Law On Oblicon Notes.docx

DIFFERENT KINDS OF OBLIGATION I. Pure and Conditional Obligations A. Pure Obligation Pure obligation is one which is not subject to any condition and no specific date is mentioned for its fulfillment and is, therefore, demandable at once. B. Conditional Obligation Conditional obligation is one whose consequences are subject in one way or another to the fulfillment of a condition. 1. Characteristics of a Condition a) Future and Uncertain b) Past but Unknown A condition is an event which is future and uncertain or a past event unknown to the parties. 2. Effect of Happening of Condition In obligations subject to a suspensive condition, the acquisition of rights by the creditor depends upon the happening of the event which constitutes the condition. In obligation subject to a resolutely condition, the happening of the event which constitutes the condition produces the extinguishment or loss of rights already acquired. 3. When is an Obligation Demandable at Once When the obligation is pure. When the obligation is subject to resolutory condition. When it is subject to a resolutory period. 4. Classification of Conditions a) As to Effect (1)Suspensive In suspensive condition, the happening of the condition gives rise to the obligation. (2)Resolutory

In resolutory condition, the happening of an event extinguishes the obligation. b) As to Form (1)Express An express condition is a condition clearly stated. (2)Implied An implied condition is a condition merely inferred. c) As to Possibility (1)Possible A possible condition is one which is capable of fulfillment, legally or impliedly. (2)Impossible An impossible condition is one which is not capable of fulfillment, legally or physically. d) As to Cause or Origin (1)Potestative A potestative condition is one which depends upon the will of one of the contracting parties. (2)Casual A casual condition is one which depends upon chance or upon the will of a third person. (3)Mixed A mixed condition is one which depends partly upon chance and partly upon the will of a third person. e) As to Mode (1)Positive A positive condition consists in the performance of an act. (2)Negative

A negative condition consists in the omission of an act. f) As to Number (1)Conjunctive In conjunctive condition, there are several conditions and all must be fulfilled. (2)Disjunctive In disjunctive condition, there are several conditions and only one or some of them must be fulfilled. g) Divisibility (1)Divisible A divisible condition is susceptible of partial performance. (2)Indivisible An indivisible condition is not susceptible of partial performance. II. Obligation with a Period A. Meaning of Obligation with a Period An obligation with a period is one whose effects or consequences are subject in one way or another to the expiration or arrival of a period or term. B. Meaning of Period or Term A period is a future and certain event upon the arrival of which the obligation (or right) subject to either arises or is terminated. It is a day which must necessarily come, although it may not be known when. C. Period and Condition Distinguished 1. As to Fulfillment A period is a certain event which must happen sooner or later at a date known beforehand, or at a time which cannot be determined, while a condition is an uncertain event. 2. As to Time A period refers only to the future, while a condition may refer also to a past event unknown to the parties.

3. As to Influence on the Obligation A period merely fixes the time for the efficaciousness of the obligation. If suspensive, it cannot prevent the birth of the obligation in due time; if resolutory, it does not invalidate the fact that the obligation existed. On the other hand, a condition causes an obligation either to arise or to cease. 4. As to Effect, When Left to the Debtor’s Will A period which depends upon the will of the debtor empowers the court to fix the duration thereof, while a condition which depends upon the sole will of the debtor invalidates the obligation. 5. As to Retroactivity of Effect Unless there is an agreement to the contrary, the arrival of a period does not haven retroactive effect, while the happening of a condition has a retroactive effect. D. Kinds of Period or Term 1. According to Effect a) Suspensive period (ex die) In obligation with a suspensive period, the obligation begins only from a day certain upon the arrival of the period. b) Resolutory period (in diem) In obligation with a resolutory period, the obligation is valid up to a day certain and terminates upon the arrival of the period. 2. According to Source a) Legal Period Legal period is one which is provided by law. b) Conventional or Voluntary Period Conventional period is one which is agreed by the parties. c) Judicial Period Judicial period is one which is fixed by the court. 3. According to Definiteness

a) Definite Period Definite period is one which is fixed or it is now when it will come. b) Indefinite Period Indefinite period is one which is not fixed or it is not known when it will come. When a period is not fixed but a period is intended, the courts are usually empowered by law to fix the same. E. When Obligation can be Demanded Before the Lapse of Period The general rule is that the obligation is not demandable before the lapse of the period. However, the following the instance where the debtor shall lose every right to make use of the period, that is, the period is disregarded and the obligations becomes pure, and there, immediately demandable, to wit: When the debtor is insolvent. When the debtor does not furnish guaranties or securities promised. When the guaranties or securities given have been impaired or disappeared. When debtor violates an undertaking. When the debtor attempts to abscond. III. Alternative and Facultative Obligations A. Kinds of Obligation According to Object 1. Simple Obligation A simple obligation is one where there is only one (1) prestation. 2. Compound Obligation a) Conjunctive Obligation A compound obligation is one where there are two or more prestations and all of them are due. b) Distributive Obligation A distributive obligation obligation is one where two or more presentations are due. (1)Alternative Obligation

An alternative obligation is one where several presentations are due but the performance of one is sufficient. (2)Facultative Obligation A facultative obligation is one where only one presentation is due but the debtor may substitute another. B. Meaning of Alternative Obligation An alternative obligation is one wherein various presentations are due but the performance of one of them is sufficient as determined by the choice which, as a general rule, belongs to the debtor. C. Meaning of Facultative Obligation A facultative obligation is one where only one presentation has been agreed upon but the obligor may render another in substitution. D. Alternative and Facultative Obligations Distinguished In alternative obligation, several presentations are due but compliance with one is sufficient, while in facultative obligation, only one presentation is due although the debtor is allowed to substitute it. IV. Joint and Solidary Obligation A. Kinds of Obligations According to the Number of Parties 1. Individual Obligation Individual obligation is one where there is only one (1) obligor or one (1) obligee. 2. Collective Obligation Collective obligation is one where there are two (2) or more debtors and/or two (2) or more creditors. It may be joint or solidary. B. Meaning of Joint Obligation Joint obligation is one where the whole obligation is to be paid or fulfilled proportionately by the different debtors and/or is to be demanded proportionately by the different creditors. 1. Words Used to Indicate Joint Liability Mancomunada, Mancomunadamente, Pro Rata, Proportionately

