Oblicon essential notes_2015[1]-1

Obligations and
Contracts:
Essential Notes
1

OBLIGATION WITH A PENAL CLAUSE
An obligation to which an accessory
undertaking (penal clause/penalty) is
attached for the purpose of insuring its
performance by virtue of which the obligor
is bound to pay a stipulated indemnity or
perform a stipulated prestation in case of
breach.
2

A penal clause is attached to an obligation
in order to insure performance and has a
double function:
1) to provide for liquidated damages, and
2) to strengthen the coercive force of the
obligation by the threat of greater
responsibility in the event of breach
(Filinvest Land, Inc. vs. CA, G.R. No. 138980, Sept.
20, 2005)
3

4
General Insurance & Surety Corp. vs.
Republic (Jan. 31, 1963)
The bond is penal in nature and substitute
indemnity for damages and payment of interest.
Even if bond is worth more than actual
damages.
• Bond is to guarantee DepEd that school will
follow rules/pay salaries. School did not pay
salary amounting to only P2,000, bond was for
P10,000.
• If bond less than actual damages, no action for
payment of deficiencies except when there is
fault.

Effect of Penalty (Art. 1226, par. 1)
General Rule: The penalty shall substitute
the indemnity for damages and payment of
interest in case of non-compliance.
Except:
1) When there is a stipulation to the contrary
2) When the obligor refuses to pay the penalty
3) When the obligor is guilty of fraud (Art. 1170)
5

Limitation Upon the Right of the Debtor in
Obligations with a Penal Clause (Art. 1227)
General Rule: Debtor cannot exempt
himself from the performance of the
principal obligation by paying the stipulated
penalty
Except:
Unless this right has been clearly and expressly
granted to him
6

Limitation on the Right of the Creditor in
Obligations with a Penal Clause (Art. 1227)
General Rule: Creditor cannot demand the
fulfillment of the principal obligation and
demand the satisfaction of the penalty at the
same time.
Except:
Unless this right has been clearly granted to him
• If creditor has chosen fulfillment of the principal obligation
and performance thereof became impossible without his
fault, he may still demand satisfaction of the penalty.
• If there was fault on the part of debtor, creditor may
demand not only satisfaction of penalty but also the
payment of damages.
7

8
Compagnie Franco-Indochinoise vs.
Deutsched (29 Phil 474)
Property of plaintiff transported on board
steamship of defendant company, was
unlawfully detained by the captain, resulting
in loss to its owner. Sued for damage for an
amount equal to the value of cargo, the
defendant claimed that the amount
recoverable cannot exceed the amount of
freight under the penal clause. Tenable?

9
Held: NO. Assuming limitation expressed in
the penal clause is valid, xxx it was intended
to apply to cases of NON-PERFORMANCE,
that is to cases where defendant is liable for
damages for failure to perform obligations in
contract. The ACT of captain which is basis of
claim is NOT non-performance but amounts to
a conversion of the cargo, AN ACT OF
POSITIVE MISFEASANCE, and not a mere
NON-FEASANCE such as is contemplated in
the penal clause. Recoverable damages are
not limited to the amount of the freight as
stated by the Penal Clause.

Article 1229 – Judge may reduce penalty
1) Principal obligation has been partly/
irregularly complied;
2) Even if no performance, the penalty may
also be reduced if iniquitous/
unconscionable
10

Filinvest Land Inc. vs. CA & PepCorp
Sept. 20, 2005
Penalty of P15K a day of delay agreed.
94% of work completed. As a general rule,
courts are not at liberty to ignore agreement
to a penalty. But courts may equitably
reduced stipulated penalty in 2 instances:
(1) if principal obligation has been partly or
irregularly complied; (2) if no compliance
but penalty is iniquitous or unconscionable.
11

NOTE:
If the interest rate agreed upon is VOID for
being iniquitous, the rate of interest should
be 12% PA computed from judicial or
extrajudicial demand. (Dino vs. Jardines,
481 SCRA 226
12

Modes of Extinguishing Obligations
1) Payment/performance
2) Loss of the thing due
3) Condonation or remission of debt
4) Confusion or merger
5) Compensation
6) Novation
7) Annulment
8) Rescission
9) Fulfillment of a resolutory condition
10) Prescription
13

A. Payment or Performance (Art. 1232)
• Means delivery of money and the
performance, in any other manner, of an
obligation.
• Also means non-performance
Characteristics of payment:
1) Identity – only the prestation agreed upon and no
other must be complied with
2) Integrity – the thing or service must be completely
delivered or rendered
3) Indivisibility – payment or performance must be
indivisible
14

Manila International Airport Authority vs.
Ding Velayo Sports Center (May 30, 2011)
Contract of lease stipulated that lessee to
build/develop improvements on property
after a few months. But 1 year period of the
contract has expired without the
improvements, yet lessor did not register
any protest/objection to incompleteness –
Art. 1235 applies.
15

Persons From Whom the Creditor Must
Accept Payment (Art. 1236)
1) Debtor himself or his legal representative
2) Any person who has an interest in the
obligation (like a guarantor)
(Ex. Monte de Piedad vs. Rodrigo)
3) A 3rd person who has no interest in the
obligation when there is stipulation that he
can make payment
• Person who pays the obligation should have the
necessary legal capacity to effect such payment
(Art. 1239)
16

Cecilleville Realty & Services Corp. vs.
Sps. Acuna (July 13, 2009)
Cecilleville paid the debt of the Acuna spouses
to Prudential as an interested third party.
Even if the Acuna spouses insist that
Cecilleville’s payment to Prudential was without
their knowledge or against their will, Art. 1302
(3) of the Civil Code states that Cecilleville still
has a right to reimbursement.
17

Cecilleville clearly has an interest in the
fulfillment of the obligation because it owns
the properties mortgaged to secure the
Acuna spouses’ loan. Because of its
payment of the Acuna spouses’ loan,
Cecilleville actually steps into the shoes of
Prudential. There is legal subrogation.
18

Effect of Payment by 3rd Person
• Without knowledge or against the will –
recovery is only up to the amount
beneficial to the debtor; no subrogation
• With knowledge – rights of
reimbursement and subrogation
19

To Whom Payment Must Be Made (Art. 1240)
1) The person in whose favor the obligation
has been constituted
2) His successor in interest
3) Any person authorized to receive it – by
law or by the creditor at the time when
payment is due and not when the
obligation was constituted
20

Effect of Payment to Unauthorized Persons
in Obligation to Give
General Rule: It shall NOT be valid, even
though made in good faith.
Except:
1) Provided that it has redounded to the benefit of
the creditor.
2) Payment to the possessor of the credit, made
in good faith (Art. 1242)
• Refers to the possession of credit not the
document evidencing it.
21

Benefit to the creditor is presumed in the
following cases: (Art. 1241)
1) The third person acquires the creditor’s
rights (subrogation);
2) Creditor ratifies the payment
3) Creditor’s conduct, the debtor led to
believe that the third person authorized to
receive (estoppel)
22

Note:
In obligations to give, payment to
incapacitated person is valid when:
1) The incapacitated has kept the amount or
thing paid or delivered
2) Payment has been beneficial to the
incapacitated person (Art. 1241)
23

Rule in Monetary Obligation (Art. 1249)
Must be made in the currency stipulated; if it
is not possible to deliver such currency, then
in the currency which is legal tender in the
Philippines.
24

Legal Tender
Such currency which may be used for the payment
of all debts, whether private or public. Its
significance is manifested by the fact that it is such
which the debtor may compel a creditor to accept in
payment of the debt.
Legal tender in the Philippines would be all NOTES
AND COINS issued by the Bangko Sentral (Circular
No. 537)
1) 1-Peso, 5-Pesos and 10-Peso coins: in amounts
not exceeding P1,000.00
2) 25 centavo coin or less: in amounts not exceeding
P100.00
25

Take note that bills, regardless of denomination,
are legal tender up to whatever amount.
RA 8163 provides that all monetary obligations
shall be settled in the Philippine currency which
is legal tender in the Philippines. The parties
may agree that the obligation or transaction be
settled in other currency at the time of payment.
26

