1. Revised By: Atty. Virginio L. Valle 2.

Course Outline PART I INTRODUCTION TO LAW AND BUSINESS LAW Definition of Law and Business Law Sources of Business Law Characteristics of Business Law PART II OBLIGATIONS In General Definition Sources of Obligations Law; Contracts; Quasi-Contracts; Delicts or Crimes; Quasi-Delicts Essential requisites of obligation Parties; object; Juridical tie or vinculum juris 3. PART II OBLIGATIONS Nature and Effect of Obligation According to the Object or Prestation Obligations to give; Obligations to do; Obligations not to do Liability of Damages Fraud Dolo incidente; Dolo causante Neglignce Delay Mora solvendi, accipiendi, compensatio morae Contravention of tenor of obligation 4. PART III GENERAL PROVISIONS ON CONTRACT Contracts Defined Elements of Contract: Stages of A Contract Characteristics of Contracts: Classification of A Contract: (FROM) Contract Binds by Both Parties Cases Where Third person May Be Affected By a Contract Forms of Contracts Reformation of Instruments Interpretation Of Contracts Cause of Contracts 5. PART IV DEFECTIVE CONTRACTS Rescissible Contracts Voidable Contracts Unenforceable Contracts Void or inexistent contracts 6. PART 1 INTRODUCTION TO LAW AND BUSINESS LAW 1. Definition of Law and Business Law 2. Sources of Business Law 3. Characteristics of Business Law 7. Introduction to Law Preliminaries In the preliminaries, the sight of a human being in his everyday undertaking has to follow some. The instructions that a person will learn, result to that consciousness of following the law. As he learns the law, he can define it, with its characteristics. 8. In Philosophy, the human mind consists principally of two faculties: 1. the Intellect the object of which is the TRUTH. 2. the Will the object of which is the GOOD. The infinite truth and infinite good is infinite beauty of God. The person was created by God and destined for God, the people can attain the final destiny by following the law. The laws that contained the instructions of God given to us are the COMMANDMENTS. 9. Law The most basic, simple and concise definition of law was defined by Sanchez Roman, a Spanish Civilist and he defined Law as: A RULE OF CONDUCT , JUST AND OBLIGATORY PROMULGATED BY LEGITIMATE AUTHORITY FOR THE COMMON OBSERVANCE AND BENEFIT. Edgardo Paras defined Law as an ordinance of reason promulgated for the common good by Him who is in charge. 10. Characteristics of Law 1. A RULE OF CONDUCT Meaning any action, things, dictate of reason if regulated or gathered together could become a conglomeration of rules, regulations that can

create an orderly, peaceful, harmonious relations among the people concerned so that in the end justice will prevail. 11. Characteristics of Law 2. PROMULGATED BY LEGITIMATE AUTHORITY That is, made known to those who are expected to follow it. In a Republican State like the Philippines, we have three branches of government legislative body (like Congress, Sanggunian) is the law-making body; the executive body is the implementing body and the judiciary as the enforcing body. 12. Characteristics of Law 3. JUST and OBLIGATORY Treatment of Law should be equal, regardless of sex, creed, age and status in life and to follow the law there should be equivalent punishment or penalties to enforce them. The dictum Justice delayed is Justice denied is commonly abused term on the relation of a criminally inclined poor person and a moneyed person on the treatment of the application of law. Obligatory means any duty binding parties to perform their agreement. (Blacks dict. P. 1074). 13. Characteristics of Law 4. FOR THE COMMON OBSERVANCE and BENEFIT The application of law should not be titled or favoring an individual but by the observance of all and the benefits that may be derived from it. 14. Sources of Law 1. LEGISLATIVE It consists of legal rights by a competent authority. In the Philippines, being a democratic form of government, the Legislative is the law-making body. For national government, Congress comprising the House of Representatives and the Senate. For provinces, the Sangguniang Panlalawigan for every province. For a town, the Sangguniang Pambayan or the local Municipal council. For a Barangay level, the Sangguniang Pambarangay. 15. Sources of Law 2. CONSTITUTION The fundamental law that governs a nation in its relation to its citizens. All laws must conform and comply with the provisions of the Constitution, otherwise it becomes unconstitutional. 16. Sources of Law 3. ADMINISTRATIVE OR EXECUTIVE ORDERS, REGULATIONS AND RULINGS The fundamental law that governs a nation in its relation to its citizens. All laws must conform and comply with the provisions of the Constitution, otherwise it becomes unconstitutional. 17. Sources of Law 4. JUDICIAL DECISIONS OR JURISPRUDENCE Judicial decisions or interpreting the laws or the Constitution shall form a part of the legal system of the Philippines. (Art. 8, New Civil Code) Judicial decisions, though, are part of the legal system in the Philippines still are not laws for if this were so, the Courts exists for stating what the law is, but not for giving it. Judicial decisions, though not law, are evidence of what the law means. This is why they are part of the legal system in the Philippines. So, f an interpretation is placed by the Supreme Court upon a law, it constitute in a way, part of the law since the Courts interpretation merely establishes the legislative intent.

18. Sources of Law 4. JUDICIAL DECISIONS OR JURISPRUDENCE Thus, our country adhere to the Doctrine of Stare Decisis (Let it Stand), the doctrine which in reality is adherance to precedents stated that once a case has been decided, then another case involving the same point at issue, should be decided in the same manner. Therefore, if the Supreme Court being a Court of last resort, has decided that a certain law passed by Congress is constitutional, the law becomes binding and has its full force and effect. 19. Sources of Law 5. CUSTOM It consists of those habits and practices which through long and uninterrupted usage have become acknowledged and approved by society as binding rule of conduct. Thus, it has been a custom for a person to enter and exit a door. Once a person uses the window for his entrance and exit, it runs counter to the custom of use of the door. Even our Lord said as a good shepherd, if a person does not pass the gate, he is a thief for a marauder. 20. Sources of Law 6. OTHER SOURCES To add, the principle of justice and equity, decisions of foreign tribunals, opinions of text writers and even religion may also be sources of law. 21. Kinds of Law 1. DIVINE LAW It is formally promulgated by God, revealed or divulged to mankind by means of direct revelation like the Ten Commandments. 22. Kinds of Law 2. NATURAL LAW Promulgated impliedly in our conscience and body. It is the divine interpretation in man in the sense of justice, fairness, right and equity by internal dictate of reason on our mind. Like for instance, it is better to do good than to do evil for being a Godfearing person. 23. Kinds of Law 3. PHYSICAL LAW Refers to the act of rules governing the action and movement of things like the law on gravity by Newton. 4. HUMAN LAW Those promulgated by man to regulate human relations. THIS CAN BE CLASSIFIED INTO: 24. Classification of Human Law A. GENERAL or PUBLIC LAW Body of rules which regulates the rights and duties arising from the relationship between the State and its inhabitants. It includes the following: 1. International Law consists of those rules and principles which govern the relations and dealing of nations with each other. 2. Constitutional Law It simply governs the relations between the State and its citizens. 25. Classification of Human Law GENERAL or PUBLIC LAW 3. Administrative Law it fixes the organization and determines the competence of the authorities that execute the law and indicates to the individual remedies for the violation of his rights. 4. Political Law deals with the organization and operation of the governmental organs of the State and defines the relations of the state with the inhabitants of its territory. 5. Criminal Law guaranties the coercive power of the law so that it will be obeyed. Governs the methods of trial and punishment of crimes.

26. Classification of Human Law B. INDIVIDUAL or PRIVATE LAW Those law which govern the private relation person. It includes the following: 1. Civil Law branch of law which has for its double purpose the organization of the family and the regulation of property. It is defined as the mass of precepts which determines and regulate the relation of assistance, authority and obedience among the members of a society for the protection of private interests. 27. Classification of Human Law INDIVIDUAL or PRIVATE LAW 2. Commercial Law defined as a whole body of substantial jurisprudence applicable to the rights, intercourse and relation of persons engaged in commerce, trade or mercantile pursuits. (Blacks law dict. 338) 28. Classification of Human Law INDIVIDUAL or PRIVATE LAW 3. Procedural Law defined as the branch of law which prescribes the method of enforcing rights or obtaining redress for their invasion, Procedural law otherwise known as Remedial Law, as distinguished from Substantive law which creates, defines and regulate rights. (Ballantine Law Dict. P. 36) 29. Sources of Philippine Civil Code 1. The New Civil Code of the Philippines the collection of laws which regulates the private relations of the members of civil society, determining the defective rights and obligations with reference to persons, things and civil acts. A civil code is a compilation of existing Civil Laws, scientifically arranged into books, titles, chapters and subheads and promulgated by legitimate authority. (Black Law Dict. 334). 30. Sources of Philippine Civil Code 2. Special laws or statutes, Presidential decrees and other social legislation. 3. Jurisprudence there is need to mention that, jurisprudence in our system of government, cannot be considered as an independent source of law; but the Courts interpretation of a statute that constitute part of the law as of the date it was originally passed since the Courts construction merely establishes contemporaneous legislative intent, that the interpreted law could take into effect. 31. Sources of Philippine Civil Code 4. Customs and Traditions Custom is a judicial rule which results from a constant and continuous uniform practice by the members of a social group. 5. The Code Commission itself A Code commission of five members was created by Pres. Manuel Roxas through Exec. Order No. 48 dated Mar. 20,1947 in view of the need of revision in keeping with progressive modern legislation. The Civil Code was finished on Dec. 15, 1947 and Congress approved the draft on June, 1949. 32. Books of the Civil Code Book I Person and Family Relations This was re-codified as Family Code of the Philippines embodied in Exec. Order No. 209 as amended by Exec. Order No. 227. The Family Code effectuates the long-felt reforms and changes to the Civil Code provisions on Family relations consistent with Filipino values, customs and traditions vis--vis recent developments in the social-cultural scene. (Pineda, Family Code).

33. Books of the Civil Code Book II Property, Ownership and its modifications. Book III Different Modes of Acquiring Ownership (Succession) Book IV Obligations and Contracts Book V Special contracts The Civil Code begins with preliminary titles and ends up with the repealing clause. This module is taken from the Civil Code of the Philippines from Articles 1156 to 1422 inclusive. 34. Concept of Commercial Law The commercial laws, excepting the Code of Commerce are designated by the legislator by any mark or sign, which determines their nature and their commercial function, but they derive their mercantile character from their subject matter or their contents. In order to determine whether a particular law or provision of law is commercial, it is necessary to first inquire if its purpose is to govern a relation pertaining to commercial matters and in this inquiry, the Code of Commerce should be principally considered, because it defines the acts and the person having a mercantile character. Generally, all laws referring to merchants and to commercial transactions are commercial in nature. (Agbayani, Vol. 1 p 2) 35. Code of Commerce The Code of Commerce is only one of the remaining laws in relation to business that has been heavily modified and repealed by subsequent laws which originally divided into four books. BOOK ONE - Merchants and Commerce in General BOOK TWO - Special Commercial Contracts BOOK THREE - Maritime Commerce BOOK FOUR - Suspension of payments, Bankruptcy and Prescription of Actions. 36. Subsequent Repealing Legislation The following are among the important special laws which repealed either expressly or impliedly certain portions of the Code of Commerce. 1. The Corporation Code which repealed principally the provision on sociedad/anonimas on Book Two and the Corporation law; 2. The Negotiable Instrument Law which repealed principally the provisions of Promissory; Notes and Bill of Exchange in Book Two 37. Subsequent Repealing Legislation 3. The Insolvency law, which repealed the provisions on Suspension of payments and Bankruptcy in Book four; 4. Insurance Law, which repealed the provisions on Fire and Marine Insurance on books two and three; 5. The Securities Act, which repealed the provisions on Commercial Houses in Book Two; 38. Subsequent Repealing Legislation 6. The New Civil Code which repealed the provisions on Partnership, Agency, Sales, Loan, Deposit and Guaranty in Book two. 7. Other legislation, in addition to the foregoing special laws, there wee other laws and now form part of the Commercial laws of the Philippines: The Warehouse Receipts law; the General Bonded Warehouse Act; the Chattel Mortgage law; the Usury law; the General Banking Act; the Central Bank Act; The Rural Act; The Public Service Act; Carriage of Gods by Sea Act; the Salvage law; the Copyright law; the Patent law; the Trade-mark law; the Law on the Use of Duly Marked