C. Meaning of Solidary Obligation Solidary obligation is one where each one of the debtors is bound to render, and/or each one of the creditors has a right to demand from any of the debtors, entire compliance of the presentation. 1. When Obligation is Solidary When the obligation expressly so states. When law requires solidarity. When nature of the obligation requires solidarity. 2. Words Used to Indicate Solidary Liability Joint and/or severally, solid aria, in solidum, together and/or separately, individually and/or collectively, juntos o separadamente 3. Solidarity Not Presumed The presumption where there are two or more person in the same obligation is that it is joint. Reason: Solidary obligations are very burdensome for they create unusual rights and liabilities. Solidarity between debtors increases their responsibility while solidarity between creditors increases the right of each creditor. The law tends to favor the debtors in presuming that they are bound jointly and not solidarily. V. Divisible and Indivisible Obligations A. Meaning of Divisible Obligation Divisible obligation is one the object of which, in its delivery or performance, is capable of partial fulfillment. B. Meaning of Indivisible Obligation Indivisible obligation is one the object of which, in its delivery and performance, is not capable of partial fulfillment. C. Test of Distinction In determining whether an obligation is divisible or not, the controlling circumstance is not the possibility or impossibility of partial prestation but the purpose of the obligation. Hence, even though the object or service may be physically divisible, an obligation is indivisible if so provided by law or intended by the parties.

However, if the obligation is not physically divisible or the service is not susceptible of partial performance, the obligation is always indivisible, the intention to the contrary notwithstanding. This rule is absolute. VI. Obligation with a Penal Clause A. Meaning of Principal Obligation Principal obligation is one which can stand by itself and does not depend for its validity and existence upon another obligation. B. Meaning of Accessory Obligation Accessory obligation is one which is attached to a principal obligation and, therefore cannot stand alone. C. Meaning of Obligation with a Penal Clause An obligation with a penal clause is one which contains an accessory undertaking to pay a previously stipulated indemnity in case of breach of the principal prestation, intended primarily to induce its fulfillment. D. Meaning of Penal Clause A penal clause is an accessory undertaking attached to an obligation to assume greater liability in case of breach, i.e. the obligation is not fulfilled, or is partly or irregularly complied with. E. Purpose of Penal Clause To insure the performance of an obligation creating an effective deterrent against breach, making such breach onerous as it may be possible. (Reparation) To substitute a penalty for the indemnity for damages and the payment of interest in case of non-compliance; or punish the debtor for the non-fulfillment or violation of the obligation. (Punishment) F. When Penalty may be Enforced Penalty may be enforced only when it is demandable in accordance with the provisions of the Civil Code. This means that the penalty, as a stipulation in the contract, is demandable only if there is breach of the obligation and it is not contrary to law, morals, good customs, public order, or public policy. Thus, if the obligation cannot be fulfilled due to a fortuitous event, the penalty is not demandable.

G. Effect of Nullity of the Penal Clause The nullity of the penal clause does not carry with it the principal obligation. If the penal clause is void, the principal obligation remains valid and demandable. The penal clause is just disregarded. The injured party may still recover indemnity for damages in case of non-performance of the obligation as is no penalty has been stipulated. H. Effect of the Nullity of the Principal Obligation The nullity of the principal obligation carries with it that of the penal clause. If the principal obligation is void, the penal clause is likewise void. The clause cannot stand alone without the principal obligation to which it is subordinate. Basis: The accessory follows the principal and not vice versa.

EXTINGUISHMENT OF AN OBLIGATION I. Causes of Extinguishment of an Obligation Obligations are extinguished by: Payment or performance; Loss of the thing due; Condonation or remission of the debt; Confusion or merger of the rights of creditor and debtor; Compensation; Novation; Annulment; Rescission; Fulfillment of a resolutory condition; Prescription; Death of a party is an obligation requiring personal service; Mutual desistance or withdrawal; Arrival of a resolutory period; Compromise; Impossibility of fulfillment; and Happening of a fortuitous event. II. Payment or Performance A. Meaning of Payment In ordinary parlance, payment refers to the delivery of money. But as a mode of extinguishing an obligation, payment consist of not only in the delivery of money but also the giving of a thing (other than money), the doing of an act, or not doing of an act. In law, payment or performance are synonymous. B. When Debt is Considered Paid A debt may refer to an obligation to deliver money, to deliver a thing (other than money) to do an act, or not to do an act. A debt is understood to have been paid when the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. C. Persons from Whom the Creditor Must Accept Payment The creditor is bound to accept payment or performance from the following: The debtor; Any person who has an interest in the obligation (like a guarantor); or A third person who has no interest in the obligation when there is a stipulation that he can make payment.

D. Persons to Whom Payment Shall be Made Payment shall be made to: The creditor or obligee (person in whose favor obligation has been constituted); His successor in interest (like an heir or assignee); or Any person authorized to receive it. E. Legal Tender Legal tender is the currency which if offered by the debtor in the right amount, the creditor must accept in payment of the debt in money. Generally, debts in money shall be paid in the currency stipulated. However, if it is not possible to deliver such currency or in the absence of any stipulation to make payment in foreign currency, then the payment shall be made in the currency which is legal tender in the Philippines. In our jurisdiction, all coins and notes issued by the Bangko Sentral ng Pilipinas (BSP) constitute legal tender for all debts. However, in the case of coins in denomination of 1-, 5- and 10-Piso they shall be legal tender in amounts not exceeding P1,000.00 while coins in denomination of 1-, 5- and 10- and 25-Sentimo shall be legal tender in amounts not exceeding P100.00, pursuant to BSP Circular No. 537, Series of 2006. F. Place Where Obligation Shall be Paid If there is a stipulation, the payment shall be made in the place designated. If there is a stipulation and the thing to be delivered is specific, the payment shall be made at the place where the thing was, at the perfection of the contract. If there is no stipulation and the thing to be delivered is generic, the place of payment shall be the domicile (place of habitual residence) of the debtor. G. Special Forms of Payment 1. Dation in Payment (Dacion en pago) Dation in payment or adjudication or dacion en pago is the conveyance of ownership of a thing as an accepted equivalent of performance. An existing debt in money is satisfied, not by payment of money but by the alienation of property. 2. Application of Payment