Place of Payment (Art. 1251)
1) Place stipulated by the parties
2) No stipulation to deliver a determinate thing,
payment is at the place where the thing be at
the time the obligation was constituted.
3) In any other case, the payment shall be
made at the domicile of the debtor.
27

Go Sinco vs. CA, et al. (Oct. 9, 2009)
Issue: If there is unjustified refusal to accept
payment, does it extinguishment obligation?
Rule: NO. The law requires the twin acts of
tender of payment and consignation. The
effect of the tender is xxx debtor is freed
from the obligation to pay interest.
28

Special Forms of Payment
A. 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.
29

Requisites:
1) There must be only one debtor and
only one creditor;
2) There must be two or more debts of
the same kind;
3) All the debts must be due; and
4) Amount paid by the debtor is
insufficient.
30

B. Dation in Payment (Dacion en pago)
Delivery and transmission of ownership of
a thing by the debtor to the creditor as an
accepted equivalent of the performance of
the obligation. (Art 1245)
31

C. Payment by Cession (Art. 1255)
Special form of payment where debtor
assigns/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.
Requisites:
1) Plurality of debts;
2) Partial or relative insolvency of the debtor;
and
3) Acceptance of the cession by the creditors
32

D. Tender of Payment and Consignation (Art.
1256)
Tender of Payment – Manifestation of the
debtor to the creditor of his decision to comply
immediately with his obligation;
Consignation – Deposit of the object of the
obligation in a competent court, after refusal or
inability of the creditor to accept the tender of
payment;
33

Special Requisites of Consignation
1) Existence of a valid debt which is due;
2) Tender of payment by the debtor;
creditor’s refusal without just cause to
accept it
a) Tender must be precede consignation;
b) It must have been unconditional;
c) Refusal must be without just cause
34

3) Previous notice of consignation to person
interested in the fulfillment of the obligation
• Lack of previous notice does not invalidate the
consignation, but debtor liable for the expenses
occasioned thereby
• With respect to the creditor, this notice can be
made simultaneously with the tender of payment
by way of warning.
4) Consignation – amount or thing due placed
at the disposal of the court
5) Subsequent notice of consignation
35

Instances Where Consignation Shall
Produce the Effects of Payment Without
Prior Tender of Payment (Art. 1259, par. 2)
1) Creditor is absent or unknown, or does
not appear at the place of payment
• Absence need not be judicially declared.
He must, however, have no legal
representative to accept the payment
2) Creditor is incapacitated to receive the
payment at the time it is due
36

3) When without just cause, the creditor refuses
to give a receipt
• Refusal to issue a receipt preceded the tender of
payment
4) When two or more persons claim the right to
collect (as in the case of interpleader)
5) When the title of the obligation has been lost
6) Creditor declares he will not accept
Note:
The list is not exclusive.
37

E. Loss of the Thing Due
Effects of Loss in Determinate Obligation
to Give (Art. 1262) – Obligation is
extinguished if the thing is lost or destroyed
without the fault of the debtor and before
he has incurred in delay. No liability.
38

General Rule: Loss of a determinate thing due to
a fortuitous event shall extinguish the obligation.
Except:
1) When the law so provides;
2) When the stipulation so provides;
3) When the nature of the obligation requires
an assumption of risk;
4) Loss of the thing is partly due to the fault of
the debtor;
5) Loss of the thing occurs after the debtor
incurred in delay;
39

6) When the debtor promised to deliver the
same thing to two persons who do not have
the same interest;
7) When the obligation to deliver arises from a
criminal offense; and
8) When the obligation is generic
40

Effect of Partial Loss (Art. 1264)
General Rule: Partial loss does not
extinguish the obligation.
Except:
Partial loss is of such importance that would
be tantamount to a complete loss or
destruction.
41

Effect of Impossibility of Performance in
Obligation to Do (Art. 1266)
When the obligation becomes legally or
physically impossible without the fault of the
debtor, obligor is released from the obligation.
The legal and physical impossibility must have
occurred after the constitution of the obligation.
42

43
Release in obligation to do when
prestation becomes legally or
physically impossible.

44
PNCC vs. CA (May 5, 1997)
PNCC leased land for rock crushing plant. Term
for 5 years, beginning on date of issuance of an
industrial clearance. PNCC given Temporary
Permit for 2 years in Jan. 7, 1986, hence Lessor
demand payment for rent 1 year.
PNCC declined because it decided to cancel rock
crushing plant due to financial and technical
difficulties. PNCC cites Art. 1266.

45
Held: NO. Contract of lease was perfected.
PNCC cannot use Art. 1266 because it is
applicable to obligation to ‘DO’. The contract
created obligation to ‘GIVE’. Lease property
delivered and to pay rent are TO GIVE.

Temporary Impossibility
Merely delays performance of the obligation
NOT extinguishes the same.
Except:
1) In case of agreement
2) Must be performed within a definite time
BUT if the obstacle is unforeseen or unknown
as to DURATION, obligation may be
considered juridically impossible to perform,
hence, extinguished. Subsequent REMOVAL
of the obstacle does NOT revive the obligation.
46

Effect of Relative Impossibility
(Difficulty of Performance)
Doctrine of Unforeseen Events (Art. 1267) – When
the service has become so difficult as to be
manifestly beyond the contemplation of the parties,
the court should be authorized to release the
obligor in whole or in part. (This is also referred to
as the Doctrine of Frustration of Enterprise)
Also known as—
• Theory of IMPREVISIBILITY
• Theory of Lack of Basis
• Rebus Sic Stantibus
47

Requisites:
1) The event or change of circumstances
could not have been foreseen at the time of
the execution of contract
2) Makes performance extremely difficult NOT
impossible
3) The event must NOT be due to the act of
any of the parties
4) Contract is for a long period of time or for
successive performances.
48

Natelco vs. CA & Casureco (Feb. 24, 1994)
- Natelco contract with Casureco to use
electric post for telephone lines
- Natelco promised 10 telephone lines for
Casureco
- After 10 years, Casureco filed
reformation because contract was one-
sided. More lines attached, heavier load
for post and post not in City also used.
49

SC: 1267 applicable. Obligation is
extinguished. BUT for the removal will
affect public. SC required NEW contract in
order not to disrupt the basic and essential
services of parties.
50

Effect of Loss on Reciprocal Obligations
• First View: If an obligation is
extinguished by the loss of the thing
fortuitous events, the counter-prestation
is also extinguished. He who gives
nothing has no reason to demand.
(Tolentino, Commentaries and Jurisprudence
on the Civil Code of the Phils., Vol. 4, p. 337-
338 [1991])
(Res Perit Domino)
51

• Second View: If the loss or impossibility
was due to a fortuitous event, the other
party is still obliged to give the prestation
due to the other. (J.B.L. Reyes)
(Res Perit Creditori)
52

Better View:
Res Perit Creditori general rule
Except:
1) Law requires Res Perit Domino
• Art. 1504 – Sale of Personal Property
• Art. 1655 – In Lease Contracts
• Art. 1717 – Contract for a Piece of Work
53

F. Condonation or Remission of the Debt
• An act of liberality, renounces the
enforcement of the obligation, as a
result of which it is extinguished.
• It is the gratuitous abandonment by the
creditor of his right; a form of donation.
54

Requisites of remission:
1) It must be gratuitous;
2) It must be accepted by the obligor;
3) The obligation must be demandable;
4) Parties must have the capacity;
5) Not inofficious; and
6) Must comply with the forms of donation
SHOULD IT BE EXPRESS (Arts. 748
and 749)
55

56
Court may NOT condone interest due the
creditor for to condone is an act of
liberality. It is to forgive, or revert a debt.
(Baez vs. Young, Oct. 27, 1952)

57
Implied Remission (Art. 1271)
- Delivery of private document
evidencing a credit made voluntarily
by creditor to debtor

58
To refute implication – it should be
claimed to be inefficious

59
Lopez Lizo vs. Tambunting
Creditor proved that he sent his receipt to
debtor for purposes of collecting without
intending the document to remain in
possession of debtor – is sufficient proof
to rebut the presumption that creditor
voluntarily delivered document.

