Business Law with Focus on

Business Law with Focus on

Micro, Small, and Medium

Enterprises (MSMEs)
Atty. Jill B. Manangkil-Benitez
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Course Code: BL 1
Course Description: The course is an introductory subject for business

laws which involves the basic legal knowledge and general principles of law
in relation to obligations and contracts with practical applications of the
different legal provisions in everyday life and impact on micro, small, and
medium enterprises (MSMEs). This course also involves an introduction
to taxation in relation to business. It deals with the underlying principles
behind the imposition of the tax in general, the Expanded Value-Added
Tax and business taxes in particular.
Course Intended Learning Outcomes (CILO):

At the end of the course, students should be able to:
1. Acquire basic knowledge on the general principles of law in relation

to obligations and contracts;
2. Illustrate the application and relationship of obligations and
contractual law in the business context and impact on business; and
3. Develop creative thinking, innovation, inquiry and analysis,
evaluation and syntheses of legal information related to business
and business transactions with focus on micro, small, and medium
enterprises (MSMEs).
Course Requirements:
 Assessment Tasks - 60%

 Major Exam s - 40%
Periodic Grade 100%
PRELIM GRADE : 60% (Activity 1-4) + 40% (Prelim exam)

MIDTERM GRADE : 30% (Prelim Grade) + 70 % [60% (Activity 5-7)
+ 40% (Midterm exam)]
FINAL GRADE : 30% (Midterm Grade) + 70 % [60% (Activity 8-10)
+ 40% (Final exam)]
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Table of Contents
Module 1: Introduction to Obligations 1
Introduction 1
Learning Objectives 1
Lesson 1. General Concepts 1
Lesson 2. Sources of Obligation 4
Lesson 3. Solutio Indebiti and Negotiorum Gestio 6
Lesson 4. Proximate Cause in Quasi-Delicts 10
Assessment Task 1 12
Summary 13
References 14
Module 2: Nature and Effects of Obligations 15

Introduction 15
Lesson 1. Rights of a Creditor in Obligations 16
Lesson 2. Kinds of Breach of Obligations 20
Lesson 3. Extinguishment of Interest and Prior Installments 26
Summary 27
References 29
Module 3: Different Kinds of Obligations 30

Introduction 30
Lesson 1. Pure Obligation vs. Conditional Obligation 30
Lesson 2. Traditional Classification of Conditions 32
Lesson 3. Effects of Loss, Deterioration and Improvement 39
in Real Obligations
Lesson 4. Reciprocal Obligations 40
Lesson 5. Obligations with a Period 43
Lesson 6. Alternative and Facultative Obligations 46
Lesson 7. Joint and Solidary Obligations 49
Lesson 8. Obligation with a Penal Clause 54
Summary 57
References 61
Module 4: Extinguishment of Obligations 61

Introduction 61
Lesson 1. Modes of Extinguishing Obligations under Article 1231 62
Lesson 2. Loss of the Thing Due 74
Lesson 3. Condonation or Remission of Debt 77
Lesson 4. Confusion 78
Lesson 5. Compensation 79
Lesson 6. Novation and Compromise 81
Summary 90
References 92
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MODULE 1
INTRODUCTION TO OBLIGATIONS
Introduction
The law of obligations based on the Civil Code of the Philippines (R.A. 386, as
amended) is a body of rules which deals with the nature, sources, kinds and effects of
obligations as well as the modes of its extinguishment.
In this module, an introduction on the basic principles of law of obligations including

case applications related to business will be discussed and will serve as a study guide
designed to, among other things, primarily test and further increase the understanding of
the student.
Students are also exposed to actual legal business cases where they could apply
theories and concepts regarding obligations and concepts.
Learning Outcomes
At the end of this module, students should be able to:
1. Elucidate the general concepts of obligations;
2. Determine the sources of obligations in the Philippines and discuss each;
3. Familiarize on the basic principles on obligation.
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Lesson 1. General Concepts
A. Definition of Obligation
A juridical necessity to give, to do, or not to do (Civil Code, Art. 1156). A legal
relation established between one party and another whereby the latter is bound to the
fulfillment of a prestation which the former may demand of him.
An obligation is a legal duty, however created, the violation of which may become
the basis of an action of law (Aldeguer, 2014).
Jurado (2010) on Comments and Jurisprudence on Obligations and Contracts

further discussed that obligations may be either civil or natural. A civil obligation is one
which has a binding force in law, and which gives to the obligee or creditor the right of
enforcing it against the obligor or debtor in a court setting. This is the obligation which
is defined under Article 1156 of the Civil Code. A natural obligation, on the other hand,
is one which cannot be enforced by action, but which is binding on the party who makes
it in conscience and according to the natural law.
Jurado (2010) cites an example on these two (2) kinds of obligation, as follows: If
A has a right of action, evidenced by a promissory note, to collect one thousand pesos
from B, and such promissory note prescribes after the latter is no longer bound to pay
the obligation in accordance with the statute of limitations, he is still bound to pay in
accordance with equity and natural law. Thus, civil obligation and natural obligation
may be distinguished as follows:
1. A civil obligation is based on positive law, while a natural obligation is based

on equity and natural law; and
2. A civil obligation is enforceable in courts of justice, while natural obligation is
not. (Jurado, 2010)
Juridical Necessity
In case of noncompliance, there will be legal sanctions (Jurado, 2010).
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Prestation
Not the thing or object, but the particular conduct of the debtor which may consist
in giving, doing, or not Commentaries and Jurisprudence on the Civil Code of the
Philippines (2002) o. 4, p. 57) [hereinafter Tolentino, 2002].
B. Requisites of Obligations (Jurado, 2010)
1. Active Subject – one who can demand the fulfillment of the obligation; he who in
his favor, the obligation is constituted or created. He is called the obligee or
creditor.
2. Passive Subject – from whom the obligation is juridically demandable or one bound
to perform the prestation. He is called the obligor or debtor.
3. Juridical Tie or Vinculum Juris – the efficient cause which creates the relation
between the obligor/debtor and obligee/creditor and which may arise from either
bilateral or unilateral acts of persons.
4. Prestation or Object – the particular conduct of the debtor which may consist in
giving, doing, or not doing something which constitutes the object of obligation
(Jurado, 2010)
4.1 Requisites of Prestation:

a. Physically and juridically possible;
b. Determine or at least determinable according to pre-established elements
or criteria;
c. Must be within the commerce of man;
d. Must be licit; and
e. Possible equivalent in money.
C. Overview on the Primary Classifications under the New Civil Code (Jurado, 2010):
1. Pure and Conditional (Civil Code, Art. 1179-1192)

a. Pure
b. Conditional
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2. With a Period or Term (Civil Code, Art. 1193-1198)
3. Alternative and Facultative (Civil Code, Art. 1199-1206)

a. Alternate
b. Facultative
4. Joint and Solidary (Civil Code, Art. 1207-1222).

a. Joint
b. Solidary
5. Divisible and Indivisible (Civil Code, Art. 1223-1225).
6. With a penal clause (Civil Code, Art. 1226-1230).
7. Individual and collective (Civil Code , Art. 1207, 1223)

a. Individual
b. Collective
8. Accessory and principal (Civil Code, Art. 116, 1226)
D. Secondary Classifications under the New Civil Code:
1. Legal (Civil Code, Art. 1158) – arises from law;

2. Conventional (Civil Code, Art. 1159) - arises from contracts;
3. Penal (Civil Code, Art. 1161) – arises from commission of crime;
4. Real and personal (Civil Code, Art. 1163-1168);
5. Determinate and generic (Civil Code, Art. 1163-1166);
6. Positive and negative (Civil Code, Art. 1167-1168); and
7. Unilateral and bilateral (Civil Code, Art. 1169-1191)
a. Unilateral – only one party is bound to perform an obligation (e.g., simple
donation, to give support).
b. Bilateral – also known as synallagmatic contracts where two parties are
reciprocally bound (e.g., purchase and sale).
Lesson 2. Sources of Obligations (Aldeguer, 2014)
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The list of sources of obligation is exclusive as per Jurado (2010). However, Tolentino
(2002) gives another source, that is, unilateral promise .
1. Law (Ex-Lege), (Civil Code, Art. 1158)
Obligations derived from law are not presumed. Only those expressly determined
in the New Civil Code or in Special Laws are demandable, and shall be regulated by
the precepts of the law which establishes them. In case of conflict between the Civil
Code and a special law, the latter prevails unless the contrary has been stipulated.
Jurado (2010) gave an example thus: the obligation of the spouse to support each
other is based on law.
2. Contracts (Ex-Contractu) (Civil Code, Art. 1159).
Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith Contract is the meeting of the minds
between two persons whereby one binds himself with respect to the other to give
something or to render some service (CIVIL CODE, Art. 1305).
Jurado (2010) further discussed that contracts are perfected by mere consent, and
from that moment the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all of the consequences which according to their nature
may be in keeping with good faith, usage and law. These contracts are commonly
called consensual contracts. Once the contract is perfected, the valid contract has the
force of law binding the parties to comply therewith in good faith, where neither one
may renege therefrom without the consent of the other.
The terms of the contract determine the respective obligations of the parties
thereto. If the parties of a contract are clear and leave no doubt upon the contracting
parties’ intention, such terms should be applied in their literal meaning. ( Spouses
Dumlao vs. Marlon Realty Corp., G.R. No. 131491, August 17, 2007).
3. Quasi-contracts (Quasi Ex-Contractual) (Civil Code, Art. 2142)