a) Concept of Application of Payment Application of payments is the designation of the debt to which should be applied the payment made by a debtor who has various debts of the same kind in favor of one (1) and the same creditor. b) Requisites There must be one (1) debtor and one (1) creditor; There must be two (2) or more debts; The debts must be of the same kind; The debts to which payment made by the debtor has been applied must be due; and The payment must not be sufficient to cover all debts. c) Rules on Application of Payment The debtor has the first choice; he must indicate at the time of making payment, and not afterwards, which particular debt is being paid. The right to make application once exercised is irrevocable unless the creditor consents to the change. If the debtor does not apply payment, the creditor may make the designation by specifying in the receipt which debt is being paid; If the creditor has not also made the application, or if the application is not valid, the debt which is most onerous to the debtor among those due, shall be deemed to have been satisfied. If the debts are of the same nature and burden, the payment shall be applied to all of them proportionately. d) Application of Payment to Most Onerous Debt In case no application for payment has been made by the debtor and the creditor, then the payment shall be applied to the most onerous debt, and if the debts are of the same nature and burden, to all of them proportionately. Guidelines in determining a more onerous or burdensome debt: An interest-bearing debt is more onerous that a non-interestbearing debt even if the latter is an older one. A debt as a sole debtor is more onerous than as a solidary debtor.

Debts secured by a mortgage or by pledge are more onerous than unsecured debts. Of two (2) interest bearing debts, the one with a higher rate is more onerous. An obligation with a penalty clause is more burdensome that one without penalty clause. 3. Payment by Cession a) Concept of Payment by Cession Payment by cession is another special form of payment. It is the assignment or abandonment of all the properties of the debtor for the benefit of his creditors in order that the latter may sell the same and apply the proceeds thereof to the satisfaction of their credits. b) Requisites There must be two (2) or more creditors; The debtor must be partially insolvent; The assignment must involve all the properties of the debtor; and The cession must be accepted by the creditors. c) Effect of Payment by Cession Unless there is a stipulation to the contrary, the assignment does not make the creditors the owners of the property of the debtor and the debtor is released from his obligation only up to the net proceeds of the sale of the property assigned i.e. the debtor is still liable if there is a balance. d) Dation in Payment and Cession Distinguished In dacion, there is usually only one (1) creditor, while in cession, there are several creditors. Dacion does not presuppose the insolvency of the debtor, while in cession, the debtor is insolvent at the time of the assignment. Dacion does not involve all the properties of the debtor, while cession extends to all the properties of the debtor subject to execution;

In dacion, the creditor becomes the owner of the thing given, while in cession, the creditors only acquire the rights to sell the thing and apply the proceeds to their credits proportionately; and Dacion is really an act of novation, while cession is not an act of novation. 4. Tender of Payment and Consignation a) Tender of Payment Defined Tender of payment is the act, on the part of the debtor, of offering to the creditor the thing or amount due. The debtor must show that he has in his possession the thing or money to be delivered at the time of the offer. b) Consignation Defined Consignation is the act of depositing the thing or amount due with the proper court when the creditor does not desire or cannot receive it, after complying with the formalities required by law. c) Requisites of Valid Consignation In order to that the debtor may be release from his obligation by consignation of the thing or sum due, the following requisites must be observed: Existence of a valid debt which is due; Tender of payment by the debtor and the refusal without justifiable reason by the creditor to accept it; Previous notice of consignation to persons interested in the fulfillment of the obligation; Consignation of the thing or sum due; and Subsequent notice of consignation made to the interested parties. H. Effect of Impossibility of Performance The debtor in obligation to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor. Impossibility of performance will result in the extinction of the obligation.

The impossibility must take place after the constitution of the obligation. If the obligation is impossible from the very beginning, the obligation is void. 1. Physical Impossibility - death/incapacity 2. Legal Impossibility - law/issuance of building permit I. Effect of Difficulty of Performance When the performance of the service has become so difficult as to be manifestly beyond the contemplation of both parties, the court is authorized to release the obligor in whole or in part. III. Loss of the Thing Due A. When a Thing is Considered Lost A thing is lost when it perishes, or goes out of commerce or disappears in such a way that its existence is unknown or it cannot be recovered. B. When Loss of Thing Will Extinguish an Obligation to Give In order that an obligation may be extinguished by loss of the thing, the following requisites must be present: The obligation is to deliver a specific or determinate thing; The loss of the thing occurs without the fault of the debtor; and The debtor is not guilty of delay. C. When Loss of Thing Will Not Extinguish Liability There are cases, however, when the loss of the specific thing even in the absence of fault and delay will not exempt the debtor from liability. They are: When the law so provides; When the stipulation so provides; When the nature of the obligation requires the assumption of risk; and When the obligation to deliver a specific thing arises from a crime. D. Effect of Loss of a Generic Thing In obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. It is based on the principle

that a generic thing never perishes (genus nunquam petit). The debtor can still be compelled to deliver a thing of the same kind. The creditor, however, cannot demand a thing of superior quality and neither can the debtor deliver a thing of inferior quality. IV. Condonation or Remission of Debt A. Meaning of Condonation or Remission It is the gratuitous abandonment by the creditor of his right against the debtor. B. Requisites of Condonation or Remission It must be gratuitous; It must be accepted by the obligor; The parties must have capacity; It must be in officious, i.e. no one can give more than that which he can give by will; and If made expressly, it must comply with the forms of donations. C. Kinds of Remission As to its extent: Complete - it covers the entire obligation. Partial - does not cover the entire obligation. As to its form: Express - made either verbally or in writing. Implied - can only be inferred from conduct. As to its date of effectivity: Inter vivos - take effect during the lifetime of the donor. Mortis causa - take effect upon the death of the donor. It must comply with the formalities of a will. D. Effect of Renunciation of the Principal Debt on the Accessory Obligation The renunciation of the principal debt shall extinguish the accessory obligations; but waiver of the latter shall leave the former in force. This is based on the legal principle that the accessory follows the principal. Accessory obligations cannot exist without the principal obligation, the latter may exist without the former. V. Confusion or Merger of Right A. Meaning of Confusion or Merger