Bottles, Boxes, Casks, Kegs, Barrels, and other Similar Containers; the Business Names Law; and the Law on Monopolies and Combinations. 39. Subsequent Repealing Legislation 8. Provisions of the Code of Commerce still in force. a. Those contained in Book one governing merchants and commerce in general, commercial registries, books and bookkeeping of commerce and general provisions relating to commercial contracts, except such portions thereof as have been repealed or modified by the New Civil Code and other legislation. b. Those contained in Book Two governing joint accounts, transfers, transfers of non-negotiable credits, commercial contracts on transportation overland; and letters of credits but not those relating to partnership, agency, sales, loans, deposit 40. Subsequent Repealing Legislation 8. Provisions of the Code of Commerce still in force. c. Those contained in Book Three governing maritime commerce but not those relating to marine insurance which have been repealed. All the provisions in Book four are no longer in force as they have likewise been repealed. (Agbayani, Vol. 1, pp3-4) 41. Subsequent Repealing Legislation 9. Some provision of the code of Commerce which are pertinent in our study in business in general: a. MERCHANTS Merchants may be natural or juridical person: In the case of natural person, he is a merchant: a. If he has legal capacity to engage in commerce; and b. He habitually engage thereto 42. Subsequent Repealing Legislation A natural person has legal capacity to engage in commerce; 1. If he has reached the age of twenty one years; 2. He is not subject to parental authority; and 3. He has free disposition of his property. In the case of juridical person, it is a merchant: a. It is a commercial and industrial company; b. It is organized in accordance with existing legislation and c. Its engaging in commerce is habitual. 43. Subsequent Repealing Legislation b. Habituality in engaging in commerce Habituality in engaging in commerce is attained when there exists series of acts of commerce or commercial dealings. There must be continuity of repetition of commercial acts. However, a single act may be deemed habituality in engaging in commerce in the way of the following acts: 1. Throwing open to the public a business entity or establishment; 44. Subsequent Repealing Legislation 2. Announcement through circulars, newspaper, handbills, posters and similar means of the opening of an establishment for commercial acts or dealings with the public; or 3. Where a foreign corporation appoints an agent as required by law. 4. A series of acts consisting of investigating and preparations of project studies implying an intention to engage in commerce and comes to reality. 45. Subsequent Repealing Legislation c. Absolute Disqualifications The following may not engage in commerce nor hold office or have any direct administrative or financial intervention

in commercial of industrial companies: 1. Those suffering the penalty of civil interdiction primarily because they are deprived of the right to mange and to dispose of their properties inter-vivos or during their lifetime; 46. Subsequent Repealing Legislation 2. Those judicially declared insolent while they have not obtained their discharge; 3. Those who in account of special laws or provisions cannot engage in commerce like incapacitated persons or employees covered by the Civil Service law. 47. Subsequent Repealing Legislation d. Relative Disqualifications These are persons who cannot engage in commerce in places where they exercise their functions. 1. Justices, judges, and officials of the Prosecutors office in active service, except Municipal Mayors; municipal judge; municipal prosecuting attorneys and those who temporarily discharge judicial or prosecuting duties; 2. Administrative, economic or military heads of districts, provinces or post; 48. Subsequent Repealing Legislation 3. Those employed in the collection and administration of funds of the State appointed by the Government except those who administer and collect under contract and their representative. 4. Stock and commercial brokers of whatever class; 5. Those who under special laws and provisions cannot trade in specified territory. 49. Subsequent Repealing Legislation e. Commercial Registry A commercial registry is a public office that takes charge of the registration of merchants, business associations, vessels and documents of commercial importance. The purpose of a commercial registry is to furnish necessary information and reliable data to any interested party so as to promote and facilitate trade and commercial transaction. 50. Subsequent Repealing Legislation f. Books of Merchants 1. Merchants must keep the following books: a. Book of inventories and balances; b. A journal; c. A ledger; d. Book or books for copies of letters or telegrams; and other books that may be required by special laws. 51. Subsequent Repealing Legislation f. Books of Merchants 2. Corporation are bound to keep: a. Record of all business transactions; b. Minutes of all meetings of directors; c. Minutes of all meetings of stockholders; and Stock and transfer books. 52. Registration is compulsory: 1. In case of vessel of more than three (3) tons gross in use in Philippine waters; 2. In case of partnership whose immovable property is contributed by any partner to a common fund. 3. In case of business names under the Business Names Law. 53. Registration is compulsory: 4. In case of ship agent; 5. In case of vehicles with the Land Transportation Office. 6. In all other cases required by law. 54. Commercial Registries in the Philippines 1. Bureau of Domestic Trade for registration of business names and merchants to avoid duplication of trade names. 2. Securities and Exchange

Commission for registration of partnership and Corporation. 3. Local municipalities, cities or province for local permits and licenses. 4. Office of Register of deeds for registration all transaction affecting lands, as well as shattel mortgage. 55. Commercial Registries in the Philippines 5. The MARINA (Marine Industry Authority) for registration of vessels and other transaction affecting vessels. 6. Intellectual property Office for registration of patents and design as well as trade names; trademarks and service marks; 7. Land Transportation Office for registration of patents and designs as well as trade names; trademarks and service marks; 56. Commercial Registries in the Philippines 8. Office of Air Transportation Administration for registration of aircrafts. 9. Bureau of Public Library for registration of copyrights; 10. Board of investment for registration of pioneer and registered enterprises and with corporations having foreign entity participation. 57. Kinds of Procedural Law 1. Public Remedial Law affords a remedy in favor of the State against the individual, like criminal procedure or in favor of the individual against the State, like Habeas Corpus. 2. Private Remedial Law affords a remedy in favor of an individual against another individual, like the civil procedure. 58. Philippine Remedial Law Principally contained in the Rules of Court, which is a combination of rules promulgated by the Supreme Court for the easy, orderly, adequate and effective compliance with the law. The Rules of Court have the force and effect of law. (Alvero V. dela Rosa, 76 Phil 428). 59. COURTS DEFINED It is the entity, body or tribunal vested with a portion of the judicial power. (Lontok V. Battung 63 Phil 1054) JUDICIAL POWER Includes the duty of the courts of justice to settle actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government. (Const. Art. VIII, Sec. 1, par.2) 60. Different Courts of Justice 1. Supreme Court 2. Sandigan-bayan 3. Court of Appeals 4. Regional Trial Court; and 5. Metropolitan / Municipal Trial Courts 61. Lesson 1: General Provisions on Obligation The definition of obligations establishes the unilateral act of the debtor either to give, to do or not to do as a patrimonial obligation. It means that the debtor has the obligation while the creditor has its rights. On the sources of obligation, the main sources are really Law and Contracts. The other sources are also established by law.

62. ART. 1156. An obligation is a juridical necessity to give, to do or not to do. OBLIGATIONS as defined by ARIAS RAMOS is a juridical relation whereby a person (called the creditor) may demand from another (called the debtor) the observance of a determinate conduct, and, in case of breach, may obtain satisfaction from the assets of the latter. (Approved by Mr. Justice J. B. L. Reyes) 63. The obligations referred to in our manual is a patrimonial obligations that is, those obligations with pecuniary value or assessable in terms of money. Characteristics of patrimonial obligations: They represent an exclusively private interest. They create ties that are by nature transitory. They exist a power to make effective in case of non-fulfillment, the economic equivalent obtained at the patrimony of a debtor. Meaning of Juridical Necessity it means the rights and duties arising from obligation are legally demandable and the courts of justice may be called upon through proper action to order the performance. 64. Action means an ordinary suit in court of justice by which one party prosecutes another for the enforceable or protection for a right or a prevention or redress of a wrong ( Sec. 1. Rules of court ). Example Gaya bought refrigerator from Tito but Gaya did not pay the refrigerator. If after demand, Gaya still did not pay, Tito can sue Gaya in Court either to demand payment or for recovery of the refrigerator. 65. Essential requisites of an obligation An active subject, who has the power to demand the prestation, known as the creditor or oblige; A passive subject, who is bound to perform the prestation, known as debtor or obligor. An object or the prestation which may consist in the act of giving, doing or not doing something. The vinculum juris or the juridical tie between the two subjects by reason of which the debtor is bound in favor of the creditor to perform the prestation. It is the legal tie which constitutes the source of obligation the coercive force which makes the obligation demandable. It is the legal tie which constitutes the devise of obligation the coercive force which makes the obligation demandable. 66. Juridical Tie Debtor To give, to do Creditor Or Obligor or not to do or Obligee Illustration: Gaya enters into a contract of sale with Tito who paid the purchase of a GE refrigerator. Gaya did not deliver the refrigerator. Gaya is the passive subject or debtor and Tito is the active subject or creditor. The object or prestation is the GE refrigerator and the obligation to deliver is the legal tie or the vinculum juris which binds Gaya and Tito. 67. This is also known as a unilateral obligation, that is, the obligation of the debtor to fulfill or comply his commitment, in this case, the delivery of the refrigerator. On the other hand, if Gaya, delivered the refrigerator and Tito did not pay, then Tito becomes the debtor who is bound to pay while Gaya is the creditor who has the right to demand the prestation. Distinctions between Obligations and Contracts: Contract is the only one of the sources of

obligation, while obligations have other sources like law, quasi-contracts, delicts or quasidelicts; Contract is a bilateral obligation while obligation is a unilateral obligation; All contracts are obligations while not all obligations are contracts. 68. Civil obligations as distinguished from Natural obligations Civil obligations derive their binding force from positive law; Natural Obligation derives their binding effect from equity and natural justice. Civil can enforced by court action of the coercive power of public authority; Natural the fulfillment cannot be compelled by court action but depends on the good conscience of debtor. 69. ART. 1157. Obligations arise from: Law; Contracts; Quasi-contracts; Acts or omissions punished by law; and Quasi-delicts. (1089a) ART. 1158. Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions of this Book. (1090) ART. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. (1091a) 70. ART. 1160. Obligations derived from quasi-contracts shall be subject to the provisions of Chapter 1, Title XVII, of this Book. ART. 1161. Civil obligations arising from criminal offenses shall be governed by the penal laws, subject to the provisions of article 2177, and of the pertinent provisions of Chapter 2, Preliminary Title, on Human Relations, and of Title XVIII of this Book, regulating damages. (1092a) ART. 1162. Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title XVIII of this Book, and by special law. (1093a) 71. Source of Obligations LAW as a source of obligations The provisions of Art. 1158 refers to the legal obligations or obligations imposed by specific provisions of law, which means that obligations arising form law are not presumed and that to be demandable must be clearly provided for, expressly or impliedly in the law. Examples: It is the duty of the Spouses to support each other. (Art. 291, New Civil Code) And under the National Internal Revenue Code, it is the duty of every person having an income to pay taxes. 72. Source of Obligations CONTRACT as a source of obligations Contract as defined in Art. 1305, NCC is the meeting of minds between two person whereby one binds himself with respect to the other, Obligations arising from contracts have the force of law between the contracting parties because that which is agreed upon in the contract by the parties is the law between them, thus, the agreement should be complied with in good faith. (Art. 1159). For examples: A contract of lease was executed between Gaya as the lessee and Tito as the lessor for the rent of an apartment. Although contracts have the force of law, it does not mean that contract are over and above the law. Contracts are with the limitations imposed by law in Art.

1306, NCC, it states that the contracting parties may establish such stipulations, clauses terms and conditions as, they may deem convenient, provided that are not contrary to law, morals, good custom, public order or public policy. 73. Sources of Obligations QUASI-CONTRACTS as a source of obligations The quasi literally means as if. Quasi-contract is the juridical relation resulting from a lawful, voluntary and unilateral act which has for its purpose the payment of indemnity to the end that no one shall unjustly enrich or benefited at the expense of another. (Art. 2142, NCC) Contracts and quasicontracts distinguished: in a contract, consent is essential requirement for its validity while in quasi-contract, there is no consent as the same is implied by law; contract is a civil obligation while quasi-contract is a natural obligation. 74. 2 Kinds of Quasi-contracts Solutio Indebiti (Payment by mistake) It is the juridical relation which arises when a person is obliged to return something received by him through error or mistake. Example- Arvin owed Ian the sum of P1, 000.00. By mistake, Arvin paid P2, 000.00. Ian has the obligation to return the P1, 000.00 excess because there was payment by mistake. 2. Negotiorum gestio (management of anothers property) It is the voluntary management or administration by a person of the abandoned business or property of another without any authority or power from the latter. (Art. 2144, NCC) Example- Victor, a wealthy landowner suddenly left for abroad leaving his livestock farm unattended. Ramon, a neighbor of Victor managed the farm thereby incurring expenses. When Victor returns, he has the obligation to reimburse Ramon for the expenses incurred by him and to pay him for his services. It is bases on the principle that no one shall enrich himself at the expense of another. 75. Sources of Obligations DELICTS or acts or omissions punished by law as a source of obligations Acts or omission punished by law is known as Delict or Felony or Crime. While an act or omission is felonious because it is punished by law, the criminal act gives rise to civil liability as it caused damage to another. Civil liability arising from delicts: Restitution which is the restoration of or returning the object of the crime to the injured party. Reparation which is the payment by the offender of the value of the object of the crime, when such object cannot be returned to the injured party. Indemnification the consequential damages which includes the payment of other damages that may have been caused to the injures party. Illustration: Mario was convicted and sentenced to imprisonment by the Court for the crime of theft, the gold wrist watch, of Rito. In addition to whatever penalty that the Court may impose, Mario may also be ordered to return (restitution) the gold wrist watch to Rito. If restitution is no longer possible, for Mario to pay the value (reparation) of the gold wrist watch. In addition to either restitution or reparation, Mario shall also pay for damages (indemnification) suffered by Rito.

76. Sources of Obligations QUASI-DELICTS as a source of obligations Concepts of Quasi-Delict Quasi-delict is one where whoever by act or omission causes damage to another, there being fault of negligence, is obliged to pay for the damage done. Such fault of negligence, if there is no pre-existing contractual relation between the parties. (Art. 2176) Example- If Pedro drives his car negligently and because of his negligence hits Jose, who is walking on the sidewalk of the street, inflicting upon him physical injuries. Then Pedro becomes liable for damages based on quasi-delict. 77. Sources of Obligations DELICTS or acts or omissions punished by law as a source of obligations Acts or omission punished by law is known as Delict or Felony or Crime. While an act or omission is felonious because it is punished by law, the criminal act gives rise to civil liability as it caused damage to another. Civil liability arising from delicts: Restitution which is the restoration of or returning the object of the crime to the injured party. Reparation which is the payment by the offender of the value of the object of the crime, when such object cannot be returned to the injured party. 78. Requisites of a quasi-delicts - There must be fault of negligence attributable to the offended; There must be damage or injury caused to another; There is no pre-existing contract. 79. Negligence Defined is the failure to observe for the protection of the interests of another person, that degree of care, precaution and vigilance which the circumstances justly demand, whereby such other person suffers injury. (Judge Cooley) Test of Negligence For the existence of negligence, the following are necessary: a duty on a party of the defendant to protect the plaintiff from the injury of which the letter complains; a failure to perform that duty; and an injury to the plaintiff through such failure. 80. Kinds of Negligence Culpa Aquiliana, also known as quasi-delict or negligence as a source of obligation. Culpa contractual or negligence in the performance of a contract. 81. An illustration showing this difference is founding Gutierrez vs. Gutierrez , 56 Phil 177While trying to pass each other on a narrow bridge, a passenger truck and private automobile collided, and the plaintiff, a passenger in the truck, was injured. The owner of the passenger truck was made a defendant, although a driver was driving the truck and the owner of the car was also made a defendant, although he was not in the car but which was being driven by his 18 year old son and in which members of his family were then riding. The court found both drivers negligent, basing basing the liability of the owner of the truck to the plaintiff on the contract of carriage; while the liability of the owner of the car was based on Quasi-delict of the Civil Code. As against the owner of the truck, there was Culpa contractual, while as against the owner of the car there was culpa Aquiliana.

