OBLIGATIONS

I. Concept and Sources

A. Concept, Elements and Transmitability

Article 1423. Obligations are civil or natural. Civil obligations give a right of action to compel
their performance. Natural obligations, not being based on positive law but on equity and
natural law, do not grant a right of action to enforce their performance, but after voluntary
fulfillment by the obligor, they authorize the retention of what has been delivered or
rendered by reason thereof. Some natural obligations are set forth in the following articles.

“obligations without a sanction, susceptible of voluntary performance, but not through compulsion
by legal means.”

While it is true that natural obligations are now regulated by the New Civil Code, there are still
two essential distinctions between such obligations and civil obligations. They are:

first, natural obligations are based on equity and natural law, while civil obligations are based on
positive law; and
second, natural obligations are not enforceable by court action, while civil obligations are
enforceable by court action.

Although the terms “natural obligations’’ and “moral obligations’’ are used interchangeably in this
jurisdiction, strictly speaking, there are two essential differences between the two. They are:

first, in natural obligations there is a juridical tie between the parties which is not enforceable by
court action, while in moral obligations there is no juridical tie whatsoever, and

second, voluntary fulfillment of natural obligations by the obligor produces legal effects which the
courts will recognize and protect, while voluntary fulfillment of moral obligations, on the other
hand, does not produce any legal effect which courts will recognize and protect.

Thus, when an action has prescribed in accordance with the statute of limitations, a natural
obligation still subsists, although the civil obligation is extinguished.

Article 1156. An obligation is a juridical necessity to give, to do or not to do. (n)

Manresa - “legal relation established between one person and another, whereby the latter is bound
to the fulfillment of a prestation which the former may demand of him.’’
Requisites of Obligations. — An obligation has four essential requisites. They are:

(1) A juridical or legal tie, which binds the parties to the obligation, and which may arise from
either bilateral or unilateral acts of persons;

(2) An active subject known as the obligee or creditor, who can demand the fulfillment of the
obligation;

(3) A passive subject known as the obligor or debtor, against whom the obligation is juridically
demandable; and

(4) The fact, prestation or service which constitutes the object of the obligation

Some obligations require and additional requisite, such as CONTRACTS.

Classification of Obligations. — The following is the primary classification of obligations under

the Civil Code:
(1) Pure and conditional (Arts. 1179-1192). 

(2) With a period (Arts. 1193-1198). 

(3) Alternative and facultative (Arts. 1199-1206).
(4) Joint and solidary (Arts. 1207-1222).
(5) Divisible and indivisible (Arts. 1223-1225).
(6) With a penal clause (Arts. 1226-1230).

There are, however, other classifications of a secondary character which can be gathered from
scattered provisions of the Civil Code, such as:
(1) Legal, conventional and penal;

(2) Real and personal; 

(3) Determinate and generic;

(4) Positive and negative;

(5) Unilateral and bilateral; 

(6) Individual and collective;
(7) Accessory and principal. 


MKSE vs. Campos – “The Civil Code enumerates the sources of obligations: Art. 1157.
Obligations arise from: (1) Law; (2) Contracts; (3) Quasi-contracts; (4) Acts or omissions punished
by law; and (5) Quasi-delicts. Therefore, an obligation imposed on a person, and the corresponding
right granted to another, must be rooted in at least one of these five sources. The mere assertion of
a right and claim of an obligation in an initiatory pleading, whether a Complaint or Petition,
without identifying the basis or source thereof, is merely a conclusion of fact and law”



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.

Transmissibility of Rights. — Rights of obligations or those rights which are acquired by virtue
of an obligation are as a general rule transmissible in character. Consequently, they may be
alienated or assigned to third persons. There are, however, several exceptions to this rule. They
are:
first, where they are not transmissible by their very nature, such as in the case of a purely personal
right;
second, where there is a stipulation of the parties that they are not transmissible; and
third, where they are not transmissible by operation of law.

Stronghold Insurance Co., vs. Republic Asahi – “Since death is not a defense that a party or
his estate can set up to wipe out the obligations under a performance bond, the surety cannot use
such party’s death to escape its monetary obligation. - In the present case, whatever monetary
liabilities or obligations Santos had under his contracts with respondent were not intransmissible
by their nature, by stipulation, or by provision of law. Hence, his death did not result in the
extinguishment of those obligations or liabilities, which merely passed on to his estate. Death is
not a defense that he or his estate can set up to wipe out the obligations under the performance
bond. Consequently, petitioner as surety cannot use his death to escape its monetary obligation
under its performance bond.”

Art. 1157. Obligations arise from:

1. Law; 


2. Contracts; 


3. Quasi-contracts; 


4. Acts or omissions punished by law; and 


5. Quasi-delicts. 

1. Law

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.

Unlike other obligations, those derived from law can never be presumed. Consequently, only those
expressly determined in the Civil Code or in special laws are demandable.

OSG vs. Ayala Land Inc., et al. – “Statutory construction has it that if a statute is clear
and unequivocal, it must be given its literal meaning and applied without any attempt at
interpretation. Since Section 803 of the National Building Code and Rule XIX of its IRR do not
mention parking fees, then simply, said provisions do not regulate the collection of the same. The
RTC and the Court of Appeals correctly applied Article 1158 of the New Civil Code, which states:

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.”

2. Contracts

Art. 1159. Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.

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 some service.

Two kinds of Contracts:

1. Consensual
2. Real

Whether the contract is consensual or real, the rule is that from the moment it is perfected,
obligations which may be either reciprocal or unilateral arise.

3. Quasi-Contracts

Art. 1160. Obligations derived from quasi-contracts shall be subject to the provisions of
Chapter 1, Title XVII, of this Book.
Article 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical relation
of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense
of another. (n)

The most important of these juridical relations which are recognized and regulated by the Civil
Code are negotiorum gestio and solutio indebiti.

Negotiorum gestio is the juridical relation which arises whenever a person voluntarily takes charge
of the agency or management of the business or property of another without any power or authority
from the latter. In this type of quasi-contract, once the gestor or officious manager has assumed
the agency or management of the business or property, he shall be obliged to continue such agency
or management until the termination of the affair and its incidents, exercising such rights and
complying with such obligations as provided for in the Code.

Solutio indebiti, on the other hand, is the juridical relation which arises whenever a person unduly
delivers a thing through mistake to another who has no right to demand it. In this type of quasi-
contract, once the delivery has been made, the person to whom the delivery is unduly made shall
have the obligation to return the property delivered or the money paid.

Lao Chit vs. Security Bank and Trust Co., et al. – “The former is part of Title XVI, Book IV of
the Spanish Civil Code, entitled "obligations incurred without contract", whereas the latter is
included in Title XVII, Book IV of the Civil Code of the Philippines, regulating "extra-contractual
obligations" or obligations beyond, outside of, or outside the scope of, a contract. The construction
of the improvements in question was not a "purely voluntary act" or "unilateral act" of Lao Chit.
He introduced them in compliance with a bilateral "obligation" he undertook under his contract
with Dikit. The right of Dikit to enter into such contract, in turn, sprang from his lease contract
with the lessor. As a privy to Dikit's rights under this contract, insofar as said improvements are
concerned, Lao Chit's title thereto, as against the lessor, is governed, therefore, by such contract
of lease, not by any quasicontract, or by the principles of equity, as distinguished from law,
contracts or quasi-contracts.”

PNB vs. CA and B.P. Mata – “The instant case fulfills the indispensable requisites of solutio
indebiti as defined in Article 2154: that something (in this case money) has been received when
there was no right to demand it and (2) the same was unduly delivered through mistake. There is
a presumption that there was a mistake in the payment if something which had never been due or
had already been paid was delivered; but he from whom the return is claimed may prove that the
delivery was made out of liberality or for any other just cause.””

PADCOM vs. Ortigas – “Having ruled that PADCOM is a member of the Association, it is
obligated to pay its dues incidental thereto. Article 1159 of the Civil Code mandates:

Art. 1159. Obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith.
Assuming in gratis argument that PADCOM is not a member of the Association, it cannot evade
payment without violating the equitable principles underlying quasi- contracts. Article 2142 of the
Civil Code provides:

Art. 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-
contract to the end that no one shall be unjustly enriched or benefited at the expense of another.

Generally, it may be said that a quasi-contract is based on the presumed will or intent of the obligor
dictated by equity and by the principles of absolute justice. Examples of these principles are: (1)
it is presumed that a person agrees to that which will benefit him; (2) nobody wants to enrich
himself unjustly at the expense of another; or (3) one must do unto others what he would want
others to do unto him under the same circumstances.”

a. Negotiorum Gestio

Article 2144. Whoever voluntarily takes charge of the agency or management of the business or
property of another, without any power from the latter, is obliged to continue the same until the
termination of the affair and its incidents, or to require the person concerned to substitute him, if
the owner is in a position to do so. This juridical relation does not arise in either of these instances:

(1) When the property or business is not neglected or abandoned;

(2) If in fact the manager has been tacitly authorized by the owner.

In the first case, the provisions of articles 1317, 1403, No. 1, and 1404 regarding unauthorized
contracts shall govern.

In the second case, the rules on agency in Title X of this Book shall be applicable. (1888a)

b. Solutio Indebiti

Article 2154. If something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises.

Metrobank v. Absolute Management Corp. – “Solutio indebiti, as defined in Article 2154 of the
Civil Code, has two indispensable requisites: first, that something has been unduly delivered
through mistake; and second, that something was received when there was no right to demand it.

In its fourth-party complaint, Metrobank claims that Chua’s estate should reimburse it if it becomes
liable on the checks that it deposited to Ayala Lumber and Hardware’s account upon Chua’s
instructions.

This fulfills the requisites of solutio indebiti. First, Metrobank acted in a manner akin to a mistake
when it deposited the AMC checks to Ayala Lumber and Hardware’s account; because of Chua’s
control over AMC’s operations, Metrobank assumed that the checks payable to AMC could be
deposited to Ayala Lumber and Hardware’s account. Second, Ayala Lumber and Hardware had no
right to demand and receive the checks that were deposited to its account; despite Chua’s control
over AMC and Ayala Lumber and Hardware, the two entities are distinct, and checks exclusively
and expressly payable to one cannot be deposited in the account of the other. This disjunct created
an obligation on the part of Ayala Lumber and Hardware, through its sole proprietor, Chua, to
return the amount of these checks to Metrobank.”

c. SECTION 3
 Other Quasi-Contracts *

Article 2164. When, without the knowledge of the person obliged to give support, it is given by a
stranger, the latter shall have a right to claim the same from the former, unless it appears that he
gave it out of piety and without intention of being repaid. (1894a)

Article 2165. When funeral expenses are borne by a third person, without the knowledge of those
relatives who were obliged to give support to the deceased, said relatives shall reimburse the third
person, should the latter claim reimbursement. (1894a)

Article 2166. When the person obliged to support an orphan, or an insane or other indigent person
unjustly refuses to give support to the latter, any third person may furnish support to the needy
individual, with right of reimbursement from the person obliged to give support. The provisions
of this article apply when the father or mother of a child under eighteen years of age unjustly
refuses to support him.

Article 2167. When through an accident or other cause a person is injured or becomes seriously
ill, and he is treated or helped while he is not in a condition to give consent to a contract, he shall
be liable to pay for the services of the physician or other person aiding him, unless the service has
been rendered out of pure generosity.

Article 2168. When during a fire, flood, storm, or other calamity, property is saved from
destruction by another person without the knowledge of the owner, the latter is bound to pay the
former just compensation.

Article 2169. When the government, upon the failure of any person to comply with health or safety
regulations concerning property, undertakes to do the necessary work, even over his objection, he
shall be liable to pay the expenses.

Article 2170. When by accident or other fortuitous event, movables separately pertaining to two
or more persons are commingled or confused, the rules on co-ownership shall be applicable.

Article 2171. The rights and obligations of the finder of lost personal property shall be governed
by articles 719 and 720.


Article 2172. The right of every possessor in good faith to reimbursement for necessary and useful
expenses is governed by article 546.

Article 2173. When a third person, without the knowledge of the debtor, pays the debt, the rights
of the former are governed by articles 1236 and 1237.

Article 2174. When in a small community a majority of the inhabitants of age decide upon a
measure for protection against lawlessness, fire, flood, storm or other calamity, any one who
objects to the plan and refuses to contribute to the expenses but is benefited by the project as
executed shall be liable to pay his share of said expenses.

Article 2175. Any person who is constrained to pay the taxes of another shall be entitled to
reimbursement from the latter

4. Acts of Omissions Punished by Law (Delicts)

Art. 1161. Civil obligations arising from 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.

Obligations Arising from Criminal Offenses. — As a rule, every person liable for a felony is
also civilly liable. This principle is based on the fact that, generally, a crime has a dual aspect —
the criminal aspect and the civil aspect. Although these two aspects are separate and distinct from
each other in the sense that one affects the social order and the other, private rights, so that the
purpose of the first is to punish or correct the offender, while the purpose of the second is to repair
the damages suffered by the aggrieved party, it is evident that the basis of the civil liability is the
criminal liability itself.

Please note, however, that there are offenses and special crimes without civil liability. Examples
are crimes of treason, rebellion, illegal possession of firearm and gambling. But a person who is
not criminally liable may still be civilly liable.

5. Quasi-Delicts

Art. 1162. Obligations derived from quasi-delicts shall be governed by the provisions of Chapter
2, Title XVII of the Book, and by special laws.

Article 2176. Whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-
existing contractual relation between the parties, is called a quasi-delict and is governed by the
provisions of this Chapter. (1902a)

Thus, using Art. 2176 of the Civil Code and decided cases as bases or anchors, it may be defined
as the fault or negligence of a person, who, by his act or omission, connected or unconnected with,
but independent from, any contractual relation, causes damage to another person. It is, therefore,
the equivalent of the term “tort” in Anglo-American law.

