes the
debts to the concurrent amount

Guarantor can set up compensation of what principal debtor may owe creditor

Compensation may be total or partial

Parties may agree to compensate debts not yet due

When one or both debts are rescissible or voidable, they may be compensated before
they are judicially rescinded or avoided

Requisites of legal compensation (by operation of law ):

P • Parties are principal creditors and debtors of each other
C • Both debts consist in sum of money or consumable of same kind and quality
D • Both debts are due and demandable
L • Two debts are liquidated (amount is certain)
R • No retention or controversy commenced by 3rd party

Compensation after assignment

C • Assignment made with consent of debtor
o Debtor cannot set up compensation against previous creditor
K • Assignment with knowledge but without consent
o Debtor can set up compensation for debts before the notification
o Debtor cannot set up compensation with respect to debts which matured after
notification
W • Assignment without knowledge of debtor
o Debtor can set up compensation for debts maturing before he learned of
assignment

Compensation cannot take place in following cases:

D • Debts from Contracts of Depositum (A person receives a thing belonging to another
for safekeeping and of returning the same; not bank deposits)
C • Debts from Commodatum (One person delivers to another something for him to use
and return it)
S • Claims for support due by gratuitous title
C • Debts from Criminal offense
T • Taxes

5. Novation

Novation – extinction of an obligation through the creation of a new one which substitutes it

Requisites:
P • Previous valid obligation
A • Agreement to enter new obligation
E • Extinguishments of old
C • Creation of new valid obligation
Must be declared in unequivocal terms

Or incompatible on every point – Test: Whether old and new contract can stand together each
having its own independent existence

Substitution of Debtor

Expromision – Without the knowledge or consent of debtor, at the instance of the new
debtor
R • Payment by new debtor gives him right to beneficial reimbursment
I • Insolvency or non fulfillment of obligation by new debtor will not give rise to liability of
old debtor

Delegacion – Substitution made at the instance of old debtor

R • Payment by new debtor entitles him to reimbursement and subrogation
N • Non fulfillment of obligation by new debtor will not give rise to liability of old debtor
I • Insolvency of new debtor will revive action against old debtor if insolvency was
already existing and of public knowledge, or known to the debtor when he delegated
his debt

If new obligation is void, the original one shall subsists

If original obligation is void, novation is void; except when annulment may be claimed only by
debtor or when voidable acts have been ratified

Subrogation – Substitution of Debtor

Conventional – By express agreement of the old creditor, debtor and the new creditor

Legal –Without agreement, by operation of law

P • When creditor pays another creditor who is preferred, even without the debtor’s
knowledge
A • When a third person, not interested in the obligation, pays with the express or tacit
approval of debtor
T • When a third person interested in the fulfillment of obligation pays, even without the
knowledge of debtor
CONTRACT

Definition of a Contract
M • A meeting of the minds
B • Between two persons
B • Whereby one binds himself, with respect to the other
G • To give something or to render some service

Different phases or stages in the life of a contract

P • Preparation – Preliminary to formation
P • Perfection – birth of the contract
C • Consummation - fulfillment

Essential characteristics of Contracts

O • Obligatory force – must be complied with in good faith
A • Autonomy – parties are free to enter such stipulations, clauses, terms and conditions
M • Mutuality – contract must bind both parties
R • Relativity – takes effect only bet parties, their assigns and heirs

Autonomy - Clauses and condtions must not be contrary to:

L • LAW
M • Morals
G • Good Customs
O • Public Order
P • Public Policy

Mutuality – instance involving mutuality

D • Determination can be left to third party, whose decision shall be binding only when
communicated to both parties
I • Unless such determination be evidently inequitable

Relativity – instances involving relaitvity

S • Stipulation pour autrui accepted by third party
P • Where third persons comes into possesion of the object of contract creating real
rights
D • Where contract is to defraud a third person
I • Where third person induces a contracting party to violate his contract
• a

Different Classes of Contracts

According to perfection
C Consensual – Perfected by mere agreement of the parties
R Real – Requires not only consent, but also the delivery of the object

According to form
C Common – Do not require particular form
F Formal – Those which require particular form, like donation, mortgage