It is the meeting in one (1) person of the qualities of creditor and debtor with respect to the same obligation. B. Reason or Basis for Confusion The law treats confusion or merger as a mode of extinguishing an obligation because if a debtor is his own creditor, enforcement of the obligation becomes absurd since the person cannot claim payment from himself. C. Requisites of Confusion It must take place between the principal debt and creditor; and It must be complete; VI. Compensation A. Meaning of Compensation Compensation is the extinguishment to the concurrent amount of the debts of two or more persons who, in their own rights, are debtors and creditors of each other. It involves the simultaneous balancing of two obligations in order to extinguish them to the extent in which the amount of one is covered by that of the other. B. Object of Compensation To prevent unnecessary litigations and payments. This is accomplished through the mutual extinguishment by operation of law of concurring debts of two (2) persons. Compensation provides a more convenient and less expensive effectuation of payments between two (2) persons who are reciprocally creditors and debtors. C. Compensation and Confusion Distinguished In confusion, there is only one person who is a creditor and debtor of himself, while in compensation, there are two or more persons involved, each of whom is a debtor and a creditor of the other; In confusion, there is but one obligation, while in compensation, the are two (2) obligations; In confusion, there is impossibility of payment, while in compensation, there is indirect payment.

D. Kinds of Compensation 1. By its effect or extent a) Total - when both obligations are of the same amount and are entirely extinguished. b) Partial - when two (2) obligations are of different amounts and a balance remains. The extinctive effect of compensation will be partial only as regards the larger debt. 2. By its Cause or Origin a) Legal - it takes place by operation of law even without the knowledge of the parties. b) Voluntary - it takes place by agreement of the parties. c) Judicial - it takes place by order from a court in a litigation. d) Facultative - when it can be set up only by one of the parties. E. Requisites of Legal Compensation The parties are principal creditors and principal debtors of each other. Both debts consist in a sum of money, or of consumable things of the same kind and quality. The two debts are due and demandable. The two debts are liquidated i.e ascertained. No retention (credit of one on the parties is subject to satisfaction of the claims of a third person) or controversy (third person claims he is the creditor of one of the parties) commenced by a third person. VII. Novation A. Meaning of Novation It is the total or partial extinction of an obligation through the creation of a new one which substitute it. It is the substitution or change of an obligation by another, which extinguishes or modifies the first, either by: Changing the object of principal conditions; Substituting the person of the debtor; or Subrogating a third person in the rights of the creditor. B. Dual Function of Novation It extinguishes or modifies an existing obligation.

It substitutes a previous obligation with a new one. C. Kinds of Novation According to origin: Legal - it takes place by operation of law. Conventional - it takes place by agreement of the parties. According to how it is constituted: Express - it is so declared in unequivocal terms. Implied - when the old and the new obligations are essentially incompatible with each other.

According to extent or effect: Total or extinctive - when the old obligation is completely extinguished. Partial or modificatory - when old obligation is merely modified. According to the subject: Real or objective - when the object (or cause) or principal conditions of the obligation are changed. Personal or subjective - when the person of the debtor is substituted and/or when a third person is subrogated in the rights of the creditor. Mixed - when the object and/or principal conditions of the obligation and the debtor or the creditor, or both the parties , are changed. D. Requisites of Novation A previous valid contract; Capacity and intention of the parties to modify or extinguish the obligation; The modification or extinguishment of the obligation; and The creation of a new valid obligation. CONTRACTS I. General Provisions

A. Meaning of Contract A contract a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. The definition lays emphasis on the meeting of minds between two contracting parties which take place when an offer by one is accepted by the other. In contract, there must be at least two person or parties, because it is impossible for one to contract with himself. B. Contract and Obligation Distinguished Contract is one of the sources of obligation. On the other hand, obligation is the legal tie or relation itself that exists after a contract has been entered into. There can be no contract if there is no obligation accepted in return for some benefit to be enjoyed. But an obligation may exist without a contract. C. Meaning of a Valid Contract Valid contracts are those which meet all the legal requirements (i.e. elements of contract) and limitations (i.e. not contrary to law, morals, good customs, public order, or public policy) for the type of agreement involved and are, therefore, legally binding and enforceable. D. Freedom to Contract Guaranteed The right to enter into contract is a guaranteed right by the Constitution (Art. III, Sec. 10). However, it is not an absolute right. The constitutional prohibition against impairment of contractual obligations refers only to legally valid contracts and cannot be invoked as against the right of the state to exercise its police power. E. Limitations on Contractual Stipulations Law - It is a fundamental requirement that the contract entered into must be in accordance with, and not repugnant to, an applicable statute. Its terms are embodies in every contract. The law, thus sets limits. Police Power - When there is no law in existence or when law is silent, the will of the parties prevails unless their contract contravenes the limitations of morals, good customs, public order, or public policy. F. Contract Must Not Be Contrary to Law, Morals, Good Customs, Public Order and Public Policy

A contract cannot be given effect if it is contrary to law because law is superior to a contract. Acts executed are void, except when law itself authorizes their validity. The contracting parties must respect the law which is deemed to be an integral part of every contract. Morals deal with norms of good and right conduct evolved in a community. Customs consist of habits and practices which though long usage have been followed and enforced by society or some part of it is binding rules of conduct. Public order refers principally to public safety although it has been considered to mean also the public weal. Public policy are broader that public order, as the former may refer not only to public safety but also to considerations which are moved by common good. G. Classification of Contract According to Its Name or Designation 1. Nominate Contracts Nominate contract or that which has a specific name or designation in law. 2. Innominate Contracts Innominate contract or that which has no specific name or designation in law. a) Kinds of Innominate Contract Do ut des (I give that you may give), now Barter; Do ut facias (I give that you may do); Facto ut des (I do that you may give); Facto ut facias (I do that you may do). b) Rules Governing Innominate Contracts Innominate contracts are governed by: The agreement of the parties; The provision of the Civil Code; The rules governing the most analogous contracts; and The customs of the place. H. Contract Binds Both Contracting Parties