Persons liable. — Obligations arising from quasi- delicts are demandable not only from the person
directly responsible for the damage incurred, but also against the following:

(1) The father and, in case of his death or incapacity, the mother, with respect to damages caused
by the minor children who live in their company;
(2) Guardians, with respect to damages caused by the minors or incapacitated persons who are
under their authority and who live in their company;

Requisites of liability. — In actions based on quasi- delicts, before the person injured can recover
damages from the defendant, it is necessary that he must be able to prove the following facts:

(1) The fault or negligence of the defendant; 


(2) The damage suffered or incurred by the plaintiff; and 


(3) The relation of cause and effect between the fault or negligence of the defendant and the
damage incurred by the plaintiff.

Quasi-delicts and crimes. — Quasi-delicts and criminal offenses are sometimes difficult to
distinguish from each other. However, they may be distinguished from each other in the following
ways:

(1) Crimes affect the public interest, while quasi-delicts are only of private concern;

(2) The Penal Code punishes or corrects the criminal act, while the Civil Code, by means of
indemnification, merely repairs the damages incurred;

(3) Generally, there are two liabilities in crime: criminal and civil. In quasi-delict, there is only
civil liability; and

(4) Crimes are not as broad as quasi-delicts, because the former are punished only if there is a law
clearly covering them, while the latter include all acts in which any kind of fault or negligence
intervenes.

II. Nature and Effect

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.

A. Obligation to Give

1. Obligation to deliver
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.

Article 1244. The debtor of a thing cannot compel the creditor to receive a different one, although
the latter may be of the same value as, or more valuable than that which is due.

In obligations to do or not to do, an act or forbearance cannot be substituted by another act or

forbearance against the obligee's will. (1166a)

2. Obligation to Take Care of the Thing

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.

Obligations to Give. — An obligation to give a thing may be either determinate or generic. It is

determinate when the object is particularly designated or physically segregated from all others of
the same class.

3. Obligation to Deliver Fruits

Art. 1164. 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.

In case of obligations arising from contracts, the obligation to deliver arises, as a general rule, from
the moment of the perfection of the contract.

4. Obligation to Deliver Accessions and Accessories

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.

To deliver all accessions and accessories of the thing, even though they may not have been
mentioned. This accessory obligation is expressly imposed upon the debtor by the provision of
Art. 1166 of the Code. The term “accessions’’ signifies all of those things which are produced by
the thing which is the object of the obligation as well as all of those which are naturally or
artificially attached thereto. Consequently, it comprehends all of the different kinds of accessions
which are defined and regulated by the provisions of Art. 441 to Art. 475 of the Civil Code, such
as accesión discreta (natural, industrial and civil fruits) as well as accesión industrial (building,
planting and sowing), accesión natural (alluvion, avulsion, abandoned river beds, and islands
formed in non-navigable or non-floatable rivers) and accession with respect to movable property
(adjunction or conjunction, confusion or commixtion, and specification). “Accessories,’’ on the
other hand, must be understood in its current and popular sense. It signifies all of those things
which have for their object the embellishment, use or preservation of another thing which is more
important and to which they are not incorporated or attached. In other words, it includes all of
those things which are necessary or convenient for the perfection of another thing, such as the
equipment of a factory, the spare parts and tools of a machine, the key of a house, and others of a
similar nature

B. Obligation to Do

Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost.

The 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.

In obligation to do (positive personal obligations), if the obligor fails to do that which he has
obligated himself to do, the obligee can have the obligation performed or executed at the expense
of the former, and, at the same time, demand for damages by reason of the breach.

Unlike obligations to give, in obligations to do the obligee does not possess the power to compel
the obligor to comply with his obligation. In this type of obligation the law recognizes the
individual’s freedom or liberty to choose between doing that which he has promised to do and not
doing it.

It must be observed, however, that the right of the obligee to have the prestation executed at the
expense of the obligor cannot be availed of when such prestation consists of an act where the
personal and special qualification of the obligor is the principal motive for the establishment of
the obligation, as for instance, the talent and prestige of an artist. In such case, there is no other
remedy of the obligee except to proceed against the obligor for damages under Art. 1170 of the
Code.

C. Obligation Not to Do

Art. 1168. When the obligation consists in not doing, and the obligor does what has been forbidden
him, it shall also be undone at his expense.

If the obligor does what has been forbidden him, two remedies are available to the obligee — to
have it undone at the expense of the obligor in accordance with Art. 1168 and to ask for damages
in accordance with Art. 1170. Thus, if the obligor obligated himself not to construct his house
beyond a certain height in order not to obstruct the view from the house of the obligee, and
subsequently, he adds another story beyond the stipulated height, the obligee has the right to
demand for the demolition of the additional storey at the expense of the obligor. In addition, he
can also demand indemnity for damages.

III. Non-Performance of Obligations

A. Kinds of Non-Performance
Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence,
or delay, and those who in any manner contravene the tenor thereof, are liable for damages. (1101)

1. Delay (Mora)

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them 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 so declares; or

(2) When from the nature and the circumstances of the obligation it appears that the designation
of the time when the thing is to be delivered or the service is to be rendered was a 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, nither party incurs in delay if the other does not comply or is not ready
to 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.

In general, the breach of an obligation may be either voluntary or involuntary. It is voluntary if the
debtor or obligor in the performance of his obligation is guilty of default (mora), or fraud (dolo),
or negligence (culpa), or in any manner contravenes the tenor thereof.

Voluntary Breach Through Default or Mora. — The first kind of voluntary breach of an
obligation regulated by the Civil Code is that which takes place by reason of default or mora.
Default or mora signifies the idea of delay in the fulfillment of an obligation with respect to time.

There are three kinds of default or mora. They are:

(1) Mora solvendi or the delay of the obligor or debtor to perform his obligation. This delay is
called mora solvendi ex re when the obligation is an obligation to give or mora solvendi ex persona
when the obligation is an obligation to do.

(2) Mora accipiendi or the delay of the obligee or creditor to accept the delivery of the thing which
is the object of the obligation.

(3) Compensatio morae or the delay of the parties or obligors in reciprocal obligations.

There are three requisites which should be present in order that the obligor or debtor may be
considered in default. They are:
(1) The obligation is demandable and already liquidated;

(2) The obligor or debtor delays performance; and

(3) The creditor requires the performance judicially or extrajudicially.

Cetus Development v. CA – “It is very clear that in the case at bar, no cause of action for ejectment
has accrued. There was no failure yet on the part of private respondents to pay rents for three
consecutive months. As the terms of the individual verbal leases which were on a month-to-month
basis were not alleged and proved, the general rule on necessity of demand applies, to wit: there is
default in the fulfillment of an obligation when the creditor demands payment at the maturity of
the obligation or at anytime thereafter. This is explicit in Article 1169, New Civil Code which
provides that (t)hose obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation. Petitioner has
not shown that its case falls on any of the following exceptions where demand is not required: (a)
when the obligation or the law so declares; (b) when from the nature and circumstances of the
obligation it can be inferred that time is of the essence of the contract; and (c) when demand would
be useless, as when the obligor has rendered it beyond his power to perform.

The demand required in Article 1169 of the Civil Code may be in any form, provided that it can
be proved. The proof of this demand lies upon the creditor. Without such demand, oral or written,
the effects of default do not arise. This demand is different from the demand required under Section
2, Rule 70, which is merely a jurisdictional requirement before an existing cause of action may be
pursued.”

RCBC vs. CA & Lustre – “Article 1170 of the Civil Code states that those who in the performance
of their obligations are guilty of delay are liable for damages. The delay in the performance of the
obligation, however, must be either malicious or negligent. Thus, assuming that private respondent
was guilty of delay in the payment of the value of the unsigned check, private respondent cannot
be held liable for damages. There is no imputation, much less evidence, that private respondent
acted with malice or negligence in failing to sign the check. Indeed, we agree with the Court of
Appeals’ finding that such omission was mere inadvertence on the part of private respondent.”

Aerospace vs. CA – “As pointed out earlier, petitioner is guilty of delay, after private respondent
made the necessary extrajudicial demand by requiring petitioner to lift the cargo at its designated
load ports. When petitioner failed to comply with its obligations under the contract it became liable
for its shortcomings. Petitioner is indubitably liable for proven damages.

The Court of Appeals had relied on private respondent’s earlier letter to petitioner of that date for
computing the commencement of delay. But as averred by petitioner, said letter of August 6th is
not a categorical demand. What it showed was a mere statement of fact

There are three requisites which should be present in order that the obligor or debtor may be
considered in default. They are:

(1) The obligation is demandable and already liquidated;

(2) The obligor or debtor delays performance; and

(3) The creditor requires the performance judicially or extrajudicially.”

Santos v. Santos – “Delay as used in this article is synonymous to default or mora which means
delay in the fulfillment of obligations. It is the non-fulfillment of the obligation with respect to
time
 In order for the debtor to be in default, it is necessary that the following requisites be (1)
that the obligation be demandable and already liquidated; (2) that the debtor delays performance;
and (3) that the creditor requires the performance judicially or extrajudicially In the case at bar,
the obligation was already due and demandable after the lapse of the two-year period from the
execution of the contract. The two-year period ended on October 26, 1992.

When the respondents gave a demand letter on October 28, 1992, to the petitioner, the obligation
was already due and demandable. Furthermore, the obligation is liquidated because the debtor
knows precisely how much he is to pay and when he is to pay it.

The second requisite is also present. Petitioner delayed in the performance. It was able to fully
settle its outstanding balance only on February 8, 1995, which is more than two years after the
extrajudicial demand. Moreover, it filed several motions and elevated adverse resolutions to the
appellate court to hinder the execution of a final and executory judgment, and further delay the
fulfillment of its obligation.

Third, the demand letter sent to the petitioner on October 28, 1992, was in accordance with an
extrajudicial demand contemplated by law.

Verily, the petitioner is liable for damages for the delay in the performance of its obligation.”

2. Fraud (Dolo)

Art. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an
action for future fraud is void.

Voluntary Breach Through Fraud or Dolo. — The second kind of voluntary breach of an
obligation regulated by the Civil Code is that which takes place by reason of fraud or dolo.
According to Manresa, fraud or dolo consists in the conscious and intentional proposition to evade
the normal fulfillment of an obligation. This type of fraud, which is present during the performance
of an obligation, must not be confused with the causal or incidental fraud, which is present at the
time of the birth of an obligation. Under our legal system, fraud in general may be classified into
civil and criminal fraud. Civil fraud, in turn, may be classified into the following: first, the fraud
or dolo in the performance of an obligation; and second, the fraud or dolo in the constitution or
establishment of an obligation.

Incidental Fraud – Dolo incidente, fraud in performance (Remedy is to claim damages)

Causal Fraud – Dolo causante, fraud in perfection (Remedy is to annul)

The two may be distinguished from each other as follows:

(1) The first is present only during the performance of a pre- existing obligation, while the second
is present only at the time of the birth of the obligation.

(2) The first is employed for the purpose of evading the normal fulfillment of an obligation, while
the second is employed for the purpose of securing the consent of the other party to enter into the
contract.

(3) The first results in the nonfulfillment or breach of the obligation, while the second, if it is the
reason for the other party upon whom it is employed for entering into the contract, results in the
vitiation of his consent.

(4) The first gives rise to a right of the creditor or obligee to recover damages from the debtor or
obligor, while the second gives rise to a right of the innocent party to ask for the annulment of the
contract if the fraud is causal or to recover damages if it is incidental.

If there is a breach or non-fulfillment of the obligation by reason of fraud or dolo on the part of the
obligor or debtor, he can be held liable for damages. As a ground for damages, malice or dishonesty
is implied. It cannot cover cases of mistake and errors of judgment made in good faith. Fraud or
dolo is synonymous to bad faith.

Thus, waiver for future fraud is contrary to law and public policy. As such, said waiver is void.
But waiver for a past fraud is valid since such waiver can be deemed an act of generosity. Further,
what is renounced is the effect of fraud, more particularly the right of the party to indemnity.

Legaspi Oil vs. CA & Bernard Oseraos – “The conduct of private respondent clearly manifests
his deliberate fraudulent intent to evade his contractual obligation for the price of copra had in the
meantime more than doubled from P82.00 to P168 per 100 kilograms. Under Article 1170 of the
Civil Code of the Philippines, those who in the performance of their obligation are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for
damages. Pursuant to said article, private respondent is liable for damages.”

Woodhouse vs. Halili – “We conclude from the above that while the representation that plaintiff
had the exclusive franchise did not vitiate defendant's consent to the contract, it was used by
plaintiff to get from defendant a share of 30 per cent of the net profits; in other words, by pretending
that he had the exclusive franchise and promising to transfer it to defendant, he obtained the
consent of the latter to give him (plaintiff) a big slice in the net profits “

ICB v. Gueco – “Fraud has been defined as the deliberate intention to cause damage or prejudice.
It is the voluntary execution of a wrongful act, or a willful omission, knowing and intending the
effects which naturally and necessarily arise from such act or omission; the fraud referred to in
Article 1170 of the Civil Code is the deliberate and intentional evasion of the normal fulfillment
of an obligation.

We fail to see how the act of the petitioner bank in requiring the respondent to sign the joint motion
to dismiss could constitute as fraud. True, petitioner may have been remiss in informing Dr. Gueco
that the signing of a joint motion to dismiss is a standard operating procedure of petitioner bank.
However, this cannot in anyway have prejudiced Dr. Gueco. The motion to dismiss was in fact
also for the benefit of Dr. Gueco, as the case filed by petitioner against it before the lower court
would be dismissed with prejudice. The whole point of the parties entering into the compromise
agreement was in order that Dr. Gueco would pay his outstanding account and in return petitioner
would return the car and drop the case for money and replevin before the Metropolitan Trial Court.
The joint motion to dismiss was but a natural consequence of the compromise agreement and
simply stated that Dr. Gueco had fully settled his obligation, hence, the dismissal of the case.
Petitioner’s act of requiring Dr. Gueco to sign the joint motion to dismiss cannot be said to be a
deliberate attempt on the part of petitioner to renege on the compromise agreement of the parties.”