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Juridical relations arising from lawful, voluntary, and unilateral acts by virtue of
which the parties become bound to each other, based on the principle that no one shall
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be unjustly enriched or benefited at the expense of another. (Civil Code, Art. 2142)
Quasi-contract is differentiated with other sources of obligations, such that, that act
giving rise to quasi-contract is lawful unlike crime. Further, quasi-contract is voluntary
while quasi-delict is based on fault or negligence. Lastly, quasi-contract is unilateral,
while a contract is based on agreement which requires at least two (2) parties. (Jurado,
2010)
4. Delict (Ex-Delictu, Culpa Criminal) (Civil Code, Art. 1161).
Civil obligations arising from criminal offence shall be governed by the penal laws.
As a rule, every person liable for a felony is also civilly liable. (RPC, Art. 100) There
are however, offenses and special crimes, such as treason, rebellion, and gambling,
which are without civil liability.
Exemption from criminal liability under Art. 12 of the Revised Penal Code does not
carry with it the exemption from the obligation to indemnify the damage done, as they
have no right or justification to inflict the damage. (Jurado, 2010)
5. Quasi-delict (Quasi Ex-Delicto) (Civil Code, Art. 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.
(Jurado, 2010)
It has been ruled that tort liability can exist even if there are already contractual
relations, but this should be interpreted to mean that the tort liability itself does not
arise because of the contract, but because of some other fact. (Paras, 2002)
Lesson 3. Solutio In debiti and Negotiorum Gestio
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Quasi-contracts have kinds, namely:
1. Negotiorum Gestio;
2. Solutio Indebiti; and
3. Other Quasi-contracts
1. Negotiorum Gestio (or Officious Management)
Whoever voluntarily takes charge of the agency or management of the

business of 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 (Civil Code, Art. 2144).
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 Civil Code.
Requisites of Negotiorum Gestio as per Jurado (2010):

a) The gestor must voluntarily assume the agency or management of the
business or property of another.
b) The business or property must be either neglected or abandoned.
c) The agency or management must not be authorized by the owner either
expressly or impliedly.
d) The assumption of the agency or management must be made in good
faith.
So long as the owner does not know that another is acting on his behalf
without authority, negotiorum gestio exists. However, once he becomes aware
of such fact and still he does not repudiate the acts of the agent, the quasi-
contract ceases to exist. It has become an implied agency. (Jurado, 2010).
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2. Solutio Indebiti (or Payment Not Due)
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 (Civil Code,
Art. 2154)
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. (Jurado, 2010)
The responsibility of two or more payees, where there has been payment
of what is not due, is solidary. (Civil Code, Art. 2157)
It should also be remembered that when the property delivered or money

paid belongs to a third person, the payee shall comply with the provisions of
Article 1984 on notifying who the true owner is. If, in spite of such information,
the true owner does not claim the property or money paid within one (1) month,
the payee shall be relived of all responsibility by returning the thing to the payor.
(Jurado, 2010)
3. Other Quasi-contracts (also known as support given by strangers) (Articles

2164 to 2175)
Just to give you a proper appreciation, here are the provisions on quasi-
contracts under the Civil Code:
“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.
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
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deceased, said relatives shall reimburse the third person, should the latter
claim reimbursement.
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.
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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, anyone 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.”
The foregoing provisions are mere illustrations of other specific cases of quasi-
contracts and the enumeration is not exclusive on other possible other instances.
(Jurado, 2010)
In the case of Perez vs. Palomar, 2 Phil. 682, it was significantly noted that in a
quasi-contract where no express consent is given by the other party, the consent
needed in a contract is provided by law through presumption (presumptive consent).
Presumptive consent gives rise to multiple juridical relations resulting in obligations
for delivery of the thing and rendering of service. (Jurado, 2010) Thus, in a quasi-
contract, there is no meeting of the minds.
Lesson 4. Proximate Cause in Quasi-Delicts
Quasi-delicts refer to all of those obligations which do not arise from law, contracts,
quasi-contracts, or criminal offenses. Thus, referring to Article 2176 of the Civil Code
and decided cases, quasi-delict 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, cause damage to another person. It is, therefore, the
equivalent of the term “tort”. (Jurado, 2010)
In relation to this source of obligations is the term “proximate cause”. Article 2179
of the Civil Code provides that, “[ w]hen the plaintiff's own negligence was the
immediate and proximate cause of his injury, he cannot recover damages. But if his
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negligence was only contributory, the immediate and proximate cause of the injury
being the defendant's lack of due care, the plaintiff may recover damages, but the
courts shall mitigate the damages to be awarded.:”
Proximate cause is defined as that cause, which, in natural and continuous

sequence, unbroken by any efficient intervening cause, produces the injury, and
without which the result would not have occurred. Proximate cause is that cause
acting first and producing the injury, either immediately or by setting other events in
motion, all constituting a natural and continuous chain of events, each having a close
causal connection with its immediate predecessor, the final event in the chain
immediately effecting the injury as natural and probable result of the cause which first
acted, under such circumstances that the person responsible for the first event
should, as an ordinarily prudent and intelligent person, have reasonable ground to
expect at the moment or default that an injury to some person might probably result
therefrom. There is no exact formula to determine proximate cause. It is based upon
mixed considerations of logic, common sense, policy and precedent. (Dy Teban
Trading, Inc. vs. Jose Ching, et. al, G.R. No. 161803, February 4, 2008)
In relation to proximate cause under the provisions on quasi-delicts, we should

note that obligations arising from quasi-delict 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, are responsible
for the damages caused by the minor children who live in their company.
2. Guardians are liable for damages caused by the minors or incapacitated persons
who are under their authority and live in their company.
3. The owners and managers of an establishment or enterprise are likewise

responsible for damages caused by their employees in the service of the branches in
which the latter are employed or on the occasion of their functions.
4. Employers shall be liable for the damages caused by their employees and
household helpers acting within the scope of their assigned tasks, even though the
former are not engaged in any business or industry.
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5. The State is responsible in like manner when it acts through a special agent; but
not when the damage has been caused by the official to whom the task done properly
pertains, in which case what is provided in article 2176 shall be applicable.
6. Lastly, teachers or heads of establishments of arts and trades shall be liable for
damages caused by their pupils and students or apprentices, so long as they remain
in their custody.
The responsibility treated of in this article shall cease when the persons herein
mentioned prove that they observed all the diligence of a good father of a family to
prevent damage. (Civil Code, Article 2180)
Requisites of Liability (Jurado, 2010):
a) The fault or negligence of the defendant;

b) The damage suffered or incurred by the plaintiff; and
c) The relation of cause and effect between the fault or negligence of the
defendant and the damage incurred by the plaintiff.
Assessment Task 1
CASE STUDY. Read. Then answer the succeeding questions:
Facts: Xavier by mistake delivered to Amara and Basti a sum of money

which should have been delivered to Chester and Glad. Xavier now demands
the return of the same from Amara and Basti.
Questions:
1. What is the liability of Amara and Basti for the sum of money to which
they are not entitled to receive?
2. If Xavier did not demand for the return of the sum of money, (a.) what
is the responsibility of Amara and Basti? (b.) Can Amara and Basti
own the sum of money wrongfully delivered to them? Explain.
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Summary
The law of obligations based on the Civil Code of the Philippines (R.A. 386, as
amended) is a body of rules which deals with the nature, sources, kinds and effects of
obligations as well as the modes of its extinguishment.
Obligation based on the Civil Code is defined as the juridical necessity to give, to
do, or not to do.
The elements of obligation are as follows: a) active subject- one who can demand
the fulfillment of a prestation; b) passive subject – one bound to perform the prestation;
and c) juridical tie or vinculum juris- the efficient cause which creates the relation
between the obligor/debtor and the oblige/creditor; d) prestation / object - the particular
conduct of the debtor which may consist in giving, doing, or not doing something which
constitutes the object of obligation.
The sources of obligations are law, contracts, quasi-contract, delict and delict or
crime.
Quasi-contracts have three (3) kinds namely: negotiorum gestio, solution indebiti
and other quasi-contracts.
Quasi-delict is also known as “tort” and obligations or liabilities arising therefrom

are demandable not only from the person directly responsible for the damage incurred
but also against the persons enumerated under Article 2180 of the Civil Code.
References
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Books and Laws:
Aldeguer, C. (2014) Law on Obligations and Contracts in the Philippines: An
Overview https://ssrn.com/abstract=2429979 or http://dx.doi.org/10.2139/
ssrn.2429979
Jurado, D., (2010). Comments and Jurisprudence on obligations and Contracts.