Mutuality of Contract A contract is an agreement which gives rise to obligations. It must bind both parties in order that it can be enforced against either. Without this equality between the parties, it cannot be said that the contract has force of law between them. Its validity or compliance cannot be left to the will of one of the contracting parties. I. Person Affected by a Contract 1. General Rule A party’s rights and obligations derived from contract are transmissible to the successors. Contracts takes effect only between the parties, their assigns, and heirs. 2. Exception A contract is effective only between the parties when: By the nature (like a contract involving personal qualifications); By stipulation; and By provision of law (as in agency, partnership and commodatum). 3. Cases when Strangers or Third Persons Affected by a Contract A third person is one who has not taken part in a contract and is, therefore, a stranger to the contract. As a general rule, a third person is has no right and obligations under a contract to which he is a stranger. He has no standing in law to demand the enforcement of a contract or question its validity. However, a third person may be affected by a contract in the following instances: In contracts containing a stipulation in favor of a third person (stipulation pour autrui); In contracts creating real rights; In contracts entered into to defraud creditors; or In contracts which have been violated at the inducement of a third person. 4. Meaning of Stipulation Pour Autrui It is a stipulation in a contract which clearly and deliberately confers a favor upon a third person who has a right to demand its fulfillment

provided he communicates his acceptance to the obligor before its revocation by the obligee or the original parties. 5. Requisites of Stipulation Pour Autrui The contracting parties by their stipulation must have clearly and deliberately conferred for upon a third person; The third person must have communicated his acceptance to the obligor before its revocation by the obligee or the original parties; The stipulation in favor of the third person should be a part, not the whole, of the contract; The favorable stipulation should not be conditioned or compensated by any kind of obligation whatever; and Neither of the contracting parties bears the legal representation or authorization of the third party for otherwise, the rules on agency apply. J. Classification of Contracts According to Perfection 1. Consensual Contract One that is perfected by mere consent. (sale, lease, agency) 2. Real Contract One that is perfected by the delivery of thing subject matter of the contract. (depositum, commodatum, pledge) 3. Solemn Contract One which requires compliance with certain formalities prescribed by law, such prescribed form being thereby an essential element thereof (donation of real property must be in a public instrument). K. Stages in the Life of a Contract 1. Preparation or Negotiation It includes all the steps taken by the parties leading to the perfection of the contract. At this stage, parties have not yet arrived at any definite agreement. 2. Perfection or Birth

This is when the parties have come to a definite agreement or meeting of the minds regarding the subject matter and cause of the contract i.e. upon concurrence of the essential elements of a contract. 3. Consummation or Termination This is when the parties have performed their respective obligations and the contract may be said to have been fully accomplished or executed, resulting to the extinguishment or termination thereof. L. How Contracts are Perfected 1. In Consensual Contracts As a general rule, contract are perfected by mere consent of the parties regarding the subject matter and cause of the contract. They come into existence upon their perfection by mutual consent, even if the subject matter or the consideration has not been delivered. 2. In Real Contracts Exceptions are the so-called real contracts which are perfected not merely by consent but by the delivery, actual or constructive, of the object of the obligation. II. Elements of a Contract A. Consent 1. Meaning of Consent Is the conformity or concurrence of wills (offer and acceptance) and with respect to contracts, it is the agreement of the will of one (1) contracting party with that of another or others, upon the object and terms of the contract. (4Sanchez Roman 19;8 Manresa 648.) 2. Meaning of Offer Is a proposal made by one (1) party (offerer) to another (offeree), indicating a willingness to enter into a contract. It is more than an expression of desire of hope. It is really a promise to act or to refrain from acting on condition that the terms thereof are accepted by the person to whom it is made. 3. Meaning of Acceptance Is the manifestation by the offeree of his assent to all the terms of the offer. Without acceptance, there can be no meeting of the minds between the parties. (Art. 1305.)

4. Option of Contract Is one giving a person for a consideration a certain period within to accept the offer of the offerer. It is separate and distinct from the contract which will be perfected upon the acceptance of the offer. Option may also refer to the privilege itself given to the offeree to accept an offer within a certain period. 5. Option Money Distinguished from money Earnest Money Is the money paid or promised to be paid in consideration for the option. It is not to be confused with earnest money which is actually a partial payment of the purchase price and is considered as proof of the perfection of the contract. (see Art. 1482) 6. Business Advertisements Generally Not Definite Offer Business advertisements of things for sale are not definite offer acceptance of which will perfect a contract but are merely invitations to the reader to make an offer. However, it is necessary in a contract, it may amount to a definite offer which, if accepted, will produce a perfected contract. 7. Advertisements for Bidders are Generally Not Definite Offers In an advertisement for bidders, the advertiser is not the one making the offer. In reality, the bidder is the one making the offer which the advertiser is free to accept or reject. Acceptance by the advertiser of a given bid is necessary for a contract to exist between the advertiser and the bidder, regardless of the terms and conditions of his bid. 8. Person who Cannot Give Consent A contract entered into where one of the parties is capable of giving consent to a contract is voidable. A voidable contract is valid and binding until it is annulled by a proper action in court. It is susceptible of ratification. (Art. 1390) 9. Contracts Entered During Lucid Intervals Is a temporary period of sanity. A contract-entered into by an insane or demented person during a lucid interval is valid. It must be shown, however, that there is a full return of the mind to sanity as to enable him to understand the contract he is entering into.

10.

Effect of Drunkenness and Hypnotic Spell Drunkenness and hypnotic spell impair the capacity of a person to give intelligent consent. (8 Manresa 660-661) These conditions are equivalent to temporary insanity. Hence, the law considers a contract entered into in a state of drunkenness, or during a hypnotic spell voidable and it is not required that such state was procured by the circumvention of the other party.