3. Negligence (Culpa)

Article 1172. Responsibility arising from negligence in the performance of every kind of
obligation is also demandable, but such liability may be regulated by the courts, according to the
circumstances. (1103)

Article 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 which is to be observed in the performance, that
which is expected of a good father of a family shall be required. (1104a)

Civil negligence, in turn, may be either culpa contractual or culpa aquiliana (quasi-delicts). Using
the general definition of negligence enunciated in Art. 1173 as basis, the first may be defined as
the fault or negligence of the obligor by virtue of which he is unable to perform his obligation
arising from a pre-existing contract, because of the omission of the 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. The second, on the other hand, may be defined as the fault or negligence of a person,
who, because of the omission of the diligence which is required by the nature of the obligation and
which must correspond with the circumstances of the persons, of the time and of the place, causes
damage to another.

From the above definitions, it is clear that whether the negligence is culpa contractual or culpa
aquiliana, the provision of Art. 1173 of the Civil Code applies. The negligence of the defendant
in both cases is characterized by 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.
The similarity, however, ends there. They are different with respect to antecedents and
consequences. They may be distinguished from each other as follows:

(1) As regards the character of the negligence of the defendant: In culpa contractual, the
negligence of the defendant is merely an incident in the performance of an obligation; in culpa
aquiliana it is substantive and independent.

(2) As regards the relationship of the parties: In the first there is always a pre-existing contractual
relation; in the second there may or may not be a pre-existing contractual relation.

(3) As regards the source of the obligation: In the first the source of the obligation of the defendant
to pay damages to the plaintiff is the breach or nonfulfillment of the contract; in the second the
source is the defendant’s negligent act or omission itself.

(4) As regards the proof required for recovery: In the first proof of the existence of the contract
and of its breach or nonfulfillment is sufficient prima facie to warrant a recovery; in the second
the negligence of the defendant must be proved.

(5) As regards the availability of due diligence as a defense: In the first proof of diligence in the
selection and supervision of employees is not available as a defense; in the second it is.

Picart v. Smith – “The test by which to determine the existence of negligence in a particular case
may be stated as follows: Did the defendant in doing the alleged negligent act use that reasonable
care and caution which an ordinarily prudent person would have used in the same situation? If not,
then he is guilty of negligence.

Stated in these terms, the proper criterion for determining the existence of negligence in a given
case is this: Conduct is said to be negligent when a prudent man in the position of the tortfeasor
would have foreseen that an effect harmful to another was sufficiently probable to warrant his
foregoing the conduct or guarding against its consequences.

MALCOLM, J., concurring:

After mature deliberation, I have finally decided to concur with the judgment in this case. I do so
because of my understanding of the "last clear chance" rule of the law of negligence as particularly
applied to automobile accidents.”

4. Contravention of Tenor

Article 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)

Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence,
or delay, and those who in any manner contravene the tenor thereof, are liable for damages. (1101)

Voluntary Breach Through Contravention of Tenor of Obligation. — Under Art. 1170 of the
Civil Code, not only debtors guilty of fraud, negligence or default in the performance of obligations
are decreed liable; in general, every debtor who fails in the performance of his obligations is bound
to indemnify the creditor for the damages caused thereby. The phrase “in any manner contravene
the tenor” of the obligation includes not only any illicit act which impairs the strict and faithful
fulfillment of the obligation, but also every kind of defective performance.

Chavez v. Gonzales – “The cost of execution of the obligation to repair a typewriter is the cost of
the labor or service expended in the repair of the typewriter. In addition, the obligor, under Article
1170 of the Code, is liable for the cost of the missing parts because in his obligation to repair the
typewriter he is bound to return the typewriter in the same condition it was when he received it.”
Arrieta v. NARIC – “We would like to make reference also to Article 1170 of the Civil Code
which provides:

"Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof, are liable in damages."

Under this provision, not only debtors guilty of fraud, negligence or default in the performance of
obligations are decreed liable; in general, every debtor who fails in the performance of his
obligations is bound to indemnify for the losses and damages caused thereby.”

Tanguiling v. CA – “Petitioner failed to show that the collapse of the windmill was due solely to
a fortuitous event. Interestingly, the evidence does not disclose that there was actually a typhoon
on the day the windmill collapsed. Petitioner merely stated that there was a strong wind. But a
strong wind in this case cannot be fortuitous/unforeseeable nor unavoidable. On the contrary, a
strong wind should be present in places where windmills are constructed, otherwise the windmills
will not turn.

The appellate court correctly observed that given the newly-constructed windmill system, the same
would not have collapsed had there been no inherent defect in it which could only be attributable
to the appellee”

B. Effect of Fortuitous Event

Article 552. XXXXX

A possessor in bad faith shall be liable for deterioration or loss in every case, even if caused by a
fortuitous event. (457a)

Article 1165. XXXXX

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
delivery. (1096)

Article 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)

Article 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous
event:

(1) If he devotes the thing to any purpose different from that for which it has been loaned;

(2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which
the commodatum has been constituted;

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation
exempting the bailee from responsibility in case of a fortuitous event;

(4) If he lends or leases the thing to a third person, who is not a member of his household;

(5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter.
(1744a and 1745)

Article 1979. The depositary is liable for the loss of the thing through a fortuitous event:

(1) If it is so stipulated;


(2) If he uses the thing without the depositor's permission;


(3) If he delays its return;


(4) If he allows others to use it, even though he himself may have been authorized to use the same.
(n)

Article 2001. The act of a thief or robber, who has entered the hotel is not deemed force majeure,
unless it is done with the use of arms or through an irresistible force. (n)

Article 2147. The officious manager shall be liable for any fortuitous event:


(1) If he undertakes risky operations which the owner was not accustomed to embark upon;

(2) If he has preferred his own interest to that of the owner;


(3) If he fails to return the property or business after demand by the owner;


(4) If he assumed the management in bad faith. (1891a)

* Fortuitous events may be classified into fortuitous event proper (act of God) and force majeure
(fuerza mayor) depending upon whether there is human intervention or not. The first refers to an
event which is absolutely independent of human intervention, while the second refers to an event
which arises from legitimate or illegitimate acts of persons other than the obligor.

Effect upon Obligation. — If the obligor is unable to comply with his obligation by reason of a
fortuitous event, the general rule is that he is exempted from any liability whatsoever. In other
words, his obligation is extinguished.

Essential conditions. — There are several essential conditions which must concur in order that
the general rule stated in Art. 1174 can be applied. These conditions are:

first, that the event must be independent of the will of the obligor;

second, that the event must be either unforeseeable or inevitable;

third, that the event must be of such a character as to render it impossible for the obligor to fulfill
his obligation in a normal manner; and

fourth, that the obligor must be free from any participation in the aggravation of the injury resulting
to the obligee or creditor.

Austria v. CA – “High Incidence of crimes against persons and property, that renders travel after
nightfall a matter to be sedulously avoided without suitable precaution and protection, the conduct
of respondent Maria G. Abad, in returning alone to her house in the evening, carrying jewelry of
considerable value, would be negligent per se, and would not exempt her from responsibility in
the case of a robbery. We are not persuaded, however, that the same rule should obtain ten years
previously, in 1961, when the robbery in question did take place, for at that time criminality had
not by far reached the levels attained in the present day.”

Philcomsat v. Globe –“Civil Law; Contracts; Force Majeure; Article 1174 exempts an obligor
from liability not only to events that are unforeseeable, but also to those which are foreseeable,
but inevitable. - Article 1174, which exempts an obligor from liability on account of fortuitous
events or force majeure, refers not only to events that are unforeseeable, but also to those which
are foreseeable, but inevitable: Art. 1174. Except in cases 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. A fortuitous event under Article 1174 may either be an act of God, or
natural occurrences such as floods or typhoons, or an act of man, such as riots, strikes or wars.”

C. Subsidiary Remedies of Creditor

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.

Remedies of Creditor To Protect Credit. — Under Art. 1177, there are three general remedies
which are available to the creditor for the protection and enforcement of his right against the
debtor. They are:

first, to exhaust the property in possession of the debtor;

second, to be subrogated to all of the rights and actions of the debtor save those which are inherent
in his person; and

third, to impugn all of the acts which the debtor may have done to defraud him. The second and
third, however, are subsidiary to the first.

Exhaustion of debtor’s property. — The principal remedy of the creditor to protect and enforce
his credit is to exhaust all properties in the possession of the debtor. This remedy is in conformity
with the rule stated in Art. 2236 of the Civil Code which states that the debtor is liable with all his
property, present and future, for the fulfillment of his obligations subject to the exemptions
provided by law.
Accion subrogatoria. — Actually, the debtor may defeat the right of the creditor by mere
omission or inaction. In other words, he may simply fail, or neglect, or refuse to collect any credit
which he may have against a third person

Accion pauliana. — Another method by which the debtor may defeat the right of the creditor is
by means of a positive act whereby the latter is defrauded or prejudiced. This may be illustrated
by alienations or conveyances of property made by the debtor to third persons in fraud of creditors

Adorable v. CA – “We hold that, as creditors, petitioners do not have such material interest as to
allow them to sue for rescission of the contract of sale. At the outset, petitioners’ right against
private respondents is only a personal right to receive payment for the loan; it is not a real right
over the lot subject of the deed of sale.

A personal right is the power of one person to demand of another, as a definite passive subject, the
fulfillment of a prestation to give, to do, or not to do. On the other hand, a real right is the power
belonging to a person over a specific thing, without a passive subject individually determined,
against whom such right may be personally exercised.

Thus, the following successive measures must be taken by a creditor before he may bring an action
for rescission of an allegedly fraudulent sale: (1) exhaust the properties of the debtor through
levying by attachment and execution upon all the property of the debtor, except such as are exempt
by law from execution; (2) exercise all the rights and actions of the debtor, save those personal to
him (accion subrogatoria); and (3) seek rescission of the contracts executed by the debtor in fraud
of their rights (accion pauliana). Without availing of the first and second remedies, i.e., exhausting
the properties of the debtor or subrogating themselves in Francisco Bareng’s transmissible rights
and actions, petitioners simply undertook the third measure and filed an action for annulment of
the sale. This cannot be done.”

Khe Hong Cheng v. CA – “An accion pauliana thus presupposes the following: 1) A judgment;
2) the issuance by the trial court of a writ of execution for the satisfaction of the judgment; and 3)
the failure of the sheriff to enforce and satisfy the judgment of the court. It requires that the creditor
has exhausted the property of the debtor. The date of the decision of the trial court is immaterial.
What is important is that the credit of the plaintiff antedates that of the fraudulent alienation by the
debtor of his property. After all, the decision of the trial court against the debtor will retroact to
the time when the debtor became indebted to the creditor.

Requisites of action to rescind or accion pauliana:

1) That the plaintiff asking for rescission has a credit prior to the alienation, although
demandable later;

2) That the debtor has made a subsequent contract conveying a patrimonial benefit to a third
person

3) That the creditor has no other legal remedy to satisfy his claim, but would benefit by
 rescission of the conveyance to the third person

4) That the act being impugned is fraudulent

5) That the third person who received the property conveyed, if by onerous title, has been an
accomplice in the fraud.”

Even if respondent Philam was aware, as of December 27, 1989, that petitioner Khe Hong Cheng
had executed the deeds of donation in favor of his children, the complaint against Butuan Shipping
Lines and/or petitioner Khe Hong Cheng was still pending before the trial court. Respondent
Philam had no inkling, at the time, that the trial court’s judgment would be in its favor and further,
that such judgment would not be satisfied due to the deeds of donation executed by petitioner Khe
Hong Cheng during the pendency of the case. Had respondent Philam filed his complaint on
December 27, 1989, such complaint would have been dismissed for being premature, Not only
were all other legal remedies for the enforcement of respondent Philam’s claims not yet exhausted
at the time the deeds of donation were executed and registered. Respondent Philam would also not
have been able to prove then that petitioner Khe Hong Cheng had no more property other than
those covered by the subject deeds to satisfy a favorable judgment by the trial court.

It bears stressing that petitioner Khe Hong Cheng even expressly declared and represented that he
had reserved to himself property sufficient to answer for his debts contracted prior to this date”

IV. Kinds of Obligations

A. Pure or Conditional

1. Pure

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

Pure Obligations. — Using the provision as a basis and bearing in mind this criticism, we can,
therefore, define a pure obligation as one whose effectivity or extinguishment does not depend
upon the fulfillment or nonfulfillment of a condition or upon the expiration of a term or period,
and which, as a consequence, is characterized by the quality of immediate demandability.

Although the obligee or creditor can demand the performance of the obligation immediately, the
quality of immediate demandability is not infringed or violated when a reasonable period is granted
for performance.
2. Conditional/Kinds of Conditional Obligations

Classification of conditions. — Conditions are traditionally classified as follows:

(1) a. Suspensive — when the fulfillment of the condition results in the acquisition of rights arising
out of the obligation.

b. Resolutory — when the fulfillment of the condition results in the extinguishment of rights arising
out of the obligation.

(2) a. Potestative — when the fulfillment of the condition depends upon the will of a party to the
obligation.

b. Casual — when the fulfillment of the condition depends upon chance and/or upon the will of a
third person. 
 (void)

c. Mixed — when the fulfillment of the condition depends partly upon the will of a party to the
obligation and partly upon chance and/or the will of a third person. 


(3) a. Possible — when the condition is capable of realization according to nature, law, public
policy or good customs.

b. Impossible — when the condition is not capable of realization according to nature, law, public
policy or good customs.

(4) a. Positive — when the condition involves the performance of an act.

b. Negative — when the condition involves the omission of an act.

(5) a. Divisible — when the condition is susceptible of partial realization.

b. Indivisible — when the condition is not susceptible of partial realization.

(6) a Conjunctive — when there are several conditions, all of which must be realized.

b. Alternative — when there are several conditions, but only one must be realized.