G. Confusion
It is the merger of the characters of the
creditor and the debtor in one and the
same person by virtue of which the
obligation is extinguished.
60

Requisites of merger:
1) Merger of the characters of the creditor
and debtor must be in the same person;
2) Must take place in the person of either the
principal creditor or the principal debtor;
and
3) Whether the merger refers to the entire
obligation or only part thereof, there must
be complete and definite meeting of all
qualities of creditor and debtor in the
obligation or in the part thereof affected by
the merger.
61

H. Compensation
Mode of extinguishing in the concurrent
amount of the obligation of those persons
who are reciprocally debtors and creditors
of each other.
• Most fundamental effect: It extinguishes
both debts to the extent that the amount
covered by the amount of the other.
62

Requisites of compensation (Art. 1279):
1) There must be two parties, who, in their
own right, are principal creditors and
principal debtors of each other except in
case of a guarantor (Art. 1280);
2) Both debts must consist in sum of money,
or if the things due are fungibles
(consumables), they must be of the same
kind and quality.
General Rule: Compensation is not possible
in obligations to do because of the difference
in the respective capacities of the obligors.
63

3) Both debts must be due;
Except: Voluntary compensation (Art. 1282)
4) Both debts must be liquidated and
demandable;
5) There must be no retention or controversy
commenced by third persons over either
of the debts and communicated in due
time to the debtor;
6) The compensation must not be prohibited
by law.
64

65
Debts which cannot be compensated:
- Depositum
- Commodatum
- Support
- Criminal offense
- In favor of government

66
Problem:
Is it proper to compensate defendant-
appellant’s indebtedness of P9k claimed in
the complaint, with the sum of P10k
representing the value of his shares of stock
with the plaintiff entity?

67
Answer:
Considering that a share of stock is not an
indebtedness to the owner nor evidence of
indebtedness, it is, therefore, not a credit.
Stockholders as such are not creditors of the
corporation. Therefore, since the defendant-
appellant stockholder is not a creditor of the
corporation although the corporation is a
creditor of the former, there can be no
compensation. (Garcia vs. Lim Chua Sing, 59
Phil 562)

68
Problem:
Has a bank the right to apply a
deposit to the debt of a depositor to
the bank?

69
Answer:
YES, because an ordinary bank deposit
creates the relationship of creditor and
debtor. (Gullas vs. Philippine National
Bank, 62 Phil 519)

I. Novation
It is the substitution or change of:
1. an obligation by another, resulting in its
extinguishment or modification, either
by:
a. changing its object;
b. principal conditions; or
2. by substituting another in place of the
debtor; or
3. by subrogating a third person in the
rights of the creditor.
70

Requisites of novation:
1) Previous valid and existing obligation;
• A new contract, recognizing and assuming a
prescribed debt, would be valid and
enforceable. The prescription, being available
to the debtor, can be waived by him. The
novation of a prescribed debt is thus valid.
2) Capacity of the contracting parties (to the
new contract)
3) Animus novandi or intent to novate
(especially for implied novation and
substitution of debtors);
71

4) Substantial difference between the old
obligation and the new obligation
(especially for implied novation),
consequently, extinguishment of the
obligation; and
5) Validity of the new obligation
72

Inchausti vs. Yulo
Mere extension of the term of payment
DOES NOT constitute EXTINCTIVE
novation.
But..
Soncuya vs. Azarraga
Extension of time couple with payment of
interest on the amount due is extinctive
novation because a new consideration has
been stipulated by the parties.
73

74
BUT..
Note:
A change in the rate of interest is merely
collateral agreement between the creditor and
principal debtor that did not affect the surety.
The agreement to pay the additional interest
was an additional burden upon the debtor only.
It did not in any way affect the original contract.
Thus, despite the compounding of the interest,
the liability of the surety remains only up to the
original uncompounded interest. (Garcia, Jr. vs.
CA, G.R. No. L-80201, Nov. 20, 1990)

Kabankalan Sugar vs. Pacheco
- Reduction of period is extinctive novation
because the obligation has been
materially altered by making obligation
more burdersome.
75

76
Problem:
B secured a money judgment against P.
Subsequently B and P entered into a contract
whereby said judgment was to be
extinguished by monthly payment and that in
case of failure to pay the monthly payment B
shall be at liberty to enter suit against P. Was
there a novation of the judgment?

Dungo vs. Lopena (6 SCRA 1007)
There is NO NOVATION even if in the
second and new contract a surety bond is
filed, or a third person assumes payment of
the obligation and creditor even accepts
partial payment from third party because
NO agreement that the first debtor be
released from debt. Surety bond is not a
new and separate contract but merely an
accessory. Thirty party merely becomes co-
obligor or surety.
77

Also in Dungo
A owes B P6K. A executed promissory note
and C surety company for P6K without
interest. A failed to pay. B goes after surety
C. C pay P6K without interest. B sues A for
accumulated interest. A defense was
NOVATION.
Held: No Novation. There was no express
or implied release of A from debt. Surety
not a new contract.
78

Sps. Reyes vs. BPI Family Bank (Mar. 31, 2006)
Issue: Is there NOVATION if there is a 45-day credit
extension in the payment of an obligation?
Rule: NO. Extinctive novation is never presumed.
There must be an express intention to novate; in
cases where it is implied, the act of the parties must
clearly demonstrate their intent to dissolve the old
obligation as the moving consideration for the
emergence of the new one.
No incompatibility between the old obligation and
the extension of the credit.
79

Kinds of Novation
As to its essence:
1) Objective/Real
2) Subjective/Personal – substitution of
debtor or by subrogation
3) Mixed – change in the object or principal
obligation and change in the persons of
either creditor and debtor of an existing
obligation
80

Kinds of Novation by Substitution of Debtors
1) Expromission – with the consent of the
creditor at the instance of the new debtor.
No need for debtor’s consent.
Requisites:
a) Initiative for substitution must emanate from
the new debtor;
b) Consent of the creditor to the substitution; and
c) Old debtor must be released from obligation.
• Creditor’s consent cannot be presumed. It
must be given expressly.
81

Kinds of Substitution by Expromission
a) Substitution with the knowledge and
consent of the old debtor; and
b) Substitution without the knowledge or
against the will of the old debtor.
82

Villanueva vs. Girged (110 Phil 478)
A owes B money. C wrote B that he will
take care of A loan as soon as A makes
shipment of logs to Japan. A did not ship. C
did not pay. Is C liable to B.
SC: No. (1) Expromission did not take
place for NO consent of B was given. (2) C
liability was dependent on suspensive
condition.
83

2) Delegacion – with the consent of the
creditor at the instance of the old debtor
(delegante), with the concurrence of the
new debtor (delegado) (reimbursement and
subrogation)
Requisites:
a) Initiative for substitution must emanate from
the old debtor;
b) Consent of the new debtor;
c) Acceptance by the creditor; and
d) Old debtor must be released from obligation.
84

Hodges vs. Rey (111 Phil 219)
A owes B P3K. A authorizes PNB to pay B
by proceeds of loan granted by PNB. PNB
agreed. PNB paid B only P2K. B sued PNB
& A for balance. Is PNB liable also?
SC: No. even if B agreed NO delegacion.
PNB never assumed payment. There was
merely authorization, accepted by PNB.
Loan was only P2K. Hence, PNB only liable
for P2K.
85

86
Problem:
In novation by substitution of the debtor,
must the creditor’s consent be express?

87
Answer:
YES, for the reason that since novation
extinguishes the personality of the first
debtor who is to be substituted by a new
one, xxx second contract was executed
without the consent of the creditor,
evidence tending to prove consent of the
creditor is not in law sufficient. There was
no novation. (Testate Estate of Mota, et al.
vs. Serra, 47 Phil 464)

88
However, in Asia Banking Corp. vs. Elser, 34 Phil
994, the court held that xxx Art. 1293 does not say
that the creditor’s consent to the substitution of the
new debtor for the old, must be express or given at
the time of the substitution. xxx It is sufficient that
the creditor’s consent be given at any time and in
any form whatever, while the agreement of the
debtor subsists. The existence of the consent may
be inferred from the acts of the creditor since
volition may as well be expressed by deeds as by
words. The holding in Testate Estate of Mota vs.
Serra is not meant to convey the impression that the
word “express” was to be given an unqualified
meaning contrary to the Spanish and American
cases cited in said decision.