82. LESSON 2: NATURE AND EFFECT OF OBLIGATIONS ART. 1163. Every person obliged to give something is also obliged to take care of it with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care. (1904a) ART. 1664. The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him. (1905) ART. 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him by article 1170, may compel the debtor to make the delivery. 83. If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor. If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same interest, he shall be responsible for any fortuitous event until he has effected the deliver. (1906) ART. 1166. The obligation to give a determinate thing includes that of delivering all its accessions and accessories, even though they may not have been mentioned. (1097a) 84. Obligations of the Debtor To Give a determinate thing- To preserve or take care of the thing with the proper diligence of a good father of a family. It means the ordinary diligence that a prudent man would exercise in taking care of his own property taking into consideration the nature of the obligation, of the time and of the place, like a person who is obliged to deliver a determinate horse to another should, pending its delivery, preserve it by taking care of the same as if the horse is his own. 85. Obligations of the Debtor To Give a determinate thing- To deliver the object or thing when the obligation to deliver arises, including: Fruits of the thing if any. Kinds of fruits: Natural; industrial or civil. Natural - spontaneous product of the soil; the young and other products of animal. E.g. tress, plants on lands without he intervention of man. Industrial - produced by lands of any king through cultivation and labor. E.g. sugar cane, vegetables, rice. Civil - derived by virtue of juridical relations. E.g. rents of a building; prices of leases of lands and other similar income. 86. Obligations of the Debtor To Give a determinate thing- Accessions and accessories. Accession is the right pertaining to the owner of a thing over its products and whatever is attached thereto either naturally or artificially. Example- Accretion which refers to the gradual and addition of sediment to the shore by action of water. Accessories are those things which are joined attached to the principal object as ornament or to render it perfect. Example- Radio attached to a car; or key to a car. 87. Obligations of the Debtor To Give a determinate thing- To be liable for damages in case of breach of obligation (Art. 1170, NCC) When creditor acquire a right to the thing to be delivered

and its fruits- The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same have been delivered to him. (Art. 1164, NCC) Example a binds himself to sell his horse to B for fro P10, 000. No date nor condition is stipulated for delivery of the horse. Later, the horse gave birth to a colt. A has right to the colt, if B has not paid the horse. Before delivery, B does not acquire ownership over it. 88. Definition of terms: Determinate thing a thing is determinate when it is particularly designated or physically segregated from all others from the same class. (Art. 1460, NCC) Indeterminate or generic thing A thing is generic when it refers to a class or thing or genus and cannot be designated with particularity. (Art. 1460, NCC) Fortuitous Events those events which could not be foreseen or which though foreseen were inevitable. (Art. 1174, NCC) 89. Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost. This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be undone. ( 1098 ) 90. Obligation of the debtor To Do Being a personal positive obligation, The creditor has the right to secure the services of third person to perform the obligation at the expense of the debtor under the following instances: When the debtor fails to do the obligation; When the debtor performs the obligation but contrary to the tenor; or When the obligor poorly performs the obligation. 91. ART. 1168. When the obligation consists in not doing, and the obligor does has been forbidden him, it shall also be undone at his expense, (1099a) Obligation of the Debtor NOT To Do This is negative personal obligation which is consisting of an obligation, of not doing something. If the debtor does what has been forbidden him to do, the obligee can ask the debtor to have it undone. If it is impossible to undo what was done, the remedy of the injured party is for an action of damages. Example- A bought a land from B. It was stipulated that A would not construct a fence in a certain portion of his land adjoining that land sold by B. Should A construct a fence in violation of the agreement, B. can bring an action to have the fence remove at the expense of A. 92. ART. 1169. Those oblige to deliver or to do something incur in delay from the time the obligee judicially or extra - judicially demands from theme the fulfillment of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exist: ( 1 ) When the obligation or the law expressly declares; or ( 2 ) When from the nature and the circumstances of the obligation it appears that the destination of the time when the thing is to be delivered or the service is to rendered was controlling motive for the establishment of the contract; or ( 3 ) When demand would be useless, as when the obligor has rendered it beyond

his power to perform. In reciprocal obligations, neither party incurs in delay if the other does not comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. ( 1100a ) 93. Delay ( Mora ) means a legal delay or default and it consists of failure discharge a duty resulting to ones own disadvantaged. The debtor incurred delay if: The debtor fails to perform his obligation when it falls due; and A demand has been made by the creditor judicially or extra judicially. Example Gaya obliged herself to deliver a determinate horse to Tito on June 20. this year. Gaya failed to delivered on the agreed date, Is Gaya already on delay on June 20, only when Tito makes a judicial or extra-judicial demand and from such date of demand when Gaya is on default or delay. 94. However, there are instances when the demand by the Creditor is not necessary to place the debtor on delay: When the obligation expressly so provides The mere fixing of the period is not sufficient to constitute a delay. An agreement to the effect that fulfillment or performance is not made when the obligation becomes due, default or delay by the debtor will automatically arise. 95. When the law so provides The express provision of law that a debtor is in default. For instance, taxes must be paid on the date prescribed by law, and demand is not necessary in order that the taxpayer is liable for penalties. When time is of the essence Because time is the essential factor in the fulfillment of the obligation. Example, Gaya binds herself to sew the wedding gown of Maya to be used by the latter on her wedding date. Gaya did not deliver the wedding gown on the date agreed upon. Even without demand, Gaya will be in delay because time of the essence. 96. When demand would be useless When the debtor cannot comply his obligation as when it is beyond his power to perform. Like when the object of the obligation is lost or destroyed through the fault of the debtor, demand is not necessary. In a reciprocal obligation, from the moment one of the parties fulfills his obligation, delay to the other begins For instance, in a contract of sale, if the seller delivers the object to the buyer and the buyer does not pay, then delay by the buyer begins and vice versa, if the buyer pays and the seller did not deliver the object, then the seller is on delay. 97. Kinds of delay Mora solvendi delay on the part of the debtor. Mora accipiendi delay on the part of the creditor, like when the creditor unjustifiably refused to accept payment at the time it was due, is in delay. Compensatio morae delay both parties in a reciprocal obligation. 98. ART. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those whoin any manner contravene the tenor thereof, are liable for damages. (1101) ART. 1171. Responsibility arising from fraud is demandable in all obligations.

Any waiver of an action for future fraud is void. (1120a) ART. 1172. Responsibility arising from negligence in the performance of every king of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances. (1130) 99. ART. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply. If the law or contract does not state the diligence of which is to be observed in the performance, that which is expected of a good father of a family shall be required. (1104a) 100. Sources of liability for damages: Fraud (dolo) is the intentional deception made by one person resulting in the injury of another. The fraud referred to is incidental fraud , that is, fraud incident to the performance of a pre-existing obligation. Negligence (culpa) consists in the omission by the obligor of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the person, of the time and of the place. (Art. 1173, NCC) 101. Sources of liability for damages: Delay (Mora) like when there has been judicial or extrajudicial demand and the debtor does not comply his obligation, delay will occur. In contravention of the tenor of the obligation refers to the violation of the terms and conditions or defects in the performance of the obligation, like when a landlord fails to maintain a legal and peaceful possession of a tenant being leased by the latter because the landlord was not the owner and the real owner wants to occupy the land, there is contravention of the tenor of the obligation. 102. Sources of liability for damages: Delay (Mora) like when there has been judicial or extrajudicial demand and the debtor does not comply his obligation, delay will occur. In contravention of the tenor of the obligation refers to the violation of the terms and conditions or defects in the performance of the obligation, like when a landlord fails to maintain a legal and peaceful possession of a tenant being leased by the latter because the landlord was not the owner and the real owner wants to occupy the land, there is contravention of the tenor of the obligation. 103. Other sources of liability for damages Loss of the thing with the fault of debtor. Deterioration with the fault of debtor. (Art. 1189) 104. Kinds of Damages Moral damages include physical sufferings, mental anguish, fright, serious anxiety, besmirched reputation, wounded feeling, moral shock, social humiliation and similar injury. Exemplary damages imposed by way of example or correction for the public good. Like in quasi-delicts, if the defendant acted with gross negligence. (Art. 2231, NCC)

105. Kinds of Damages Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated by the defendant, may be vindicated or recognized and not for the purpose of indemnifying the plaintiff for any loss suffered by him. (Art. 2221, NCC) Temperate or moderate damages are more than nominal but less than compensatory damages may be recovered when the courts finds that its amount cannot, from the nature of the case, be proved with certainty. Pecuniary loss means loss of money, or of something by which money or something of money value may be acquired. (Black Law Dict. P. 1131) 106. Kinds of Damages Actual or compensatory damages except as provided by law, or a stipulation, one is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly proved. (Art. 2199, NCC) Damages may be recovered: For loss or impairment of earning capacity in cases of temporary or permanent personal injury; For injury, to the plaintiffs business standing or commercial credit. 107. Kinds of Damages Liquidated damages are those agreed upon by parties to a contract to be paid in case of breach thereof. (Art. 2226, NCC) 108. Distinguish Fraud (Dolo) from Negligence (culpa) Dolo there is deliberate intent to cause damage or injury. Culpa ther is no deliberate intent to cause damage. Dolo waiver of liability of future fraud is void. Culpa waiver may in some cases be allowed. Dolo fraud must be clearly proved. Culpa presumed from breach of contractual obligation. Dolo liability cannot mitigated by the courts. Culpa may be reduced according to circumstances. 109. ART. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable (1105a) 110. Fortuitous even is an event which cannot be foreseen which though foreseen is inevitable. Fortuitous event proper are acts of God such as volcanic eruption, earthquake, lightning, etc. is now similar with force majuere or acts of man such as conflagration, war, robbery, etc. Requisite necessary to constitute fortuitous event The failure of the debtor to comply with the obligation must be independent from the human will; The occurrence makes it impossible for the debtor to fulfill the obligation on a normal manner, and the obligor did not take part as to aggravate the injury of the creditor. (Vasquez v.C.A. G.R. 42926) 111. As a general rule, no person shall be held responsible for fortuitous events Example Gaya obliged herself to deliver a determine car to Tito on Dec. 30, 1998. Before the arrival of the period, the car was struck by lightning and was totally destroyed. Gaya cannot be held responsible for the destruction of the car, hence her obligation to deliver is extinguished.

112. Exceptions (when the person is responsible despite the fortuitous even). When the law expressly so provides, such as: The debtor is guilty of fraud, negligence or in contravention of the tenor of the obligation. (Art, 1170, NCC) The debtor has proved to deliver the same thing to two or more persons who do not have the same interest. ( Art. 1165,NCC ) The thing to delivered is generic. The debtor is guilty of default or delay. ( Art. 1169,NCC ) The debtor is guilty of concurrent negligence. When declared by stipulation; When the nature of obligation requires the assumption of risk. An example of this is a contract of insurance. 113. ART. 1175. Usurious transaction shall be governed by special laws. Note: C.B. Circular No. 905 suspends the ceilings in the usury law. Hence, parties can agree as to the rate of interest. Kinds of interest 1. Conventional *The rate which is agreed upon by the parties. 2. Legal Interest *The rate which is prescribed by law. 3. Lawful Interest *The rate which is agreed upon by the parties but which rate is within the rate authorized by law. 4. Usurious Interest *The rate which is in excess of the maximum rate of interest allowed by law. 114. ART. 1176. The receipt of the principal by the creditor without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid. The receipt of a later installment of a debt without reservation as to prior installments, shall likewise raise the presumption that such installments have been paid. (1110a) Presumption means the inference as to the existence of a certain fact which if not contradicted is considered as true. 115. The presumption in the above article is a disputable presumption, whereby one which can be contradicted by presenting proof to the contrary while a conclusive presumption does not admit any evidence or proof, hence, it is considered as a fact. Presumption under this article: Receipt of the principal, without reservation as to the interest, shall give rise to the presumption that the said interest has been paid. When the creditor issues a receipt of a later installment of a debt without reservation as to prior installment is presumed to have been paid. 116. ART. 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them. (1111) Rights of Creditors In order to satisfy their claims against the debtor, creditors have the following successive rights: to levy by attachment and execution upon all the property of the debtor, except such as are exempt by law from execution; to exercise all the rights and actions of the debtor, except, such as are inherently personal to him; and to ask for the rescission of the contracts made by the debtor in fraud of their rights. 117. ART. 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no stipulation to the contrary. (1112) As a rule, all rights