(7) a. Express — when the condition is stated expressly. 


b. Implied — when the condition is tacit.

Article 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)
Suspensive and Resolutory Conditions. — A suspensive condition (condition precedent) is a
future and uncertain event upon the happening or fulfillment of which rights arising out of the
obligation are acquired.

It is, therefore, evident that when the obligation is subject to a suspensive condition, its birth or
effectivity can take place only if and when the event which contitutes the condition happens or is
fulfilled

Gaite v. Fonacier – “We find the court below to be legally correct in holding that the shipment or
local sale of the iron ore is not a condition precedent (or suspensive) to the payment of the balance
of P65,000.00, but was only a suspensive period or term. What characterizes a conditional
obligation is the fact that its efficacy or obligatory force (as distinguished from its demandability)
is subordinated to the happening of a future and uncertain event; so that if the suspensive condition
does not take place, the parties would stand as if the conditional obligation had never existed.

To subordinate the obligation to pay the remaining P65,000.00 to the sale or shipment of the ore
as a condition precedent, would be tantamount to leaving the payment at the discretion of the
debtor, for the sale or shipment could not be made unless the appellants took steps to sell the ore.

The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on credit,
and not an aleatory contract where the transferor, Gaite, would assume the risk of not being paid
at all; and that the previous sale or shipment of the ore was not a suspensive condition for the
payment of the balance of the agreed price, but was intended merely to fix the future date of the
payment.

Gonzales v. Heirs of Thomas – “Because the ninth clause required respondents to obtain a
separate and distinct TCT in their names and not in the name of petitioner, it logically follows that
such undertaking was a condition precedent to the latter’s obligation to purchase and pay for the
land. Put differently, petitioner’s obligation to purchase the land is a conditional one and is
governed by Article 1181 of the Civil Code.

When the consent of a party to a contract is given subject to the fulfillment of a suspensive
condition, the contract is not perfected unless that condition is first complied with.

In this case, the obligation of the petitioner to buy the land cannot be enforced unless respondents
comply with the suspensive condition that they acquire first a separate and distinct TCT in their
names. The suspensive condition not having been fulfilled, then the obligation of the petitioner to
purchase the land has not arisen.”

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 in the preceding article shall be applied to the party who is bound to
return.

As for obligations to do and 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.

b. Potestative, Casual or Mixed

Article 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)

Potestative, Casual and Mixed Conditions. — As regards the cause upon which its fulfillment
depends, a condition may be either potestative, casual or mixed. A purely potestative condition is
one whose fulfillment depends exclusively upon the will of either one of the parties to the
obligation. A casual condition is one whose fulfillment depends exclusively upon chance and/or
upon the will of a third person. A mixed condition is one whose fulfillment depends jointly upon
the will of either one of the parties to the obligation and upon chance and/or the will of a third
person.

Lim v. CA – “The continuance, effectivity and fulfillment of a contract of lease cannot be made
to depend exclusively upon the free and uncontrolled choice of the lessee between continuing the
payment of the rentals or not, completely depriving the owner of any say in the matter. Mutuality
does not obtain in such a contract of lease and no equality exists between the lessor and the lessee
since the life of the contract is dictated solely by the lessee.”

Naga Telephone v. CA – “A potestative condition is a condition, the fulfillment of which depends

upon the sole will of the debtor, in which case, the conditional obligation is void. Based on this
definition, respondent court’s finding that the provision in the contract, to wit:

(a) That the term or period of this contract shall be as long as the party of the first part
(petitioner) has need for the electric light posts of the party of the second part (private
respondent) x x x.

is a potestative condition, is correct. However, it must have overlooked the other conditions in the
same provision, to wit:

x x x it being understood that this contract shall terminate when for any reason whatsoever,
the party of the second part (private respondent) is forced to stop, abandoned (sic) its
operation as a public service and it becomes necessary to remove the electric light post
(sic);

which are casual conditions since they depend on chance, hazard, or the will of a third person. In
sum, the contract is subject to mixed conditions, that is, they depend partly on the will of the debtor
and partly on chance, hazard or the will of a third person, which do not invalidate the
aforementioned provision.
Rustan Pulp v. IAC – “Civil Law; Obligations and Contracts; It is a truism in legal jurisprudence
that a condition which is both potestative (or facultative) and resolutory may be valid even though
the saving clause is left to the will of the obligor.- A purely potestative imposition of this character
must be obliterated from the face of the contract without affecting the rest of the stipulations
considering that the condition relates to the fulfillment of an already existing obligation and not to
its inception (Civil Code Annotated, by Padilla, 1987 Edition, Volume 4, Page 160). It is, of
course, a truism in legal jurisprudence that a condition which is both potestative (or facultative)
and resolutory may be valid, even though the saving clause is left to the will of the obligor.”

Article 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)

Effects - Furthermore, if the condition is not to do an impossible thing, it shall be considered as

not having been agreed upon. Consequently, the obligation becomes pure, and therefore,
immediately demandable.

Heirs of San Miguel v. CA – “Severina’s heirs insist that delivery of the certificate of title is
predicated on a condition - payment of three hundred thousand pesos (P300,000.00) to cover the
sale of Lot 3 of LRC Psu 1312. We find this argument not meritorious. The condition cannot be
honored for reasons afore-discussed. Article 1183 of the Civil Code provides that:

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, x x x

Hence, the non-payment of the three hundred thousand pesos (P300,000.00) is not a valid
justification for refusal to deliver the certificate of title.

Besides, we note that the certificate of title covers Lots 1 and 2 of LRC Psu-1313, which were
fully paid for by Dominador, et al. Therefore, Severina’s heirs are bound to deliver the certificate
of title covering the lots.”

Article 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)

Article 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.

If no 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)

Positive and Negative Conditions. — The condition upon which an obligation is made to depend
may also be classified as positive or negative. It is positive if it involves the performance of an act
or the fulfillment of an event; it is negative if it involves the nonperformance of an act or the
nonfulfillment of an event.

Effects. — The condition that some event happen at a determinate time shall extinguish the
obligation as soon as the time expires or if it becomes indubitable that the event will not take place.
(Art.1184) Thus, if A binds himself to give to B P2,000 if the latter passes the bar examinations in
his first attempt, and B flunks the examinations, the obligation is extinguished.

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. (Art. 1185) Thus, if A binds himself to give P5,000 to B provided that the latter shall
not get married before reaching the age of twenty-five, the condition is negative. If B is not yet
married at the time when he finally reaches the age of twenty-five, the obligation becomes
effective.

Attention must be called to the rule stated in the second paragraph of Art. 1185. The intention of
the parties, taking into consideration the nature of the obligation, shall govern if no time has been
fixed for the fulfillment of the condition. It is evident that the same rule can also be applied to a
positive condition.

Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment. (1119)

Constructive Fulfillment of Suspensive Conditions. — The above article enunciates the doctrine
of constructive fulfillment of suspensive conditions. In order that this doctrine can be applied, it
is, however, necessary that the obligor must have actually prevented the obligee from complying
with the condition, and that such prevention must have been voluntary or willful in character.

Article 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)

Article 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)

Effect of Suspensive Conditions Before Fulfillment. — If the obligation depends upon a

suspensive condition, the demandability as well as the acquisition or effectivity of rights arising
from the obligation is suspended pending the happening or fulfillment of the fact or event which
constitutes the condition. It is but logical, therefore, that during the pendency of the condition, the
obligee or creditor has only a mere hope or expectancy. This hope or expectancy, however is
protected by the law. This is evident from the provision of the first paragraph of Art. 1188.
Inasmuch as the obligee or creditor has an expectant right to the eventual fulfillment or
performance of the obligation, it is but just and proper that the law accords to him the right to avail
of all remedies for the protection or preservation of such right. Thus, if the obligor has promised
in writing to sell a parcel of land to the obligee upon the happening of a certain condition, and
subsequently, before the fulfillment of the condition, he changes his mind and finally decides to
sell the land to another person, the obligee can bring an appropriate action, such as a petition for
the issuance of a writ of injunction, to prevent the sale in order to preserve his right.

In the case of the obligor or debtor, it is also logical that during the pendency of the condition, his
obligation to comply with the prestation which constitutes the object of the obligation is held in
suspense until the fulfillment of the condition. Or more accurately, his obligation to comply with
the prestation arises only if and when the event which constitutes the condition is finally fulfilled.
Consequently, if he has paid anything by mistake during the pendency of the condition, he can
recover what has been paid.

Effect of Suspensive Conditions After Fulfillment. — Once the event which constitutes the
condition is fulfilled, the obligation arises or becomes effective. The right of the creditor, which,
before the fulfillment of the condition, was a mere hope or expectancy, is perfected. It becomes
effective and demandable. The obligor or debtor, on the other hand, can thereafter be compelled
to comply with what is incumbent upon him.

Art. 1191. The power to rescind obligations 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 latter 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.

JUDICIAL ACTION PA RIN PAG RESCISION -

Concept of Reciprocal Obligations. — Reciprocal obligations are those which are created or
established at the same time, out of the same cause, and which result in mutual relationships of
creditor and debtor between the parties

Tacit Resolutory Condition. — Because of the fact that in reciprocal obligations the obligation
of one party is the correlative of the obligation of the other, the Code in the first paragraph of Art.
1191 has established the principle that if one of the parties fails to comply with what is incumbent
upon him, there is a right on the part of the other to rescind (or “resolve” in accordance with
accepted translations of the Spanish Civil Code) the obligation. This condition is implied as a
general rule in all reciprocal obligations. Since it has the effect of extinguishing rights which are
already acquired or vested, it is resolutory in character.

Necessity of judicial action. — The right to rescind or resolve the obligation is a right which
belongs to the injured party alone. However, it is essential that it must be invoked judicially. This
is evident from the provision of the third paragraph of Art. 1191 which states that the court shall
decree the rescission, unless there be a just cause authorizing the fixing of a period. Therefore, the
mere failure of a party to comply with what is incumbent upon him does not ipso jure produce the
rescission or resolution of the obligation

It must be noted, however, that where the contract itself contains a resolutory provision by virtue
of which the obligation maybe cancelled or extinguished by the injured party in case of breach,
judicial permission to cancel or rescind the contract is no longer necessary.

In Delta Motor Corp. vs. Gentino (170 SCRA 29), the Supreme Court reiterated the rule that
rescission will be ordered only where the breach complained of is substantial as to defeat the object
of the parties in entering into the agreement.

Alternative remedies of injured party. — In case one of the parties 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. These remedies are alternative, not
cumulative; in other words, the injured party cannot seek both.

Effect of rescission. — When an obligation has been rescinded or resolved, it is the duty of the
court to require the parties to surrender whatever they may have received from the other; in other
words, the parties must be placed as far as practicable in their original situation. This should,
however, be understood to be without prejudice to the liability of the party who was unable to
comply with what was incumbent upon him for damages.

Effect upon third persons. — According to the fourth paragraph of Art. 1191, the decree of
rescission shall be understood to be without prejudice to the rights of third persons who have
acquired the thing in accordance with Arts. 1385 and 1388 and the Mortgage Law. Consequently,
the rescission of a contract can no longer be demanded when he who demands it is no longer in a
position to return whatever he may be obliged to restore; neither can it be demanded when the
thing which is the object of the contract is already legally in the possession of a third person who
did not act in bad faith. In such case, the only remedy of the injured party is to proceed against the
party responsible for the transfer or conveyance for damages. However, if the third person had
acquired the thing in bad faith, the injured party can still go after the property. If for any cause the
thing can no longer be recovered, the only remedy of the injured party is to proceed against the
third person who had acted in bad faith for damages.

Ong v. CA – “Reciprocal obligations are those which arise from the same cause, and in which
each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon
the obligation of the other. They are to be performed simultaneously such that the performance of
one is conditioned upon the simultaneous fulfillment of the other. Rescission of reciprocal
obligations under Article 1191 of the New Civil Code should be distinguished from rescission of
contracts under Article 1383. Although both presuppose contracts validly entered into and
subsisting and both require mutual restitution when proper, they are not entirely identical.

Same; Same; Same; Rescission Distinguished from Resolution; Rescissible Contracts under
Article 1381 of the New Civil Code. - While Article 1191 uses the term rescission, the original
term which was used in the old Civil Code, from which the article was based, was resolution.
Resolution is a principal action which is based on breach of a party, while rescission under Article
1383 is a subsidiary action limited to cases of rescission for lesion under Article 1381 of the New
Civil Code, which expressly enumerates the following rescissible contracts: 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 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.

The breach contemplated in Article 1191 of the New Civil Code is the obligor’s failure to comply
with an obligation already extant, not a failure of a condition to render binding that obligation. -
Respondents in the case at bar bound themselves to deliver a deed of absolute sale and clean title
covering the two parcels of land upon full payment by the buyer of the purchase price of
P2,000,000.00. This promise to sell was subject to the fulfillment of the suspensive condition of
full payment of the purchase price by the petitioner. Petitioner, however, failed to complete
payment of the purchase price. The non-fulfillment of the condition of full payment rendered the
contract to sell ineffective and without force and effect. It must be stressed that the breach
contemplated in Article 1191 of the New Civil Code is the obligor’s failure to comply with an
obligation already extant, not a failure of a condition to render binding that obligation. Failure to
pay, in this instance, is not even a breach but merely an event which prevents the vendor’s
obligation to convey title from acquiring binding force. Hence, the agreement of the parties in the
case at bench may be set aside, but not because of a breach on the part of petitioner for failure to
complete payment of the purchase price. Rather, his failure to do so brought about a situation
which prevented the obligation of respondent spouses to convey title from acquiring an obligatory
force.”
Mistica v. Naguiat – “In the present case, the failure of respondents to pay the balance of the
purchase price within ten years from the execution of the Deed did not amount to a substantial
breach. In the Kasulatan, it was stipulated that payment could be made even after ten years from
the execution of the Contract, provided the vendee paid 12 percent interest. The stipulations of the
contract constitute the law between the parties; thus, courts have no alternative but to enforce them
as agreed upon and written.
 Moreover, it is undisputed that during the ten-year period, petitioner
and her deceased husband never made any demand for the balance of the purchase price. Petitioner
even refused the payment tendered by respondents during her husband’s funeral, thus showing that
she was not exactly blameless for the lapse of the ten- year period. Had she accepted the tender,
payment would have been made well within the agreed period.”