According to nature of vinculum

U Unilateral – Obligation of one party only
B Bilateral – Reciprocal obligations for both parties

According to cause
O Onerous – Giving of an equivalent or compensation
G Gratuitous – Given without compensation, just pure liberality

According to risks involved

C Commutative – Prestation is pecuniarily appreciable and determined at the moment of
celebration of contract
A Aleatory – Pecuniarily appreciable but not yet determined at the moment of celebration,
since it depends upon the happening of an uncertain event. Ex. Insurance

According to name
N Nominate – with specific names or designation in law
I Innominate – no specific name

Essential Requisites of Contracts

C • Consent of the contracting parties

O • Object - certain subject matter of the contract
C • Cause of the obligation which is established

Elements of Consent

Concurrence of the offer and the acceptance

O • Definite Offer that may be exactly fixed
A • Assent to the terms without qualifications or conditions
C • Conveyed before the death, civil interdiction, insanity, or insolvency
Q • Qualified acceptance is a counter offer
P • Perfected when acceptance comes to knowledge of offeror
W • Offer can be withdrawn anytime before acceptance, unless option is founded on
consideration
A • If offer made thru agent, accepted when communicated to the agent
 By parties with legal capacity to contract
• Not minors, insane or demented, deaf-mutes who do not know how to write,
incompetents under guardianship, civil interdiction
• Minor can be liable if he misrepresents his age

Prohibited by law from entering into contracts

H • Husband and Wife to each other
I • Insolvents
P • Persons prohibited from giving donations
A • Adultery, concubinage
C • In consideration of criminal offense
P • Made to public officer, spouse, by reason of office
F • Persons with fiduciary relations
G • Guardian, for property under his guardianship
A • Agents, for property entrusted to them
E • Executor/administrator
P • Public officers, judges, for property under their jurisdiction

Consent - Intelligently, freely given, consciously

Vices of the will

1. Mistake - False notion of a thing or a fact materrial to the contract. Simple mistake gives
rise to correction
Render voidable in following cases:
O • Mistake as to object of the contract – Identity of thing, Substance, Condition.
Quantity only if principal reason
•
L • Mistake of Law - Will not make it voidable except: Mutual error as to the legal effect
of an agreement when the real purpose of the parties is frustrated
P • Mistake as to person
• - If such identity or qualification is principal cause of contract

2. Violence – Employment of external physical force, irresistible and serious to wrest consent
S • Force employed must be serious or irresistible
D • Determining cause for the party in entering into the contract

3. Intimidation – Moral compulsion to influence another to give his consent thru fear of
imminent or grave evil

4. Undue Influence – Improper advantage of his power over the will of another depriving the
latter of reasonable freedom of choice
C • Confidential, Family, Spiritual and other relations or
M • Person influenced suffering from mental weakness, ignorant, financial distress

5. Fraud – Insidious words or machinations of one of the contracting parties induced the other
to enter into a contract, which without them he would not have agreed; Failure of one party
to disclose facts to other party when there is a duty to reveal them

Dolo incidente (Incidental Fraud) - committed in the performance of pre-existing

obligation, remedy is damages

Dolo causante (Causal Fraud) – Fraud employed at the time of the execution of a
contract in order to secure consent, remedy is annulment bec of vitiation of consent
E • Must be employed by one of the contracting parties, but not by both or by third parties
S • Must be Serious
I • Must have induced the other party to enter into the contract
•

Vices of Declaration

Simulated Contracts

1. Absolute
B • Contracting parties do not intend to be bound by the contract at all
V • Void

2. Relative
C • Contracting parties conceal their true intentions
R • Real agreement binding on the parties if it does not prejudice third person
•

OBJECTS

Object - Thing, right or service which is the subject matter of the obligation created or
established

Thing or service must be within the commerce of man

P • The law prohibits future inheritance as object of contract
T • Transmissible and can be appropriated
C • Not contrary to Law, Moral, Good Conduct, Public Order, Public Policy
R • Real or possible
D • Determinate or determinable

CAUSE

Cause - Essential reason why the parties enter into the contract
E • Cause should be in existence
L • Licit or lawful
T • True

Interchangeable with consideration, but not same as motive

General rule: Particular motive of the party in entering into a contract are not material. Except:
When it predetermines the purpose of the contract