acquired in virtue of an obligation are transmissible, except in the following cases: When the law so provides. When the parties stipulate otherwise by agreement of parties that the rights acquired by them will not be transmitted to any other person. When the obligation is purely personal in nature. 118. LESSON 3: Kinds of Obligations Classification of Obligations: The Civil Code classifies obligations primarily into: (PU CO PE ALFA JOS DIP) Pure; Conditional; With a period; Alternative; Facultative; Joint; Solidary or several or in solidum; Divisible; Indivisible; With a penal clause. 119. Other provisions of the Civil Code, however, impliedly admit other classes of obligations, to wit: a.) Unilateral and bilateral; b.) determinate and generic; c.) legal, conventional and penal; d.) real and personal 120. Section I. Pure and Conditional Obligations ART. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once. Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects of the happening of the event. (1113) 121. Pure Obligation when the obligation contain no term or condition whatever upon which depends the fulfillment of the obligation contracted by the debtor. It is immediately demandable and there is nothing to exempt the debtor from compliance therewith. Example Gaya obliged herself to pay her loan of P1,000 to Tito on demand. Instances when obligations immediately demandable: It is a pure obligation; It is subject to a resolutory condition; It is subject to resolutory period. 122. Conditional Obligations one which is subject to a condition of one whose performance depends upon a future or uncertain events or upon past event unknown to the parties. ART. 1180. When the debtor binds himself to pay when his means permits him to do so, the obligation shall be deemed to be one with the period, subject to the provisions of article 1197.(n) Example A promissory note states that This is to acknowledge receipt of sum of One thousand Six Hundred pesos (P1, 600.00) and I am to pay my debt to Arvin as soon as possible or as soon as I have the money. It was held that the conditional obligation is void, because the collection would be impossible, the remedy of the creditor is to ask the Court to fix the period of payment, thus, it becomes an obligation with a period. 123. ART. 1181. In conditional obligations, the acquisition of rights as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition. (1114) ART. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void. If it depends

upon chance or upon the will of a third person, the obligation shall take effect in conformity with the provisions of this code. (1115) ART. 1183. Impossible conditions, those contrary to good customs or public policy and those prohibited by law shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof which is not affected by the impossible or unlawful condition shall be valid, The condition not to do an impossible thing shall be considered as not having been agreed upon. (1116a) 124. ART. 1184. The condition that some event happen at a determinate time shall extinguish the obligation as soon as the time expires or if it has become indubitable that the event will not take place. (1117) ART. 1185. The condition that some event will not happen at a determinate time shall render the obligation effective from the moment the time indicated has elapsed, or if it has become evident that the event cannot occur. I f not time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been contemplated, bearing in mind the nature of the obligation. (1118) A R T. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. (1119) 125. Kinds or classifications of condition: Suspensive and Resolutory Suspensive the happening of the condition gives rise to an obligation. Example: Maya binds herself to deliver a determinate car to Tito if he marries Gaya. The obligation is only demandable upon the happening of the condition that is, if Tito marries Gaya. The obligation is suspended and not yet demandable. Resolutory the happening of the condition extinguishes the obligation already existing. Example: Arvin binds himself to lend his only car to Ian until the latter passes the CPA Board. The obligation to lend is immediately demandable. Ians right over the car is extinguished upon his passing the CPA board. Ian is now obliged to return the car. 126. Kinds or classifications of condition: Potestative, Casual and Mixed Potestative is one the fulfillment of which depends upon the sole will of the debtor. This kind of condition is void. Example: Arvin Promise to give his only parcel of land to Maya if he decides to leave for the United States. Casual is one the fulfillment of which depends upon chance. Example: Mario agrees to give Maria a determinate car if Marias only racing horse will win the sweepstake race. Mixed is one which depends partly upon the will of third person and partly upon chance Example: Vincent promise to give Victor a new Toyota Car if Victor will be able to play with and beat Karpov in a game of chess. This is mixed condition, that is Karpov willingness to play chess with Victor and the latters winning over Karpov. 127. Kinds or classifications of condition: Possible and Impossible Impossible condition is divided into 2: Physical Impossibility the condition imposed is not capable of being performed physically. Example: Grace will give Christine a gold necklace if she swims across the Pacific Ocean. Illegal Impossibility when the condition imposed is contrary to law, good custom or public policy. Example: Contrary to law Pedro agrees to give Ernesto P100,000 if Ernesto will

kill Mario. Contrary to good custom Santos binds himself to give Maria a gold wrist watch if she will cohabit with Mr. Reyes without benefit of marriage. Contrary to public policy Maria agrees to employ Grace in her company if Grace will not join a labor union. 128. Kinds or classifications of condition: Positive and Negative: A Negative condition is one where some event will not happen at a determinate time, either a.) the time indicated has elapsed; or b.) it has become evident that the event cannot occur (Art. 1185, NCC) Example: Victor will give Jason a car if he will not marry Helen until Dec. 19, 2001, if Jason has not married Helen until Dec. 19, 2001 or if Helen has died within the prescribed time without having married to Jason, the obligation becomes demandable. If Jason married Helen within the prescribed time, the obligation of Victor is extinguished. 129. Kinds or classifications of condition: Divisible and Indivisible Divisible that part of obligation which is not affected by impossible or unlawful condition shall be valid (Art. 1183, NCC) Example- X promise to pay Y the sum of P1, 000.00 if Y furnishes X with information as to the whereabouts of Z and another sum of P2, 000.00 if Y kills Z. in the obligation, the first part (to pay P1, 000.00) is valid while the second part (P2, 000.00) is void because only the latter is affected by the condition. Express and Implied 130. ART. 1187. The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation. Nevertheless, when the obligation imposes reciprocal prestations upon the parties, the fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated. If the obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and circumstances of the obligation it should be inferred that the intention of the person constituting the same was different. In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been complied with. (1120) 131. Effects of conditional obligation to give: Once the condition is fulfilled, the effects of the conditional obligations shall retroact to the day of the constitution of the obligation and not on the date when the condition was fulfilled. Example On Jan. 1, 1999 A agreed to give B a parcel of land if he passes the May, 1999 CPA exams. If B passes the CPA exams in May, 1999, he is entitled to the land effective Jan. 1, 1999 because Bs right over the land retroacts to the date when the obligation was constituted. 132. As to the fruits and interest The effect of conditional obligation to give, as a rule, do not retroact to the date of the constitution of the obligation. The following rules shall govern: In reciprocal obligation (like a contract of sale) - the fruits and interest during the pendency of the condition shall be deemed to have been mutually compensated. Example: A agrees to sell and B

agrees to buy As parcel of land if B passes the May, 1999 CPA exams. If B passes the May, 1999 CPA Board, the obligation becomes demandable. B is entitled to all the interests that his money (with which to pay A) may earn while A is entitled to the fruits which the parcel of land may have produced during the pendency of the condition. 133. In unilateral obligation the debtor shall appropriate the fruits and interests received during the pendency of the condition unless a contrary intention appears. Example X agreed to give Y a parcel of land if Y passes the CPA Board in May, 1999 exams. Pending the happening of the condition, A is entitled to the fruits which the land may produce, A will deliver only the parcel of land if the condition is fulfilled, unless a contrary intention appears. 134. ART. 1188. The creditor may, before the fulfillment of the condition, bring the appropriate actions for the preservation of his right. The debtor may recover what during the same time he has paid by mistake in case of a suspensive condition (1121a) Preservation of Creditors Right The action for the preservation of the creditors right may have for their objectives: To prevent the loss or deterioration of the things which are the objects of the obligation by enjoining or restraining acts of alienation or destruction by the debtor himself or by third person; 135. Preservation of Creditors Right To prevent concealment of the debtors properties which constitute the guaranty in case of non-performance of the obligation; To demand security if the debtor becomes insolvent; To compel the acknowledgement of the debtors signature on a private document or the execution of proper public document for registration so as to affect third person. 136. Preservation of Creditors Right To register the deeds of sale or mortgages; To set aside fraudulent alienation made by the debtor; To interrupt the period of prescription by actions against adverse possessors of the things which are objects of the obligation. (Lawyers journal, 1951, p. 47) 137. Paragraph I of the above article authorizes the creditor to take any appropriate actions for the preservation of creditors right during the pendency of the condition: Example: On Jan. 1, 1999, Raul obliged himself to sell a parcel of land to Dennis if he passes the CPA exams in October, 1999. From the time the obligation was constituted and pending the happening of the condition (passing the CPA Exams) Dennis may cause the annotation of the condition in the certificate of title in the Register of Deeds where the land is located, to preserve his right over the parcel of land. 138. Paragraph II in order that debtor may recover what he has paid by mistake, during the pendency of the condition, the following requisites may be present: The debtor paid the creditor before the fulfillment of the condition; Payment made by debtor was through mistake and error; The action to recover what was paid by mistake should be made before the

fulfillment of the condition. Example Pedro obliged himself to pay Santos P20, 000 if a PAL plane crashes at Cebu before Dec. 30, 1998. After the obligation was constituted and before Dec. 30, 1998, a plane crushed in Cebu. Pedro honestly and believing that the condition was fulfilled paid the P20, 000 to Santos. It turned out however that it was a Cebu airline that crushed. Thus, Pedro may recover the amount paid to Santos by mistake for the reason that the condition has not yet been fulfilled. 139. ART. 1189. When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the pendency of the condition: If the thing is lost without the fault of the debtor, the obligation shall be extinguished. If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood that the 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; When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor; If it deteriorates through the fault of the debtor; the creditor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case; If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor; If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary. 140. These rules apply only to obligation to give a determinate or specific thing subject to a suspensive condition in case of loss, deterioration or improvement of the thing. In case of loss of the thing If the thing is lost without the fault of the debtor, the obligation shall be extinguished. Example Reyes obliged himself to give Santos a determinate car if he passes the CPA Exams in Oct. the current year. If during the pendency of the condition the car was lost through fortuitous event without the fault of Reyes, the obligation to deliver the car is extinguished even if the condition is fulfilled later. If the thing is lost through the fault of the debtor, he shall be obliged to pay damages. If in the example above, the specific car was lost through the fault of Reyes, he shall be liable for damages upon the fulfillment of the condition. 141. It is understood that the thing is lost: When it perishes (as when a house is burnt to ashes) When it goes out of commerce (as when the object before is unprohibited becomes prohibited) When disappears in such a way that its existence is unknown (as when a particular car has been missing for some time) When it disappears in such a way that it cannot be recovered (as when a particular diamond ring is dropped in the middle of the Atlantic Ocean). 142. When the thing deteriorates - When the thing deteriorates during the pendency of the condition, without the fault of the debtor, the impairment is to be borne by the creditor. Example Arvin obliged himself to give Ian a determinate Toyota car if Ian passes the October CPA Exams. During the pendency of the condition, the car was partially damaged by flood,

without the fault on the part of Arvin. If the condition is fulfilled, Ian will bear the impairment. If the thing deteriorates, during the pendency of the condition, through the fault of the debtor, the creditor may choose, after the fulfillment of the condition, between the rescission of the obligation or its fulfillment, with indemnity for damages in either case. 143. When the thing improved If the thing improved during the pendency of the condition, by its nature, or by time, the improvement shall inure to the benefit of the creditor. The reason for this is to compensate the creditor who would suffer in case, instead of improvement, there would be deterioration without the fault of the debtor. If the thing is improved at the expense of the debtor, he have no other right than that granted to the usufructuary. By us usufruct is meant the right to enjoy the property of another which includes the right to enjoy and use the fruits of the property. 144. ART. 1190. When the conditions have for their purpose the extinguishment of an obligation to give, the parties, upon the fulfillment of said conditions, shall return to each other what they have received. In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor , are laid down to the preceding article shall be applied to the party who is bound to return. As for obligations to do or not to do, the provisions of the second paragraph of article 1187 shall be observed as regards the effect of the extinguishment of the obligation. (1123) 145. Effects When Resolutory Condition is fulfilled The obligation is extinguished. (Art. 1181, NCC) Because the obligation is extinguished and considered to have had no effect, the parties should restore to each other what they have received. The fruits and interests thereon should also be returned after deducting of course the expenses made for the production, gathering and preservation, if any. The rules given in Art. 1189, N CC will apply to whoever has the duty to return in case of loss, deterioration or improvement of the thing. The courts are given power to determine the retroactivity of the fulfillment of a resolutory conditions. Example : A gave B a parcel of land on condition that B will pass the CPA Exams on May, this year. B did not pass the CPA Exams. The obligation is extinguished and therefore, it is as if there was never an obligation at all. B will therefore have to return both the land and the fruits he had received there from the moment A has given him the land. 146. ART. 1191. The power to rescind obligatios is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the later should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of

third persons who have acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law. 147. Right to Rescind The right to rescind means the right to cancel or to resolve in case of reciprocal obligation in case of non-fulfillment on the part of one. Example: In a contract of sale, the buyer can rescind if the seller does not deliver or te seller can rescind if the buyer does not pay. The power to rescind is given to the injured party and the injured party has the following alternative remedies: Demand fulfillment of the obligation plus damages; or Demand rescission of the obligation plus damages. 148. ART. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. Rules if Both Parties Have Committed a Breach The above rules are deemed just. The first one is fair to both parties because the second infract or, though they would derive some advantage by his own act or neglect. The second rule is likewise just, because it is presumed that both parties at about the same time tried to reap some benefits. (Report of the Code Commission) 149. Section 2 - Obligations with a period ` ART. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day comes. Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain. A day certain is understood to be that which must necessarily come, although it may not be known when. If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it shall be regulated by the rules of the preceding Section. 150. Period Defined A period is a future and certain length of time which determines the effectivity or the extinguished of obligation. Obligation with a period is one whose consequences are subject in one way or another to the expiration of said period or term. (8Manresal58) A day certain is understood to be that which must necessarily come, although it may not be known when. 151. Period and Condition Distinguished: As to fulfillment - A period is a certain event which must happen sooner or later while a condition is an uncertain event. As to time a period refers only to the future while a condition may refer to a past unknown event. As to influence or effect on the obligation the period fixes the time of the effectivity of the obligation while a condition may cause the demandability of the obligation to arise or to terminate. 152. ART. 1194. In case of loss, deterioration or improvement of the thing before the arrival of the day certain, the rules in article 1189 shall be observed. (n) Effect of loss, deterioration, or improvement before the arrival of period. Note the cross reference to Art. 1189, NCC. Example:

If A is suppose to deliver to B a particular car on Dec. 19, 1999 by the car was destroyed by fortuitous event in July 1, 1999, the obligation is extinguished. 153. ART. 1195. Anything paid or delivered before the arrival of the period, the obligor being unaware of the period or believing that the obligation has become de and demandable, may be recovered, with the fruits and interests. (1126a) Effect Of Payment Before Arrival of Period This article which is similar to Article 1188, NCC, in an obligation to give, allows the recovery of what has been paid by mistake before the fulfillment of a suspensive condition. Example - E owes G P20, 000.00, which was supposed to be paid on December 25 this year. By mistake, E paid his obligation on December 25 last year. Assuming that today is only June 30, E can recover the amount plus interest therein. But E cannot recover, except he interest, if the debt had already matured or if E had knowledge of the period. 154. ART. 1196. Whenever in an obligation a period is designated, it is presumed to have been established for the benefit of both the creditor and the debtor, unless from the tenor of the same or other circumstances it should appear that the period has been established in favor of one or of the other. (1127) Presumption As to Benefit Of A Period The general rule is that when a period is fixed by the parties , the period is presumed to be for the benefit of both creditor and debtor. Which means that before the expiration of the period, the debtor may not fulfill the obligation and neither the creditor demand its fulfillment. 155. By way of exceptions, however, if the tenor of the obligation or other circumstances may indicate that a period is have been established for the benefit of either the creditor or debtor: For the benefit of both creditor and debtor Example Gaya obtained a loan of P10, 000 at 12% interest per annum from Tito for one year. Gaya has a period of one year within which to use the money, while Tito will benefit from the interest which the money will earn. For the benefit of the creditor Example - Gaya executes a promissory note in favor of Tito which reads: I promise to pay Tito or order the amount of P10, 000 on demand. Thus, Tito can demand payment from Gaya anytime. For the benefit of debtor Example Gaya executes a promissory note which reads: I promise to pay Tito r order the amount of P 10,000 or before December 31, 2001. Gaya can pay her obligation on or before Dec. 31, 2001. 156. ART. 1197. If the obligation does not fix a period, but from its nature and circumstances it can be inferred that a period was intended, the courts may fix the duration thereof. The courts shall also fix the duration of the period when it depends upon the will of the debtor. In every case, the courts shall determine such period as may under the circumstance have been probably contemplated by the parties. Once by the courts, the period cannot be changed by them. (1128 a) Court Generally is Without Power to Fix a Period If an obligation does not state a judicial period and no period is intended, the court is not authorized to fix a period. The courts have no right to make contracts for the parties.

157. Exceptions to the general rule If the obligation does not fix a period but it can be inferred from its nature and circumstances that a period is intended. Example: S sold a parcel of land to B with a right of repurchase. No term is specified in the contract for the exercise of the right. Then, the court is authorized to fix the period to repurchase. If the duration of the period depends upon the sole will of the debtor Example: I will pay you as soon as possible. Here , the period is not fixed, so the court may fix the same because if this is not so the obligation may never be complied with by the debtor. 158. ART. 1198. The debtor shall lose every right to make use of the period: When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the debt; When he does not furnish to the creditor the guaranties or securities which he has promised ; When by his own acts he has impaired said guaranties or securities after their establishment, and when through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory; When the debtor violates any undertaking, in consideration of which the creditor agreed to the period; When the debtor attempts to abscond. (1129a) 159. When Debtor Loses The Right to Make Use Of A Period The general rule is that the obligation is not demandable before the lapse of the period. The exceptions are based on the fact that the debtor might not be able to comply with his obligation: When debtor becomes insolvent: The insolvency need not be judicially declared. It is sufficient that the debtor has less assets than his liabilities or if debtor is unable to pay his debts as they mature. It is noted that the insolvency of the debtor must occur after the obligation has been contracted. 160. When Debtor Loses The Right to Make Use Of A Period When debtor does not furnish guaranties or securities promised: Example: Gaya borrowed loan from Tito which loan was secured by a chattel mortgage of Gayas car as a guaranty. After obtaining the loan, Gaya fails or does not execute a chattel mortgage, the loan becomes demandable or the debtor loses her right to make use of the period. When by his own acts he has impaired said guaranties or securities: Example: Gaya borrowed P50, 000 from Tito which loan was secured by a chattel mortgage on Gaya s car. Later, Gayas fault, the car was damaged or she causes the impairment of the car, Gaya loses her right to make use of the period, unless she gives another one equally satisfactory. 161. When Debtor Loses The Right to Make Use Of A Period When by fortuitous event, the guaranty or security was lost. Example: Gaya borrowed P50, 000 from Tito which loan was secured by a chattel mortgage on Gayas car. After obtaining the loan, the car was lost by fortuitous event. Gaya loss her right to male use of the period unless she gives another guaranty or security equally satisfactory. When debtor violates an undertaking Example: Art secured a loan from Arnold on condition that Art will paint the house of Arnold. If after the proceeds of the loan was given to Art, he did not pant the house of Arnold, Art loses his right to

make use of the period. When the debtor attempts to abscond. Abscond means a depart or escape from creditors knowledge to avoid payment of his debt. Mere attempt on the part of debtor will entitle the creditor to demand payment of the obligation without waiting for the period to expire. 162. Section 3. Alternative and Facultative obligations ART. 1199. A person alternatively bound by different prestations shall completely perform one of them. The creditor cannot be compelled to receive part of one and part of the other undertaking. (1131) Meaning of Alternative Obligation It means an obligation where two or more prestations are due but the delivery of one is sufficient to extinguish the obligation. Example: Gaya binds herself to give Tito either a determinate refrigerator or a TV set. If Gaya chooses and delivers the TV set, the obligation is extinguished. Thus, Gaya cannot compel Tito to accept part of one and the part of the other prestations. 163. ART. 1200. The right of choice belongs to the debtor, unless it has been expressly granted to the creditor. The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not have been the object of the obligation. 164. Rule on Who Makes the Choice As a general rule, the right of choice or to select the prestation belongs to the debtor, unless the right to choose is expressly granted to the creditor. But the right of the debtor is subject to the following: The debtor cannot choose those prestations which are: Impossible E.g.- Gaya promised to deliver to Tito 100 sacks of rice or a stone from Mars. Gaya cannot chose to deliver the stone coming from Mars as it is physically impossible. Unlawful E.g. Gaya obliged herself to deliver to Tito a kilo of dangerous drug or a parcel of land. Gaya can choose only the delivery of parcel of land. Could not have been the object of the obligation - E.g. Gaya borrowed from Tito P50, 000. It was agreed that Gaya would give Tito her horse or her German Piano. Now, Gaya has two horses, a race horse worth P50, 000 and an ordinary horse which is worth for only P5, 000. Gaya cannot choose Only one prestation is practicable (Art. 1202) E.g. Gaya will deliver to Tito her carabao, or her horse or her refrigerator. Through no fault of Gaya, the horse and the carabao were lost by fortuitous event. Gaya can only delivery the refrigerator which is the only one practicable. 165. ART. 1201. The choice shall produce no effect except from the time it has been communicated. (1133) Right of Choice Must be Communicated Until the choice is made and communicated, the communicated, the obligation remains alternative. Once the notice to the effect that a choice is made, the obligation ceases to be alternative and becomes a simple obligation. Where the choice has been expressly given to the creditor, such choice shall likewise produce legal effects upon being communicated to the debtor. (Art. 1205, par. 1)

166. ART. 1202. The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only one is practicable. ART. 1203. If Through The creditors acts the debtor cannot make a choice according to the terms of the obligation, the latter may rescind the contract with damages. When debtor may rescind contract If through the creditors fault, the debtor cannot made a choice according to the terms of the obligation the debtor is given the right to rescind and recover damages. Example: Gaya borrowed from Tito P5, 000.00. it was agreed that instead of P5, 000, Gaya could deliver a TV set or a refrigerator or a piano. If through the fault of Tito, the TV set was destroyed, Gaya can rescind the contract if she wants. In case of rescission, the amount of P 5, 000.00 must be returned by Gaya with interest. Tito, in turn, must pay Gaya the value of the TV set plus damages. 167. ART. 1204. The creditor shall have a right to indemnity for damages when, through the fault of the debtor, all the things which are alternatively the object of the obligation have been lost, or the compliance of the obligation has become impossible. The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, or that of the service which last became impossible. Damages other than the value of the last thing or service may also be awarded. (1135a) When right of choice is with debtor and all prestations were lost This article entitles the creditor to indemnity for damages when all the alternative objects are lost through the fault of the debtor before he has made his choice. The indemnity for which the creditor is entitled shall be based on the value of the last thing which disappeared or lost or the compliance of the obligation has become impossible. 168. ART. 1205. When the choice has been expressly given to the creditor, the obligation shall cease to be alternative from the day when the selection has been communicated to the debtor. Until then the responsibility of the debtor shall be governed by the following rules If one of the things is lost through a fortuitous event, he shall perform the obligation by delivering that which the creditor should choose from among the remainder, or that which remains if only one subsists; If the loss of one of the things occurs through the fault of the debtor, the creditor may claim any of those subsisting, or the price of that which, through the fault of the former, has disappeared, with a right to damages If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the price of any one of them, also with indemnity for damages. 169. The same rules shall be applied to obligations to do or not to do in case one. Some or all of the prestations should become impossible. (1136a) When Right of Choice is With Creditor and All Prestations Were Lost This article provides for the rules to be observed when the right of choice is expressly granted to the creditor, the rules are as follows: When a thing is los through a fortuitous event Example Gaya obliged herself to deliver to Tito a TV set, or a refrigerator, or a

piano. If the TV set was lost through fortuitous event, Tito can choose from among the remainder or that which remains if only one subsists. 170. When a thing is lost through debtors fault Example: If the loss of the TV set occurs through the fault of Gaya, Tito may claim the refrigerator or the piano with a right of damages or the price of the TV set with a right of damages. When all the things were lost through debtors fault Example: If all the items are lost through the fault of Gaya, then Tito can demand the payment of the price of any one of them with a right to indemnity for damages. When all the thing are lost through a fortuitous event Example: The obligation of Gaya shall be extinguished if all the items which are alternatively the object of the obligation are lost through a fortuitous event (Art. 1174 will apply). 171. ART. 1206. When only one prestation has been agreed upon, but the obligor may render another in substitution, the obligation is called facultative. The loss or deterioration of the thing intended as a substitute, through the negligence of the obligor, does not render him liable. But once the substitution has been made, the obligor is liable for the loss of the substitute on account of his delay, negligence or fraud. Meaning of Facultative Obligation A facultative obligation is one where only one prestation has been agreed upon but the obligor may render another in substitution. Example: I will give you my piano but I may give my television set as a substitute. 172. Alternative and Facultative Distinguished As to choice In facultative the right for substitution is given only to the debtor in Alternative the choice may be given either to the debtor or to the creditor; As to things due In facultative only the principal obligation is due by may substitute another; in alternative, there are several things due but the delivery of one is sufficient; As to validity or nullity In facultative if the principal thing is unlawful or impossible, there is no need of delivering the substitute in alternative if one of the thing is unlawful or impossible, there is still a need to deliver any of those which remain valid or the only remaining one is valid. 173. Section 4 Joint and Solidary Obligations ART. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestation. There is a solidary liability only when the obligation requires solidarity. (1137a) ART. 1208. If from the law, or the nature or the wording of the obligations to which the preceding article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits. (1138a)

174. Joint Obligation It is an obligation where there is a concurrence of two or more debtors or two or more creditors or of several debtors and creditors, by virtue of which each of the debtors is liable for a proportionate part of the credit. Example of different instances A, B, and C borrowed P9, 000 for D. The presumption is that A, B and C are jointly liable. D can demand only P3, 000 from each or a total of P9, 000. A borrowed from B, C and D P9, 000. There is one debtor and three creditors. Each creditor can demand only P3, 000 from A. A and B are liable to C and D for P9, 000. There are two debtors and two creditors. Each creditor can demand only P4, 500 from each debtor. 175. SOLIDARY OBLIGATION There are solidary liability when The obligation expressly so states, or The law requires solidarity or The nature of the obligation requires solidarity. 176. Kinds of Solidary Obligation Passive solidarity on the part of the debtors, where anyone of them can be made liable for the fulfillment of the entire obligation. Example A and B are solidary debtors of C in the amount of P 10, 000 Active solidarity on the part of the creditors, where anyone of them can demand the fulfillment of the entire obligation. Example A is liable to B and C for the amount of P10, 000. B and C are solidary creditors. Mixed Solidarity solidarity on the part of the debtors and creditors where each one of the debtors is liable to render and each one of the creditors has a right to demand, entire compliance with the obligation. Example A and B are solidarity debtors to C and D, solidary creditors in the amount of P 10, 000. 177. Solidarity not presumed The presumption, where there are two or more persons in the same obligation, is that it is joint. The reason is that solidary obligations are very burdensome for they create unusual rights and liabilities. Solidarity between debtors increases their responsibility while solidarity between creditors presuming that they are bound jointly and not solidarily. ART. 1209. If the division is impossible, the right of the creditors may be prejudiced only by their collective acts, and the debt can be enforced only by proceeding against all the debtors. If one of the latter should be insolvent, the others shall not be liable for his share. Indivisible Joint Obligation The object is indivisible and the T/E between the parties are merely proportionately liable. Example A and B are jointly liable to give C a particular car. The obligation is joint but since the object is indivisible, the creditor must proceed against al the joint debtor. If any of the joint debtors be insolvent, the others shall not be liable for others. 178. ART. 1210. The indivisibility of an obligation does not necessarily give rise t solidarity. Nor does solidarity of itself imply indivisibility. (n) Indivisibility as Distinguished from Solidarity Indivisibility refers to the subject matter while solidarity refers to the Tie between the parties. Examples: Joint divisible obligation A and B are jointly liable to C for P10, 000. Joint indivisible obligation A and B are jointly liable to give C their car. Solidary divisible obligation A and B