But...
If creditor is a corporation, its consent must
always be expressed (Pirovano vs. Dela
Rama Steamship)
Except:
In case of veil of corporate fiction is
pierced. (Asia Banking vs. Elser)
89

90
Problem:
X sue Y for estafa. While the case was
pending, Y entered into a contract with X
where Y promised to pay X in installment
the amount misappropriated by Y. Despite
this stipulation, the court convicted Y for
estafa. Y questioned the legality of the
conviction on the ground of novation.

91
Answer:
The conviction must be upheld. Y’s novation theory
may perhaps apply prior to the filing of the criminal
action in court xxx because up to that time, the original
trust relation may be converted by the parties into an
ordinary creditor-debtor relationship xxx. But after the
justice authorities have taken cognizance of the crime
and instituted action in court, the offended party may
no longer divest the prosecution of its power to exact
the criminal liability as distinguished from the civil.
(People vs. Nery, L-19567, Feb. 5, 1964; People vs.
Benitez, L-15923, June 30, 1960)

Effects of Insolvency or Non-Fulfillment by
New Debtor (Arts. 1294-1295)
1) Expromission
• Tolentino: it shall not revive the original
debtor’s liability whether the substitution is
effected with or without the knowledge or
against the will of the original debtor.
• Jurado: If the substitution was effected with
the knowledge and consent of the original
debtor, it shall revive the original debtor’s
liability to the creditor.
92

2) Delegacion
The right of the creditor can no longer be
revived EXCEPT in the following cases.
a) Insolvency already existing and of public
knowledge
b) Insolvency was already existing and known
to the original debtor
It is submitted that ACTUAL knowledge of the
creditor that new debtor was insolvent at the
time of delegation, will bar him from recovering
from the old debtor.
93

Novation by Subrogation (Art. 1300)
A personal novation effected by subrogating
a third person in the rights of the creditor.
94

Legal Subrogation (Art. 1302)
General Rule: Legal subrogation is not
presumed.
Except:
1) When a creditor pays another creditor who is
preferred, without debtor’s knowledge;
2) When a third person, not interested in the
obligation, pays with the express or tacit approval
of the debtor; or
3) When, even without knowledge of the debtor, a
person interested in the fulfillment of the obligation
pays, without prejudice to the effects of confusion
as to the latter’s share.
95

CONTRACTS
A Contract is a meeting of minds between
two persons whereby one binds himself,
with respect to the other, to give something
or to render some service.
Stages in life of contract:
1) Preparation (conception)
2) Perfection/Executory
3) Consummation/Executed
97

Estate of Orlando Llenado, et al. vs. Llenado
(March 4, 2009)
Lease with option to Lessee to renew must be
exercised.
SC – “While the option to renew is an enforceable right, it
must be first exercised to be given effect. xxx the option of the
lessee gives the latter an enforceable right to renew xxx such
time as provided for. xxx In the absence of a stipulation in the
lease requiring notice of the exercise of an option xxx to be
given within a certain time before the expiration of the lease,
xxx general rule is that the lessee must exercise an option xxx
to renew xxx and NOTIFY the lessor thereof BEFORE or at
least at the time of the expiration of the original term xxx
(Executory). The silence of lessee after termination of original
period CANNOT mean to be that they opted to renew xxx
(Executed).
98

Characteristics of Contracts
1) Obligatory force of contracts
2) Mutuality
3) Autonomy
4) Relativity
5) Consensuality
99

Obligatory Force of Contracts
• This principle is explicitly recognized in
Arts. 1159, 1308, 1315 and 1356.
• It is a rule that once the contract is
perfected, it shall be of obligatory force
upon both of the contracting parties.
100

Mutuality (Art. 1308)
The contract must bind both parties.
Note:
The validity or fulfillment of a contract cannot
be left to the will of one of the contracting
parties.
Validity or fulfillment may be left to (1) the will
of a third person, whose decision shall not be
binding until made known to both the
contracting parties (Art. 1309) or (2) chance.
101

Taylor vs. Uy
One of the parties is given the right to
CANCEL contract is NOT violative of
“Mutuality” because the exercised of that
right is a fulfillment of the provision of
contract.
102

Philippine Savings Bank vs. Sps. Castillo, et al.
(May 30, 2011)
The unilateral determination and imposition
of the increased rates (of interest in loan) is
violative of the principle of mutuality of
contracts under Art. 1308 xxx. Any contract
which appears to be heavily weighed in
favor of one of the parties so as to lead to
an unconscionable result, thus partaking of
the nature of a contract of adhesion, is void.
103
Only to loan?

MIAA vs. Ding Velayo Sports Center (May 30, 2011)
An express agreement which gives the
lessee the sole option to renew the lease
is frequent and subject to statutory
restrictions, valid and binding on the
parties. xxx The right of renewal constitutes
a part of the lessee's interest in the land and
forms a substantial and integral part of the
agreement.
104

The fact that such option is binding only
on the lessor and can be exercised only
by the lessee does not render it void for
lack of mutuality. After all, the lessor is
free to give or not to give the option to
the lessee.
BUT…
105

Encarnacion vs. Baldomar
Where a lessee is given the right to
continue to rent as long as they pay
rentals—lessor never be able to
discontinue; conversely, should owner
desire the continue, lessee could end by
NOT paying is VOID—violative
MUTUALITY.
106

Autonomy (Art. 1306)
The contracting parties may establish such
stipulations, clauses, terms and conditions
as they deem convenient.
Limitation to the principle of autonomy:
• Stipulations should not be contrary to law,
morals, good customs, public order, or public
policy.
• Exercise of Parens Patriae – weakening the
consensual nature of contracts giving undue
advantage to one of the contracting parties
107

Ferrazini vs. Gsell (34 Phil 697)
Employment contract between A and B, B
agreed for period of 5 years after
employment with A, B will NOT do business
or employed in similar business as A in RP.
SC: VOID. Contrary to public policy.
Agreement is clearly one in undue and
unreasonable restrain of trade.
108

Agreement of this sort—2 tests for its validity:
1) Is there limitation as to the time or
place;
2) Is the prohibition reasonably
necessary for the protection of parties.
Also: Cui vs. Arellano
109

Relativity (Art. 1311)
General Rule: Contracts take effect only
between parties, their assigns and heirs.
Limitations: HOWEVER with respect to
assignees or heirs, the general rule under Art.
1311 is not applicable if the rights and
obligations arising from the contract are not
transmissible or purely personal.
110

Exceptions:
1) Beneficial stipulation/stipulation pour autrui – A
stipulation in favour of a third person.
2) When the third person comes into possession of
the object of a contract creating real rights; (Art.
1312)
3) Where the contract is entered into in order to
defraud a creditor; (Art. 1313)
• Here, the creditor may ask for its rescission.
1) Where the third person induces a contracting
party to violate his contract (Art. 1314). Such third
person can be held liable for damages.
111

112
5) Contracts creating “status” (marriage contract)
6) In suspension of payments and compositions
under the Insolvency Law
7) CBA
8) Negotiorum gestio (Art. 2150-2151)
9) Violence & intimidation employed by 3P
(Art. 1336)

POUR AUTRUI (BPI vs. Conception)
A mere uncertain benefit and interest
promised to a third party is NOT sufficient
consideration for pour autrui. Parties must
have so clearly expressed benefit for a third
person. There must be intention to
specifically benefit third party.
113

Tortious Interference – Requisites
So Ping Ban vs. CA (1999)
1) Existence of valid contract
2) Knowledge of third party of contract
3) Interference without justification
(Jose Lagon vs. CA, 2005)
114

Jose Lagon vs. CA (Mar. 18, 2005)
Facts: Land leased out, with condition the
lessee to build. Lessor died. Heirs sold to
third person. Lessee sued lessor based on
Art. 1314 for allegedly inducing heirs to sell
to him.
SC: Third party buyer conducted an
investigation and found no suspicious
circumstances that would lead him to probe
deeper and watch out for any conflicting
claim over the property.
115

Note: As a rule, justification for interfering
with business relations of another exists
where the actor’s motive is to benefit
himself.
• Justification does NOT exist where actor’s
motive is to cause harm to the other.
• Individual acts under an economic interest
that is substantial (not de minimis), no
wrongful/malicious motives—he acts in self-
protection
116