Manila, Philippines, Rex Bookstore.
Paras, E., Civil Code of the Philippines Annotated Book V 14th Edition. 2000,
Manila: Rex Printing Company, Inc.
Republic Act No. 386 or the Civil Code of the Philippines, June 18, 1949.
Tolentino, A. (2002). Commentaries and Jurisprudence on the Civil Code of the

Philippines. Central Law Book Publishing Co., Inc.
Jurisprudences:
Dy Teban Trading, Inc. vs. Jose Ching, et. al, G.R. No. 161803, February 4, 2008
Spouses Dumlao vs. Marlon Realty Corp., G.R. No. 131491, August 17, 2007
MODULE 2
NATURE AND EFFECTS OF OBLIGATIONS

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Introduction
This module focuses on the nature and effects of obligations. Particularly, the
module will touch on the rights of a creditor in obligations, such as rights to the fruits.
Personal and real rights will also be distinguished, or rights in relation to obligations to
give, to do or not to do.
The different kinds of breach of obligations will also be discussed and the rules
applicable to each. The rules applicable on extinguishment of interest and installments
affecting obligations will further be elucidated. We will also discuss what law governs in
the topics enumerated above affecting obligations. In discussing these, we will touch on
the provisions of law and legal concepts and principles.
Learning Outcomes
1. Understand the rights of a creditor in obligations, such as rights to the fruits, as
well as the rights in relation to obligations to give, to do or not to do;
2. Familiarize on the kinds of breach of obligations and discuss each;
3. Comprehend and discuss the rules applicable on extinguishment of interest and
installments affecting obligations.
Lesson 1. Rights of a Creditor in Obligations
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First we have to differential personal and real obligations. Personal obligations refer
to the prestation to do or not to do; whereas real obligations pertain to the prestation to
give. (Tolentino, 2002)
Under real obligation, the object may be determinate, generic or limited generic.
Determinate object pertains to specific object or which is particularly designated or
physically segregated from all others of the same class. On the other hand, generic
object pertains to object which is designated merely by its class or genus. Lastly, limited
generic thing refers to those generic objects that are confined to a particular class, e.g.
an obligation to deliver one of my horses. (Tolentino¸ 2002)
A. Rights of Creditor to the Fruits

1. Before delivery, the right of a creditor to the fruits is a personal right.
2. After delivery, the right of a creditor to the fruits is a real right.
The ownership of things is transferred not by mere agreement but by delivery. When
there has been no delivery yet, the proper action of the vendee to take against the
vendor of a thing is not one for reivindicacion but one for specific performance.
(Tolentino, 2002)
Specific performance is an action available to the creditor to ask that a real

obligation (to give) be performed. Whether the thing be specific or generic, it is, as a
rule, available to the creditor, subject to different consequences as provided by law.
The basis for action for specific performance is a contractual relation between the
plaintiff and the defendant. (Jurado, 2010)
Jurado (2010) differentiated personal right and real right as follows:
1. Personal right is jus ad rem, or a right enforceable only against a definite person
or group of persons. On the other hand, real right is jus in re or a right enforceable
against the whole world.
2. Personal right is a right pertaining to the person to demand from another, as a

definite passive subject, the fulfillment of a prestation to give, to do or not to do. On
the other hand, real right is a right pertaining to a person over a specific thing,
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without a passive subject individually determined against whom such right may be
personally enforced.
B. Obligations of the Debtor (Jurado, 2010)
1. If the thing is determinate, the obligations of the debtor are the following:
a) Specific performance.
b) Take care of the thing with the proper diligence of a good father of a family
unless another standard of care is required by law or stipulated by the
parties (Civil Code, Art. 1163).
c) Deliver all accessions and accessories of the thing although not mentioned
(Civil Code, Art. 1166).
Everything that is attached to naturally or artificially, or even temporarily

separated from the principal thing (i.e. when windows of the house are
removed for repairs), as well as that which serves to complete it, even if not
attached to it, must be delivered with it. (Jurado, 2010)
d) To be liable for damages in cases of breach due to delay, fraud, negligence

or contravention of tenor thereof. (Article 1165)
2. If the thing is generic, the obligations of the debtor are the following:
a) To deliver the thing of the quality intended by the parties, taking into
account the purpose of the obligation, intent of the parties and other
circumstances.
b) To be liable for damages in case of breach due to delay, fraud, negligence

or contravention of the tenor thereof. (Article 1170)
C. Rights of a Creditor in Real Obligations to Give (Jurado, 2010)

1. If the thing is determinate, the rights of a creditor in real obligations “to give” are
the following (Article 1165):
a) To compel specific performance with right to be indemnified for damages.
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b) To demand rescission of the obligation with right to recover damages.
c) To demand payment of damages when it is the only feasible remedy.
d) 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 delivery.
2. If the thing is generic, the rights of a creditor are the following:

a) To ask for performance of the obligation/
b) To ask that the obligation be complied with at the expense of the debtor.
c) To recover damages in case of breach of obligation.
D. When Obligation to Deliver the Thing and the Fruits Arises (Jurado, 2010)
1. If the source of obligation is law, quasi-contracts, delict, quasi-delict, it arises from

the time designated by the law creating or regulating them.
2. If the source is contract, it arises upon perfection unless there is a stipulation to the
contrary. If there is a term or condition, then from the moment the term arrives or
the condition happens.
In specific performance, equity requires that the contract be just and equitable in tis
provisions, and that the consequences of specific performance likewise be
equitable and just. The general rule is that this equitable relief will not be granted if
the result of the specific performance of the contract would be harsh, inequitable,
and oppressive or result in an unconscionable advantage to the party. (Agcaoili vs.
GSIS, G.R. No. 30056, August 30, 1988).
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E. Rights of a Creditor/Obligee in Personal Obligations: “To Do” or “Not To Do”
(Articles 1167-1168)
In case of positive personal obligations, the creditor/obligee has the following rights:
1. To have the obligation performed or executed at the expense of the obligor.
2. Ask that what has been poorly done be undone.
3. Recover damages because of breach of the obligation.
In case of negative personal obligations, the creditor/obligee has the following rights
or remedies in case the obligor/debtor does what has been forbidden him:
1. To have it undone at the expense of the obligor; and
2. To ask for damages.
Cases where the remedy granted under Article 1168 is not available
(Jurado, 2010):
1. Where the effects of the act, which is forbidden, are definite in character – even
if it is possible for the obligee to ask that the act be undone at the expense of the
obligor, consequences permanent in character and contrary to the object of the
obligation will be produced.
For instance, should a TV star is absolutely prohibited by his contract with his
home station to appear in programs of other TV stations, the effects of the breach
thereof can no longer be undone.
2. Where it is physically or legally impossible to undo what has been undone

because of the very nature of the act itself or of a provision of law, or because of
conflicting rights of third persons.
In either case, the remedy is to ask for damages. (Jurado, 2010)
19
Lesson 2. Kinds of Breach of Obligations
In case the breach of obligations is involuntary wherein the debtor is unable to comply
with his obligation because of fortuitous event, the debtor is not liable for damages. (Article
1174)
On the other hand, the debtor is liable for damages where the debtor, in the
performance the obligation, is guilty of:
a) Default (mora)
b) Fraud (dolo)
c) Negligence (culpa)
d) Breach through contravention of tenor of the obligation. (Jurado, 2010)
A. Default (Mora) (Jurado, 2010)
Default (mora) refers in the delay in the fulfillment of the obligation with respect
to time. (Jurado, 2010)
Delay in the performance of the obligation, however, must be either malicious

or negligent. If delay is only due to inadvertence without any malice or
negligence, the obligor cannot be liable under Art. 1170. (RCBC vs. Court of
Appeals, G.R. No. 133107, March 25, 1999)
Requisites in order to consider the obligor in default: (SSS vs. Moonwalk

Development and Housing Corporation, G.R. No. 73345, April 7, 1993)
1. Obligation is demandable and already liquidated;

2. The obligor/debtor delays performance; and
3. The creditor requires performance judicially or extra-judicially. This refers
to formal demand.
Kinds of Default: (Jurado, 2010)

20
1. Mora solvendi or that which refers to the delay of the debtor to perform
his obligation. It may be ex re, when obligation is to give; or ex persona,
when obligation is to do.
Please remember that there is no mora solvendi in negative obligation

for as one can never be late in not doing or not giving something. Also,
there is no mora solvendi in natural obligation because the performance
is optional on the part of the debtor.
In mora solvendi, debtor is liable for interest in obligations to pay

money, or damages. In the absence of extra-judicial demand, the
interest shall commence from the filing of the complaint. Further, debtor
is liable even for fortuitous event when the obligation is to deliver a
specific thing. But court may equitably mitigate damages if debtor
proves that the loss would have still resulted if he had not been in
default. For generic things, debtor may still be compelled to deliver a
thing of the same kind or be held liable for damages.
2. Mora accipiendi refers to the delay of the creditor in accepting delivery

of the thing which is the object of the obligation.
Requisites:
a) Offer of performance by the debtor who has the required capacity;
b) Offer is to comply with the prestation as it should be performed; and
c) Creditor refuses the performance without just cause.
The debtor may release himself from the obligation by consignation of

the thing due. For obligation to pay money, debtor is not liable for
interest from the time of creditor’s delay.
3. Compensatio morae refers to delay of the parties or obligors in

reciprocal obligation.
The obligor cannot possibly incur in delay in negative obligations “not
to do”.
21
The delay of the obligor cancels the delay of the obligee and vice versa.
There is no actionable default on the part of both parties. (Art. 1192) If
delay of one party is followed by that of the other, the liability of the first
infractor shall be equitably balanced by the courts.
Rules on Default: (Jurado, 2010)
1. In case of unilateral obligation, demand is necessary. No demand – no

delay. Mere expiration of the period fixed by the parties will not cause
delay.
Commencement of a suit is sufficient demand. (Palmares vs. Court of