are solidarily liable to give C P10, 000. Solidary indivisible obligation A and B are solidarily liable to give C their car. 179. ART. 1211. Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions. The solidary character of the obligation is not destroyed even if the creditors and debtors are bound by different terms and conditions. The solidarity is still preserved by recognizing in the creditor the power of claiming from any or all debtors the payment of the entire obligation. Example: A and B solidarily bound themselves to pay a total of P10, 000 to C, and D and E to the following conditions. Cs share will be due at the end of the year; D will get his share only after he passes the CPA exams and E will get his share only after he painted the house of C. 180. ART. 1212. Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudicial to the latter. (1141a) ART. 1213. A solidary creditor cannot assign his rights without the consent of the others. Solidary Creditors May Do Useful Act; Not Prejudicial Acts A solidary creditor may do any act beneficial or useful to the others but he cannot act prejudicial to them. Example of Beneficial Acts To interrupt the running of prescription, the act of one solidary creditor in making a judicial demand upon any of the solidary debtors is sufficient. (Art. 1155, NCC) Example of Prejudicial Acts Should not be performed, otherwise, there will be liability for damages. However, in the case of remission or condonation, the solidary creditor is allowed to so remit, and the obligation is extinguished. 181. Art. 1214. The debtor may pay any one of the solidary creditors but if any demand, judicial or extrajudicial, has been made by one of them, payment should be made to him. Payment to Any of the Solidary Creditors The rule is that the debtor may pay any one of the creditors. But when a demand is made by any of the creditors, payment should be made to him who made the demand, judicially or extra-judicially. Example A is liable to B and C P5, 000. A may pay either B or C But if B made a demand then payment should only be made to him. If A paid C, B is still entitled to his share from A in case C does not turn over to B his share. 182. ART. 1215. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of article 1219. The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the others for the share in the obligation corresponding to them. Liability of Solidary Creditor in case of Novation, Compensation, Confusion or Remission When a creditor who executed any of these acts, it is logical that he is liable to the other solidary creditors for their corresponding shares considering that such acts are prejudicial to them. (Art. 1212, NCC)

183. ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected. (1144a) Creditor May Proceed Against Any Solidary Debtor In a solidary obligation, the creditor may proceed against any, some or all of the solitary creditors simultaneously so long as it has not been fully collected. Example A, B and C solidarily owe D the amount of P9, 000. D can collect from A or B or C alone or from any two of them or all of them simultaneously. If demand is made on A, the latter cannot require D to make a demand also on B and C or to include them as party defendants as D has the right to proceed against any one of them. 184. ART. 1217. Payment made by one of the soldiery debtors extinguishes the obligation. If two or more solidary debtors offer to pay the creditor may choose which offer to accept. He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded. When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the debt to each. (1145a) 185. Effects of Payment by a Solidary Debtor Payment is one of the ways by which an obligation is extinguished and consist in the delivery of the thing or the rendition of the service which is the object of the obligation. Example A, B and C are solidarily liable to D and E in the amount of P9, 000 due on Dec. 31. If both A and B offer to pay D on Dec. 31, the latter may choose which offer to accept. If A pays the entire amount of P9, 000 on Dec. 31, the obligation is extinguished. The payment of A gives him the right of reimbursement from B and C P3, 000 each with interest from the date of payment. However, if C is insolvent, both A and B shall bear the insolvency in proportion to their shares. 186. ART. 1218. Payment by a solidary debtor shall not entitle in to reimbursement from his codebtors if such payment is made after the obligation has prescribed or become illegal. (n) Effect of Payment After Obligation Has Prescribed or Become Illegal Prescription is one where one acquires ownership and other rights through the lapse of time in the manner and under the conditions laid down by law. Example A and B are solidarily indebted to C in the amount of P 10, 000. The debt prescribed. If A paid the debt, he cannot collect form B his share of the debt. Neither can A can recover from C. Becomes Illegal A and B are solidarily bound to deliver medical drugs to C. the transaction of such medical drugs were later prohibited by law. Notwithstanding the prohibition, B performed the obligation by delivering the prohibited drugs. B is not anymore entitled to reimbursement from A.

187. ART. 1219. The remission made by the creditor of the share which affects one of the solidary debtors does not release the latter from his responsibility towards the co-debtors, in case the debt had been totally paid by anyone of them before the remission was effected. (1146a) ART. 1220. The remission of the whole obligation obtained by one of the solidary debtors, does not entitle him to reimbursement from his co-debtors. Remission by Creditor If payment if made first, the remission is of no effect. There is no more to remit. If remission is made prior to the payment and payment is made, then there is payment by mistake. If one of the solidary debtors obtained remission on the whole obligation, he is not entitled to reimbursement from his co-debtors because remission is essentially gratuitous. 188. ART. 1221. If the thing has been lost or if the prestation has become impossible without the fault of the solidary debtors, the obligation shall be extinguished. If there was fault on the part of any one of them, all shall be responsible to the creditor, for the price and the payment of damages and interest, without prejudice to their action against the guilty or negligent debtor. If through a fortuitous event, the thing is lost or the performance has become impossible after one of the solidary debtors has incurred in delay through the judicial or extrajudicial demand upon him by the creditor, the provisions of the preceding paragraph shall apply. (1147a) 189. Rules in Case thing has Been Lost or Prestation Has Become Impossible If the thing is lost or has become impossible to perform through a fortuitous event without the fault of the debtor, the obligation is extinguished. Example: A, B and C are solidarily bound to deliver a determinate car to D. Without any fault on the part of any one of the debtors, the car was lost through the fortuitous event. The obligation is extinguished. 190. Rules in Case thing has Been Lost or Prestation Has Become Impossible If in the preceding paragraph, the car was lost through the fault of anyone of the solidary debtors, anyone of them may be held liable by D for the price of the car plus damages. The debtors who did not any fault on the lost of the car have the right to recover from the co-debtor who is at fault. The solidary debtors are likewise liable even if the thing is lost through fortuitous event if the loss occurs after anyone of the solidary debtors has been in delay. The debtors, however who were not in delay have the right to recover from their co-debtors who was responsible due to his delay. 191. ART. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible.

192. Defenses available to a Solidary Debtor The defenses available to the solidary debtors if the creditor proceeds against him alone for the payment of the entire obligation The defenses derived from the nature of the obligation, such as fraud prescription, remission illegality or absence of consideration, payment or performance. Example A and B are solidarily liable to C in the among to P6, 000. The entire debt was paid by d. in an action by C against A, the latter can raise the defense of payment by virtue of which the obligation was extinguished. 193. Defenses available to a Solidary Debtor Defenses personal to him or pertaining to his own share, such as minority, insanity and vitiated consent. Defenses which are personal to others, such as minority, insanity and vitiated consent. 194. Section 5 Divisible and Indivisible Obligations] ART. 1223. The divisibility or indivisibility of the things that are the object of obligations in which there is only one debtor and only one creditor does not alter or modify the provisions of Chapter 2 of this title. (1149) 195. Definition of Terms A divisible obligation is one the object of which in its delivery or performance is capable of partial fulfillment. Example: A agreed to pay B P10, 000 in five monthly installment. The obligation of A is divisible because it is payable in partial payments. An indivisible obligation is one the object which in its delivery or performance is not capable of partial fulfillment. Example: A agreed to deliver a determinate car to B on Dec. 31. This is an indivisible obligation because it is not subject to partial performance. 196. ART. 1224. A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does not comply with his undertaking. The debtors who may been ready to fulfill their promises shall not contribute to the indemnity beyond the corresponding portion of the price of the thing or of the value of the service in which the obligation consist. (1150) ART. 1225. For the purposes of the preceding articles, obligation to give definite things and those which are not susceptible of partial performance shall be deemed to be indivisible. 197. When the obligation has for its object the execution of a certain number of days of work, the accomplishment of work by metrical units, or analogous things which by their nature are susceptible of partial performance, it shall be indivisible. However, even though the object or service may be physically divisible, and obligation is Indivisible if so provided by law or intended by the parties. In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each particular case. (1151a) 198. Obligations Deemed Indivisible The general rule of determining the divisibility or indivisibility of an obligation depend on the purpose of the obligation. Obligation to give definite things Example: To give a particular house. Here the obligation is indivisible because of the nature of the subject matter. Obligations which are not susceptible of partial performance

Example: A is obliged to sing a song. Here the obligation is indivisible by reason its purpose which requires the performance of all the parts. 199. Obligations Deemed Indivisible Obligation provided by law to be indivisible even if thing or service physically divisible. Example: Taxes should be paid within a definite period. Although money is physically divisible, the amount of tax payable must be delivered in Toto, not partially. Obligations intended by the parties to be indivisible even if thing or service is physically divisible. Example: The obligation of A to give P10, 000 to B on a certain date. Money is physically divisible by the clear intention ere for A to deliver the amount at on time and as a whole. 200. Obligations Deemed Divisible Obligations which have for their object the execution of a certain number of days of work. Example A obliged himself to paint the house of B to be finished in 10 days. The obligation is divisible because it will not be finished in one time. Obligations which have for their object the accomplishment of work by metrical units. Example: A obliged himself to deliver 25 cubic meter of sand. Obligations which by their nature are susceptible of partial performance Example The obligation of A to pay a debt of P10, 000 to B in ten (10) monthly installments. 201. Section 6 Obligations with a Penal Code ART. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in accordance with the provisions of this Code. (1152a) Meaning of Penal Clause An obligation with a penal clause is one which contains an accessory undertaking to pay a previously stipulated indemnity incase of breach. It is attached to obligations in order to insure their performance. 202. Purpose of a Penal Clause To insure the performance of the obligation. To substitute for indemnity for damages and the payment of interest in case of non-compliance of the principal obligation. To penalize the obligor in case of breach of the principal obligation. 203. ART. 1227. The debtor cannot exempt himself from the performance of the obligation by paying the penalty, save in the case where this right has been expressly reserved for him. Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless this right has been clearly granted him. However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become impossible without his fault, the penalty may be enforced. (1153a) Debtor Cannot Substitute Penalty For the Principal Obligation The general rule is that the debtor is not allowed to just pay the penalty instead of fulfilling the obligation. He can do so if the right

has been expressly reserved. The reason is that if he can just pay, fulfillment of the obligation will be considered an alternative one. The word expressly means that any implied reservation is not allowed. 204. ART. 1228. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded. ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (1154a) 205. When Penalty May be Reduced by the Court When the obligation has been partly complied with by the debtor; When the obligation has been irregularly complied with by the debtor When the penalty is iniquitous or unconscionable, even if there has been no performance at all. 206. ART. 1230. The nullity of the penal clause does not carry with it that of the principal obligation. The nullity of the principal obligation carries with it the penal clause. (1155) Effect of Nullity of Penal Clause The general principle that the accessory follows the principal. If only the penal clause is void, the principal obligation remains valid and demandable. The penal clause may be disregarded. Example: A agreed to sell merchandise to B. it is provided in their agreement that in case of default, A will deliver a prohibited drug as penalty. Here, the obligation to sell merchandise is valid by the penalty to deliver the prohibited drug is void. For failure of A to comply with the obligation, B may recover damages 207. Meaning of Loss Of The Thing Due It means that he ting which constitutes the object of the obligation perishes or goes out of commerce or disappears. In such a way that its existence is unknown or it cannot be recovered. The general rule is that if the thing to be delivered is determinate and it is lost without the fault of the debtor or is lost through fortuitous even pending delivery, th obligation is extinguished and the debtor cannot be held liable. 208. The exceptions to this rule are: 1. by stipulation or agreement of the parties; 2. by provision of law; 3. when the nature of the obligation requires the assumption of risk; 4. when the thing to be delivered is generic or indeterminate. 5. if the debtor is at fault; 6. when the debt or a thing certain and determinate proceeds from a crime. 7. when the debtor has promised to deliver the same thing to two or more pesons who do not have the same interest. 209. Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. Art. 1264. The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation. Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault, unless there is

proof to the contrary, and without prejudice to the provisions of article 1165. This presumption does not apply in case of earthquake, flood, storm, or other natural calamity. (1183a) 210. Thing Lost In Possession Of Debtor If the thing is lost while in the possession of the debtor, the law presumes that he ting was lost through his fault. The presumption of fault, however, does not apply when the ting is lost due to earthquake, flood or other natural calamities. 211. becomes legally or physically impossible without the fault of the obligor. (1184a) Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. (n) Art. 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it. (1185) 212. Effect Of Obligation Arising From Felony Obligation arising from felony or crime or if a person who was convicted of the crime like of theft , was ordered by the court to return the object to its owner is liable for the payment of its value if such object is lost through whatever case. The only exception to this rules when the person who should receive the object unjustifiably refused to accept it and the object is subsequently lost due ot fortuitous event, in which case the obligation is extinguished. 213. Art. 1269. The obligation having been extinguished by the loss of the thing, the creditor shall have all the rights of action which the debtor may have against third persons by reason of the loss. (1186) 214. When Creditor Acquires Debtors Right Of Action By reason of the loss of the thing, the creditor acquire all the rights of actions which a debtor may have against at third person. 215. SECTION 3. - Condonation or Remission of the Debt Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly. One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation. (1187) 216. Condonation or Remission Defined Remission is an act of liberality by which the obligee, without receiving any price or equivalent, renounces the enforcement of the obligation, as a result his right against the debtor. (4 Sanchez Roman 422) 217. Requisites of Condonations OR Remissions it must be gratuitous; it must be accepted by the debtor; the parties must have capacity; must not be inofficious; and if made expressly, it must comply with the forms

