 The word Contract was derived from a Latin word Contractum which means drawn

together.
 Agreement creating and defining obligations between the parties.
 Any agreement or promise enforceable at law .
 Agreement upon consideration basis to do or not to do a particular thing.
 A meeting of minds between two person whereby one binds himself with respect to the
other , to give something or to render some service. –civil code of the philippines
thus Contract is defined as an agreement.
To form an agreement, two elements are needed, namely;
 Offer
The status of offer is equal to that of question. The person who is making the offer
is called Offerer or Promissor or Proposer.
 Acceptance
the status of acceptance is equal to that of an answer. The person who is giving
acceptance is called Offeree or Promise or Acceptor.
 Social agreement
The agreement which is not enforceable by law is called Social agreement. In this
agreement, only one directional consideration will be seen.
 Legal agreement
The agreement which is enforceable by law is called legal agreement. In case on
legal agreement, two directional consideration will be seen.
 An offer that specifically details exactly what will be provided.
 Acceptance, which is the agreement by the other party to the offer presented.
 Consideration, money or something of interest being exchange between the
parties
 Capacity of the parties in terms of age and mental ability.

 The intent of both parties to carry out their promise.

 Legally enforceable terms and conditions, also called object of the contract.
› On the basis of Formation
› On the basis of Nature of Consideration
› On the basis of Execution
› On the basis of Validity
 Express Contracts
The Contracts where there is expression or conversation are called
Express Contracts.
 Implied Contract
The Contracts where there is no expression are called implied
contracts.
 Quasi Contract
In case of Quasi Contract there will be no offer and acceptance so,
Actually there will be no Contractual relations between the partners.
 Bilateral Contract
If considerations in both directions are to be moved after the contract

 Unilateral Contract
If considerations is to be moved in one direction only after the Contract
 executed contract
If performance is completed, it is called executed contract.

 executor contract.
In case where contractual obligations are to be performed in future.
 Valid contract
The Contracts which are enforceable in a court of law are called Valid Contracts. To attain Validity the
Contract should have certain features like Certainty, free consent, two directional consideration, fulfillment of legal
formalities, legal obligations, lawful object, capacity of parties, possibility of performance.
 Void contract
A Contract which is not enforceable in a court of law is called Void Contract. If a Contract is deficient in
any one or more of the above features (Except free consent and legal formalities).
 Illegal contract
If the contract has unlawful object it is called Illegal Contract.
 Voidable contract
A Contract which is deficient in only free consent, is called Voidable Contract. That
means it is a Contract which is made under certain pressure either physical or mental. At the
option of suffering party, a voidable contract may become either Valid or Void in future.
 Unenforceable contract
A contract which has not properly fulfilled legal formalities is called unenforceable
contract. That means unenforceable contract suffers from some technical defect like insufficient
stamp etc. After rectification of that technical defect, it becomes enforceable or valid contract.
 All illegal Contracts are void, but all void contracts are not illegal
An illegal Contract will not be implemented by court. So, illegal contract
is Void. A void contract may not be illegal because its object may be lawful.
 The Contracts which are collateral to illegal contract are void, But the
contracts which are collateral to Void contract may be Valid
An illegal contract makes not only itself Void but also the contracts
connected to it. But a contract collateral to void contract may attain Validity
because object of main contract is lawful.
 Void Contracts and Voidable Contracts
A Voidable Contract may become Valid at the option of suffering party.
But a Void Contract can never and never become Valid.
 Third Party Rights
In case of Voidable Contracts third party may attain rights on
concerned property, If the third party gets the property before the Voidable
Contracts gets declared as Void. But in case of Void Contract third party cannot
get any right.
 IS a legal bond by which one or more parties (obligants) are bound to act or
refrain from acting. An obligation thus imposes on the obligor a duty to perform, and
simultaneously creates a corresponding right to demand performance by
the obligee to whom performance is to be tendered. Obligations may be civil, which
are enforceable by action in a court of law, or natural, which imply moral duties but
are unenforceable unless the obligor consents.
Obligations are extinguished by:
 Payment or performance
 The Loss of the thing due
 The Condonation or remission of the debt
 The Confusion or merger of rights of the creditor and debtor
 Compensation
 Novation
 Payment means not only the delivery of money but also the
performance, in any other manner, of an obligation
 A debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered
or rendered, as the case may be.
 If the obligation has been substantially performed in good faith, the
obligor may recover as though there had been a strict and complete
fulfillment, less damages suffered by the obligee.
 When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied with
 The creditor is not bound to accept payment or performance by a third
person who has no interest in the fulfillment of the obligation, unless
there is a stipulation to the contrary.
 Whoever pays on behalf of the debtor without the knowledge or
against the will of the latter, cannot compel the creditor to subrogate
him in his rights, such as those arising from a mortgage, guaranty, or
penalty.
 Payment made by a third person who does not intend to be
reimbursed by the debtor is deemed to be a donation, which requires
the debtor’s consent. But the payment is in any case valid as to the
A construction company agreed to paint the
star hotel for P200,000.00. the construction
company did not paint the restaurant part
anymore and instead asked the star hotel to
pay them P200,000.00 less the cost of painting
the restaurant.
 An obligation which consists in the delivery of a determinate thing shall
be extinguished if it should be lost or destroyed without the fault of the
debtor, and before he has incurred in delay.
 In an obligation to deliver a generic thing, the loss or destruction of
anything of the same kind does not extinguish the obligation.
 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.
A rice company promised to deliver 100 cavans of rice
to the prime hotel. The 100 cavans of rice which is the
rice company intended to deliver were lost in a flood.
The rice company is liable to the prime hotel because
its obligation is to deliver the 100 cavans of rice and it
can still be paid from other sources.
 The obligation is extinguished from the time the characters of creditor
and debtor are merged in the same person.
 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.
 Confusion does not extinguish a joint obligation except as regards the
share corresponding to the creditor or debtor in whom the two
characters concur
Cherry and Dee owed P 2 M from Frank. Cherry and
Dee had an agreement that Cherry will pay the whole
P 2 M to Frank. That extinguishes Dee’s obligation to
Frank. However, Dee will be liable to pay P 1 M To
Cherry.
 Compensation shall take place when two persons, in their own right,
are creditors and debtors of each other
 Notwithstanding the provisions of the preceding article, the guarantor
may set up compensation as regards what the creditor may owe the
principal debtor.
 Compensation may be total or partial. When the two debts are of the
same amount, there is a total compensation.
Jack owes jill the amount of p 1,000.00. jill owes jack
the amount of P700.00. both debts are due and
payable today. The compensation takes place
partially . That is the concurrent amount of P 700.00. so
jack shall be liable to jill for only p300.00.
 A payment is the trade of value from one party (such as a
person or company) to another for goods, or services, or to fulfill
a legal obligation.
 Payment can take a variety of forms. Barter, the exchange of
one good or service for another, is a form of payment. The most
common means of payment involve use of money, cheque, or
debit, credit or bank transfers.
 Or simply, payment is the act of paying
 Normal or voluntary – debtor paid obli on his own volition, not because he was
told to pay.
 Abnormal or involuntary – obligor is ordered to pay.
Requisites of a valid payment:

 Parties (debtor and creditor)

 The thing to be paid
 Time, place, and manner of payment
Here are some of the condition for considering a party / parties;

 What is required is the plurality of parties, not of persons, such that a

person who represents at least two parties may affect a valid
payment by himself.
 Only those who have an interest in the fulfillment of the obli can
compel the creditor to accept payment. These are the debtor, his
heirs, successors-in-interest,assignee, or anyone authorized by him
to make payment.
 Generally, payment must be made to the creditor, but payments may
also be made to his heirs, successors-in-interest, or his agent.
 There must be at least two parties.
 Conventional – never presumed; agreement of the parties
 Legal –cannot be presumed.:
(a) when a creditor pays another creditor who is preferred;
(b) 3rd person who is not interested in the fulfillment of the obli pays with the
consent of the debtor;
(c) 3rd person who has an interest in the fulfillment pays even without the
consent of the debtor.
o Rights of guarantor against the debtor:absolute reimbursement and
subrogation.
o Payment made to a 3rd person is invalid, except if such payment
redounded to the benefit of the creditor. Debtor must prove such benefit,
except if:
• After payment, the 3rd person acquiresthe creditor’s rights.
• Creditor ratifies the payment to the 3rd person.
• By the creditor’s conduct, the debtor has been led to believe that
the 3rd person had authority to revive the payment.