Gilchrist vs. Cuddy
SC: That a person is NOT a malicious
interferer if his conduct is impelled by proper
business interest.
117

Is liability of third party in tortious
interference SOLIDARY?
• Code of Commerce – Yes, because he
commits a tortious act or a QD for which
liability arises.
• Coquioa – No, different source. Third
party, liability is QD; but guilty party is
Contract.
118

Essential Requisites of Contracts
CONSENT: conformity of the parties to the
terms of the contract; the acceptance by the
offeree of the offer made by the other
Requisites:
1) Must be manifested by the concurrence of the
other and acceptance; (Arts. 1319-1326)
2) Parties must possess the necessary legal
capacity; (Arts. 1327-1329) and
3) Must be intelligent, free, spontaneous, and
real. (Arts. 1330-1346)
119

• The fact that the signatures of the witnesses
and the notary public were forged does not
negate the existence of the contract for as
long as the parties consented to it. The
signatures of the witnesses and the notary
public are necessary simply to make the
contract binding on the third person (Soriano
v. Soriano, G.R. No. 130348, Sept. 3, 2007)
120

Rosenstock vs. Burke (46 Phil 217)
“I am willing to entertain the purchase of it,
under the following conditions xxx” seller
accepted.
SC: No perfected contract because “to
entertain” applied to an act DOES NOT
mean assurance to perform but simply a
position to deliberate before deciding to
perform or NOT to.
121

OFFER: Unilateral proposition which one
party makes to the other for the celebration
of a contract
Requisites:
1) It must be defined.
2) It must be intentional.
3) It must be complete.
4) It must be directed to person or persons with
whom the other offeror intends to enter into a
contract except definite offers which are not
directed to a particular person but to the public
in general (i.e. public auction)
122

123
Complex Offers
When a single offer involves two or more
contracts, the perfection, where there is only
partial acceptance, will depend upon the
relation of the contracts between
themselves, whether due to their nature or
due to the intent of the offeror.

124
Rule on Complex Offers
1) Offers are interrelated – contract is
perfected if all the offers are accepted
2) Offers are not interrelated – single
acceptance of each offer results in a
perfected contract unless the offeror has
made it clear that one is dependent upon
the other and acceptance of both is
necessary

ACCEPTANCE: Must be certain or definite
and absolute in character. A qualified
acceptance constitutes a counter-offer. (Art.
1319)
It may be express or implied (e.g. failure on
the part of the heir to reject the inheritance
within 30 days from notice of the order of
the court distributing the estate). (Art. 1320)
125

Requisites of acceptance:
1) Absolute (no vitiation)
2) Directed to the offeror
3) Made with the intention to be bound
4) Made within the prior time
5) Communicated to the offeror and learned
by him unless the offeror knows of the
acceptance.
126

127
Amplified Acceptance
Under certain circumstances, a mere
amplification on the offer must be
understood as an acceptance of the
original offer, plus a new offer which is
contained in the amplification.

128
Withdrawal Acceptance
• First View (Manresa) – Although the offeror
is not bound until he learns of the
acceptance, the same thing cannot be said
of the offeree who from the moment he
accepts, loses the power to retract such
acceptance xxx
• Second View (Tolentino) – Acceptance
may be revoked before it comes to the
knowledge of the offeror because in such
case there is still no meeting of minds

Theories that determine the exact moment of
perfection when acceptance is made by letter or
telegram:
1) Manifestation Theory – perfected from the
moment the acceptance is declared or
made.
• Adhered to by the Code of Commerce
1) Expedition Theory – perfected from the
moment the offeree transmits the notification
of acceptance to the offeror.
129

3) Reception Theory – perfected from the
moment that the notification is in the hands
of the offeror in such a manner that he can,
under ordinary conditions, procure the
knowledge of its contents, even if he is not
able to actually acquire such knowledge.
4) Cognition Theory – perfected from the
moment the acceptance comes to the
knowledge of the offeror.
Note:
The stipulation of the parties governs the manner
and moment of acceptance as when they stipulate
that it be expressly accepted.
130

OPTION CONTRACT
A preparatory contract in which one party
grants to the other for a fixed period under
specified conditions, to decide whether or not to
enter into a principal contract.
Requisites:
1) It is supported by an independent
consideration; and
2) It is exclusive.
If the option is not supported by a consideration which is
distinct from the purchase price, the offer may still be
withdrawn even if the offeree has already accepted it
(Jurado, Desiderio, Comments and Jurisprudence on
Obligations and Contracts, p. 413 [2010])
131

Persons Incapacitated to Give Consent
(Art. 1327)
A. Minors
Exceptions:
a) When minor misrepresents his age (It must be
an active not merely constructive
representation); physical attributes;
b) Contracts involving the sale and delivery of
necessaries to minors (Art. 1489)
c) Contracts by guardians or legal
representatives.
d) Contracts of savings deposit.
132

B. Insane or Demented Persons - Unless
the contract was entered into during a
lucid interval (Art. 1328).
C. Deaf-mutes who do not know how to
read and write
N.B. Rule 93, Sec. 2—
Incompetents
1) Persons under civil interdiction
2) Hospitalized lepers, prodigals, deaf & dumb
3) Unsound mind
4) Person who cannot take care of themselves
because of age, disease or weak mind.
133

Are they Incapacitated?
Answer: Incompetents also incapacitated
OBVIOUSLY cannot give consent
BUT
incompetents NOT incapacitated – can give
consent
BUT
if guardian already appointed, then cannot
give consent anymore.
134

Incapacity to give consent (Art. 1327) vs.
Disqualification to contract (Art. 1329)
Article 1327 Article 1329
Restrains the existence
of the right to contract
Restrains the very right
itself
Based upon subjective
circumstances of
certain persons
Based upon public
policy and morality
Voidable Void
135

Vices of Consent (Art. 1330)
1) Vices of the will (vicios de la formacion de la
voluntad)
2) Violence
3) Intimidation
4) Mistake
5) Fraud
6) Undue Influence
Vices of Declaration (vicios de la declaracion)
- Simulation of contracts
136

A. Mistake
It must refer to the substance of the thing
which is the object of the contract, or to
those conditions which have principally
moved one or both parties to enter into the
contract. (Art. 1331)
Not only wrong conception of the thing but
also the lack of knowledge with respect to it.
137

Two (2) General Kinds of Mistake
Mistake of Fact Mistake of Law
One or both contracting
parties believe that a fact
exists when in reality it does
not or vice versa.
One or both parties arrive at
an erroneous conclusion
regarding the interpretation
of a question of law or legal
effects of a certain act or
transaction.
Vitiates consent Does not vitiate consent
except when it involves
mutual error as to the effect
of an agreement when the
real purpose is frustrated.
138

Requisites of Art. 1334 which will vitiate
consent:
1) It must be of a past or present fact;
2) It must not be imputable to the party mistaken,
i.e. mistake is not inadvertent and excusable;
3) Mistake must be with respect to the legal effect
of an agreement;
4) It must be mutual; and
5) Parties’ real purpose must have been frustrated.
• There is NO MISTAKE in the party alleging it
knew the doubt, contingency or RISK affecting
the object of the contract (Art. 1333)
139

Sherwood vs. Walker
Sale of cow believed by the parties to be
“barren”. Turned out cow was for breeding
not barren.
SC: There was mistake of fact which vitiates
consent.
140

B. Violence
When in order to wrest consent serious or
irresistible force is employed (Art. 1335)
Requisites:
1) Must be serious or irresistible
2) Must be the determining cause for the party
upon whom it is employed in entering in the
contract
3) It is not justified
4) It is sufficient
141

C. Intimidation (Art. 1335)
Requisites:
1) One party is compelled to give his consent by
a reasonable and well-grounded fear of an
evil;
2) The evil must be imminent and grave;
3) The evil must be upon his person or property,
spouse, descendants or ascendants; and
4) It is the reason why he enters the contract.
5) The evil must be unjust.
142

Violence vs. Intimidation
Violence Intimidation
Refers to physical
compulsion
Refers to moral compulsion
External or prevents the will
to manifest itself
Internal or induces the
performance of an act
143

D. Undue Influence (Art. 1337)
When a person takes improper advantage
of his power over the will of another,
depriving the latter of a reasonable freedom
of choice.
Test of undue influence:
Whether or not the influence exerted has so
overpowered or subjugated mind of a contracting
party as to destroy his free agency, making him
express the will of another rather than his own.
(Coso v. Fernandez Deza, G.R. No. 16763, December 22,
1921)
144

145
Circumstances considered to determine
whether the influence exerted is unreasonable:
1) Confidential relations
2) Family relations
3) Spiritual relations
4) Other relations between the parties
• By analogy, undue influence employed by
a third person may annul the contract.