Appeals, G.R. No. 126490, March 31, 1998)
Exceptions:
a) When the obligation or law expressly so declares (i.e. taxes)
b) When the time for fulfillment of the obligation is of the essence of the
contract;
c) When demand would be useless (i.e. debtor voluntarily destroys the
things).
We should remember that one cannot admit or acknowledge delay

unless the obligation is due.
Mere stipulation of maturity date is not enough to dispense with the

need to demand. The words “without the need of demand” should
appear in the face of the instrument.
Mere reminder is not a demand because for all that we know, lateness
may still be tolerated by the creditor. (Jurado, 2010)
In cases of contracts with acceleration clause, if the is default, one can

demand for all installment payments, however, there still has to be a
demand from the creditor.
22
The rule is that, prior extrajudicial demand is not necessary before a
suit may be filed when obligor defaults. The exceptions to this rule are
in cases of ejectment and consignment cases. (Sta. Maria, 2003)
2. In case of unilateral obligations or those created or established at the

same time out of the same cause and which result in mutual relationship
between the parties.
The rule is that fulfillment by both parties should be simultaneous; one

party incurs in delay from the moment the other party fulfills his
obligation, while he himself does not comply or is not ready to comply
in a proper manner with what is incumbent upon him. (Art. 1169)
The exception to this is when different dates for the performance of the
obligation is fixed by the parties Demand is necessary in such case.
If neither party complies with his prestation, the default of one

compensates for the default of the other.
B. Fraud (dolo) (Jurado, 2010)
Fraud (dolo) refers to conscious and intentional proposition to evade the normal
fulfillment of an obligation. It implies some kind of malice or dishonesty and cannot
cover cases of mistake and errors in judgment made in good faith. In such case,
obligor can be held liable for damages.
Waiver of Fraud
1. Future fraud cannot be waived because it is contrary to law and public policy.
2. Waiver of past fraud is valid. It can be deemed an act of generosity. What is
renounced is the effect of fraud or the right to indemnity, more particularly the
right of the party to indemnity.
C. Negligence (culpa) (Jurado, 2010)

23
Negligence (culpa) refers to any voluntary act or omission, there being no malice
which prevents the normal fulfillment of an obligation. (Jurado, 2010)
Kinds of Negligence:
1. Civil Negligence which is further categorized into culpa contractual or culpa

aquiliana/quasi-delict.
In culpa contractual, the fault or negligence of obligor by virtue of which he

is unable to perform his obligation, arising from a pre-existing contract. On the
other hand, in culpa acquiliana, the fault or negligence of a person whose failure
to observe the required diligence to the obligation causes damage to another.
2. Criminal Negligence refers to fault or negligence which results in the

commission of a crime.
The diligence required may be that agreed upon by the parties, or in the
absence of stipulation, that required by law in the particular case. If both contract
and law are silent, the diligence required is the “diligence of a good father of a
family”. This latter kind of diligence is defined as that reasonable diligence which
an ordinary prudent person would have done under the same circumstances.
D. Breach through Contravention of Tenor of Obligation (Jurado, 2010)
Under Article 1170 of the Civil Code, 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. The exception to this is in cases of fortuitous events.
Fortuitous event is an event which could not be foreseen, or which, though

foreseen, was inevitable.
Requisites of fortuitous event:
24
1. Event must be independent of the will of the obligor;
2. It must be either unforeseeable or inevitable;
3. Must be of such a character as to render it impossible for the obligor to fulfill
his obligation in a normal manner; and
4. Obligor must be free from any participation in the aggravation of the injury
resulting to the obligee. (Jurado, 2010)
Jurado (2010) emphasized that fortuitous event must not only be the
proximate cause, but it must be the only and sole cause. Further, contributory
negligence of the debtor renders him liable despite the fortuitous event. Courts
may equitably mitigate damages. If the negligence was the proximate cause,
the obligation is not extinguished. It is converted into a monetary obligation for
damages.
As a general rule, there is no liability for damages in case of fortuitous

event. The exceptions to this rule are either when expressly declared by law,
or when expressly declared by the stipulation or contract, or when the nature
of the obligation requires the assumption of risk, or when the object of the
prestation is generic.
In relation to this, Jurado (2002) discussed the Doctrine of Created Risk

which refers to situations in which the obligor, with full knowledge of the risk
enters into some relation with the obligee.
Lesson 3. Extinguishment of Interest and Prior

Installments (Article 1176)
Receipt of the principal (or later installment) without reservation as to the interest
(or prior installment) shall give rise to a disputable presumption that the interest (or prior
installment) has been paid.
The above presumption does not apply in the following cases:
1. When there is a reservation made orally or in writing.

25
2. If the receipt does not recite that is was issued for a particular installment due as
when the receipt is only dated.
3. To payment of taxes.
4. Where non-payment of the prior obligations has been proven.
Remedies of a Creditor to Protect Credit (Article 1177)
1. To exhaust the property in possession of the debtor generally by attachment,

subject to exemptions provided by law.
2. Accion subrogatoria which refers to the right to be subrogated to all the rights and
actions of the debtor save those which are inherent in the person of the debtor.
Please remember that there is no change of creditor in accion subrogatoria. The

creditor merely acts in the name and for the account of the debtor after exhausting
all of the assets of the later.
3. Accion pauliana or the action to impugn all the acts which the debtor may have
done to defraud them by means of rescissory action at the instance of the creditor
who is prejudiced.
Please remember that rights acquired by virtue of an obligation are

transmissible in character. Exceptions to this are when prohibited by law, or when
prohibited by personal qualification or circumstances of the transferor which is
material ingredient attendant in an obligation, or when prohibited by stipulation of
the parties. (Jurado, 2010)
Assessment Task 2
Answer the following objectively.
1. Define fortuitous events and cite five (5) examples.

2. Differentiate the kinds of breach of obligations.
3. Discuss when accion subrogatoria is applicable. 26
4. Define “diligence of a good father of a family”.
Summary
Obligation is categorized into personal and real obligations. Personal obligations

refer to the prestation to do or not to do; whereas real obligations pertain to the
prestation to give.
Under real obligation, the object may be determinate, generic or limited generic.
Specific performance is an action available to the creditor to ask that a real obligation
(to give) be performed.
The obligations of the debtor depends if the thing is determinate or generic. For
both, debtor is liable for damages in cases of breach due to delay, fraud, negligence
or contravention of tenor thereof.
The rights of a creditor in real obligations to give also depends if the thing is
determinate or generic.
The rights of a creditor/obligee in personal obligations: “to do” or “not to do” varies
in case of positive personal obligations, and in case of negative personal obligations.
There are four (4) kinds of breach of obligation, namely: a) default (mora); b)
fraud (dolo); c)negligence (culpa); and d) breach through contravention of tenor
of the obligation.
Default (mora) refers in the delay in the fulfillment of the obligation with respect to
time which may either be mora solvendi or mora or compensatio morae.
On the other hand, fraud (dolo) refers to conscious and intentional proposition to
evade the normal fulfillment of an obligation. It implies some kind of malice or
27
dishonesty and cannot cover cases of mistake and errors in judgment made in good
faith. In such case, obligor can be held liable for damages.
Negligence (culpa) in turn refers to any voluntary act or omission, there being no
malice which prevents the normal fulfillment of an obligation which may either be civil
or criminal negligence.
The last one is breach through contravention of tenor of obligation under Article
1170 of the Civil Code, 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. The exception to this is in
cases of fortuitous events.
In relation to this, Jurado (2010) discussed the Doctrine of Created Risk which
refers to situations in which the obligor, with full knowledge of the risk enters into some
relation with the obligee.
The creditor has the following remedies to protect credit under Article 1177, that is,
to exhaust the property in possession of the debtor generally by attachment, accion
subrogatoria, or accion pauliana.
References
Books and Laws:

Paras, E., Civil Code of the Philippines Annotated Book V 14th Edition. 2000,
Manila: Rex Printing Company, Inc.
28
Sta. Maria, M., Obligations and Contracts – Text and Cases 2nd. Ed., 2003 Quezon
City Philippines: Rex Printing Co.