Cannu v. Spouses Galang – “Settled is the rule that rescission or, more accurately, resolution,
 is
predicated on a breach of faith by the other party that of a party to an obligation under Article 1191
violates the reciprocity between them. Article 1191 reads:

Art. 1191. The power to rescind obligations 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 latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.

Rescission will not be permitted for a slight or casual breach of the contract. Rescission may be
had only for such breaches that are parties in making the agreement.
 a breach of contract is
substantial depends upon the attending circumstances and not merely on the percentage of the
amount not paid.

In the case at bar, we find petitioners’ failure to pay the remaining balance of P45,000.00 to be
substantial.”

Pryce Corp v. PAGCOR – ““JBL Reyes – “The rescission on account of breach of stipulations
is not predicated on injury to economic interests of the party plaintiff but on the breach of faith by
the defendant, that violates the reciprocity between the parties. It is not a subsidiary action, and
Article 1191 may be scanned without disclosing anywhere that the action for rescission thereunder
is subordinated to anything other than the culpable breach of his obligations to the defendant. This
rescission is a principal action retaliatory in character, it being unjust that a party be held bound to
fulfill his promises when the other violates his. As expressed in the old Latin aphorism: Non
servanti fidem, non est fides servanda. Hence, the reparation of damages for the breach is purely
secondary.”
Rescission has likewise been defined as the unmaking of a contract, or its undoing from the
beginning, and not merely its termination. Rescission may be effected by both parties by mutual
agreement; or unilaterally by one of them declaring a rescission of contract without the consent of
the other, if a legally sufficient ground exists or if a decree of rescission is applied for before the
courts. On the other hand, termination refers to an end in time or existence; a close, cessation or
conclusion. With respect to a lease or contract, it means an ending, usually before the end of the
anticipated term of such lease or contract, that may be effected by mutual agreement or by one
party exercising one of its remedies as a consequence of the default of the other.
 Thus, mutual
restitution is required in a rescission (or resolution), in order to bring back the parties to their
original situation prior to the inception of the contract. Applying this principle to this case, it means
that PPC would re-acquire possession of the leased premises, and PAGCOR would get back the
rentals it paid the former for the use of the hotel space.

In contrast, the parties in a case of termination are not restored to their original situation; neither
is the contract treated as if it never existed. Prior to its termination, the parties are obliged to comply
with their contractual obligations. Only after the contract has been cancelled will they be released
from their obligations.”

Deiparine v. CA – “The construction contract falls squarely under the coverage of Article 1191
because it imposes upon Deiparine the obligation to build the structure and upon the Carungays
the obligation to pay for the project upon its completion.

Article 1191, unlike Article 1385, is not predicated on economic prejudice to one of the parties but
on breach of faith by one of them that violates the reciprocity between them. The violation of
reciprocity between Deiparine and the Carungay spouses, to wit, the breach caused by Deiparine’s
failure to follow the stipulated plans and specifications, has given the Carungay spouses the right
to rescind or cancel the contract.”

Laperal v. Solid Homes – “Mutual restitution is required in cases involving rescission under
Article 1191. In Velarde vs. Court of Appeals, this Court, in no uncertain terms, squarely ruled on
this matter: x x x Rescission creates the obligation to return the object of the contract. It can be
carried out only when the one who demands rescission can return whatever he may be obliged to
restore (citing Co v. Court of Appeals, 312 SCRA 528, August 17, 1999; and Vitug, Compendium
of Civil Law and Jurisprudence, 1993 revised ed., p. 556). To rescind is to declare a contract void
at its inception and to put an end to it as though it never was. It is not merely to terminate it and
release the parties from further obligations to each other, but to abrogate it from the beginning and
restore the parties to their relative positions as if no contract has been made.”

UP v. De Los Angeles – ““there is nothing in the law that prohibits the parties from entering into
agreement that violation of the terms of the contract would cause cancellation thereof, even without
court intervention. In other words, it is not always necessary for the injured party to resort to court
for rescission of the contract.”
Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved
on account of infractions by the other contracting party must be made known to the other and is
always provisional, being ever subject to scrutiny and review by the proper court. If the other party
denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring
the matter to court. Then, should the court, after due hearing, decide that the resolution of the
contract was not warranted, the responsible party will be sentenced to damages; in the contrary
case, the resolution will be affirmed, and the consequent indemnity awarded to the party
prejudiced.”

Angeles v. Calasanz – “Article 1191 is explicit. In reciprocal obligations, either party has the right
to rescind the contract upon the failure of the other to perform the obligation assumed thereunder.
Moreover, there is nothing in the law that prohibits the parties from entering into an agreement
that violation of the terms of the contract would cause its cancellation even without court
Intervention (Froilan v. Pan Oriental Shipping, Co., et al., 12 SCRA 276)·

“Well settled is, however, the rule that a judicial action for the rescission of a contract is not
necessary where the contract provides that it may be revoked and cancelled for violation of any of
its terms and conditionsÊ (Lopez v. Commissioner of Customs, 37 SCRA 327, 334, and cases cited
therein) “

“Resort to judicial action for rescission is obviously not contemplated . . . The validity of the
stipulation can not be seriously disputed. It is in the nature of a facultative resolutory condition
which in many cases has been upheld by this Court. (Ponce Enrile v. Court of Appeals, 29 SCRA
504).”

The rule that it is not always necessary for the injured party to resort to court for rescission of the
contract when the contract itself provides that it may be rescinded for violation of Its terms and
conditions, was qualified by this Court in University of the Philippines v. De los Angeles”

Iringan v. CA – “Clearly, a judicial or notarial act is necessary before a valid rescission can take
place, whether or not automatic rescission has been stipulated. It is to be noted that the law uses
the phrase “even though” emphasizing that when no stipulation is found on automatic rescission,
the judicial or notarial requirement still applies.”

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.
Effect of Breach by Both Parties. — The above rules are deemed just. The first one is fair to both
parties because the second infractor also derived, or thought he would derive, some advantage by
his own act or neglect. The second rule is likewise just because it is presumed that both at about
the same time tried to reap some benefit.

Yao v. Matela – “Both parties in this case breached their respective obligations.- Both parties in
this case breached their respective obligations. The well entrenched doctrine is that the law does
not relieve a party from the effects of an unwise, foolish or disastrous contract, entered into with
full awareness of what he was doing and entered into and carried out in good faith. Such a contract
will not be discarded even if there was a mistake of law or fact. Courts have no jurisdiction to look
into the wisdom of the contract entered into by and between the parties or to render a decision
different therefrom. They have no power to relieve parties from obligation voluntarily assumed,
simply because their contracts turned out to be disastrous deals or unwise investments. However,
in situations such as the one discussed above, where it cannot be conclusively determined which
of the parties first violated the contract, equity calls and justice demands that we apply the solution
provided in Article 1192 of the Civil Code.”

Ong v. Bognalbal – “This Court, however, has held in Tan v. Court of Appeals, 175 SCRA 656
(1989), that: [T]he power to rescind obligations is implied in reciprocal ones in case one of the
obligors should not comply with what is incumbent upon him x x x. However, it is equally settled
that, in the absence of a stipulation to the contrary, this power must be invoked judicially; it cannot
be exercised solely on a party’s own judgment that the other has committed a breach of the
obligation. Where there is nothing in the contract empowering [a party] to rescind it without resort
to the courts, [such party’s] action in unilaterally terminating the contract x x x is unjustified. In
the case at bar, there is nothing in the Owner Contractor Agreement empowering either party to
rescind it without resort to the courts. Hence, respondent Bogñalbal’s unilateral termination of the
contract without a court action is unjustified.”

f. Constructive Fulfillment

Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment. (kung babaran yung payummy – wala na)

Constructive Fulfillment of Suspensive Conditions. — The above article enunciates the doctrine
of constructive fulfillment of suspensive conditions. In order that this doctrine can be applied, it
is, however, necessary that the obligor must have actually prevented the obligee from complying
with the condition, and that such prevention must have been voluntary or willful in character.

It must be noted, however, that the doctrine can be applied only to suspensive and not to resolutory
conditions.
IHC v. Joaquin, Jr. – “This provision refers to the constructive fulfillment of a suspensive
condition, whose application calls for two requisites, namely: (a) the intent of the obligor to
prevent the fulfillment of the condition, and (b) the actual prevention of the fulfillment. Mere
intention of the debtor to prevent the happening of the condition, or to place ineffective obstacles
to its compliance, without actually preventing the fulfillment, is insufficient.”

B. With a Period

1. Definition

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.

Concept of Term or Period. — According to Manresa’s classic definition, a term or period is an

interval of time, which, exerting an influence on an obligation as a consequence of a juridical act,
either suspends its demandability or produces its extinguishment. Hence, obligations with a period
may be defined as those whose demandability or extinguishment is subject to the expiration of a
term or period.

Distingished from condition. — A term or period must not be confused with a condition. As we
have already seen, a condition is a future and uncertain fact or event upon which an obligation is
made to depend. Hence, the two may be distinguished from each other in the following ways:

(1) As to requisites: While a term or period refers to an interval of time which is future and certain,
a condition refers to a fact or event which is future and uncertain.

(2) As to fulfillment: While a term or period is an interval of time which must necessarily come,
although it may not be known when, a condition is a future and uncertain fact or event which may
or may not happen.

(3) As to influence on obligation: While a term or period merely exerts an influence upon the time
of the demandability or extinguishment of an obligation, a condition exerts an influence upon the
very existence of the obligation itself.

(4) As to retroactivity of effects: While a term or period does not have any retroactive effect unless
there is an agreement to the contrary, a condition has retroactive effects.

(5) As to effect of will of debtor: When a term or period is left exclusively to the will of the debtor,
the existence of the obligation is not affected, but when a condition is left exclusively to the will
of the debtor, the very existence of the obligation is affected

Classification of Term or Period. — A term or period may be classified as follows:

(1) Suspensive or resolutory.— According to the first and second paragraphs of Art. 1193, a period
may be suspensive (ex die) or resolutory (in diem). It is suspensive when the obligation becomes
demandable only upon the arrival of a day certain; it is resolutory when the obligation is
demandable at once, although it is terminated upon the arrival of a day certain.

(2) Legal, conventional or judicial. — A period may also be legal, conventional or judicial. It is
legal when it is granted by law; conventional, when it is stipulated by the parties; and judicial,
when it is fixed by the courts.

(3) Definite or indefinite. — A period may also be definite or indefinite. This classification can be
deduced from the provision of the third paragraph of Art. 1193 which states that a day certain is
understood to be that which must necessarily come, although it may not be known when. From
this it is evident that a period is definite when the date or time is known beforehand, and indefinite
when it can only be determined by an event which must necessarily come to pass, although it may
not be known when.

Effects of Term or Period. — If the term or period is suspensive, the fulfillment or performance
of the obligation is demandable only upon the arrival of the day certain or the expiration of the
term. What is therefore suspended by the term is not the acquisition of the right or the effectivity
of the obligation but merely its demandability. In other words, the obligation itself becomes
effective upon its constitution or establishment, but once the term or period expires it becomes
demandable. However, if the term or period is resolutory, the fulfillment or performance of the
obligation is demandable at once, but it is extinguished or terminated upon the arrival of the day
certain or the expiration of the term.

Solante v. COA – “A plain reading of the Contract of Reclamation reveals that the six (6)-year
period provided for project completion, or, with like effect, termination of the contract was a mere
estimate and cannot be considered a period or a day certain in the context of the aforequoted Art.
1193.”
2. When Courts may fix a Period

Art. 1197. If the obligation does not fix a period, but from its nature and the 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 will determine such period as may under the circumstances have been
probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by
them.

Judicial Term or Period. — A term or period is judicial when the duration thereof is fixed by a
competent court in accordance with the causes expressly recognized by law. Once fixed by a
competent court, the period can no longer be judicially changed.

When court may fix term. — Under Art. 1197, there are two cases where the courts are
empowered to fix the duration of the term or period. They are: first, if the obligation does not fix
a period, but from its nature and the circumstances it can be inferred that a period was intended by
the parties; and second, if the duration of the period depends upon the will of the debtor. We might
add a third — if the debtor binds himself to pay when his means permit him to do so.

Effect of judicial period. — Once fixed by the courts, the period can no longer be judicially
changed. This is so because from the very moment the parties gave their consent to the period
fixed by the court, said period acquires the nature of a covenant; in other words, it becomes a law
governing their contract; consequently, the courts can have no power to change or modify the
same.

Araneta v. Phil Sugar – “Article 1197 of the New Civil Code involves a two-step process. The
court must first determine that the obligation does not fix a period (or that the period depends upon
the debtor's will) and that the intention of the parties, as may be inferred from the nature and
circumstances of the obligation, is to have a period for its performance. The second step is to
ascertain the period probably contemplated by the parties. The court cannot arbitrarily fix a period
out of thin air.”

3. Effect
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.

Effects of Term or Period. — If the term or period is suspensive, the fulfillment or performance
of the obligation is demandable only upon the arrival of the day certain or the expiration of the
term. What is therefore suspended by the term is not the acquisition of the right or the effectivity
of the obligation but merely its demandability. In other words, the obligation itself becomes
effective upon its constitution or establishment, but once the term or period expires it becomes
demandable. However, if the term or period is resolutory, the fulfillment or performance of the
obligation is demandable at once, but it is extinguished or terminated upon the arrival of the day
certain or the expiration of the term.

4. Beneficiary of the Period

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 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.

Benefit of Term or Period.