o If a 3rd person pays without intention of seeking reimbursement,

such payment isconsidered by law as a donation whichmust be
accepted by the debtor. If debtor does not give his consent, there
is no donation, and the 3rd person acquires the right to
reimbursement and subrogation. If debtor opposes, there will be
no donation, and the 3rd person acquires the right to reimburse
to the extent which the debtor was benefited.
o The debtor cannot compel the 3rd person to accept
reimbursement.
 This refers to the object of the prestation, not the obli. The object to be paid
cannot be another object that is merely similar to that contemplated by the
parties.
 If the object is specific, the very samething promised should be paid. If the
object is generic, the thing paid must belong to the class of the thing agreed
upon in the contract.
 The debtor cannot compel the creditor to accept something of inferior quality. In
the same manner, the creditor cannot compel the debtor to deliver something of
superior quality.
o Dation in payment
 Payment must be made on the day the obli falls due, even if it be a
Sunday or holiday. When the instrument presented for payment is covered
by the Negotiable Instruments Law which provides that when an obli falls
due on aSunday or holiday, the instrument must be presented for payment
on the succeeding business day.
• Requisites for negotiability:
○ Must be in writing and signed bythe maker or drawer
○ Contains an unconditional promiseor order to pay a sum certain
inmoney
○ Payable on demand or at a fixed,future time
○ Payable to order or to bearer
○Instrument is addressed to a drawee who must be named or
otherwise indicated therein with reasonable certainty.
 An obli falls due when it becomes demandable, such that the credit or
acquires the right to enforce the obli.
 No provision of law that dictates where demand must be made, but the
lawprovides for the place of payment. (Art.1251)
 If creditor demands payment in a place other than the proper place, debtor
canrefuse to pay w/o incurring delay. Likewise, if debtor offers to pay in a
place other than the proper place, creditor can refuse w/o incurring delay.
 Manner of payment must be inaccordance with the tenor of the
obli.
 Checks do not produce payment until encashed because checks
are not legal tender. They are mere representations of money.
The validity of payments made with checks depends on the kind.
If the check used is certified, as the SC held inthe case of New
Pacific Timber v. Sener, the payment is valid. The SC also ruled
in Co v. PNB that payment by manager’scheck is valid.
 Legal tender is that currency which when offered as payment for
a debt, whether public of private, the creditor cannot refuse to
accept.
 Under RA 8183, which repealed theUniform Currency Act,
 It is a mode of extinguishing to the concurrent amount, the obligations of
those persons who in their own right are reciprocally debtors and creditors
of each other (Art. 1232, NCC). It involves the simultaneous balancing of
two obligations in order to extinguish them to the extent in which the
amount of one is covered by that of the other.
 In financial terms, compensation refers to the salary and wages you pay to
your employees for the work they do. Other, nonfinancial forms of
compensation can also be offered to attract and retain staff. .
 The compensation is a mode of extinguishment of obligation wherein
there is simultaneous balancing or weighting of two obligations of two
persons who are reciprocally debtors and creditors of each other. It
extinguishes to the extent in which the amount of one is covered by
that of the other.
 The compensation takes effect by operation of law, and extinguishes
both debts to the concurrent amount, even without the consent of the
parties.
A compensation of obligations is considered as a simplified payment that
aims to:
 facilitate payment in a more convenient and less expensive way.
 guarantee the effectiveness/enforcement of credit against fraud,
insolvency, etc.
 prevent unnecessary suits and payments thru the mutual extinction by
operation of law of concurring debts.
 a compensation take effect by operation of law, while a payment takes
effect by act of the parties.
 a compensation does not require the parties to have the capacity to give
and to receive, while a paymentrequires such capacity.
 a compensation can bee partial extinguishment, while a payment must be
complete and indivisible.
 a compensation requires two persons to be mutually debtor and
creditor each other, while a confusionrequires only one person to be
both the debtor and creditor.
 a compensation covers two obligations, while a confusion covers only
one obligation.
A legal compensation requires:
 that both parties must be mutually creditors and debtors to each
other and be bound principally.
 that both debts must consist in sum of money or if consumable, of the
same kind or quality.
 that both debts be due at the same time.
 that both debts be liquidated and demandable.
 that the debts are allowed by law.
A compensation shall take effect by operation of law when all the
aforementioned requisites are present, even though the creditors and
debtors are not aware.
according to its effect or extent:
 complete/total - covers the two obligations of the same amount; extinguishes both debts entirely,
hence no balance remaining.
 partial - covers only a part of the two obligations of different amounts; extinguishes both debts partly.
according to its origin or cause:
 legal - by operation of law with all the requisites are present.
 voluntary - by mutual agreement and consent of the parties even if the debts are not yet due.
 judicial - by an order from a court as pleaded by one party.
 facultative - by unilateral choice of one party to claim or oppose compensation; no mutual agreement
needed.
A compensation is not allowed by the law:
 if one of the debts arises from a depositum or deposit, wherein one receives a thing
belonging to another, with the obligation of safely keeping it and of returning the same. (not
to be confused with a 'deposit in a bank')
 if one of the debts arises from a bailee (agent) in commodatum, wherein one gratuitously
delivers something to the other to be used for a certain time and then return.
 if one of the debts arises from a claim for support due to gratuitous title, which are deemed
“vital to the life of the recipient". This only applies to support in arrears (behind schedule),
but not to future support.
 if one of the debts consists in civil liability arising from a criminal/penal offense; the fulfillment
of such obligation is imperative or necessary.This only applies to the accused, but not to the
victim of a crime.
Such prohibitions only applies to the party that has such debts. This is in order to prevent breach
of trust and confidence.
Although one party cannot use compensation, the other party has the option to claim or not to
claim compensation. This is a facultative compensation.