Jurisprudences:
Agcaoili v. GSIS, G.R. No. 30056, August 30 1988
RCBC vs. Court of Appeals, G.R. No. 133107, March 25, 1999
SSS vs. Moonwalk Development and Housing Corporation, G.R. No. 73345,
April 7, 1993
MODULE 3
DIFFERENT KINDS OF OBLIGATIONS
Introduction
This module will discuss the different kinds of obligations under the Civil Code. In
this module, the effects, remedies and different principles relating to each kind of obligation
will be touched upon.
29
theories and concepts regarding kinds of obligations. This module will also discuss what
law governs in the topics enumerated above affecting obligations. In discussing these, we
will touch on the provisions of law and legal concepts and principles.
Learning Outcomes
1. Determine the different kinds of obligations and further know what rule will apply;
2. Analyze the effects of the loss, deterioration and improvement in real obligations;
and
3. Explain the principles relating to the different kinds of obligations.
Lesson 1. Pure Obligation and Conditional Obligation
A. Pure Obligation
Pure obligation refers to that 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 (Civil Code, Art. 1179, par 1).
Obligation which contain no terms or conditions whatever upon which depends

the fulfillment of the obligation contracted by the obligor (Tolentino, 2002).
30
A demand note is subject to neither a suspensive condition nor a suspensive
period. The demand is not a condition precedent, since the effectivity and binding
effect of the note does not depend upon the making of the demand. It follows
therefore, that a demand note is strictly a pure obligation, and payment therefore
is immediately demandable in the absence of other restrictions (Tolentino,
2002).
B. Conditional Obligation
Conditional obligation is one in which 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 (CIVIL CODE, Art. 1181).
Jurado (2010) further discussed that the effectivity is subordinated to the

fulfillment or non-fulfillment of a future and uncertain fact or event.
A demand is not a condition precedent since the effectivity and binding effect of
the note does not depend upon the making of the demand. (Jurado, 2010)
1. Characteristics of Condition:
a. It is a future and uncertain event upon which an obligation or provision is

made to depend;
b. Even though the event is uncertain, it should be possible;
c. The condition must be imposed by the will of the party and not a
necessary legal requisite; and
d. Past event but unknown to parties (the knowledge to be acquired in the
future of a past event which at that moment is unknown to parties
interested – it is only in that sense that the event is be deemed uncertain)
(Tolentino, 2002).
We should note that when the debtor binds himself to pay when his means
permit him to do so, the obligation shall be deemed to be one with a period
instead. (Article 1180) In this case, the creditor must first ask the court to fix
the period, otherwise the action to collect the debt would be premature.
31
(Article 1197)
2. Effects of Failure to Comply with Condition:
a. If condition is imposed on the perfection of a contract, it results in the

failure of the contract; or
b. If condition is imposed on the performance of the obligation, it gives the
other party an option either to refuse to proceed with the compliance of
the obligation or to waive the condition.
Jurado (2010) emphasized that obligation is demandable at once when it is

pure, or when it is subject to a resolutory condition, or when it is subject to a
resolutory period.
Lesson 2. Traditional Classifications of Conditions
a. As to the Effect of Obligation
1. Suspensive – when the fulfillment of the condition results in the

acquisition of rights arising out of the obligation; or
2. Resolutory – when the fulfillment of the condition results in
extinguishment of rights arising out of the obligation.
Example of suspensive condition: X bound himself to deliver his only car
to his son Y if the latter will pass all his enrolled subject this semester.
Example of resolutory condition: X gave his only car to his son Y with the
agreement that the son will return said car if he will fail the CPA board
examinations.
b. As to the Origin of Condition
3. Potestative – one which depends upon the will of one of the

contracting parties; it is in the power of one of the parties to realize or
to prevent.
32
i. Simple Potestative – presupposes not only a manifestation of will
but also the realization of an external act of a 3 rd party.

ii. Purely Potestative – if it depends solely and exclusively upon the
will of the debtor, it is void for the debtor cannot fulfill an obligation
arising from his own choice. But it is valid if it depends on the will
of the creditor.
4. Casual – depends exclusively upon chance, will of a third person, or

partially by chance and partially by will of a third person, or other
factors and not upon the will of the contracting parties.
5. Mixed – depends upon the will of one of the contracting parties and
other circumstances, including the will of third persons or chance.
c. As to Possibility
1. Possible – when the condition is capable of realization according to

nature, law, public policy or good customs; or
2. Impossible – when the condition is not capable of realization
according to nature (physical) law, public policy, morals or good
customs (legal).
General Rule: If the obligation is divisible, the impossible conditions

shall annul the obligation which depends upon them (Civil Code, Art.
1183).
Exceptions:
a. Pre-existing obligation;
b. Divisible obligation;
c. Negative Impossible things; and
d. Testamentary deposition.
d. As to Mode
33
1. Positive – condition that some event happen at a determine time shall
extinguish the obligation as soon as the time expires or become
indubitable that the event will not take place (Civil Code, Art. 1184).
2. Negative – the condition that some event will not happen at a
determine time shall render the obligation effective from the moment
the time has elapsed of it has become evident that the event cannot
occur (Civil Code, Art. 1185).
e. As to Divisibility
1. Divisible – when the condition is susceptible of partial realization; and

2. Indivisible – when the condition is not susceptible of partial
realization.
Principle of Indivisibility of Conditions. The indivisibility of the

condition passes to the heirs of the debtor; hence, some heirs cannot
demand partial performance of the obligation by offering to fulfill part
of the condition corresponding to them.
Exceptions: The condition may be divisible when:

a. By nature of the condition;
b. By stipulation; and
c. By law.
f. As to Plurality of Conditions
1. Conjunctive – there are several conditions, which must all be realized;

and
2. Alternative – there are several, but only one must be realized.
g. As to Form
a. Express – condition is stated expressly

b. Implied – condition is tacit
34
1. Effects of Suspensive, Resolutory, Potestative, Mixed, Casual Condition (Civil
Code, Art. 1181-1182):
a. Suspensive Condition – obligation shall only be effective upon the

fulfillment of the condition; upon constitution of obligation, and before
fulfillment, obligee acquires a mere hope or expectancy, protected by law.
1. Before fulfillment – Demandability and the acquisition of the rights

arising from the obligation is suspended. Obligation of obligor to
comply with the prestation is held in suspense until fulfillment of
condition. Anything paid by mistake during such time may be
recovered.
2. After the fulfillment – The obligation arises or becomes effective;

obligor can be compelled to comply with what is incumbent upon
him.
b. Resolutory Condition – obligation becomes demandable immediately

after its constitution and rights are immediately vested in the obligee, but
such rights are always subject to the threat or danger of extinction.
Principle of retroactivity applies (Civil Code, Art. 1190, par. 1)
1. Before fulfillment – right recognized in Art. 1188, par. 1 of the Civil

Code in case of a suspensive condition should likewise be available
in obligations with a resolutory condition.
2. After fulfillment – Whatever may have been paid or delivered by one

or both of the parties upon the constitution of the obligation shall
have to be returned upon the fulfillment of the condition. There is a
return to the status quo.
c. Potestative Condition
1. When it depends exclusively upon the will of creditor, the condition

35
and obligation is valid.
2. When it depends exclusively upon the will of debtor in case of a

suspensive condition, the condition and obligation are void. To allow
such condition would be to sanction illusory obligation, in direct
contravention of the principle announced in Art. 1308 of the Civil
Code.
3. When it depends exclusively upon the will of debtor in case of a

resolutory condition, the condition and obligation is valid. The
position of the debtor is exactly the same as the creditor in a
suspensive condition and does not render the obligation illusory.
a. Casual Condition – the obligation and condition shall take effect.
b. Mixed Condition – the obligation and condition shall take effect.
2. Effects of Impossible Conditions:

a. Conditional obligation is void – both obligation and condition are void.
b. Conditional obligation is valid – if condition is negative, it is disregarded
and obligation is rendered pure and valid.
c. Only the affected obligation is void – if the impossible condition is divisible,
the part not affected by the impossible condition shall be valid.
d. Only the condition is void – if obligation is pre-existing, not depending on
fulfillment of the condition which is impossible for its existence, only the
condition is void.
e. Condition considered not imposed – if impossible/unlawful condition is
attached to a simple or remuneratory donation as well as to a
testamentary disposition, condition is considered not imposed while the
obligation is valid (Civil Code, Art. 1183).
3. Effect of Positive and Negative Condition
a. In positive condition, obligation is extinguished as soon as the time

36
expires or if it becomes indubitable that the event will not take place (Civil
Code, Art. 1184).
b. In negative condition, the obligation is effective from the moment the time
indicated has lapsed, or if it has become evident that the event cannot
occur, although the time indicated has not yet lapsed (Civil Code, Art.
1185).
c. The intention of parties, taking into consideration the nature of the
obligation, shall govern if no time has been fixed for the fulfillment of the
condition (CIVIL CODE, Art. 1185)
4. Doctrine of Constructive Fulfillment of Suspensive Condition
Condition is deemed fulfilled when the obligor actually prevented the obligee
from complying with the condition (Civil Code, Art. 1186); Prevention must
have been voluntary or willful in character.
Doctrine applies only to suspensive condition. It can have no application to

an external contingency which is lawfully within the control of the obligor,
(Jurado, 2010)
The mere intention of the debtor to prevent its happening or the mere placing
of ineffective obstacles to its compliance, without actually preventing
fulfillment is not sufficient. (Jurado, 2010)
Requisites Constructive Fulfillment:

1. Condition is suspensive;
2. Debtor actually prevents the fulfillment of the condition; and
3. He acts voluntarily
5. Principle of Retroactivity in Suspensive Condition (Civil Code, Art. 1187)
37
The principle of retroactivity under Civil Code, Art. 1187, is limited to the
effects of the obligation. The cause of action for the enforcement of the
obligation accrues and the prescription of the action must still be computed
from the moment of the happening of the suspensive condition. (Jurado,
2010)
Rule on retroactivity has no application to:

a. In Reciprocal Obligations: no retroactivity – mutual compensated (fruits
may be natural, industrial or civil
b. In Unilateral Obligations: no retroactivity; debtor appropriates the fruits
and interests received because it is usually gratuitous unless intention
was otherwise, as inferred from nature and circumstances (Jurado,
Obligations and Contracts, supra at 129-130).
6. Rights of the Creditor Before the Fulfillment of the Condition