There are several reasons why a creditor may not be compelled to receive payment. They are: first,
payment of interest; second, the creditor may want to keep his money invested safely instead of
having it in his hands, in which case, by fixing the period, he is thus able to protect himself against
sudden decline in the purchasing power of the currency loaned especially at a time when there are
many factors that influence the fluctuation of the currency; and third, under the Usury Law, there
is a special prohibition of payment of interest in advance for more than one year

Exception. — However, if it can be proved either from the tenor of the obligation or from other
circumstances that the period or term has been established in favor of the creditor or of the debtor,
the general rule or presumption will not apply.
Art. 1198. The debtor shall lose every right to make use of the period:

(1) When after the obligation has been contracted, he becomes insolvent, unless he give a guaranty
or security for the debt;

(2) When he does not furnish to the creditor the guaranties or securities which he has promised;

(3) 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;

(4) When the debtor violates any undertaking, in consideration of which the creditor agreed to the
period;

(5) When the debtor attempts to abscond.

Extinguishment of Debtor’s Right to Period. — According to the above article, there are five
different grounds or causes for the extinguishment of the debtor’s right to make use of the term or
period.

With respect to the first, the word “insolvent” must not be understood in its technical sense so as
to require a judicial declaration in accordance with the Insolvency Law; it must be understood in
its ordinary or popular sense.

With respect to the third, attention must be called to the difference between the effect of
impairment and the effect of disappearance as applied to the guaranty or security. The rules may
be restated as follows: (1) If the guaranty or security is impaired through the fault of the debtor, he
shall lose his right to the benefit of the period; however, if it is impaired without his fault, he shall
retain his right. (2) If the guaranty or security disappears through any cause, even without any fault
of the debtor, he shall lose his right to the benefit of the period. In either case, however, the debtor
shall not lose his right to the benefit of the period if he gives a new guaranty or security which is
equally satisfactory.

6. Loss Deterioration or Improvement of ThingArt. 1194. In case of loss, deterioration or

improvement of the thing before the arrival of the day certain, the rules of Article 1189 shall be
observed.

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:

(1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished;
(2) 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;

(3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor;

(4) 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;

(5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor;

(6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary.

7. Premature Payment/Delivery

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 due and demandable, may be recovered,
with the fruits and interests.

Alternative and Facultative

Concept. — When an obligation comprehends several objects or prestations it may be either

conjunctive or distributive. It is conjunctive when all of the objects or prestations are demandable
at the same time; it is distributive when only one is demandable. The latter, in turn, may be either
alternative or facultative. It is alternative when it comprehends several objects or prestations which
are due, but it may be complied with by the delivery or performance of only one of them; it is
facultative when it comprehends only one object or prestation which is due, but it may be complied
with by the delivery of another object or the performance of another prestation in substitution.

*3rd person only when you opt

1. DEFINITION

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.

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

2. Right to Choose

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.

Right of Choice in Alternative Obligations. — In alternative obligations, the general rule is that
the right of choice belongs or pertains to the debtor

There are, however, two exceptions to the general rule. They are: first, when the right of choice
has been expressly granted to the creditor; and second, when it has been expressly granted to a
third person. Although the Code does not expressly recognize the second, there is no reason why
it should not be allowed, since it is not contrary to law, morals, good customs, public order or
public policy.

3. When Right to Choose is Lost

Art. 1202. The debtor shall lose the right of choice when among the prestations whereby he
is alternatively bound, only one is practicable.

4. When Choice Effective

Art. 1201. The choice shall produce no effect except from the time it has been communicated

5. When Creditor Makes Choice Impossible

Art. 1203. If through the creditor’s acts the debtor cannot make a choice according to the
terms of the obligation, the latter may rescind the contract with damages.

6. When Creditor Entitled to Damages

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.

7. When Creditor has Right of Choice

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:

(1) 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 one only subsists;

(2) 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;

(3) 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.

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.

D. Joint and Solidary

1. When Solidary

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 expressly so states, or when the law or the nature
of the obligation requires solidarity.

Art. 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor
does solidarity of itself imply indivisibility
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.

2. When Joint

Art. 1208. If from the law, or the nature of 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.

3. Joint Indivisible Obligation

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.

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 have 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 consists.

4. Right and Obligations of Solidary Creditors

a. Useful and Non-prejudicial acts

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.

b. Not to Assign Rights

Art. 1213. A solidary creditor cannot assign his rights without the consent of the
others.

5. Who Debtor Must Pay

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

6. When Solidary Creditor Extinguishes Obligation

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

7. Who Creditor May Proceed Against

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.

8. Payment by Solidary Debtor

Art. 1217. Payment made by one of the solidary 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 of each.
Art. 1218. Payment by a solidary debtor shall not entitle him to reimbursement from his
co-debtors if such payment is made after the obligation has prescribed or become illegal.

9. Remission by Creditor

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.

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.

10. When Extinguished

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 extra- judicial
demand upon him by the creditor, the provisions of the preceding paragraph shall apply

11. Defenses of Solidary Debtors

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.
E. Divisible and Indivisible

1. Divisibility and Indivisibility of Objects

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.

Art. 1225. For the purposes of the preceding articles, obligations to give definite things and
those which are not susceptible of partial performance shall be deemed to be indivisible.

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 divisible.

However, even though the object or service may be physically divisible, an 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.

2. Joint Indivisible Obligation

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 have 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 consists.

F. With a Penal Clause

1. Purpose of Penalty

Concept. — An obligation with a penal clause may be defined as one to which an accessory
undertaking is attached for the purpose of insuring its performance by virtue of which the obligor
is bound to pay a stipulated indemnity or perform a stipulated prestation in case of breach. From
this definition it is clear that the penal clause or penalty is an accessory obligation attached to the
principal obligation by virtue of which the obligor is bound to pay a stipulated indemnity or to
perform a stipulated prestation in case of breach of the obligation.

Purpose of Penalty. — The penal clause or penalty has a three-fold purpose. They are:

(1) Función coercitiva o de garantia — to insure the performance of the obligation;

(2) Función liquidatoria — to liquidate the amount of damages to be awarded to the injured party
in case of breach of the principal obligation; and

(3) Función estrictamente penal — in certain exceptional cases, to punish the obligor in case of
breach of the principal obligation.

It is evident that the second is compensatory, while the third is punitive in character; the first, on
the other hand, is the general purpose regardless of whether the penalty is compensatory or
punitive.

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.

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.

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.
2 kinds

Subsidiary

Complimentary

3. Effect of Nullity

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 that of the penal clause

V. Extinguishment of Obligations

Art. 1231. Obligations are extinguished:

(1) By payment or performance;

(2) By the loss of the thing due;

(3) By the condonation or remission of the debt;

(4) By the confusion or merger of the rights of creditor and debtor;

(5) By compensation;

(6) By novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of

a resolutory condition and prescription, are governed elsewhere in this Code.

Modes of Extinguishing Obligations. — There are ten modes of extinguishing obligations

enumerated in the above article. This enumeration, however, is not complete. There are others,
such as: (1) renunciation or waiver by the obligee or creditor; (2) compromise; (3) expiration of
the resolutory term or period; (4) death of one of the contracting parties in purely personal
obligations; (5) the will of one of the contracting parties in certain contracts; or (6) the agreement
of both contracting parties or what is sometimes known as mutual assent or dissent.

A. Payment or Performance
1. In General

a. Definition

Art. 1232. Payment means not only the delivery of money but also the performance, in any
other manner, of an obligation.

b. Requirements

Art. 1233. 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.

c. Substantial Performance

Art. 1234. 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.

Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents
its fulfillment.

d. Incomplete/Irregular Performance

Art. 1235. 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.

e. Partial Prestations

Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be
compelled partially to receive the prestations in which the obligation consists. Neither may
the debtor be required to make partial payments.

However, when the debt is in part liquidated and in part unliquidated, the creditor may
demand and the debtor may effect the payment of the former without waiting for the
liquidation of the latter.

Character of Payment. — According to Castan, in order that the prestation which constitutes the
object of the obligation may be considered as paid or performed, three conditions or characteristics
must, as a general rule, concur. They are: identity, completeness and indivisibility.
It must be noted, however, that Art. 1248 is applicable only to an obligation where there is only
one debtor and one creditor; it is not applicable to one where there is plurality of debtors and
creditors.

f. Payment by 3rd party

Art. 1236. 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 stipulation to the
contrary.

Whoever pays for another may demand from the debtor what he has paid, except that if he
paid without the knowledge or against the will of the debtor, he can recover only insofar as
the payment has been beneficial to the debtor.

Art. 1237. 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.

Art. 1238. 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 creditor who has accepted it.

g. Incapacity to Pay

Art. 1239. In obligations to give, payment made by one who does not have the free disposal
of the thing due and capacity to alienate it shall not be valid, without prejudice to the
provisions of Article 1427 under the Title on “Natural Obligations.’’

Capacity To Make Payment. — It is, of course, essential that the person who pays the obligation
should have the necessary legal capacity to effect such payment. This is especially true in
obligations to give. In such case, it is essential for the validity of the payment that the payor should
have the free disposal of the thing due and the capacity to alienate it. The absence of one or the
other will affect the validity of the payment.

h. Payee

Art. 1240. Payment shall be made to the person in whose favor the obligation has been
constituted, or his successor in interest, or any person authorized to receive it.
i. Payment to Incapacitated/Third Person

Art. 1241. Payment to a person who is incapacitated to administer his property shall be valid
if he has kept the thing delivered, or insofar as the payment has been beneficial to him.

Payment made to a third person shall also be valid insofar as it has redounded to the benefit
of the creditor. Such benefit to the creditor need not be proved in the following cases:

(1) If after the payment, the third person acquires the creditor’s rights;

(2) If the creditor ratifies the payment to the third person;

(3) If by the creditor’s conduct, the debtor has been led to believe that the third person had
authority to receive the payment

Valaro v. CA – “Because their maid had received monthly payments in the past, it is futile for
petitioners to insist now that she could not have accepted the aforementioned tender of payment,
on the ground that she did not have a special power of attorney to do so. Clearly, they are estopped
from denying that she had such authority. Under Article 1241 of the Civil Code, payment through
a third person is valid “[i]f by the creditor’s conduct, the debtor has been led to believe that the
third person had authority to receive the payment”

j. Payment to Possessor of Credit

Art. 1242. Payment made in good faith to any person in possession of the credit shall release
the debtor.

Payment to Possessors of Credit. — It must be noted that the possession referred to in the above
article is the possession of the credit, not the possession of the document evidencing it. Thus, the
article may be applied to the payment made to the original creditor by a debtor who is not aware
of the fact that the credit has already been assigned to another person. It may also be applied to the
payment made to an assignee, although the assignment is afterwards rescinded or annulled. It must
always, of course, be indispensable that the payment should have been made in good faith. If this
requisite is present, then the payment shall release the debtor. In such case, the remedy of the
creditor would be to proceed against the possessor of the credit to whom payment was improperly
made.

k. Payment after Judicial Order to Retain

Art. 1243. Payment made to the creditor by the debtor after the latter has been judicially
ordered to retain the debt shall not be valid.
Payment After Judicial Order of Retention. — According to the above article, if the debtor pays
the creditor after he has been judicially ordered to retain the debt, such payment shall not be valid.
Consequently, after the debtor has received the notice of attachment or garnishment, payment can
no longer be made to the creditor whose credit has been attached to satisfy a judgment in favor of
another person. Such payment must be made to the proper officer of the court issuing the writ of
attachment or garnishment in conformity with the provisions of the Rules of Court.

l. Substitution of Prestation

Art. 1244. The debtor of a thing cannot compel the creditor to receive a different one,
although the latter may be of the same value as, or more valuable than that which is due.

In obligations to do or not to do, an act or forbearance cannot be substituted by another act

or forbearance against the obligee’s will.

m. Dation in Payment

Art. 1245. Dation in payment, wherein property is alienated to the creditor in satisfaction of
a debt in money, shall be governed by the law of sales.

Effect of dation in payment. — However, if the creditor and the debtor enter into an agreement
by virtue of which a certain property is alienated by the debtor to the creditor as the equivalent of
the performance of the obligation, the law on sales shall then govern. It is, therefore, evident that
dación en pago or dation in payment constitutes an exception to the rule stated in Art. 1244.

Dation in payment (dación en pago) is defined as the transmission of the ownership of a thing by
the debtor to the creditor as an accepted equivalent of the performance of the obligation.

n. Same quality

Art. 1246. When the obligation consists in the delivery of an indeterminate or generic thing,
whose quality and circumstances have not been stated, the creditor cannot demand a thing
of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of
the obligation and other circumstances shall be taken into consideration.

o. Extrajudicial Expenses

Art. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the
payment shall be for the account of the debtor. With regard to judicial costs, the Rules of
Court shall govern.
p. Currency and Value

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it
is not possible to deliver such currency, then in the currency which is legal tender in the
Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance.

Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should
supervene, the value of the currency at the time of the establishment of the obligation shall
be the basis of payment, unless there is an agreement to the contrary

q. Payment in Negotiable Instruments

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it
is not possible to deliver such currency, then in the currency which is legal tender in the
Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance.

r. Interest and Installments

Art. 1175. Usurious transactions shall be governed by special laws.

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.

s. Payment Place
Art. 1251. Payment shall be made in the place designated in the obligation.

There being no express stipulation and if the undertaking is to deliver a determinate thing,
the payment shall be made wherever the thing might be at the moment the obligation was
constituted.

In any other case, the place of payment shall be the domicile of the debtor.

If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional
expenses shall be borne by him.

These provisions are without prejudice to venue under the Rules of Court.

2. Application of Payments

Art. 1252. He who has various debts of the same kind in favor of one and the same creditor,
may declare at the time of making the payment, to which of them the same must be applied.
Unless the parties so stipulate, or when the application of payment is made by the party for
whose benefit the term has been constituted, application shall not be made as to debts which
are not yet due.