11. Other Special Disqualifications May Be Provided by Law In addition to the incapacity declared in Article 1327, other special disqualifications may be provided by law. (1) Under the rules of court, the following are considered incompetents and may be placed under guardian ship: (A) Person suffering the accessory penalty civil interdiction (see Art. 34 Revised Penal Code.); (B) Hospitalized lepers; (C) Prodigals(Spendthrifts); (D) Deaf and dumb who are unable to read and write; (E) Those who are of unsound mind even though they have lucid intervals; (F) Those who, by reason of age, disease, weak mind and other similar causes, cannot without outside aid, take care of themselves and manage their property, becoming thereby an easy prey for deceit and exploitation. (Sec, Rule 92, Rules of Court.) 12.Characteristics of Consent In order that consent may be valid for purposes of contract, it is required, not only that it exist, but that it must be given with exact understanding over the thing consented to. In other words, the contract must be based on the genuine assent of the both parties to the contract and the terms thereof. 13. Vices of Consent Aside from incapacity and simulation of contract, the following are the causes that vitiate consent or render it defective so as to make the contract voidable: Error or Mistakes Violence or Force Intimidation or Threat or Duress Undue Influence Fraud or Deceit 14.Simulation of Contract

Simulation of an contract is the act of deliberately deceiving others, by feigning or pretending by agreement the appearance of a contract which is either non-existent or concealed. (1 Castan 504) Absolute Simulation- when the contract does not really exist and the parties do not intend to be bound at all. Relative Simulation- when the contract entered into by the parties is different from their true agreement. (Art. 1345) The parties are bound by their real agreement provided it does not prejudice a third person and is not intended for a purpose contrary to law, morals, good customs, public policy. (Art. 1346) B. Object 1. Concept of Object of Contract In reality, the object of every contract is the obligation created. But since a contract cannot exist without an obligation, it may be said that the thing, service, or right which is the object of the obligation is also the object of the contract. 2. Kinds of Object of Contract Object certain is the second essential element of a valid contract. (Ibid). The object may be things (as in sale), rights (as in assignment of credit), or services (as in agency). 3. Requisites of Things as Object Contract In order that things may be the object of an contract, the Following requisites must be present: The thing must be within the commerce of men, that is, it can legally be the subject of commercial transactions; It must not be impossible, legally or physically; It must be determinate or determinable without the need of a new contract between the parties.

4. Requisites of Services as Object of Contract In order that service may be the object of a contract, the following requisites must concur:

The service must be within the commerce of men; It must not be impossible, physically or legally; and It must be determinate or capable of being made determinate. 5. Right as Object of Contract As a general rule, all rights may be the object of a contract. The exceptions are when they are intransmissible by their nature, or by stipulation, or by provision of law. 6. Kinds of Impossibility a) Physical - when the thing or service in the very nature of things cannot exist (e.g., a monkey that talks) or be performed. With particular reference to services (see Arts. 1206, 1207.), the impossibility may be: (1)Absolute - when the act cannot be done in any case so that nobody can perform it. (2)Relative - when it arises from the special circumstances of the case (e.g., to make payment to a dead person, to drive a car on a flooded highway, etc.) or the special conditions or qualifications of the obligor (to paint a portrait by a blind person, etc.). b) Legal - when the thing or service is contrary to law, morals, good customs, public order, or public policy. An act is contrary to law, either because it is forbidden by penal law (e.g., to sell shabu, etc.) or a rule of law makes it impossible to be done (e.g., to make a valid donation of real property without a public instrument [Art. 749.], to make a valid will, where the testator is under 18 years of age [Art. 797.], etc.) C. Cause of Contract 1. Meaning of Cause Cause (causa) is the essential reason or purpose which the contracting parties have in view at the time of entering into the contract. It is something bargained for or given by a party in exchange for a legally enforceable promise of another. 2. Cause Distinguished from Object In a bilateral or reciprocal contract like purchases and sale, the cause for one is the subject matter or object for the other, and vice versa. Hence, the distinction is only a matter of viewpoint. 3. Motive

Is the purely personal or private reason which a party has in entering into a contract. It is different from the cause of contract. 4. Cause distinguished from Motive a. Cause is the immediate or direct reason, while motive is the remote or indirect reason; b. Cause is always known to the other contracting party, while motive may be unknown; c. Cause is an essential element of a contract, while motive is not; d. The illegality of the cause affects the validity of a contract, while the illegality of one’s motive does not render the contract void. 5. Requisites of Cause 1) It must exist at the time the contract is entered into (Arts. 1352, 1409[3].); 2) It must be lawful (Ibid); 3) It must be true or real. (Art. 1353.) 6. Effect of Absences of Cause Absence or want of cause means that there is a total lack of any valid consideration for the contract. Contract without cause confer no right and produce no legal effect whatever. 7. Effect of Failure Cause Absence of cause should be distinguished from inadequacy of cause which, as a general rule, is not a ground for relief. (Art. 1355) and from failure of cause, which does not render a contract void. (see Arts. 1169, par. 3; 1170,1191) Thus, the failure to pay the stipulated price after the execution of a contract. 8. Effect of Illegality of Cause Implies that there is a cause but the same is unlawful or illegal.

9. Effect of Falsity of Cause

Is meant that the contract states a valid consideration but such statement is not true. A false cause may be erroneous or simulated. The first always renders a contract void. If the cause is false, the contract is rendered void because the same actually does not exist. (Arts. 1353, 1409[3]). The second does not always produce this effect, because it may happen that the hidden but true cause is sufficient to support the contract. If the parties can show that there is another cause and that said cause is true and lawful, then the parties shall be bound by their true agreement. (Art. 1346.) III. Form of Contracts A. Meaning of Form of Contracts Refers to the manner in which a contract is executed or manifested. The contract may be oral, or in writing, or partly oral and partly in writing. It may be express when the parties expressly set forth their intentions, or implied when their intentions may be inferred from their actions or conduct. If in writing, it may be in a public or a private instrument. B. Classification of Contract According to Form 1. Informal or common or Simple Contract- Or that which may be entered into in whatever form provided all the essential requisites for their validity are present. (Art. 1356.), such as the contract of sale. An informal contract may be oral or written and, in fact, may even be implied from the conduct of the parties; 2. Formal or Solemn Contract- Or that which is required by law for its efficacy to be in a certain specified from. C. Rules Regarding Form of Contract General rule. Contracts are binding and, therefore enforceable reciprocally by the contracting, parties, whatever may be the form in which the contract has been entered into, provided all the three (3) essential requisites (consent, object, and cause) for their validity are present. So, a contract may be oral or written. A written contract may consist of a letter, memorandum, note or other language, it being sufficient that the parties clearly express their intentions.