The creditor, may, before the fulfillment of the obligation, bring the
appropriate action for the preservation of his right (Civil Code, Art. 1188).
7. Right of the Debtor Before the Fulfillment of the Condition:

a. The debtor may recover what he paid by mistake before the happening
of the suspensive condition;
b. If the payment was for a determine thing, debtor may file an accion
reivindicatioria;
c. If the payment was for an indeterminate thing, there is solution indebiti;
d. If payment was made with knowledge of the condition, debtor impliedly
waives the condition and cannot recover;
e. If payment was with knowledge but the condition did not happen, the
debtor can recover lest the creditor will be unjustly enriched; and
f. If payment is not by mistake, debtor is deemed to have impliedly waived
the condition; he cannot recover what he has prematurely paid once the
suspensive condition is fulfilled.
Lesson 3. Effects of Loss, Deterioration or Improvement

in Real Obligations (Article 1189)
38
a. Loss - A thing is lost when it:
1. Perishes (i.e., a house is destroyed completely by fire);
2. Goes out of the commerce of men (i.e., a thing is declared by law as
contraband); and
3. Disappears in such a way that its existence is unknown or it cannot
be recovered (i.e., a thing is stolen by unknown persons) (Tolentino,
2002).
b. Deterioration - Any reduction or impairment in the substance or value of

a thing which does not amount to loss; the thing is less than when the
obligation was constituted (i.e., a house partly damaged) (Tolentino,
2002).
c. Improvement - Anything added to, incorporated in, or attached to the thing

that is due.
In Obligations to Give (Real Obligations): In case of improvement, loss or

deterioration of the thing, pending the happening of the condition, the following
rules shall be observed:
1. If loss is without the fault of debtor, obligation is extinguished.
2. If loss through the fault of the debtor, obliged to pay damages.
3. If thing deteriorates without fault of the debtor, Impairment to be borne
by the creditor.
4. If the thing deteriorates through the fault of the debtor, creditor may
choose between fulfillment or rescission with damages in either case.
5. If improvement is through nature or time, inures to the benefit of creditor.
6. If improvement is at the expense of the debtor, rights similar to that
granted to the usufructuary (Civil Code, Art. 579 and 580).
The above rules apply to the following (Jurado, 2010):
39
1. Determinate things only because the genus of a thing never perishes
(genus nun quam peruit);
2. Obligation with a period; or
3. Those who have a duty to return in case of loss, deterioration or
improvement of the thing in an obligation with a resolutory condition
(CIVIL CODE, Art. 1190, par. 2).
In Obligations To Do or Not To Do: The provision of Art. 1187, par. 2 of the

Civil Code in which the courts shall determine, shall be observed as regards
the effect of the extinguishment of the obligation. (Jurado, 2010)
Lesson 4. 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 (Jurado, 2010).
General Rule: 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) the obligation (tacit
resolutory condition) (Civil Code, Art. 1191).
Requisites of Rescission: (Jurado, 2010)
a. One of the parties failed to comply with what is incumbent upon him;
b. The injured party chose rescission over fulfillment or performance is no
longer possible; and
c. The breach is substantial so as to defeat the object of the parties in making
the agreement.
Right to Rescind is Not Absolute (Jurado, 2010)
40
The court is given discretionary power to fix a period within which the obligor in
default may be permitted to comply with what is incumbent upon him (Civil Code, Art.
1191, par. 3). But the discretionary power of the court cannot be applied to reciprocal
obligations arising from a contract of lease because they are governed by Art. 1659
of the Civil Code.
The termination of a contract must not be contrary to law, morals, good customs,
public order or public policy.
Waiver of Rights
The rights to rescind may be waived expressly or impliedly (Sps. Fracisco v.

DEAC Construction, Inc., G.R. No. 171312, February 4, 2008).
Effects:
a. If there is a stipulation granting the right of rescission on the part of the aggrieved
party and he validly rescinds the contract pursuant to such express grant, any
court decision adjudging the propriety of the rescission extra-judicially made is
not the revocatory act of rescission but merely declaratory or an affirmation of the
revocation (De Luna v. Abrigo, G.R. No. 57455, January 18, 1990).
b. The decree of rescission shall be without prejudice to the rights if third persons
who have acquired the thing in accordance with Art. 1385 and 1388 and
Mortgage Law (CIVIL CODE, Art. 119, par. 4).
Art. 1191 of the Civil Code does not apply to the following:
a. Contracts of partnership where a partner fails to pay the whole amount which he
has bound to contribute to the common fund ( Civil Code, Art. 1786 and 1788).
b. Sales of real or personal property by installments. The first being governed by

Recto Law while the latter is governed by Maceda Law (Civil Code, Art. 1191).
c. Action for rescission is not required upon breach of compromise agreement;

41
Article 2041 confers upon the party concerned the authority to regard it as
rescinded and to insist upon the original demand.
Alternative Remedies of Injured Party (Civil Code, Art. 1191, par. 2):
a. Fulfillment of the obligation with damages
b. Rescission of the obligation with damages
Effects of Rescission:
a. Duty upon the court to require the parties to surrender whatever they may
have received from the other (without prejudice to the obligation of the party
who was not able to comply with what is incumbent upon him); or
b. Can no longer be demanded when he who demands is no longer in the

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 in the
possession of third person who obtained it in good faith (Jurado, 2010).
Effects of Breach by Both Parties:
a. The liability of the first infractor shall be equitably tempered by the courts;
b. 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
42
Lesson 5. Obligations with a Period
Obligations with a period refer to those whose fulfillment a day certain has been
fixed, shall be demandable only when that day comes. Obligations with a resolutory
period takes effect at once but terminate upon the arrival of the day certain (Civil
Code, Art. 1193).
42
Requisites:
a. Future
b. Certain; and
c. Possible, legally and physically. (Jurado, 2010)
Classifications of Period/Term:
a. As to Effect
1. Suspensive (Ex Die) – Obligations whose fulfillment a day certain has
been fixed, shall be demandable only when that day comes (Civil Code,
Art. 1193, par. 1). Fortuitous event does not interrupt the running of the
period.
2. Resolutory (In Diem) – obligations with a resolutory period take effect at
once but terminate upon arrival of the day certain (Civil Code, Art. 1193,
par 2).
b. As to Expression
1. Express – when specifically stated.
2. Implied – when it can be deduced that the parties intended a period such
as in the case of Art. 1180 of the Civil Code when one promises to pay
when able.
c. As to Definiteness
1. Definite – refers to a fixed known date or time
2. Indefinite – even which will necessarily happen but the date of its
happening is unknown is no uncertainty whether the event will happen
or not. 43
d. As to Source
1. Conventional- made by agreement of the parties
2. Legal- period fixed by law such Articles 1682 and 1687
3. Judicial- set by courts in case of implied and indefinite period.
43
Effect of Advance Payment or Delivery
In obligations to give, the obligor can recover what he has paid or delivered
with fruits and interests (CIVIL CODE, Art. 1195)
Respective Periods
General Rule: For the benefit of both parties in the absence of stipulation or
in case of doubt (Civil Code, Art. 1196).
Exception: If it can be shown that the period has been established in favor of
the creditor or of the debtor.
Period for the Benefit of the Creditor

Creditor may demand the fulfillment of the obligation at any time but the
obligator cannot compel him to accept payment before the expiration of
period (e.g. “on demand”)
Period for the Benefit of the Debtor

Debtor cannot be compelled to perform obligation prematurely, but he can
do so if he desires.
Judicial Term/Period
When fixed by a competent court in accordance with the causes expressly
recognized by law. Once fixed, the period can no longer be judicially
changed.
When Court may Fix Period (Civil Code, Art. 1197)
44
General Rule: Courts are without power to fix period.
Exceptions:
a) If the obligation does not fix a period, but from its nature and
circumstances it can be inferred that a period was intended (Civil Code,
Art. 1197);
b) If the duration of the period depends upon the will of the debtor (Civil
Code, Art. 1197, Par.2);
44
c) If under the circumstances the parties have contemplated a period (Civil
Code,Art. 1197, par. 3); and
d) If the debtor binds himself when his means permit him to do so (Civil Code,
Art. 1180)
When debtor loses right to make use of period:

i. He becomes insolvent, unless he gives a guaranty or security for the debt,
the insolvency need not be judicially declared.
ii. He does not furnish to the creditor the guaranties or securities which he
has promised.
iii. If, after their establishment, 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.
iv. If the guaranty or security disappears through any cause, even without
the fault of the debtor.
v. He violates any undertaking, inconsideration of which the creditor agreed
to the period (i.e. if an employee commits a substantial breach of his
employment contract, the employer may terminate the employment).
vi. He attempts to abscond. It is not essential that there be actual
absconding. (Civil Code, Art. 1197).
3. When obligations comprehend several objects it may be:
a. Conjunctive- when all the objects or prestations are demandable at the
same time; or
b. Distributive- when only one is demandable. It may either be alternative
or facultative.
Lesson 6. Alternative and Facultative Obligations
Alternative Obligation is one where out of two or more prestations which may be
given, only one is due. A person alternatively bound by different prestations shall
completely perform one of them (CIVIL CODE, Art. 1199, par. 1) However, we should
remember that a limitation to this is that the creditor cannot be compelled to receive part
of one and part of the other undertaking (CIVIL CODE, Art. 1999, par. 2).
Right of Choice in Alternative Obligations (CIVIL CODE, Art. 1200)