N.B.
Reverential fear is fear of displeasing a
person to whom respect and obedience is
due. Here, there is NO unreasonable
restraint in the choice of the party and
HENCE NOT VITIATE CONSENT.
146

E. Fraud (Art. 1338)
When, through insidious words or
machinations of one party, the other is
induced to enter into a contract which
without them, he would not have agreed to.
Kinds of fraud:
1) Fraud in the PERFECTION of the contracts
a) Causal Fraud (Dolo Causante)
b) Incidental Fraud (Dolo Incidente)
2) Fraud in the PERFORMANCE of an obligation
(Art. 1170)
147

Requisites of Fraud under Art. 1338:
1) One party must have employed fraud or
insidious words or machinations
2) It must have been serious;
3) It induced the other party to enter into a
contract;
4) It must have been employed by one contracting
party upon the other and not employed by both
contracting parties or by third persons;
5) Damage or injury resulted to the other party;
6) It must be made in bad faith, i.e. with knowledge
of its falsify
148

149
Dolo Causante (Art. 1338) Dolo Incidente (Art. 1344)
Refers to those deceptions or
misrepresentations of a serious
character employed by one party
and without which the other party
would not have entered into the
contract
Refers to those deceptions or
misrepresentations which are not
serious in character and without
which the other party would have
still entered the contract.
Fraud which is serious in character Not serious in character
It is the cause which induces the
party to enter into a contract
Not the cause
Renders the contract voidable Liability for damages
Dolo Causante vs. Dolo Incidente

Fraud by third person does not vitiate consent
UNLESS:
a) It has created a substantial mistake and
the same is mutual.
b) Third person makes the
misrepresentation with the complicity, or
at least with the knowledge but without
the objection, of the favoured contracting
party.
150

151
• Misrepresentation made in good faith is
not fraudulent but may constitute error
(Art. 1343)
• When two persons constitute one party
of the contract with respect to another,
the deceit exercised by one of them upon
his co-party is not a cause for annulment
of the contract.

Simulation of Contracts
(Arts. 1345-1346)
A deliberate declaration contrary to the will of
the parties.
1) Agreement of the parties to the apparently
valid act.
2) The purpose is to deceive or to hide from
third persons although it is not necessary
that the purpose be illicit or for purposes of
fraud.
152

Kinds of simulation of contract:
1) Absolute (simulados) – parties do not intend to
be bound by the contract at all.
• Status: VOID
2) Relative (disimulados) – parties conceal their
true agreement. It binds the parties to their real
agreement, when it does not prejudice a third
person and is not intended for any purpose
contrary to law, morals, good customs, public
order or public policy. (i.e. a deed of sale of a
piece of land is executed by the parties to
conceal their two agreement which is a
donation)
153

OBJECT: The thing, right or service which
is the subject matter of the obligation arising
from the contract.
Requisites:
1) Must be within the commerce of man;
2) Should be real or possible;
3) Should be licit; and
4) Should be determine, or at least possible of
determination as to its kind.
154

Things Which Cannot Be the Object of
Contracts (Art. 1347-1349)
General Rule: All things or services may be the
object of contracts.
Exceptions:
1) Things outside the commerce of men;
2) Intransmissible rights;
3) Future inheritance except in cases expressly
authorized by law:
a) The object of the contract forms part of the
inheritance; and
b) The promissor has an expectancy of a right which is
purely hereditary in nature.
155

4) Services contrary to law, morals, good
customs, public order or public policy;
5) Impossible things or services;
6) Objects not possible of determination as to
their kind.
156

157
Note:
In order that a thing, right or service may be the
object of a contract, it should be in existence at the
moment of the celebration of the contract, or at
least, it can exist subsequently or in the future:
• Future thing may be the object of a contract. Such
contract may be interpreted in two possible ways:
1) Conditional contract – if its efficacy should depend
upon the future existence of the thing
2) Aleatory contract – if one of the contracting parties
should bear the risk that the thing will never come
into existence

CAUSE: It is the immediate, direct or most
proximate reason which explains and justifies
the creation of an obligation through the will of
the contracting parties.
Essential requisites of cause:
1) Existing at the time of the celebration of the
contract;
2) Licit or lawful; and
3) True
158

Cause and Object Distinguished
Cause Object
The service or benefit which
is remunerated
The thing which is given in
remuneration
The liberality of the donor or
benefactor
The thing which is given or
donated
Prestation or promise of a
thing or service by the other
The thing or service itself
Different with respect of
each party
May be the same for both
parties
159

Cause and Motive Distinguished
Cause Motive
Direct and most proximate
reason of a contract
Indirect or remote reason
Objective or juridical reason
of a contract
Psychological or purely
personal reason
Always the same for each
contracting party
Differs for each contracting
party
Its legality affects the
existence or validity of the
contract
Its legality does not affect
the existence or validity of
contract.
160

Effect of Lack of Cause, Unlawful Cause,
False Cause and Lesion (Arts. 1352-1355)
161
Cause Effect
Lack of Cause There is a total lack
or absence of cause
The contract
confers no right and
produces no legal
effect
Illegality of cause The cause is stated
but is not true
The contract is void
if it should not be
proved that they
were founded upon
another cause
which is true and
lawful

162
Cause Effect
Lesion or
inadequacy of
price
Shall not invalidate
the contract,
UNLESS:
1) There is fraud,
mistake or
undue influence;
or
2) When the
parties intended
a donation or
some other
contract.

163
FORMS OF CONTRACTS
General Rule: Contracts shall be obligatory, in
whatever form they may have been entered into,
provided all the essential requisites for their validity
are present (Art. 1356).
Exceptions:
1. When the law requires that the contract be in a
certain form to be valid (Art. 1356)
2. When law requires that the contract be in a
certain form to be enforceable (Statute of
Frauds)
3. When required to make the contract effective as
against third parties (Art. 1357-1358)

164
Where the validity of a contract is made to
depend upon a particular formality, an
action under Art. 1357 cannot be brought to
compel the other party to execute such
formality.
Article 1357 presupposes the existence of a
valid contract and cannot possibly refer to
the form to make it valid.

165
Contracts which must appear in writing:
1. Donation of personal property whose value
exceeds five hundred pesos (Art. 748)
2. Sale of a piece of land or any interest therein
through an agent (Art. 1874)
3. Agreements regarding payment of interest in
contracts of loan (Art. 1956);
4. Antichresis (Art. 2134); and
5. Stipulation limiting common carrier’s duty of
extraordinary diligence to ordinary diligence
(Art. 1744)

166
Contracts which must appear in public instrument:
1. Donation of immovable properties (Art. 749);
2. Partnership where immovable property or real rights
are contributed (Arts. 1171 and 1773);
3. Acts/contracts which have for their object the
creation, transmission, modification or
extinguishment of real rights over immovable
property (Arts. 1358 (1), 1403 (2), 1405);
4. The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal
partnership of gains (Art. 1358 (2);
5. The power to administer property or those which
should prejudice a third person (Art. 1358 (3);
6. The cession of actions or rights proceeding from an
act appearing in a public document (Art. 1358 (4)

167
Note:
With respect to those enumerated under Art.
1358 (items 3 to 6 in the preceding list), they
are valid as between the contracting parties.
The requirement that they be executed in a
particular form is for the purpose of making
them effective against third persons. However,
with respect to items 1 and 2, formalities are
required for the validity of the contract.

168
Contracts which must be registered:
1. Chattel mortgages (Art. 2140)
2. Sale/transfer of large cattle
(Cattle Registration Act)

169
Note:
Arts. 1357-1358 do not require the execution of
the contract either in a public/private document
in order to validate/enforce it but only to insure
efficacy, so that after its existence has been
admitted, the party bound may be compelled to
execute the necessary document.