FORM

Form - Whatever may be the form, Contract shall be obligatory on all provided all the essential
requisites are present

Two exceptions:
R • When Law requires a certain form for validity
R • When Law requires form for enforcement
 Must appear in Writing to be valid:
D • Donation exceeding P 5,000
A • Sale of piece of land or interest therein by an agent
A • Antichresis - Creditor acquires rights to fruits of immovable but applying to payment of
interest
I • Agreement regarding payment of interest

Must appear in Public Instrument to be valid:

D • Donations of immovable property
P • Partnership where immovable or real rights are contributed

Must appear in Public Instrument for Enforcement

I • Creation, transmission, modification, sales or extinguishments of real rights over
immovable properties
H • Cession, repudiation, or renunciation of hereditary rights, or those of conjugal
partnership of gains
P • Power to administer property
C • Cession of actions or rights proceeding from an act appearing in a public document

REFORMATION


Reformation - When the true intentions of the parties are not expressed in the
instrument, one of the party may ask for the instrument to be changed so that true
intention may be expressed.

Requisites:
M • Must be a meeting of the minds of the parties
T • True intention is not expressed in the instrument
F • Failure due to mistake, fraud, inequitable conduct or accident
•

What may be reformed

M • Mutual mistake of parties cause failure to disclose real agreements
F • One party mistaken and the other acted fraudulently or inequitably
K • One party was mistaken and the other knew that instrument did not state real
agreement, yet concealed it
I • Ignorance, lack of skill,, negligence or bad faith on the part of person drafting it
M • Where parties agree on mortgage, but instrument states property is sold absolutely or
with right to repurchase

What may not be reformed

S • Simple Donations with no condition
W • Wills
R • Those where real agreement is void

DEFECTIVE CONTRACTS
As to defect
R • Rescissible - Injury or damage
V • Voidable - Vitiation of consent or legal capacity
U • Unenforceable - In excess of authority or do not complyy with Statutes of Fraud
V • Void - Lack of an element of a valid contract

As to effect
V • Rescissible and Voidable - Valid until annulled
E • Unenforceable - Cannot be enforced by action in court
N • Void - No legal effects at all

As to parties who can file action

• Rescissible and Void – May be attack directly by contracting parties or by third parties
• Voidable and Unenforceable - Cannot be attacked by third persons

Resolution (Rescission of reciprocal obligation)

Party who may institute action

• For resolution, only party to the contract

Causes
• Failure of one party to comply w/ obligation

Kind of contract
• Reciprocal obligation only

Power of the courts

• Can grant extension for performance

Rescissible Contracts

Guardian who represent ward, lession of more than ¼ of the value of the thing

In representation of absentee, lession of ¼

In fraud of creditor who is unable to collect

Things under litigation, entered into by defendant without approval of litigants and court

Payment made in state of insolvency where debt not yet due

Those which may be declared by law

 Partition (1098)
 Result of deterioration (1189)
Unpaid seller (1526 and 1534)

  Badges of Fraud

o o Cause or consideration is inadequate

o o Transfer made after suit has begun or pending
o o Sale on credit by an insolvent debtor
o o Evidence of large indebtedness or complete insolvency
o o Transfer of all or nearly all of debtor properties
o o Between father and son, with any of above circumstances
o o Failure of vendee to take exclusive possession
Voidable Contracts
 Where one party is incapable of giving consent to a contract

 Where the consent is vitiated by mistake, violence, intimidation, fraud, undue

influence

Convalidation
 Prescription (Four years)
 From time incapacity ceases
 From discovery of such fraud or mistake
 Ratification or confirmation
 Loss of the thing by thru the fault of the person who has right to annul

Effects of annulment of Voidable Contract

– If not consummated, then parties are released from obligation
– If consummated, parties are to restore to each other what they have given, with fruits
and interests, plus damages
– If to do or not to do, there will be apportionment of damages
–Incapacitated party not obliged to make restitution except for what he was benefited

Unenforceable Contracts
 Those entered into in the name of another person by one who has been given no
authority or legal representation or who has acted beyond his powers

 Those not complying with Statute of Frauds.