D. Form for Validity of Contract

There are rare cases when the law requires that a contract be in a certain form for the validity of the contract. E. Contracts which Must Appear in a Public Document The contracts covered by this article are valid and enforceable though not contained in a public document or instrument or in writing. The public document is required only for the convenience and greater protection of the parties and to make the contract binding as against third persons. IV. Interpretation of Contracts A. Meaning of Interpretation of Contracts Is the determination of the meaning of the terms or words used by the parties in their written contract. It is the process of ascertaining the intention of the parties from the written words contained in the contract. B. Literal meaning Controls when Language Clear Contracts, which are the private laws of the contracting parties, should be fulfilled according to the literal sense of their stipulations, if the terms of a contract are clear and unequivocal. The parties are bound by such terms. (Phil. Am. Gen. Ins. Co., Inc. vs. Mutuc, 61 SCRA 22.) In this case, the question is not what existed in the minds of the parties but what intention is expressed in the language used. (17 C.J.S 700.) C. Evident Intention of Parties Prevails Over Terms of Contract Where the words and clauses of a written contract are in conflict with the manifest intention of the parties, the latter shall prevail over the former. It is a cardinal rule in the interpretation of contracts that the intention of the contracting parties should always prevail because their will has the force of law between them. (Art. 1159; see Borromeo vs. Court of Appeals,47 SCRA 65.) D. Contemporaneous and Subsequent Acts Relevant in the Determination of Intention Where the parties to a contract have placed an interpretation to the terms thereof by their contemporaneous and/or subsequent conduct, as by acts in partial performance, such interpretation may be considered by the court in determining its meaning and ascertaining the intention of the parties (17 C.J.S 755.) when such intention cannot clearly be ascertained from the words used in their contract. (Art. 1370, par. 2.)

E. Special Intent Prevail Over a General Intent As a rule, where in a contract there are general and special provisions covering the same subject matter, the latter control over the former when the two (2) cannot stand together. (Hibberd vs. Estate of McElroy, 25 Phil. 164.) The reason for this rule is that when the parties express themselves in reference to a particular matter, the attention is directed to that, and it must be assumed that it expresses their intent; whereas, a reference to some general matter, within which the particular matter may be included, does not necessarily indicate that the parties had that particular matter in mind. (12 Am. Jur. 779.) F. Interpretation of Stipulation with Several Meanings When an agreement is susceptible of several meanings, one of which would render it effectual, it should be given that interpretation. Thus, if one interpretation makes a contract valid and the other makes it illegal, the former interpretation is one which is warranted by the rule stated in Article 1373. G. Interpretation of Various Stipulations of a Contract A contract must be interpreted as a whole and the intention of the parties is to be gathered from the entire instrument and not from particular words, phrases, or clauses. All provisions should, if possible, be so interpreted as to harmonize with each other. H. Interpretation of Word with Different Significations If a word is susceptible of two or more meanings, it is to be understood in the sense which is most in keeping with the nature and object of the contract in line with the cardinal rule that the intention of the parties must prevail. (Art. 1370.) I. Resort to Usage or Custom as Aid in interpretation The usage or custom of the place where the contract was entered into may be received to explain what is doubtful or ambiguous in a contract on the theory that the parties entered into their contract with reference to such usage or custom. J. Interpretation of Obscure words

A written agreement should, in case of doubt, be interpreted against the party who has drawn it, or be given an interpretation which will be favorable to the other who, upon the faith of which, has incurred an obligation. (12 Am. Jur. 795-796.) K. Rules in Case Doubts Impossible settle When, despite the application of the preceding rules (Arts. 1370-1371.), certain doubts still exist, such doubts shall be resolved in accordance with the supplementary rules stated in the present article. V. Kinds of Defective Contracts A. Rescissible Contract 1. Meaning of Rescissible Contract Are those validly agreed upon because all the essential elements exist and, therefore, legally effective, but in the cases established by law, the remedy of rescission is granted in the interest of equity. 2. Binding Force of Rescissible Contract They are valid and enforceable although subject rescission by the court there is economic damage or prejudice to one of the parties or to a third person. In a rescissible contract, there is no defect at all but by reason of some external facts, its enforcement would cause injustice. 3. Meaning of Rescission Is a remedy granted by law to the contracting parties and sometimes even to the third persons in order to secure reparation of damages caused them by a valid contract, by means of the restoration of things to their condition in which they were prior to the celebration of said contract. (see 8 Manresa 748749.) 4. Requisites of Rescission The following are the requisites before the remedy of rescission may be availed of: 1) The contract must be validly agreed upon (Art. 1380.) 2) There must be lesion or pecuniary prejudice one the parties or to a third person (Art. 138.); 3) The rescission must be based upon a case especially provided by law (Arts. 1380, 1381, 1382.);

4) There must be no other legal remedy to obtain reparation for the damage. (Art. 1383.); 5) The party asking for rescission must be able to return what he is obliged to restore by reason of the contract (Art 1385, par. 1.); 6) The object of the contract must not legally be in the possession of third person who did not act in bad faith 7) The period for filling the action for rescission must not have prescribed. (Art. 1389.) 5. Cases of Rescissible Contracts 1) Contracts entered into in behalf of wards – A ward is a person under guardianship by reason of some incapacity. (see Art. 1329.) 2) Contracts agreed upon in representation of absentees - an absentee is a person who disappears from his domicile his whereabouts being unknown, and without leaving an agent to administer his property. Likewise, the absentee must suffer lesion by more than one-fourth of the value of the property object of the contract to entitle him to the remedy of rescission. 3)