If the debtor accepts from the creditor a receipt in which an application of the payment is
made, the former cannot complain of the same, unless there is a cause for invalidating the
contract.

Requisites. — In order that there will be an application of payment, it is essential that the following
requisites must concur: first, there must be only one debtor and only one creditor; second, there
must be two or more debts of the same kind; third, all of the debts must be due; and fourth, the
amount paid by the debtor must not be sufficient to cover the total amount of all the debts.

Art. 1253. If the debt produces interests, payment of the principal shall not be deemed to
have been made until the interests have been covered.

Art. 1254. When the payment cannot be applied in accordance with the preceding rules, or
if application cannot be inferred from other circumstances, the debt which is most onerous
to the debtor, among those due, shall be deemed to have been satisfied.

If the debts due are of the same nature and burden, the payment shall be applied to all of
them proportionately.
3. Payment by Cession

Art. 1255. The debtor may cede or assign his property to his creditors in payment of his
debts. This cession, unless there is stipulation to the contrary, shall only release the debtor
from responsibility for the net proceeds of the thing assigned. The agreements which, on the
effect of the cession, are made between the debtor and his creditors shall be governed by
special laws.

Concept. — Cession or assignment may be defined as a special form of payment whereby the
debtor abandons all of his property for the benefit of his creditors in order that from the proceeds
thereof the latter may obtain payment of their credits

Requisites. — In order that the debtor can avail of this form of payment, it is essential that the
following requisites must concur: first, plurality of debts; second, partial or relative insolvency of
the debtor; and third, acceptance of the cession by the creditors. In case the creditors do not accept
the cession or assignment, a similar result may be obtained by proceeding in accordance with the
Insolvency Law.

Distinguished from Dation in Payment. — Payment by cession must not be confused with dation
in payment (dación en pago). The two may be distinguished from each other as follows:

(1) As to number of parties: While in dacion en pago there may be only one creditor, in payment
by cession plurality of creditors is essential.

(2) As to financial condition of parties: While in dación en pago the debtor is not necessarily in a
state of financial difficulty, in payment by cession the debtor is in a state of partial or relative
insolvency.

(3) As to object: While in dación en pago what is delivered by the debtor is merely a thing to be
considered as the equivalent of the performance of the obligation, in payment by cession what is
ceded by the debtor is the universality of all of his property.

(4) As to effect: While in dación en pago the payment extinguishes the obligation to the extent of
the value of the thing delivered either as agreed upon or as may be proved, unless the silence of
the parties signifies that they consider the delivery of the thing as the equivalent of the performance
of the obligation, in payment by cession the effect is merely to release the debtor for the net
proceeds of the things ceded or assigned, unless there is a contrary intention.
4. Tender of Payment and Consignation

Art. 1256. If the creditor to whom tender of payment has been made refuses without just
cause to accept it, the debtor shall be released from responsibility by the consignation of the
thing or sum due.

Consignation alone shall produce the same effect in the following cases:

(1) When the creditor is absent or unknown, or does not appear at the place of payment;

(2) When he is incapacitated to receive the payment at the time it is due;

(3) When, without just cause, he refuses to give a receipt;

(4) When two or more persons claims the same right to collect;

(5) When the title of the obligation has been lost.

Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order
the cancellation of the obligation.

Before the creditor has accepted the consignation, or before a judicial declaration that the
consignation has been properly made, the debtor may withdraw the thing or the sum
deposited, allowing the obligation to remain in force.

b. Requirements

Art. 1257. In order that the consignation of the thing due may release the obligor, it must
first be announced to the persons interested in the fulfillment of the obligation.

The consignation shall be ineffectual if it is not made strictly in consonance with the
provisions which regulate payment.

Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial
authority, before whom the tender of payment shall be proved, in a proper case, and the
announcement of the consignation in other cases.

The consignation having been made, the interested parties shall also be notified thereof.

Soco v. Militante –
“1) When the creditor is absent or unknown, or does not appear at the place of payment;

(2) When he is incapacitated to receive the payment at the time it is due;

(3) When, without just cause, he refuses to give a receipt;

(4) When two or more persons claim the same right to collect;

(5) When the title of the obligation has been lost. Consignation is the act of depositing the thing
due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept
payment and it generally requires a prior tender of payment.”

c. Expenses

Art. 1259. The expenses of consignation, when properly made, shall be charged against the
creditor.

d. Withdrawal

Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order
the cancellation of the obligation.

Before the creditor has accepted the consignation, or before a judicial declaration that the
consignation has been properly made, the debtor may withdraw the thing or the sum
deposited, allowing the obligation to remain in force.

B. Loss of the Thing Due

1. When Obligation Extinguished

Art. 1262. 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.

When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the
thing does not extinguish the obligation, and he shall be responsible for damages. The same
rule applies when the nature of the obligation requires the assumption of risk.

(1) The thing which is lost must be determinate.

(2) The thing is lost without any fault of the debtor. If the 


thing is lost through the fault of the debtor, the obligation is not extinguished; it is simply
converted into an obligation to indemnify the creditor for damages.

(3) The thing is lost before the debtor has incurred in delay. If the thing is lost after the debtor
has already incurred in delay, the rule is that such debtor can still be held liable for indemnity for
damages.

Art. 1266. The debtor in obligations to do shall also be released when the prestation becomes
legally or physically impossible without the fault of the obligor.

Effect of Impossibility of Performance in Obligations To Do. — The above article is applicable

only to obligations to do, as distinguished from Art. 1262, which is applicable only to obligations
to give. However, in order that the impossibility of compliance with the obligation shall result in
its extinguishment, practically the same requisites prescribed by Art. 1262 are also prescribed in
this article. Consequently, the prestation constituting the object of the obligation must have become
legally or physically impossible of compliance without the fault of the obligor and before he has
incurred in delay, otherwise, the obligation shall be converted into one of indemnity for damages.
In addition, the impossibility must have occurred after the constitution of the obligation; otherwise,
if it was present before the obligation was constituted, there would be an obligation which would
be ineffective from its inception.

The article distinguishes between two causes of impossibility of the prestation by considering the
source of such impossibility. It may arise from the law, although physically it may be possible of
performance, or it may arise from a fact which renders performance impossible, although no law
is violated. In both cases, the obligor is released from his obligation.

PNCC v. CA – “It is a fundamental rule that contracts, once perfected, bind both contracting
parties, and obligations arising therefrom have the force of law between the parties and should be
complied with in good faith. But the law recognizes exceptions to the principle of the obligatory
force of contracts. One exception is laid down in Article 1266 of the Civil Code, which reads: "The
debtor in obligations to do shall also be released when the prestation becomes legally or physically
impossible without the fault of the obligor."

Petitioner cannot, however, successfully take refuge in the said article, since it is applicable only
to obligations "to do", and not to obligations "to give". An obligation "to do" includes all kinds of
work or service; while an obligation "to give" is a prestation which consists in the delivery of a
movable or an immovable thing in order to create a real right, or for the use of the recipient, or for
its simple possession, or in order to return it to its owner.

The obligation to pay rentals or deliver the thing in a contract of lease falls within the prestation to
give; hence, it is not covered within the scope of Article 1266. At any rate, the unforeseen event
and causes mentioned by petitioner are not the legal or physical impossibilities contemplated in
said article. Besides, petitioner failed to state specifically the circumstances brought about by the
abrupt change in the political climate in the country except the alleged prevailing uncertainties in
government policies on infrastructure projects.”

2. When Obligation Not Extinguished

Art. 1262. 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.

When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the
thing does not extinguish the obligation, and he shall be responsible for damages. The same
rule applies when the nature of the obligation requires the assumption of risk.

Exceptions. — There are, however, certain exceptions to the rule that the debtor cannot be held
liable if the thing which constitutes the object of the obligation is lost or destroyed through a
fortuitous event. They are:

(1) When by law, the debtor is liable even for fortuitous events;

(2) When by stipulation of the parties, the debtor is liable even for fortuitous events;

(3) When the nature of the obligation requires the assumption of risk;

(4) When the loss of the thing is due partly to the fault of the debtor;

(5) When the loss of the thing occurs after the debtor has incurred in delay;

(6) When the debtor promised to deliver the same thing to two or more persons who do not have
the same interest;

(7) When the obligation to deliver arises from a criminal offense; and

(8) When the obligation is generic.

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.

Effect of Loss in Generic Obligations To Give. — If the obligation is generic in the sense that
the object thereof is designated merely by its class or genus without any particular designation or
physical segregation from all others of the same class, the loss or destruction of anything of the
same kind even without the debtor’s fault and before he has incurred in delay will not have the
effect of extinguishing the obligation.

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.

3. Partial Loss

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.

4. Presumption of Fault

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.

Rule If Thing Is in Debtor’s Possession. — According to the above article, if the thing which
constitutes the object of a determinate obligation is lost in the possession of the debtor, there arises
a disputable presumption that the loss was due to his fault. In such case, the obligation is not
extinguished; in other words, the debtor is still liable to the creditor for damages. Therefore, the
burden of proof of absence of fault corresponds to the debtor. This must be without prejudice to
the rule stated in the third paragraph of Art. 1165 to the effect that 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 delivery. Hence, in such cases,
even if the debtor or obligor can prove that the loss or destruction of the thing in his possession
was not through his fault or that it was through a fortuitous event, he shall still be liable to the
creditor or obligee for damages.

5. Unforeseen Difficulty

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.

Art. 1267 contemplates of “service’’ which has become so difficult. Taking into consideration the
rationale for this provision, the word “service’’ should be understood as referring to the
“performance’’ of the obligation.

“Furthermore, a bare reading of this article reveals that it is not a requirement thereunder that the
contract be for future service with future unusual change. According to Sen. Arturo M. Tolentino,
Art. 1267 states in our law the doctrine of unforeseen events. This is said to be based on the
discredited theory of “rebus sic stantibus’’ in public international law. Under this theory, the
parties stipulate in the light of certain prevailing conditions, and once these conditions cease to
exist, the contract also ceases to exist. Considering practical needs and the demands of equity and
good faith, the disappearance of the basis of the contract gives rise to a right to relief in favor of
the party prejudiced.’

6. Creditors Rights

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 the third persons by reason
of the loss.

C. Condonation or Remission of Debt

Concept. — Remission is an act of liberality by virtue of which the obligee, without receiving any
price or equivalent, renounces the enforcement of the obligation, as a result of which it is
extinguished in its entirety or in that part or aspect of the same to which the remission refers. In
the terse language of Sanchez Roman, it is the gratuitous abandonment by the creditor of his right.

Requisites. — In order that there will be a remission or condonation which will result in the total
or partial extinguishment of the obligation, it is essential that the following requisites must concur:
first, it must be gratuitous; second, it must be accepted by the obligor; and third, the obligation
must be demandable.
Kinds. — Remission or condonation may be classified as follows:

(1) As to form, remission may be express or implied. It is express when it is made in accordance
with the formalities prescribed by law for donations; it is implied when, although it is not made in
accordance with the formalities prescribed by law for donations, it can be deduced from the acts
of the obligee or creditor.

(2) As to extent, remission may be total or partial. It is total when the entire obligation is
extinguished; it is partial when it refers only to the principal or to the accessory obligation or to an
aspect thereof which affects the debtor as for instance solidarity

(3) As to constitution, remission may be inter vivos or mortis causa. The first refers to that which
is constituted by agreement of the obligee and the obligor in which case it partakes of the nature
of a donation inter vivos; the second, on the other hand, refers to that which is constituted by last
will and testament in which case it partakes of the nature of a donation mortis causa.

1. Nature and Requisites

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 kinds shall be subject to the rules which govern inofficious donations.
Express condonation shall, furthermore, comply with the forms of donations.

2. Implied Renunciation

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 this 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.

Art. 1272. 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.

Effect of Delivery of Evidence of Credit to Debtor. — Art. 1271 enunciates the rule that if the
creditor voluntarily delivers the private document evidencing the credit to the debtor, there is a
presumption that he renounces his right of action against the latter for the collection of the said
credit, From an examination of the provision, it is clear that the following requisites must concur
in order that the presumption will arise: first, that the document evidencing the credit must have
been delivered by the creditor to the debtor; second, that the document must be a private document;
and third, that the delivery must be voluntary. The second requisite is, of course, logical because
if the document is public the presumption does not arise considering the fact that the public
character of the document would always protect the interest of the creditor. With regard to the third
requisite, it must be observed that, according to Art. 1272, whenever the private document
evidencing the credit is found in the possession of the debtor, there arises a presumption that the
creditor delivered it to him voluntarily, unless the contrary is proved. Thus, where the promissory
note evidencing the credit is already in the possession of the debtor, there arises a disputable
presumption to the effect that the creditor must have delivered it voluntarily to him; consequently,
in the absence of proof to the contrary, an implied or tacit renunciation of the debt may be
presumed.

3. Renunciation of Accessory Obligations

Art. 1273. The renunciation of the principal debt shall extinguish the accessory obligations;
but the waiver of the latter shall leave the former in force.

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

D. Confusion or Merger of Rights

Art. 1275. The obligation is extinguished from the time the characters of creditor and debtor
are merged in the same person.

Concept of Confusion. — With the provision of Art. 1275 as basis, confusion maybe defined as
the merger of the characters of creditor and debtor in one and the same person by virtue of which
the obligation is extinguished. The classic definition, however, is that of Sanchez Roman.
According to the eminent commentator, confusion may be defined as the meeting in one and the
same person of the qualities of creditor and debtor with respect to one and the same obligation.
By its very nature, confusion or merger of rights will necessarily result in the extinguishment of
the obligation because of the impossibility of enforcing it since it would certainly be absurd for a
person to enforce a claim against himself. Besides, the purpose or end for which the obligation is
constituted is realized when the qualities of creditor and debtor are merged in one and the same
person.