170
• When one of the contracting parties invokes Art. 1357
and 1358 by means of proper action, the effect is to
place the existence of the contract in issue, which must
be resolved by the ordinary rules of evidence.
• Actions to compel the execution of the necessary
document and action upon the contract may be
exercised simultaneously, unless it appears that the
former action must precede the latter.
• Although Art. 1357, in connection with Art. 1358, do not
operate against the validity of the contract nor the
validity of the acts voluntarily performed by the parties
for the fulfillment thereof, it is evident that under them
execution of the required document must precede the
determination of the obligations derived from the
contract.

171
R.A. 8792 (E-Commerce Act)
It provides that the formal requirements to
make contracts effective as against third
persons and to establish the existence of a
contract are deemed complied with provided
that the electronic document is unaltered and
can be authenticated as to be usable for future
reference.

172
Reformation of Instruments
Remedy by means of which a written
instrument is made or construed so as to
express or conform to the real intention of the
parties when some error or mistake has been
committed.

173
Requisites:
1) Meeting of the minds of the parties;
2) Their true intention is not expressed in the
instrument;
3) Failure to express true intention is due to
mistake, fraud, inequitable conduct or
accident; and
4) Clear and convincing proof of mistake,
accident, relative simulation, fraud, or
inequitable conduct.

Reformation Annulment
Presupposes that there is a
valid contract but the
document/instrument
executed does not express
their true intention
The contract was not validly
entered into as when their
minds did not meet or if the
consent was vitiated
Gives life to the contract by
making the instrument
conform to the true intention
of the parties
Involves a complete
nullification of the contract
174

175
When can one party ask for the reformation of the
contract (Arts. 1361-1365)
1) In case of mutual mistake of the parties (Art. 1361)
2) When one party was mistaken and the other party
acted fraudulently (Art. 1362);
3) When one party was mistaken, the other knew or
believed that the instrument does not show their
real intent but concealed that fact to the former (Art.
1363);
4) In case of ignorance, lack of skill, negligence or bad
faith on the part of the person drafting the
instrument (Art. 1364);
5) When parties agree upon the mortgage or pledge of
a real or personal property, but the instrument
states that the property is sold absolutely or with a
right of repurchase (Art. 1365).

176
Instances when there can be no reformation:
(Art. 1366)
1) Simple donations inter vivos wherein no
condition is imposed;
2) Wills;
3) When the real agreement is void (Art. 1366)
Note:
• If mistake, fraud, inequitable conduct or accident
has prevented a meeting of the minds of the
parties, the proper remedy is not reformation of
the instrument but annulment of the contract (Art.
1359)
• Expediency and convenience are not grounds for
the reformation of an instrument (Multi-Ventures
Capital vs. Stalwart, G.R. No. 157439, July 4, 2007)

177
4) When one of the parties brought an action to
enforce the instrument (Art. 1367)
Note:
• When one of the parties has brought an action
to enforce the instrument, no subsequent
reformation can be asked (principle of
estoppel)
• In case of mutual mistakes, reformation may
be ordered at the instance of either parties or
his successors in interest, otherwise it may
only be brought by the petition of the injured
party or his heirs and assigns (Art. 1365).

RESCISSIBLE Contracts
Contracts which are valid but are defective
because of injury or damage to either of the
contracting parties or to third persons, as a
consequence of which it may be rescinded
by means of a proper action for rescission.
• Distinguish from ‘RESOLUTION’ in
Article 1191
178

Requisites of rescission:
1) Contract must be rescissible under Arts. 1381 and
1382.
2) Party asking for rescission must have no other legal
means to obtain reparation for the damages suffered
by him (Art. 1383)
3) Person demanding rescission must be able to return
whatever he may be obliged to restore if rescission
is granted (Art. 1385)
4) Things which are the object of the contract must not
have passed legally to the possession of a third
person acting in good faith (Art. 1385); and
5) Action must be brought within four years (Art. 1389)
179

Contracts that are rescissible
(Arts. 1381-1382)
A. Lesion
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.
180

181
B. Fraud
1) Those undertaken in fraud of creditors when the
latter cannot in any manner claim what are due
them. (accion pauliana)
2) 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.
3) Payments made in a state of insolvency for
obligations whose fulfillment the debtor could
not be compelled at the time they were effected.

182
C. Other Causes Stated By Law
1) Art. 1098 – partition of inheritance where an heir
suffers LESION of at least ¼ of the share to which
he is entitled
2) Art. 1189 (4) – deterioration of the thing through
the fault of the debtor
3) Art. 1526 (4) – right of unpaid seller to rescind
4) Art. 1538 – deterioration of the object of the sale
5) Art. 1539 – sale of real estate with a statement of
its area at the rate of a certain price for a unit of
measure or number and the vendor failed to
deliver the area stated, which should be not less
than 1/10th of that stated

183
6) Art. 1542 – the vendee does not accede to the
failure to deliver what has been stipulated
7) Art. 1556 – when through eviction, the vendee loses
a part of the thing sold of such importance, in
relation to the whole, that he would not have bought
it without the said part
8) Art. 1560 – if immovable sold is encumbered with
any non-apparent burden or servitude of such nature
that it cannot be presumed that the vendee could not
have acquired it had he been aware thereof
9) Art. 1567 – election of the vendee to withdraw from
the contract in the cases under Arts. 1561-1566
10) Art. 1659 – rescission by the aggrieved party in a
contract of lease when the other party does not
comply with Arts. 1654 and 1657

Requisites before a contract entered into in behalf
of wards of absentees may be rescinded on the
ground of LESION:
Lesion is the injury which one of the parties
suffers by virtue of a contract which is
disadvantageous for him. TO give rise to
rescission, the lesion must be known or could
have been known at the time of making of the
contract.
184

1) Contract was entered into by a guardian in behalf
of his ward or by a legal representative in behalf of
an absentee;
2) It was entered into without judicial approval;
3) Ward or absentee suffered lesion of more than ¼
of the value of the property which is the object
contract.
4) There is no other legal means of obtaining
reparation for the lesion;
5) Person bringing the action must be able to return
whatever he may obliged to restore; and
6) Object of the contract must not be legally in the
possession of a third person who did not act in
bad faith.
185

186
Note:
A guardian is authorized only to MANAGE the
estate of the ward; should he DISPOSE a
portion thereof without authority from the court
by way of a contract, the same is
unenforceable under Art. 1403 (1), irrespective
of whether there is lesion or not.

Requisites before a contract entered into in
FRAUD OF CREDITORS may be rescinded:
1) There is a credit existing prior to the celebration
contract;
2) There is fraud, or at least, the intent to commit fraud
to the prejudice of the creditor seeking rescission;
3) Creditor cannot in any legal manner collect his
credit; and
4) Object of the contract must not be legally in the
possession of a third person who did not act in bad
faith.
The action to rescind contracts in fraud of
creditors is known as accion pauliana.
187

188
Requisites:
1) The plaintiff asking for rescission has a credit
prior to the alienation;
2) The debtor has made a subsequent contract
conveying a patrimonial benefit to a third
person;
3) The creditor has no other legal remedy to satisfy
his claim;
4) The act being impugned is fraudulent; and
5) The third person who received the property
conveyed, if it is by onerous title, has been an
accomplice in the fraud.

189
• Accion pauliana presupposes a judgment
and unsatisfied execution which cannot
exist when the debt is not yet demandable
at the time the rescissory action is brought.
• Even secured creditors are entitled to
accion pauliana.

190
When alienation of property presumed in Fraud
of Creditors:
1) Alienation by gratuitous title if the debtor has
not reserved sufficient property to pay all of
his debts contracted before alienation;
2) Alienation by onerous title if made by a
debtor against whom some judgment has
been rendered in any instance or some writ
of attachment has been issued.