218. Effect of inofficious Remission While a person may make donations, no one can give more than that which he can give by a testamentary will, otherwise, the excess shall be inofficious and shall be reduced by the Court accordingly. Like for example, a part of the testators property called legitimate cannot be disposed of because the law has reserved it from certain heirs called the compulsory heirs. 219. ART. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action which the former had against the latter. If in order to nullify the waiver it should be claimed to be inofficious, the debtor and his heirs may uphold it by proving that the delivery of the document was made in virtue of payment of the debt. (1188) ART. 1271. Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved. (1189) 220. Presumption In Case Document Found In the Possession Of Debtor If the document is found in the hands of the debtor and it is not known how he came into possession of the same, the presumption is that there was payment by virtue of the payment of the debt. Or it was voluntarily delivered to the debtor, which gives rise to the remission of the obligation. Example, Gaya owes Tito P10, 000 evidenced by a promissory note. The note as signed by Gaya was given to Tito. If the promissory note is voluntarily delivered to Gaya, the presumption is that the debt must have been paid by Gaya. it is known that Gaya has not yet paid Tito, it must be presumed that the obligation has been remitted. Suppose it is not known how Gaya came into possession of the promissory note, the presumption is that it was voluntarily delivered by Tito unless Tito proves to the contrary. 221. ART. 1273. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in forc. (1190). Of Effect Renunciation Of the Principal Debt The above provision follows the rule that the accessory follows the principal. The accessory cannot exist without the principal obligation. Example, Arvin owes Tito P10, 000 with Gaya as guarantor. The principal debt here is the P10, 000 while the accessory obligation is the guaranty of Gaya. The remission of the debt of Arvin by Tito extinguishes the guaranty of Gaya. But if only the guaranty of Gaya is condoned, the obligation of Arvin shall remain in force. 222. ART. 1274. It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing. (1191a) Pledged, Defined Pledged is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable or instrument evidencing incorporeal rights for the purpose of securing the fulfillment of a principal obligation

with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions. 223. Presumption In case Thing in Possession of Debtor If the thing pledged is found in the hands of debtor or the third person, only the accessory obligation of pledge is presumed remitted, not the obligation itself . Section 4. Confusion or Merger of Rights ART. 1275. The obligation is extinguished from the time the characters or creditor and debtor are merged in the same person. (1192a) 224. Meaning of Confusion or Merger Confusion is the meeting in one person of the qualities of creditor and debtor with respect to the same obligation. (4Sanchez Roman 421) 225. Requisites of A Valid Confusion 1. the merger of the qualities of creditor and debtor must be in the same person; 2. it must take place in the person of either the principal debtor and principal creditor; and 3. it must be complete, clear and definite; and 4. the very obligation must be the same. Example, Gaya issued a promissory note for P10, 000 in favor of Tito payable 30 days after sight. Before the maturity of the note, Tito indorsed it to Arvin; Arvin indorsed it to Mary; Mary indorsed it to Gaya. The obligation of Gaya to Tito is extinguished because there is here a merger of the qualities of the debtor and creditor in one and the same person with respect to one and the same obligation cannot demand and collect payment from himself. 226. ART. 1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which takes place in the person of any of the latter does not extinguish the obligation. (1193) Effect of Merger This article reiterates the principles established in Articles 1176, 1274, NCC, that accessory follows the principal. The extinguishment of the principal obligation extinguishes the accessory obligation; but the extinguishment of the accessory does not extinguish the principal obligation Example, Gaya obtains P10, 000 loan from Tito which loan was guaranteed by Arvin. Later, Tito assigned the credit to Mary, who in turn assigned it to Gaya. The principal debt is extinguished and Arvin is released from his obligation as guarantor. If, in this same example, the credit was assigned by Tito to Mary and Mary to Arvin. The contract of guaranty is extinguished but the principal obligations remains. Gaya has now the obligation to pay Arvin. 227. ART. 1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur. (1194) Effect of Merger in Joint Obligation In a joint obligation, the debts are distinct and separate from each other. In case there is merger in a joint obligation, it affects only the share corresponding to the creditor or debtor in whom the two characters concur. The co-debtor will not owe his corresponding share to this former joint co-debtor. Example, Gaya, Mary and Arvin are jointly indebted to Tito in the amount of P15, 000. Tito assigns his credit to Ian who in turn assigned it

to Gaya. There is here a merger between Gaya and Tito but Mary and Arvin would now owe Gaya P5, 000 each. 228. Section 5. Compensation ART. 1278. Compensation shall take place when two persons, in their own right are creditors and debtors of each other. (1195) 229. Compensation,Defined Compensation shall take place when two persons, in their own rights are creditors and debtors of each other. Compensation Distinguished From Confusion as to number of persons in compensation there must be two persons; in confusion, there is only one person in whom the quality of creditor and debtor is merged; as to number of obligation in compensation thEre must be two obligations; in confusion there is only one obligation. 230. Kinds of Compensation 1. as to cause a. Legal takes effect by operation of law provided all the requisites prescribed by law are present. b. Voluntarily takes place by virtue of the agreement of the parties. c. Judicial takes place only through court orders. 2. as to effect a. Total when both debts are completely extinguished because the debt are the same amount b. Partial the debts are not the same amount hence after compensation, a balance remains outstanding. 231. 232. 233. Requisites of a Proper Compensation or Legal Compensation 1. the parties are principal creditor and principal debtor of each other; Example, Arvin owes Tito P10, 000 payable on Dec. 20, 1999. Tito on the other hand owes Arvin P10, 000 also due and payable on Dec. 30, 1999. These two obligation become due on Dec. 30, 1999 compensation takes place because both Arvin and Tito are principal creditor and principal debtor of each other. 2. both debts consists in a sum of money or of consumable things of the same kind and quality; Example, Arvin obliged himself to deliver to Tito 100 sacks of rice on October 30, 1999. Tito, on the other hand, has an obligation to deliver 100 sacks of rice to Arvin on October 20, 1999. There is compensation because they are consisting of consumable things. 3. the two debts are due and demandable; Example, Gaya owes Maya P10, 000 payable on October 30, 1999. Maya owes Gaya P10, 000 payable also on October 30, 1999. There is compensation when the obligation becomes due on October 30, 1999. 234. the two debts liquidated; and The liquidated means that the amount of debt has already been fixed and determined, while the word demandable means when it is due; 5. there be no retention or controversy means a third person who is claiming to be a creditor. Example, Arvin woes Ian P10, 000 and Ian owes Arvin P10, 000 but Arvin credit of P10, 000 has been garnished by Gaya who claims to be an unpaid creditor of Arvin. Ian has been duly notified of the

controversy. Any possible compensation is in the meantime suspended. If Gaya wins her claim, there can be no compensation. If she loses, the controversy is resolved, and then compensation can take place. 235. ART. 1280. Notwithstanding the provision of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor Guarantor May Set Up Compensation This is an exception to Article 1279, part. 1 because the article allows setting up compensation as regard what the creditor may owe to the principal debtor. Example, Arvin owes Tito P10, 000. Maya is the guarantor of Arvin. Tito owes Arvin P10, 000. When Tito sues Arvin for P4, 000. When Tito sues Arvin and Arvin cannot pay, Maya will be liable for only P6, 000 because he can set the P4, 000 credit of Arvin as the basis of partial compensation. 236. ART. 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total compensation. Kinds of Compensation Total compensation is when the amount due are equal or of the same amount, hence both obligations are extinguished. Example, Gaya is indebted to Maya the amount of P10, 000 due on Dec. 19, 1999. Maya is likewise indebted to Gaya in the amount of P10, 000 due on Dec. 19, 1999. There is here a total compensation; hence both debts will be extinguished. 237. Partial compensation is when the amount are not the same after compensation took place, there is a balance remains. Example, Gaya owes Maya P10, 000 due on Dec. 19, 2009. On the other hand, Maya owes the due date arrives because a balance of P4, 000 will remain after compensation takes place. ART. 1282. The parties may agree upon the compensation of debts which are not yet due. (n) 238. Compensation By Agreement Of the Parties This is a voluntary compensation as an execution to the general rule that only debts which are due and demandable can be compensated.(Art.1279) Example, Gaya owes Maya P10, 000 due on Nov. 30, 2001. On the other hand Maya owes Gaya P10, 000 due on Dec. 19, 2001. Generally compensation the parties there may be compensation cannot take place comes Nov. 30, 2001 because Mayas debt is not yet due. However, by voluntary agreement between 239. ART. 1283. If one of the parties to a suit over an obligation has acclaim for damages against the other, the former may set it off by providing his right to said damages and the amount thereof. (N) Judicial Compensation A judicial compensation is one whereby a money debt of a person may be allowed by the court to be compensated with a claim of damages by another. Example, X owes Y P1, 000. When Y demanded payment, X failed to pay. In anger, Y damaged the property of X to the extend of P800. X can set off the obligation of Y to pay him damages in the amount of P800 against his debt of P1, 000.

240. ART. 1284. When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. Compensation Of Rescissible or Voidable Debts Rescissible and voidable obligations are valid until they are judicially rescinded or avoided and prior rescission or annulment, the debts may be compensated. Example, A owes B P 10, 000. Subsequently, A, through fraud was able to make B sign a promissory note that B is indebted to A for the same amount. The debt of A is valid, but that of B is voidable. Before the debt of B is nullified, both debts may be compensated against each other if all the requisites for legal compensation are present. If suppose the debt of B is later annulled by the court, A is still liable considering compensation had already taken place because the effect of annulment is retroactive, it is as if there was no compensation. 241. ART. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserve his right to the compensation. If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession , but not of subsequent ones. If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. 242. When Compensation Has Taken Place BEFORE Assignment If an extinguished obligation has been assigned by the creditor to third person, the debtor can raise the defense of compensation with respect to the debt. The remedy of the assignee is against the assignor. Example, A owes B P5, 000 due yesterday. B owes A P3, 000 due also yesterday. Both debts are extinguished up to amount of P3, 000. Hence, A still owes B P2, 000 today. If B assigns his right to C, latter can collect only P2, 000 from A. However, if A gave his consent to the assignment before it was made on will be liable to C for P5, 000 but he can still collect the P2, 000 owed by B. It is as if no compensation took place. 243. Where Compensation Has Taken Place AFTER Assignment There are three cases of compensation which take place after an assignment of rights made by the creditor. They are: Assignment with consent of debtor Example, A owes B P5, 000 due Dec. 19. B owes A P3, 000 due Dec. 19. B assigned his right to C, the assignee, the compensation which would pertain to him against B, the assignor. A is still liable to C for P5, 000 but he can still collect the P2, 000 debt from B. However, if A while consenting to the assignment, reserved his right to the compensation, he would be liable only P2, 000 to C. 244. Assignment with the knowledge but without the consent of debtor Example, A owes B P1, 000 due Dec. 1. B owes A P2, 000 Dec. 10. A owes B P1, 000 due Dec. 15. A assigned his right to C on Dec. 12. A notified B but the latter did not give his consent to the assignment, how much

can C collect from B? B can set up the compensation of debts on Dec. 10 which was before the cession on Dec. 12. There being partial compensation, the assignment is valid only up to the amount of P1, 000 but B cannot raise the defense of compensation with respect to the debt of A due on Dec. 15 which has not yet matured. So, on Dec. 12, B is liable to C for P1, 000. Come Dec. 15, A will liable for his debt of P1, 000 to B. Assignment without the knowledge of the debtor Example, in the preceding example, let us suppose that the assignment was made without the knowledge of B who learned of the assignment only on Nov. 16. In this case, B can set up the compensation of credits before and after the assignment. The crucial time is when B acquired knowledge of the assignment and not the date of the assignment. If B learned of the assignment after the debts had already matured, he can raise the defense of compensation, otherwise, he cannot. 245. ART. 1286. Compensation takes place by operation of law, even thought eh debts may be payable at different places, bu there shall be an indemnity for expenses of exchange or transportation to the place of payment. (1199a) Compensation Where Debts Payable At Different Places This legal compensation does not refer to the difference in the value of the things in their respective places but to the expenses of monetary exchange and expenses of monetary exchange and expenses in transportation. Once these expenses are liquidated, the debts also become compensated. The indemnity shall be paid by the person who raises the defense of compensation. Example, Gaya owes Maya $1, 000 payable in New York. Maya owes Gaya P38, 000(equivalent amount) payable in Manila. If A claim compensation, he must pay for the expenses of exchange. 246. ART. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depository or of a bailee in commodatum. Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to the provision of paragraph 2 of article 301. ART. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal clause. 247. PART III General Provisions on Contracts Learning Objectives: After studying this lesson, you should: 1. know the definition of contract 2. learn the different classifications of contracts; 3. know the elements of contracts; and 4. that contracts take effect only between parties and its exceptions. The classifications of contracts summarizes those types of contracts that may be freely agreed upon as long as they are not contrary to law, morals, good customs, public order or public policy. ART. 1305. 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 service. (1254a) 248. Contracts, Defined The above article defines the term Contract. In a contract, one or more persons bind themselves with respect to another or reciprocally, to the fulfillment of a presentation to give, to do or not to do.