Statute of Fraud
–Purpose is to prevent fraud, not to aid the commission of fraud
– Basic and fundamental principles
 Applies only to executory contracts
 Cannot apply if action is not for damage bec of violation of agreement or for
specific performance
 Exclusive
 May be waived
 Personal defense
 Contracts are not void
 Rule of exclusion
 Concerns admissibility of evidence, not credibility
 Does not apply if action is to claim reformation

– Following must be in writing or in some notes or memorandum:

– Agreement not to be performed within a year from the making thereof
– A special promise to answer for debt, defaults or miscarriage of another
– Agreement in consideration of marriage
– Sales of goods, chattels, things above P500
– Lease of more than one year
–Representation as to credit of another

Void Contracts
– No concurrence of offer/acceptance
– Cause, object, purpose contrary to law, morals, good customs, public order, or public
policy
– Absolutely simulated or fictitious
– Cause or object did not exist at the time of the transaction
– Object outside commerce of men
– Impossible service
– Intention of the parties relative to principal object cannot be ascretained
– Prohibited or declared void by law
Estoppel

 Estoppel in pais - by one’s conduct or acts, representatioons, admissions or silence,

culpable negligience induces another to believe certain facts to exist and such other
rightfully relies and acts on such belief.

 Estoppel by Deed - A party to a deed, are precluded from aasserting against the
other party to the deed any right or title in derogation of the deed, or from denying any
material fact asserted therein.

 Estoppel by Record - A party precluded from denying the truth of matters set forth in
a record, whether judicial or legislative.

Estoppel by Laches
 Estoppel by Laches
 Failure or neglect to enforce a right for an
 Unreasonable and unexplained length of time
 Despite knowledge or notice

EXTINCTIVE PRESCRIPTION
(Arts. 1139-1155)
40 days Redhibitory action based on defects of animals.
6 months (a) Action for reduction of price for rescission in case of breach of
sale of real estate, either with a statement of its area at a
certain price for a unit of measure or number.
(b) Action for warranty against hidden defects of thing sold.
1 year (a) (a) Action by husband against wife to impugn child’s legitimacy
if husband is in the same place as wife.
(b) (b) Action for revocation of donation for acts of ingratitude.
(c) (c) Action for forcible entry or unlawful detainer.
(d) (d) Action for defamation.
(e) (e) Action for rescission or for damages if immovable sold is
encumbered with non-apparent burden or servitude.
2 years Action to impugn child’s legitimacy if husband is in the
Philippines but not in same place as wife.
3 years Action to impugn child’s legitimacy if husband is abroad.
4 years (a) Action for revocation or reduction of donation based on
supervening birth, appearance or adoption of a child.
(b) Action for revocation of donation based on fulfillment of
condition.
(c) Action for recovery of movable (replevin) if possessor is in
good faith.
(d) Action upon injury to rights of plaintiff.
(e) Action upon a quasi-delict.
(f) Action for rescission of rescissible contracts.
(g) Action for annulment of voidable contracts.
5 years (a) (a) Action for legal separation.
(b) (b) Action for annulment of marriage based on
1. Lack of parental consent.
2. Fraud.
3. Force, intimidation or undue influence.
4. Physical incapacity and afflicted with a sexuality transmissible
disease.
(c) (c) Action to claim legitimacy if child should die during minority
or in state of insanity.
(d) (d) Action for declaration of incapacity of heir.
(e) (e) Action for warranty of solvency of debtor if credit is
assigned to co-heir during partition.
(f) (f) All other actions whose periods are not fixed by law.
6 years (a) Action upon oral contract.
(b) Action upon a quasi-contract.
8 years Action for recovery of movables (replevin) if possessor is in bad
 faith.
10 years (a) (a) Action for recovery of possession of immovables (accion
publiciana) if real right of possession is lost.
(b) (b) Action for recovery of ownership of immovables (accion
reinvindicatoria) if possessor is in good faith.
(c) (c) Action upon a mortgage contract.
(d) (d) Action upon a written contract.
(e) (e) Action upon an obligation created by law.
(f) (f) Action upon a judgment.
Lifetime (a) Action to claim legitimacy.
(b) Action to obtain declaration of illegitimate filiation.