Requisites. — In order that there will be a confusion of rights which will result in the
extinguishment of the obligation, it is essential that the following requisites must concur: (1) that
the merger of the characters of creditor and debtor must be in the same person; (2) that it must take
place in the person of either the principal creditor or the principal debtor; and (3) that it must be
complete and definite. The requisite that the merger of rights of creditor and debtor must be
complete and definite does not mean that the extinguishment of the obligation should be complete
or total in character; it merely means that whether the merger refers to the entire obligation or only
a part thereof, it must be of such a character that there will be a complete and definite meeting of
all of the qualities of creditor and debtor in the obligation or in the part or aspect thereof which is
affected by the merger.

Kinds. — Confusion or merger of rights may be classified as follows:

(1) As to cause or constitutions: Inter vivos or mortis causa — inter vivos, when it is constituted
by agreement of the parties, mortis causa, when it is constituted by succession.

(2) As to extent or effect: Total or partial — total, if it results in the extinguishment of the entire
obligation, partial if it results in the extinguishment of only a part of the obligation. There are two
cases where the extinguishment is merely partial — first, when the confusion or merger refers only
to a part of the obligation; and second, when the obligation is joint.

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.

Effect upon Accessory Obligations. — Under Art. 1276 in relation to Art. 1275, if the confusion
or merger of rights will take place in the person of either the principal creditor or the principal
debtor, the effect is the extinguishment, not only of the principal obligation, but even of the
accessory obligation. This is, of course, logical because of the principle that the accessory
obligation cannot exist without the principal obligation. Consequently, guarantors shall be
benefited by the confusion of rights. If, on the other hand, the confusion or merger will take place
in the person of a subsidiary creditor or a subsidiary debtor, such as a guarantor, it is evident that
there is no extinguishment of the principal obligation; there will be only a substitution of creditor
or debtor. If there are several guarantors and the characters of creditor and guarantor are merged
in the person of any of the guarantors, such guarantor-creditor can demand the performance of the
obligation from the debtor, and in case of default, even from his former co-guarantors. If the
characters of debtor and guarantor are merged, the creditor can demand the performance of the
obligation directly from the guarantor.

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.

E. Compensation

1. General Rules

A. Definition

Art. 1278. Compensation shall take place when two persons, in their own right, are creditors
and debtors of each other.

Concept of Compensation. — According to Castan, compensation may be defined as a mode of

extinguishing in their concur- rent amount those obligations of persons who in their own right are
creditors and debtors of each other. According to Manresa, it may be defined as a figurative
operation of weighing two obligations simultaneously in order to extinguish them to the extent in
which the amount of one is covered by the amount of the other.

Distinguished from payment. — Compensation may be distinguished from payment as

follows:

(1) The requisites prescribed by law for compensation are different from those prescribed
by law for payment.

(2) Compensation takes effect by operation of law, while payment takes effect by act of
the parties.

(3) Capacity to give and to acquire is not necessary in compensation, but it is essential in
payment.

(4) Compensation is, as a rule, partial, while payment is, as a rule, complete and
indivisible
 Distinguished from confusion. — Compensation may be distinguished from confusion as
follows:

(1) As to number of persons, in compensation there must be two persons, who, in their own right,
are creditors and debtors of each other; in confusion there is only one person in whom is merged
the qualities of creditor and debtor.

(2) As to number of obligations, in compensation there must be at least two; in confusion there is
only one.

Kinds of Compensation. — As to cause, compensation may be:

(1) Legal — when it takes effect by operation of law from the moment all of the requisites are
present. This is the fixed type which is regulated by Arts. 1278 and 1279 of the Civil Code.

(2) Voluntary — when the parties who are mutually creditors and debtors agree to compensate
their respective obligations, even though all of the requisites for compensation may not then be
present. Giorgi includes under this class the so-called facultative compensation which is effected
by a party who is entitled to oppose the compensation because he would be prejudiced thereby.
This occurs, for instance, when the obligation of one is with a term, while that of the other is pure,
and the former renounces the benefit of the term, consequently making the compensation possible

B. Nature and Effect

Art. 1281. Compensation may be total or partial. When the two debts are of the same amount,
there is a total compensation

Art. 1286. Compensation takes place by operation of law, even though the debts may be
payable at different places, but there shall be an indemnity for expenses of exchange or
transportation to the place of payment

Art. 1290. When all the requisites mentioned in Article 1279 are present, compensation takes
effect by operation of law, and extinguishes both debts to the concurrent amount, even
though the creditors and debtors are not aware of the compensation.

Effect of Compensation. — The most fundamental effect of compensation is that it extinguishes

both debts to the extent that the amount of one is covered by the amount of the other.

C. Requisites
Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due; 


(4) That they be liquidated and demandable; 


(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.

Art. 1282. The parties may agree upon the compensation of debts which are not yet due.

D. Order of Compensation

Art. 1289. If a person should have against him several debts which are susceptible of
compensation, the rules on the application of payments shall apply to the order of the
compensation

2. Application

a. When Applicable

i. In Favor of Guarantor

Art. 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up
compensation as regards what the creditor may owe the principal debtor

Right of Guarantor To Set Up Compensation. — The above article constitutes an exception to

the rule stated in Art. 1279, No. 1, in relation to Art. 1278. Under Arts. 1278 and 1279, No. 1, the
principal debtor can only set up compensation against the creditor for what the latter owes him.
He cannot set up what such creditor owes the guarantor because then that would violate the rule
that the parties must be principally bound. The guarantor, on the other hand, in case the payment
of the debt is demanded from him, may set up compensation, not only for what such creditor owes
him, but also for what such creditor owes the principal debtor.

ii. Claim for Damages

Art. 1283. If one of the parties to a suit over an obligation has a claim for damages against
the other, the former may set it off by proving his right to said damages and the amount
thereof.

Judicial Compensation. — In reality, what is set off against the other party is a counterclaim. It
will be remembered that “a counterclaim must be pleaded to be effectual; whereas, a compensation
takes place by mere operation of law.’’

iii. Rescissible/Voidable Debts

Art. 1284. When one or both debts are rescissible or voidable, they may be compensated
against each other be- fore they are judicially rescinded or avoided.

Rules in Case of Rescissible or Voidable Debts. — It is evident that the above rule is an exception
to the general rule of demandability in order that compensation shall take place. This exception is
justified by the fact that rescissible or voidable obligations are considered demandable while the
vices with which they are tainted are not yet judicially declared. Consequently, if the action for
rescission or annulment is not exercised, or is renounced, or if the debt or debts are ratified the
obligation or obligations are susceptible of compensation.

iv. Assignment before Compensation

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 reserved 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

Effect of Assignment of Rights. — If a creditor assigns his credit to a third person, what is the
effect of such assignment upon the debtor’s right to set up the defense of compensation in case
theassignee tries to enforce the credit against him? Before answering this question, attention must
be called to the fact that at the time the assignment of rights is made by a creditor to a third person
compensation may have already taken place. Hence, a distinction must always be made between
the effects of the assignment when compensation has already taken place and the effects when
compensation has not yet taken place.

b. When not Applicable

i. Deposit

Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum
or from the obligations of a depositary 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 provisions of paragraph 2 of Article 301.

ii. Civil Liability Arising for Penal Offense

Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability
arising from a penal offense.

F. Novation

1. Kinds of Novation

Art. 1291. Obligations may be modified by:

(1) Changing their object or principal conditions; 


(2) Substituting the person of the debtor; 


(3) Subrogating a third person in the rights of the creditor.

Concept of Novation. — Novation is the substitution or change of an obligation by another,

resulting in its extinguishment or modification, either by changing its object or principal
conditions, or by substituting another in place of the debtor, or by subrogating a third person in the
rights of the creditor.
Requisites. — In every novation there are four essential requisites: first, a previous valid
obligation; second, agreement of the parties to the new obligation; third, extinguishment of the old
obligation; and fourth, validity of the new obligation.

Kinds. — Novation may be classified as follows:

(1) As to its essence, novation may be (a) objective or real, (b) subjective or personal, or (c) mixed.
Objective or real novation refers to the change either in the cause, object or principal conditions
of the obligations. Subjective or personal novation, on the other hand, refers to the substitution of
the person of the debtor or to the subrogation of a third person in the rights of the creditor. When
there is a substitution of the person of the debtor, it is called passive; when there is a subrogation
in the rights of the creditor, it is called active. Mixed novation refers to a combination of objective
and subjective novation.

(2) As to its form or constitution, novation may be express or tacit, one and the other are recognized
by the Code. When it is declared in unequivocal terms that the old obligation is extinguished by a
new one which substitutes the same, the novation is express; when the old and the new obligations
are incompatible with each other on every point, the novation is tacit or implied.

(3) As to its extent or effect, novation may be total or partial depending upon whether there is an
absolute extinguishment of the old obligation or merely a modification.

2. Requisites

Art. 1292. In order that an obligation may be extinguished by another which substitutes the
same, it is imperative that it be so declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other

Form of Extinguishment. — One of the essential requisites of novation is the extinguishment of

the previous obligation by the new one. What is the form of this extinguishment? The Code does
not provide for any specific form. However, under Art. 1292, it may be either express or implied.
It is express when there is a declaration in unequivocal terms that the old obligation is extinguished
by the new which substitutes it; it is tacit or implied when the old and the new obligations are
incompatible on every point. Novation as one of the modes of extinguishing an obligation, requires
the concurrrence of the following: (1) there is a previous valid obligation; (2) the parties concerned
agree to a new contract; (3) the old contract is extinguished; and (4) there is a valid new contract.
3. Expromision and Delegation

Art. 1293. Novation which consists in substituting a new debtor in the place of the original
one, may be made even without the knowledge or against the will of the latter, but not without
the consent of the creditor. Payment of the new debtor gives him the rights mentioned in
Articles 1236 and 1237.

Novation By Substitution of Debtor. — This type of subjective or personal novation consists in

the substitution of a new debtor in the place of the original debtor, which must be effected with
the consent of the creditor at the instance of either the new debtor or the old debtor. It has two
forms — substitution by expromisión and substitution by delegación.

If the substitution of debtors is effected with the consent of the creditor at the instance of the new
debtor even without the knowledge or against the will of the old debtor, it is called expromisión.
Consequently, the following requisites must concur: first, the initiative for the substitution must
emanate from the new debtor; and second, consent of the creditor to the substitution. It is, therefore,
evident that there are two kinds of substitution by expromisión. They are: (1) substitution with the
knowledge and consent of the old debtor; and (2) substitution without the knowledge or against
the will of the old debtor.

If the substitution of debtors is effected with the consent of the creditor at the instance of the old
debtor with the concurrence of the new debtor, it is called delegación. In other words, delegación
refers to the substitution of debtors effected when the original debtor offers and the creditor accepts
a third person who consents to the substitution. Consequently, the following requisites must
concur: first, the initiative for the substitution must emanate from the old debtor; second, consent
of the new debtor; and third, acceptance by the creditor.

a. Consequence of Expromision

Art. 1294. If the substitution is without the knowledge or against the will of the debtor, the
new debtor’s insolvency or nonfulfillment of the obligation shall not give rise to any liability
on the part of the original debtor.

b. Consequence of Delegacion

Art. 1295. The insolvency of the new debtor, who has been proposed by the original debtor
and accepted by the creditor, shall not revive the action of the latter against the original
obligor, except when said insolvency was already existing and of public knowledge, or known
to the debtor, when he delegated his debt.
4. Effect on Accessory Obligation

Art. 1296. When the principal obligation is extinguished in consequence of a novation,

accessory obligations may subsist only insofar as they may benefit third persons who did not
give their consent.

5. Void Obligations

Art. 1297. If the new obligation is void, the original one shall subsist, unless the parties
intended that the former relation should be extinguished in any event

Art. 1298. The novation is void if the original obligation was void, except when annulment
may be claimed only by the debtor, or when ratification validates acts which are voidable.

6. Conditional Obligations

Art. 1299. If the original obligation was subject to a suspensive or resolutory condition, the
new obligation shall be under the same condition, unless it is otherwise stipulated.

7. Kinds of Subrogation

Art. 1300. Subrogation of a third person in the rights of the creditor is either legal
or conventional. The former is not presumed, except in cases expressly mentioned in
this Code; the latter must be clearly established in order that it may take effect.

a. Conventional

Art. 1301. Conventional subrogation of a third person requires the consent of the original
parties and of the third person.

b. Legal

Art. 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the debtor’s
knowledge;

(2) When a third person, not interested in the obligation, pays with the express or tacit
approval of the debtor;

(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of
the obligation pays, without prejudice to the effects of confusion as to the latter’s share.
8. Effect of Subrogation

Art. 1303. Subrogation transfers to the person subrogated the credit with all the rights
thereto appertaining, either against the debtor or against third persons, be they guarantors
or possessors of mortgages, subject to stipulation in a conventional subrogation.

Art. 1304. A creditor, to whom partial payment has been made, may exercise his right for
the remainder, and he shall be preferred to the person who has been subrogated in his place
in virtue of the partial payment of the same credit.

Effect of Total Subrogation. — It must be remembered that the effects of the other
forms of novation are governed by the provisions of Art. 1296. The effects of novation by
subrogating a third person in the rights of the creditor, on the other hand, are governed by
the provisions of Arts. 1303 and 1304.

Subrogation transfers to the third person who is subrogated the credit with all of the rights which
the original creditor had against the debtor or against third persons. Hence, unlike the other forms
of novation, accessory obligations are not extinguished because in such obligations the person
subrogated also acquires all of the rights which the original creditor had against third persons. The
application of this rule is absolute with respect to legal subrogations; however, with respect to
conventional subrogations, such accessory obligations may be increased or reduced depending
upon the agreement of the parties.

Effect of Partial Subrogation. — The effect of partial subrogation is given in Art. 1304. Thus, if
P, a third person, pays two-thirds of the indebtedness of D to C, such payment shall result in the
partial subrogation of P in the rights of the creditor, C. C’s rights with respect to the remainder are
not affected by the subrogation. In other words, both rights shall co-exist. In case of a conflict
between the two, however, the right of C shall be preferred.