249. Elements of Contract: 1. Essential elements those elements without which there can be no valid contract. This element are consent, object or subject matter and cause or consideration 2. Natural elements those elements which are found in a contract by its nature and presumed by law to exist, such as Warranty of hidden defects or eviction in contract of sale. 3. Accidental elements - those which exist by virtue of an agreement for the purpose of expanding, limiting, or modifying a contract. Such accidental elements are condition, clauses, terms, modes of payment, or penalties. 250. Stages of A Contract: 1. Preparatory or conception process of formation such as bargaining, negotiation to arrive at a define contract. 2. Perfection or birth there is now a meeting of minds to arrive at a definite agreement as to the subject matter, cause or consideration, terms and conditions of contract. 3. Consumption or death which is the fulfillment or performance of the terms and conditions agreed upon in the contract may be said to have been fully accomplished or executed. 251. Characteristics of Contracts: 1. Freedom to contract they may establish terms and conditions as they may deem convenient. 2. Relativity it is binding only upon the parties and their successors. 3. Obligatory force it constitutes the law as between the parties. 4. Mutuality its validity and performance cannot be left to the wil of only one of the parties. 252. Classification of A Contract: (FROM) 1. As to perfection a. Consensual one which is perfected by mere consent (Art. 1315 b. Real Contract perfected by mere consent and by the delivery of the object or subject matter. Ex. Deposit, pledge, or commodatum. 2. As to dependence to other contract. a. Principal one which can stand alone. Ex. A contract of sale, lease. b. Accessory those which are dependent upon another contract. Ex. Contract of mortgage, pledge of guaranty. c. Preparatory those which is created in order that a future transaction or contract may be entered into by te parties. Ex. Contract of partnership or agency. 253. 3. According to name or designation a. Nominate one which has particular name or designation such as sale, agency, etc. b. Innominate those without particular name. 4. According to the nature of obligation a. Unilateral where only one ha an obligation to perform. Ex. Contract of donation, commodation. b. Bilateral where both parties have reciprocal obligation to perform. Ex. Sale. 5. According to risk involved a. Commutative - where there is an exchange of values, such as lease. b. Aleatory - one which the fulfillment of the obligation depends upon chance. Ex. Contract of insurance. 6. According to cause a. Onerous one which imposes valuable consideration such as sale, mortgage. b. Gratuitous one which one of the parties does not receive any valuable consideration, such as commodatum. 254. 7. According to form a. Oral by word of mouth of the parties b. Written the agreement which is reduced in writing which may be public or private or private document ART. 1306. The

contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. (1255a) 255. Contract Binds by Both Parties ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. (1256a) 256. Contracts entered by and between the parties mush bind both parties in order that it can be enforced against each other. This is also known as mutuality of contract. Hence, its validity or compliance cannot be left to the will of one of them. This principle is based on the essential equality of the parties. It is elementary rule that no party can renounce or violate the law of the contract without the consent of the other. (11 Manresa 380) Example, Gaya and Laura entered into a contract to sell whereby Gaya binds herself to sell her only parcel of land to Laura if Gaya decides to leave for States. The contract is void because the fulfillment of the condition depends on the will of Gaya. 257. ART. 1309. The determination of the performance may be left to a third person, whose decision shall not be binding until it has been made known to both contracting parties. ART. 1310. The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is equitable under the circumstances. 258. Determination of Performance by Third Person As a rule, compliance with a contract cannot be left to the will of one of the contracting parties. However, the determination of its performance may be left to a third person after it has been made known to both contracting parties. Provided, further, the parties are not bound by the determination if it is evidently inequitable or unjust when the third person acted in bad faith or by mistake, the courts shall decide what is equitable under the circumstances. Example, Gaya sold her parcel of land to Laura. It was agreed that Maya, a real estate appraiser would be the one to determine the reasonable price of the land. Maya, then, fixed the price after considering the factors affecting the value of the land, and informing both contracting party that the decision is just and suitable. If the decision made by Maya is manifestly inequitable, the court may be called upon to decide what is equitable. 259. ART. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation, or by provision of law. The heir is not liable beyond the value of the property he perceived from the decedent. If a contact should contain some stipulation in favor of third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not

sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. (1257a) 260. Cases Where Third person May Be Affected By a Contract 1. In determining the performance of both parties (Art. 1309). 2. In contracts containing a stipulation in favor of a third person (Art. 1311). 3. In contracts creating real rights (Art. 1312). 4. In contracts entered into to defraud creditor (Art. 1313). 5. In contracts which have been violated at the inducement of the third person (Art. 314). Example, Gaya mortgaged her parcel of land in favor of Laura as collateral for her debt. The mortgage is duly registered. Later on, Gaya sold the same land to Tito. In this case, Tito bought the land subject to the mortgage constituted thereon. Tito, although a stranger in the mortgage, being a real right follows the property on the right of Laura to the mortgage. 261. Forms of Contracts Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised. (1278a) 262. Meaning of Form of Contracts Forms of a contract refer to the manner in which a contract is executed or manifested 263. Rules Regarding Form of Contracts General Rule Contracts are binding and therefore, enforceable reciprocally by the contracting parties, whatever may be the form in which the contact has been entered into to provided all the three essential requisites (consent, object, cause) for their validity are present. 264. Reformation of Instruments Art. 1359. When, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed. 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. 265. Meaning of Reformation Reformation is that remedy by means of which a written instrument is amended or rectified so as to express or conform to the real agreement or intention of the parties when by reason of mistake, fraud, inequitable conduct, or accident the instrument fails to express such an agreement or intention.

266. Requisites of Reformation 1. There is a meeting of the minds of the parties to the contract; 2. The written instrument does not express the true agreement or intention of the parties; 3. The failure to express the true intention is due to mistake, fraud, inequitable conduct or accident; 267. 4. The facts upon which relief by way of reformation of the instrument is sought are put in issue by the pleadings; and 5. There is clear and convincing evidence of the mistake, fraud, inequitable conduct or accident. Example, Arvin sold his land to Ryan. It was greed that the sale will include all the improvements. However, the contract was signed by the parties, states that the land is being sold excluding the improvements thereon. In this case, the remedy is reformation, because there has been a meeting of minds. 268. Cases When Reformation Not Allowed 1. Simple donation inter vivos where no condition is imposed Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. (Art. 725). Donation is strictly personal andfree act so that if the intend of the donor that the donation will take effect during his lifetime, it is a donation inter vivos, while the opposite of inter vivos is donation mortis causa which takes effect after the donors death. 2. Wills A will is an act whereby a person is permitted with a formalities prescribed by law to control to a certain degree the disposition of his estate, to take effect after his death. 269. 3. When the real agreement is void If the real agreement is void, thre is nothing to reform. 4. When one party ahs brought an action to enforce the instrument (Art. 1367) When a party brings an action to enforce the contract, he admits its validity and that it expresses the true intention of the parties. The bringing of the action is thus inconsistent with reformation 270. Interpretation Of Contracts Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. (1281) 271. Meaning of Interpretation of a contract Interpretation of a contract is the determination of the meaning of the terms of word used by the parties in their contact. If the terms of a contract are clear and unequivocal, the parties are bound thereby according to the literal sense of their stipulations. Example, a contract was executed by A and B, the contract recites that is a sale of land belongs to A for P500. The terms of the contract are clear and it does not appear that the intention of the parties is contrary to the literal meaning of said terms 272. Cause of Contracts Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory

ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. (1274) 273. Meaning of Cause Cause is the essential or more proximate purpose which the contracting parties have in view at the time of entering into a contract. (8Manresa697) It is the Civil Code term for consideration in Anglo American or Common Law. 274. Classification of Contracts According to Cause 1. ONEROUS the cause of which for each contracting parties is the pre-station or promise of a thing or service of the other. Ex. Sale, lease of things. 2. REMUNERATORY - the cause is the service or benefit which is remunerated. Ex. A rendered service as the lawyer-counsel of B who agreed to pay P10, 000 for said services. 3. GRATUTIOUS the cause which is the mere liberality of the benefactor or giver. Ex. X donated a parcel of land to Y. The cause is the liberality of X, the done or benefactor. 275. Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy. (1275a) Art. 1353. The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded upon another cause which is true and lawful. (1276) 276. Requisites of Cause 1. it must exist at the time the contract is entered into. (Art. 1352) 2. it must be lawful; (Ibid) and 3. it must be true or real. (Art 1353) 277. Effect of Absence of Cause A contract without cause or with an unlawful cause, according to this article, produces no effect whatever. Like, for example, an absolutely simulated contract produces no effect because there is no cause at all. 278. Effect of Inadequacy of Cause Inadequacy of cause does not invalidate a contact. (Art. 1355). Illegality of cause implies that there is a cause but the same is unlawful or illegal. By falsity of Cause is meant that the contract states a valid consideration but such statement is not true 279. PART IV DEFECTIVE CONTRACTS There are four kinds of defective contracts: 1. Rescissible contracts (Chapter 6); 2. Voidable contracts (Chapter 7); 3. Unenforceable Contracts (Chapter 8); and 4. Void or inexistent contracts (Chapter 9) 280. Rescissible contracts Contracts are valid because all the essential requisites of a contract exist but by reason of injury or damage to one of the parties or to third persons, such as creditors, the contract may be rescinded . Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290)

281. Meaning of Rescission Rescission is a remedy granted by law to the contracting parties and sometimes even to third person 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. (8Manresa 748) 282. Requisites of Rescission 1. The contract must be validly agreed upon; 2. There must be lesion on pecuniary prejudice to one of the parties or to a third person; 3. The rescission must be based upon a case especially provided by law; 4. There must be no other legal remedy to obtain reparation for the damage; 283. 5. The party asking for rescission must be able to return what he is obliged to restore by reason of the contract. 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 filing the action for rescission must not have prescribed 284. Art. 1381. The following contracts are rescissible: ` (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; (2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; (3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; (4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority; (5) All other contracts specially declared by law to be subject to rescission. (1291a) 285. Voidable Contracts Art. 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties: (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 or fraud. These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. 286. Meaning of Voidable Contracts Voidable or annullable contracts are those which possess all the essential requisites of valid contract but one of the parties is incapable of giving consent, or consent is vitiate by mistake, violence, intimidation, undue influence of fraud. 287. Meaning of Annulment Annulment is a remedy granted by law, for reason of public interest, for the declaration of the inefficacy of a contract based on defect or vice in the consent of one of the contracting parties in order to restore them to their original position in which there were before contract was executed. 288. Characteristics of Voidable Contracts 1. The defect in the contract consists in the vitiation of consent of one of the contracting parties; 2. The contract is binding until annulled by a

competent court; 3. The contract is susceptible of convalidation by ratification or prescription; 4. The defect or voidable character of the contract cannot be invoked by third persons. 289. Art. 1391. The action for annulment shall be brought within four years. This period shall begin: In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases. In case of mistake or fraud, from the time of the discovery of the same. And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. (1301a) 290. Period for Filing Action for Annulment The period within which the action for annulment shall be brought within four(4) years from: 1. The time the intimidation, violence or undue influence ceases; 2. The time of the discovery of mistake or fraud; and 3. The time guardianship ceases, in cases of contracts entered into by incapacipated persons. 291. Unenforceable Contracts Art. 1403. The following contracts are unenforceable, unless they are ratified: (1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers; (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: 292. (a) An agreement that by its terms is not to be performed within a year from the making thereof; (b) A special promise to answer for the debt, default, or miscarriage of another; (c) An agreement made in consideration of marriage, other than a mutual promise to marry; 293. (d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum; (e) An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (f) A representation as to the credit of a third person. (3) Those where both parties are incapable of giving consent to a contract. 294. Meaning of Unenforceable Contracts Unenforceable contracts are those that cannot be enforced in court or sued upon by reason of defects provide by law until unless they are ratified according to law. They are contracts either entered into without or in excess of authority or do

not comply with the statue of frauds or both of the contracting parties do not possess the required legal capacity. 295. Classes of Unenforceable Contracts 1. Those entered into the same of another person by one without authority or in excess of his authority; 2. Those which do not comply with the Statue of Frauds; and 3. Those where both parties are incapable of giving consent 296. Art. 1404. Unauthorized contracts are governed by Article 1317 and the principles of agency in Title X of this Book. Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit under them. 297. Void or Inexistent Contracts Art. 1409. The following contracts are inexistent and void from the beginning: 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; 298. 6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained; 7) Those expressly prohibited or declared void by law. These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived. Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe. 299. Meaning of Void or Inexistent Contracts 1. it cannot be ratified. (Art 1409) 2. the right to set up the defense of illegality cannot be waived. 3. the action or defense for the declaration of its inexistence does not prescribed. (art. 1410) 4. the defense of illegality is not available to third persons whose interests are not directly affected; and 5. it cannot give rise to a valid contract. (Art. 1422) 300. Instances of Void or Inexistence Contract There is no need for a detail discussion of these different kinds of void inexistent contracts considering that they have been discussed in previous chapters of this book. Void of inexistent contracts does not prescribe. Mere lapse of time cannot give effect to contracts which are null and void . 301. Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract. This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise. (1305)

302. Meaning of Pari Delicto Pari Delicto means both parties are equally at fault or are equally guilty. The principle of pari delicto, means that when the defect of avoid contracts consists in the illegality of the cause or object f the contract and both parties are at fault or in a pari delicto, the law refuse them every remedy, or the parties have no action against each other. 303. Illegal contract with Criminal Offense 1. When both parties are in pari delicto Rules a. the parties shall have no action against each other; b. both shall be prosecuted; and c. the things of the price of the contract, shall be confiscated in favor of the government. 2. Where only one party is guilty. The innocent one or less guilty may claim what he has given and shall not be bound to comply with his promise 304. Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed: (1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the others undertaking; (2) When only one of the contracting parti es is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply his promise. (1306) 305. Effect of Illegal Terms in a Contract Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced. In case a contract containing an illegal orlegal terms, the law allows the legal terms to be enforced if it can be enforced if it can be separated from the illegal ones. 306. Persons Entitled to Raise Defense of Illegality or Nullity As general rule, contracts bind only the contracting parties, their heirs or assigns. Corollary to this rule, the illegality of a contract maybe set up as a defense only by contracting parties or by parties whose interest are affect by the contracts as a defense 307. Thank you!!!!! 308.