45
General Rule: Right of choice belongs to the debtor.
Exceptions:
a. Expressly granted to the creditor.
b. Expressly granted to third person.
4. Limitations upon the Right of Choice

The debtor shall have no right to choose those prestations which are:
a. Impossible
b. Unlawful;
c. Which could not have been the object of the obligation ( Civil Code, Art.
1200, par. 2);
d. Undertakings that are not included among others from those which the
obligator may select;
e. Those which are not due or demandable at the time the selection is made;
or
f. Those by reason of accident or some other cause, have acquired a new
character distinct or different from that contemplated by the parties when
the obligation was constituted.
5. When notice produces effect:
The choice shall produce effect only upon communication of the choice to the
other party (Civil Code, Art. 1201). Notice of sselection may be in any form
provided that it is su fficient to make the other part know that the election has
been made. It may be:
a. Orally;
b. In Writing; or
c. Tacitly
1. Performance by the debtor who has the right to choose or in the
acceptance of the prestation by the creditor when he has a right of
selection.
2. When the creditor sues the debtor for the performance of one of the
prestation.
A person alternatively bound by different prestations shall completely
perform one of them (Civil Code, Art. 1199, par. 1).
46
Limitation: The creditor cannot be compelled to receive part of one
and part of the other undertaking (Civil Code, Art. 1199, par. 2).
6. Effect of Notice of Choice:

a. Limits the obligation to the object or prestation selected with all the
consequences which the law provided;
b. The obligation is converted to a simple obligation to perform the
prestation chosen;
c. Once the selection has been communicated, it becomes irrevocable.
7. Effect of Loss or Impossibility of One or All Prestations

The debtor shall lose the right of choice, when among the prestations
whereby he is alternatively bound, only one is practicable (Civil Code, Art.
1202)
8. When creditor is entitled to indemnity for damages

9.
10. When through the fault of the debtor:
a. All the things which are alternatively the object of the obligation have
been lost; or
b. Compliance of the obligation has become impossible unless due to
fortuitous event (Civil Code, Art. 1204, Par. 2).
Damages other than the above-mentioned may also be awarded
(CIVIL CODE, Art. 1204, par. 3).
11. When alternative obligation ceases to be such.

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 (Civil Code, Art. 1205, Par. 1).
12. Effects of Loss of Objects of Alternative Obligation (Civil Code, Art. 1204-1205)
a. When choice belongs to debtor:
1. Due to Fortuitous Event
a. All are lost – debtor is released from the obligation
b. Some but not all are lost – deliver that which he shall choose from
47
among the remainder
c. Only one remains – deliver that which remains
2. Debtor’s Fault
a. All are lost - creditor shall have a right to indemnity for damages
based on the value of the last thing which disappeared or service
which become impossible
b. Some but not all are lost – deliver that which he shall choose from
among the remainder without damages
c. Only one – deliver that which remains
b. When choice belongs to creditor:

1. Due to Fortuitous Event
a. All are lost – debtor is released from the obligation
b. Some but not all are lost – deliver that which he shall choose
from among the remainder
c. Only one remains – deliver that which remains
2. Debtor’s fault
a. All are lost - creditor may claim the price/value of any of them with
indemnity for damages
b. Some but not all are lost – creditor may claim any of those
subsisting without a right to damages OR price/value of the thing
lost with right to damages
Facultative Obligation refers to an obligation wherein only one object or prestation

has been agreed upon by the parties to the obligation, but which may be complied with
by the delivery of another or the performance of another prestation in substitution (Civil
Code, Art. 1206).
13. Effect of Loss of Substitute in Facultative Obligation (Civil Code, Art. 1206)
a. Before substitution is made:
1. If due to bad faith or fraud of obligor – obligor is liable
2. If due to the negligence of the obligor – obligor is not liable (JURADO,
Obligations and Contracts, supra at 175).
b. After substitution is made:

48
1. The loss or deterioration of the substitute on account of the obligor’s
delay, negligence or fraud – obligor is liable because once substitution
is made, the obligation is converted into a simple one with the
substituted thing as the object of the obligation.
Lesson 7. Joint and Solidary Obligations
1. Joint Obligation (Obligacion Mancomunada)

The whole obligation is to be paid or fulfilled proportionately by different
debtors or demanded proportionately by different creditors.
2. Solidary Obligation (Obligacion Solidaria)

Each one of the debtors is bound to render, and/or each one of the creditors
has a right to demand entire compliance with the prestation.
3. Nature of a Joint/Collective Obligation (Art. 1207)

General Rule: Obligation is presumed joint if there is concurrence of several
creditors or of several debtors or of several creditors and debtors in one and
the same obligation (CIVIL CODE, Art. 1207).
Exceptions:
a. The obligation expressly states that there is solidarity (i.e. “jointly and
severally”, “individually and collectively”, “I promise to pay” followed by
the signatures of two or more persons);
b. The law requires solidarity i.e., tort, quasi-contracts, liability of principals,
49
accomplices and accessories of a felony, obligations of devisees and
legatees, bailees in commodatum;
c. Nature of the obligation requires solidarity;
d. When a charge or condition is imposed upon heirs or legatees, and the
testament expressly makes the charge or condition in solidum; and
e. When a solidary responsibility is imputed by a final judgment upon
several defendants.
4. Principals Effects of the Joint Liability:

a. Vices of each obligation arising from the personal defect of a particular
49
debtor or creditor does not affect the obligation or right of the others;
b. Insolvency of one debtor does not make others responsible for his share;
c. Demand by the creditor on one joint debtor puts him in default, but not
the others since the debts are distinct;
d. When the creditor interrupts the running of the prescriptive period by
demanding judicially from one, the others are not affected;
e. Defenses of one debtor are not necessarily available to the others.
5. Joint Divisible Obligation

Each creditor can demand only for the payment of his proportionate share of
the credit; each debtor can be held liable only for the payment of his proportionate
share of the debt.
Credit or debt shall be presumed to be divided into as many equal shares as

there are creditors or debtors, the credits or debts considered distinct from one
another subject to the Rules of Court governing multiplicity of suits (CIVIL CODE,
Art. 1208). In case of breach of obligation by one of the debtors, damages due
must be borne by him alone; if there is any defense purely personal to one of the
debtors, he alone can avail himself of such defense.
6. Joint Indivisible Obligation

Midway between joint and solidarity obligations, preserving the two
characteristics of the joint obligation, in that no creditor can do an act prejudicial
to others, and no debtor can be made to answer for others (CIVIL CODE, Art.
50
1209).
Characteristics:
a. No creditor can act in representation of the other;
b. No debtor can be compelled to answer for the liability of others.
7. Breach of Joint Indivisible Obligation (CIVIL CODE, Art. 1224).

Obligation can be enforced only by proceeding against all of the debtors.
If anyone of the debtors should fail or refuse to comply with the obligation, it is
converted into one of indemnity for damages. Debtors who may have been ready
50
to comply with what is incumbent upon them shall not contribute to the indemnity
beyond the corresponding portion of the price of the thing or the value of the
service in which the obligation consists. The debtor who failed or refused to
comply with the prestation shall bear the burden of paying all of the damages
to the creditor/s and shall indemnify the other debtors for damages suffered as
a result of the transformation of the obligation into one of indemnity.
8. Solidarity
Solidarity may exist although creditors and debtors may not be bound in the same
manner and by the same periods and conditions (CIVIL CODE, Art. 1211).
a. Kinds of Solidarity:
1. As to source
a. Legal-imposed by law
b. Conventional- agreed upon by the parties
c. Real- imposed by the nature of the obligation
2. As to parties bound
a. Active- solidarity on the part of the creditors, where any one of

them can demand the fulfillment of the entire obligation.
Effect: Mutual representation among the solidarity creditors with
powers to exercise the rights of others in the same manner as
their rights.
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b. Passive- solidarity on the part of the debtors, where any one of
them can be made liable for the fulfillment of the entire
obligation.
Effect: Mutual guaranty relationship is created.
c. Mixed- solidarity on the part of the debtors and creditors, where
each one of the debtors is liable to render, and each one of the
creditors has a right to demand, entire compliance with the
obligation.
3. As to uniformity
51
a. Uniform- parties are bound by the same stipulations.
b. Non-uniform or Varied- parties are not subject to the same
stipulations. Effect: Creditor can commence an action against
anyone of the debtors for compliance with the entire obligation
minus the portion or share which corresponds to the debtor
affected by the condition or period.
9. Effects of Prejudicial and Beneficial Acts:

a. Each one of the solidary creditors may do whatever may be useful or
beneficial to the others, but not anything which may be prejudicial to the
latter.
b. As far as the debtor/s is/are concerned, a prejudicial act performed by a
solidary creditor is valid and binding; as between the solidary creditor, the
creditor who performed such act shall incur the obligation of indemnifying
the others for damages (CIVIL CODE, Art. 1212).
10. Effects of Assignment of Rights in Solidary Obligations

General Rule: A solidary creditor cannot assign his right as it is predicated
upon mutual confidence, i.e., personal qualification of each creditor had been
taken into consideration (CIVIL CODE, Art. 1213).
Exceptions:
a. Assignment to a co-creditor
b. Assignment is with consent of co-creditor
11. To Whom Payment Made in Solidary Obligation