Contracts undertaken in fraud of creditors - the requisites are: Existence of a credit prior to the contract to be rescinded, although it is not yet due or demandable; There must be fraud on the part of the debtor which may be presumed or proved; and The creditor cannot recover his credit in any other manner, it not being required that the debtor be insolvent. 4) Contracts which refer to things under litigation

B. Voidable Contracts 1. Meaning of Voidable Contract Voidable or annullable contracts are those which possess all the essential requisites of a valid contract but one of the parties is incapable of giving consent, or consent is vitiated by mistakes, violence, intimidation, undue influence, or fraud. 2. Binding force of Voidable Contracts

They are valid and binding between the parties unless annulled by a proper action in court by the injured party. Once ratified, they become absolutely valid and can no longer be annulled. (see comments under Arts. 1327, 1328, 1330.) Note that the existence of economic damage is not essential for their annulment as in the case of rescissible contracts. 3. Kinds of Voidable Contracts A contract otherwise legal in object and operation is voidable because of a defect caused by either: 1) Legal incapacity to give consent, where one of the parties is incapable of giving consent to the contract; 2) Violation of consent, where the vitiation is done by mistake, violence, intimidation, undue influences, or fraud. 4. Meaning of Annulment Is a remedy provided by law, for reason of public interest, for the declaration of the inefficacy of a contract based on a defect or vice in the consent of one of the contracting parties in order to restore them to their original position in which they were before the contract was executed. 5. Ratification a) Meaning of Ratification – means that one voluntarily adopts or approves some defective or unauthorized act or contract which, without his subsequent approval or consent, would not be binding on him. It indicates an intention on the part of the ratifier to be bound to the provisions of the contract. b) Effect of Ratification- Cleanses the contract from all its defects from the moment it was constituted. (Art. 1396.). The contract thus becomes valid. (Art. 1390.) Hence, the action to annul is extinguished. (Art. 1392) c) Kinds of Ratification 1) Express- when the ratification is manifested words or in writing. 2) Implied or tacit- it may take diverse forms, such as by silence or acquiescence; by acts showing adoption or approval of the contract; or by acceptance and retention of benefits flowing therefrom. (see Cadano vs. Cadano, 49 SCRA 33.)

d)

Requisites of Ratification The requisites for implied ratification are the following: i. There must be knowledge of the reason which renders the contract voidable; ii. Such must have ceased; iii. The injured party must have executed an act which necessarily implies an intention to waive his right.

C. Unenforceable Contracts 1. Meaning of Unenforceable Contract Are those that cannot be enforced or given effect in a court of law or sued upon by reason of certain defects provided by law until and unless they are ratified according to law. 2. Binding Force of Unenforceable Contracts While rescissible and voidable contracts are valid and enforceable unless they are rescinded or annulled, unenforceable contracts, although valid, are unenforceable in court unless they are cured or ratified. Once ratified, these contracts may then be enforceable. 3. Kinds of Unenforceable Contracts Under Article 1403, the following contracts are unenforceable, unless they are ratified: a. Those entered into in the name of another by one without, or acting in excess of, authority; b. Those that do not comply with the statute of frauds; c. Those where both parties are incapable of giving. 4. Agreements within the Scope of Statute of Frauds To be enforceable, a contract does not have to be in writing. In fact, most made orally are legally enforceable. However, there are agreements which fall within the scope of the statute of frauds enumerated below, which are not legally enforceable in court although valid, unless the same be in writing. In other words, if either party refused to comply with their agreement, the same could not be enforced. 5. Ratification of Contracts infringing the Statute of frauds Sec. 4. Secondary evidence when original is lost or destroyed- when the original writing has been lost or destroyed, or cannot be produced in

court, upon proof of its execution and loss or destruction, or unavailability, its contents may be proved by a copy, or by a recital of its contents in some authentic document or by the recollection of witnesses. (Rule 130, Rules of Court) 6. When Unenforceable Contract Becomes a Voidable Contract When both parties to a contract are incapable of giving consent, the contract is unenforceable. (Art. 1403[3].). However, if the parent or guardian, as the case may be, of either party, or if one of the parties after attaining or regaining capacity, ratifies the contract, it becomes voidable. (par. 1; see Arts. 1390, par 1; 1394.) 7. when Unenforceable Contract becomes a Valid contract If the ratification is made by the parents or guardians, as the case may be, of both contracting parties, or by both contracting parties after attaining or regaining capacity, the contract is validated and its validity retroacts to the time it was entered into. (see Art. 1396.) D. Void or Inexistent Contracts 1. Meaning of Void Contract Are those which, because of certain defects, generally produce no effect at all. They are considered as inexistent “void contract” is, therefore, a contradiction in terms. However, the expression is often loosely used to refer to an agreement tainted with illegality. 2. Meaning of Existent Contracts On the other hand, inexistent contracts refer to agreements which lack one or some or all of the elements (i.e., consent, object, and cause) or do not comply with formalities which are essential for the existence of a contract. An illegal contract may produce effects under certain circumstances where the parties are not of equal guilt. (see Arts. 14111412.) 3. Characteristics of a Void or Inexistent Contracts 1) 2) 3) 4)

Generally, it produces no force and effect whatsoever; It cannot be ratified (Art. 1409, par. 2.) The right to set up the defense of illegality cannot be waived. (ibid.); The action or defense for the declaration of its inexistence does not prescribe (Art. 1410.); 5) The defense of illegality is not available to third persons whose interests are not directly affected (Art. 1421.);

6) It cannot give rise to a valid contract. (Art. 1422.) 4. Instances of Void or Inexistent Contracts Void and inexistent contracts are not enforceable from the very beginning, regardless of the intentions of the parties: i. Contracts whose cause, object or purpose is contrary to law ii. Contracts which are absolutely simulated or fictitious iii. Contracts without cause or object iv. Contracts whose object is outside the commerce of men v. Contracts which contemplate an impossible service vi. Contracts where the intention of the parties relative to the object cannot be ascertained vii. Contracts expressly prohibited or declared void by law