Requisites before payment made by
insolvent can be rescinded:
1) It was made in a state of insolvency; and
2) Obligation must have been one which
the debtor could not be compelled to pay
at the time such payment was effected.
191

192
Asia Banking vs. Noble Jose and Lichauco
& Co., (51 Phil 703)
Where a debtor transfers property to a
creditor supposedly in payment of a debt
which has NOT YET matured at the time
when debtor is INSOLVENT and for a
CONSIDERATION which is grossly
inadequate as compared to the actual
value, SC considered the same as
FRAUDULENT and may be set aside.

193
But... it is NOT fraudulent if the
consideration of the sale was a pre-existing
debt and the debt was due and owing and
enforceable at the time of sale.

Parties who may institute action:
1) The creditor who is defrauded in rescissory
actions on ground of fraud, and other person
authorized to exercise the same in other
rescissory actions.
2) Their representatives
3) Their heirs
4) Their creditors by virtue of the subrogatory
action define in Art. 1177 of the NCC
194

Effect of Rescission (Art. 1385)
1) As to the parties – mutual restitution
together with the fruits and interest.
Note: This is applicable only to rescissory actions on
the ground of lesion and not to rescissory actions on
the ground of fraud.
2) As to third person
• Bad faith or not legally in possession –
obliged to return
• Legally in possession and not in bad faith –
no rescission; however, indemnity for
damages may be demanded from the
person causing the loss.
195

Prescriptive Period: Action for Rescission
(Art. 1389)
1) Under Art. 1381 (1)– within 4 years from the time
of the termination of the incapacity of the ward
2) Under Art. 1381 (2)– within 4 years from the time
the domicile of the absentee is known
3) Under Art. 1381 (3) and (4) as well as Art. 1382 –
within 4 years from the time of the discovery of
fraud
4) In certain contracts of sale especially declared by
law to be rescissible – 6 months or even 40 days
counted from the day of delivery (Arts. 1547,
1571, 1577)
196

VOIDABLE Contracts
Those which possess all the essential
elements for validity but the consent is
vitiated either by lack of legal capacity of
one of the contracting parties or by mistake
violence, intimidation, undue influence or
fraud even though there may have been no
damage to the contracting parties.
197

CAUSE
The following contracts are voidable or
annullable:
1) Those where ONE of the parties is
incapable of giving consent to a contract;
2) Those where the consent is vitiated by
mistake, violence, intimidation, undue
influence of fraud (Art. 1390)
198

Prescriptive Period: Action for Annulment
(Art. 1391):
1) Contracts entered into by incapacitated
person – within 4 years from the time
guardianship ceases;
2) Where consent is vitiated by violence,
intimidation or undue influence – within 4
years from the time such violence,
intimidation or undue influence ceases;
3) Where consent is vitiated by mistake or
fraud – within 4 years from the time of the
discovery of such mistake or fraud.
199

200
• Discovery of fraud must be reckoned
from the time the document was
registered in the Office of the Registry of
Deeds. Registration constitutes
constructive notice to the whole world.
(Carantes vs. CA, 1977)

Who May Institute Action for Annulment
(Art. 1397)
General Rule: Action for annulment may be
instituted by all who are thereby obliged
principally or subsidiarily. A stranger to the
contract cannot institute an action for
annulment.
Requisites:
1) Plaintiff must have interest in the contract;
2) The victim and not the party responsible for the
vice or defect must assert the same.
201

Exception:
If a third person is prejudiced in his rights
with respect to one of the contracting
parties, and can show detriment which
would positively result to him from the
contract in which he has no intervention
(Teves v. People’s Homesite & Housing Corp., GR No.
21498, June 27, 1968)
202

Effects of Annulment
1) In contract has not yet been
consummated parties shall be released
from the obligations arising therefrom;
2) If contract has already been
consummated rules provided in Arts.
1398-1402 shall govern.
• Arts. 1398-1399 – Obligation of mutual
restitution
• Arts. 1400-1402 – Effect of failure to make
restitution
203

UNEFORCEABLE Contracts
Those which cannot be enforced by proper
action unless they are ratified, because,
either:
1) They are entered into without or in
excess of authority (Art 1403 (1); Art.
1317);
2) They do not comply with the statute or
frauds (Art. 1403 (2);
3) Both contracting parties do not possess
the required legal capacity.
204

205
Note:
The statute of frauds applies only to
EXECUTORY CONTRACTS, not to those that
are partially or completely fulfilled. Further, the
statute does not apply to actions which are
neither for specific performance of the contract
nor for the violation thereof. Take note that the
provision mentions “unenforceable by action.”
The prohibition, thus, applies on actions which
spring from the enforcement of the contract.

Mactan-Cebu Int’l. Airport Authority vs.
Lozado, Sr. (Feb. 25, 2010)
Held: The Statute of Frauds operates
only with respect to executory contracts,
and does not apply to contracts which
have been completely or partially
performed,
206

Ratification of Contracts Infringing the
Statute of Frauds (Art 1405)
Such contracts may be ratified by:
1) Failure to object to the presentation of oral
evidence to prove such contracts; or
2) Acceptance of benefits under these
contracts
Note:
The unenforceability of a contract can only be
assailed by parties thereto (Art. 1408). This defense
is personal to the party to the agreement.
207

VOID OR INEXISTENT Contracts
In general, they are those which lack
absolutely either in fact or in law one or some
of the elements essential for its validity.
Note:
The defense of illegality of contract is not
available to third persons whose interests are not
directly affected (Art. 1421)
• A contract which is the direct result of a previous
illegal contract, is also void and inexistent (Art.
1422)
208

Void and Inexistent Contracts Distinguished
209
Void Inexistent
Those where all of the
requisites of a contract are
present but the cause, object or
purpose is contrary to law,
morals, good customs, public
order, or public policy or
contract itself is prohibited or
declared void by law.
Those where one or some or
all of the requisites essential
for the validity of a contract are
absolutely lacking
Principle of pari delicto is
applicable
Principle of pari delicto is not
applicable
May produce legal effects Cannot produce legal effect
Covers Art. 1409 nos. 1, 3, 4,
5, 6 and 7
Covers Art. 1409 nos. 2 and 3

210
Contracts which are INEXISTENT and VOID AB
INITIO (Art. 1409)
1) Those whose cause, object or purpose is contrary to
law, morals, good customs, public order or public policy;
2) Those which are absolutely simulated or fictitious;
3) Those whose cause or object did not exist at the time of
the transaction;
4) Those whose object is outside the commerce of men;
5) Those which contemplate an impossible service;
6) Those where the intention of the parties relative to the
principal object of the contract cannot be ascertained;
and
7) Those expressly prohibited or declared void by law.

Principle of In Pari Delicto (Arts. 1411-
1417)
General Rule: When the defect of a void
contract consists in the illegality of the
cause or object of the contract and both of
the parties are at fault or in pari delicto, the
law refuses them any remedy and leaves
them where they are.
211

Exceptions:
1) Payment of usurious interest (Art. 1413);
2) Payment of money or delivery of property for an
illegal purpose, where the party who paid or
delivered repudiates the contract before the
purpose has been accomplished, or before any
damage has been caused to a third person (Art.
1414);
3) Payment of money or delivery of property made
by an incapacitated person (Art. 1415);
4) Agreement or contract not illegal per se but
merely prohibited by law, and the prohibition is
designed for the plaintiff’s protection (Art. 1416);
212

5) Payment of any amount in excess of the
maximum price of any article or commodity fixed
by law (Art. 1417);
6) Contract whereby a labourer undertakes to work
longer than the maximum number of hours fixed
by law (Art. 1418);
7) Contract whereby a labourer accepts a wage
lower than the minimum wage fixed by law (Art.
1419);
8) In case of divisible contracts, the legal terms
may be enforced separately from the illegal
terms (Art. 1420); and
213

9) One who lost in gambling because of fraudulent
schemes practiced on him. He is allowed to
recover his losses. [Art. 315, 3(b), RPC] even if
gambling is prohibited.
Note:
The principle of in pari delicto is applicable
ONLY TO VOID CONTRACTS and not to
inexistent contracts.
214

Rules when only one of the parties is at
fault:
1) Executed Contracts – guilty party is barred
from recovering what he has given to the
other party by reason of the contract.
Innocent party may demand for the return of
what he has given.
2) Executory Contracts – Neither of the
contracting parties can demand for the
fulfillment of any obligation from the contract
nor may be compelled to comply with such
obligation.
215

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