General Rule: Payment may be made to any of the solidary creditors
(CIVIL CODE, Art. 1214).
Exception: If demand, judicial or extra-judicial, has been made by one of
them, payment should be made to him (CIVIL CODE, Art. 1214).
Divisible and Indivisible Obligations
12. Divisible Obligations

Those which have as their object a prestation which is susceptible of partial
performance without the essence of obligation changed.
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13. Indivisible Obligations
Those which have as their object a prestation which is not susceptible of
partial performance, otherwise, the essence of the obligation will be
changed.
14. Three Kinds of Division:

a. Quantitative- the thing can be materially divided into parts and such
parts are homogenous to each other.
1. Movable- parts are actually separated from each other
2. Immovable- the limits of the parts are fixed by mates and bounds.
b. Qualitative-the thing can be materially divided but the parts are not
exactly homogenous (i.e., inheritance)
c. Ideal/Intellectual- the thing cannot be separated into material parts (i.e.,
co- ownership)
15. Test of Divisibility: Whether the prestation is susceptible of partial compliance or not
(CIVIL CODE, Art. 1225, par. 1)
In obligations to give, even though the object may be physically divisible, the
obligation is still indivisible if it is provided by law or it is so intended by the
parties (CIVIL CODE, Art. 1225, par. 3)
Obligations to do, the obligation shall be considered divisible when it has for
53
its object (CIVIL CODE, Art. 1225, par. 3):
a. The execution of the certain number of days of work
b. The accomplishment of work by metrical units
c. The accomplishment of analogous things which by their nature are
susceptible of partial performance.
In obligations not to do, it depends upon the character of the prestation in

each particular case (CIVIL CODE, Art. 1225, par.4)
Effects of Divisible or Indivisible Obligation
53
General Rule: Creditor cannot be compelled partially to receive the
prestation in which the obligation consists; neither may the debtor be
required to make partial payments
Exceptions:
a. When the obligation expressly stipulates the contrary;
b. When the different prestations constituting the objects of the obligation
are subject to different terms and conditions; and
c. When the obligation is in part liquidated and in part unliquidated
(JURADO, Obligations and Contracts, supra at 214).
Lesson 8. Obligation with a Penal Clause
Obligation with a Penal Cause is an obligation to which an accessory undertaking

(penal cause/ penalty) is attached for the purpose of insuring its performance by virtue of
which the obligor is bound to pay a stipulated indemnity or perform a stipulated prestation
in case of breach. (Jurado, 2010)
1. Purpose of Penalty:
a. Funcion coercitiva o de garantia- to insure the performance of the
obligation;
b. Funcion liquidatoria- to liquidate the amount of damages to be awarded

54
in case of breach of the principal obligation (compensatory); and
c. Funcion estrictamente penal- in certaion exceptional cases, to punish the

obligor in case of breach of the principal obligation (punitive). Does not
resolve the question of damages
2. Kinds of Penalty:
a. As to origin
1. Legal- constituted by law
2. Conventional- constituted by parties
54
b. As to Purpose
1. Compensatory or reparatory indemnity for damages
2. Punitive – punishment for breach
c. As to Effect
1. Subsidiary only penalty may be demanded
2. Joint or complementary- both penalty principal obligation may be
demanded
1. Effect of Penalty (CIVIL CODE, Art. 1226, par. 1)
General Rule: The penalty shall substitute the indemnity for damages and
payment of interest in case of non-compliance.
Exceptions:
a. When there is a stipulation to the contrary;
b. When the obligor refuses to pay the penalty; and
c. When the obligor is guilty of fraud
2. Enforceability of Penalty (CIVIL CODE, Art. 1226 par. 2)
Penalty, as a stipulation in a contract, is demandable only if there is a breach

of the obligation, and it is not contrary to law, morals, good customs, public
order or public policy (CIVIL CODE, Art. 1306).
55
3. Limitation upon the Right of the Debtor in Obligations with a Penal Clause
(CIVIL CODE, Art. 1227)
General Rule: Debtor cannot exempt himself from the performance of the
principal obligation by paying the stipulated penalty.
Exception: Unless this right has been clearly and expressly granted to him.
4. Limitations on the Right of the Creditor in Obligations with a Penal Clause

55
(CIVIL CODE Art. 1227)
General Rule: Creditor cannot demand the fulfillment of the principal

obligation and demand the satisfaction of the penalty at the same time.
Exception: Unless the right has been clearly granted to him
5. Proof of Actual Damages (CIVIL CODE, Art. 1228)
The rule that proof of actual damages is not necessary; it is applicable only
to the general rule stated in Civil Code, Art. 1226 and not to the exceptions.
Penalty is exactly identical with what is known as "liquidated damages" under

Civil Code, Art. 2226
6. When penalty may be reduced (Civil Code, Art. 1229)

a. If the principal obligation has been partly complied with;
b. If the principal obligation has been irregularly complied with; and
c. If the penalty is iniquitous or unconscionable even if there has been no
performance.
7. Effect of Nullity of Obligation or Penalty (Civil Code, Art. 1230)
If principal obligation is void, penal clause shall also be void because the
penalty is merely an accessory obligation. But if penal clause is void, principal
obligation is not affected.
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Assessment Task 3
CASE STUDY. Read carefully and answer the following objectively.
1. X, Y and Z are solidary liable to A for P90,000.00 which matures on

July 1, 2021. July 1, 2021 came, A demanded the entire amount of
P90,000.00 from X. Is A correct in doing so? Why or why not?
2. D is obliged to give C a specific ring. The parties agreed that D may

56
give a specific bracelet as a substitute. If that specific ring is lost

through fortuitous event before substitution, is D still obliged to give
the specific bracelet as a substitute? Explain.
Summary
Obligation has numerous kinds which we must be familiar with so as to properly

apply the rules applicable to it.
Pure obligation refers to that 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. On the other hand, conditional obligation is one in which 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. Such that the
effectivity is subordinated to the fulfillment or non-fulfillment of a future and uncertain
fact or event.
57
Condition has many types. It may either be suspensive – when the fulfillment of the
condition results in the acquisition of rights arising out of the obligation; or resolutory –
when the fulfillment of the condition results in extinguishment of rights arising out of
the obligation.
Condition may also either be potestative – one which depends upon the will of one
of the contracting parties; it is in the power of one of the parties to realize or to prevent;
or casual – depends exclusively upon chance, will of a third person, or partially by
chance and partially by will of a third person, or other factors and not upon the will of
57
the contracting parties; or mixed – depends upon the will of one of the contracting
parties and other circumstances, including the will of third persons or chance.
Condition may also either be possible – when the condition is capable of realization
according to nature, law, public policy or good customs; or impossible – when the
condition is not capable of realization according to nature (physical) law, public policy,
morals or good customs (legal).
Condition may also either be positive – condition that some event happen at a
determine time shall extinguish the obligation as soon as the time expires or become
indubitable that the event will not take place (Civil Code, Art. 1184); or negative – the
condition that some event will not happen at a determine time shall render the
obligation effective from the moment the time has elapsed of it has become evident
that the event cannot occur (Civil Code, Art. 1185).
Further, condition may also either be divisible – when the condition is susceptible
of partial realization; or indivisible – when the condition is not susceptible of partial
realization.
Condition may also either be conjunctive – there are several conditions, which must
all be realized; or alternative – there are several, but only one must be realized.
Condition may also either be express – condition is stated expressly; or implied –

condition is tacit.
There are also the reciprocal obligations which 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. Such 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) the obligation (tacit resolutory condition)
There are also the obligations with a period which refer to those whose fulfillment
a day certain has been fixed, shall be demandable only when that day comes.
Obligations with a resolutory period takes effect at once but terminate upon the arrival
of the day certain.
58
Under this kind, it may either be suspensive (Ex Die) – Obligations whose fulfillment
a day certain has been fixed, shall be demandable only when that day comes; or
resolutory (In Diem) – obligations with a resolutory period take effect at once but
terminate upon arrival of the day certain
The debtor loses right to make use of period in the following instances:
i. He becomes insolvent, unless he gives a guaranty or security for the debt,
the insolvency need not be judicially declared.
ii. He does not furnish to the creditor the guaranties or securities which he has
promised.
iii. If, after their establishment, 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.
iv. If the guaranty or security disappears through any cause, even without the
fault of the debtor.
v. He violates any undertaking, inconsideration of which the creditor agreed
to the period (i.e. if an employee commits a substantial breach of his employment
contract, the employer may terminate the employment).
vi. He attempts to abscond. It is not essential that there be actual absconding.
Obligations may also be conjunctive- when all the objects or prestations are
demandable at the same time; or distributive- when only one is demandable. It may
59
either be alternative or facultative.
Obligations may also be alternative or facultative. Alternative obligation is one

where out of two or more prestations which may be given, only one is due. A person
alternatively bound by different prestations shall completely perform one of them
However, we should remember that a limitation to this is that the creditor cannot be
compelled to receive part of one and part of the other undertaking.
On the other hand, facultative obligation refers to an obligation wherein only one
object or prestation has been agreed upon by the parties to the obligation, but which
59
may be complied with by the delivery of another or the performance of another
prestation in substitution.
Obligation may also be joint or solidary. Joint obligation (Obligacion

Mancomunada) refers to the whole obligation which has to be paid or fulfilled
proportionately by different debtors or demanded proportionately by different creditors.
On the other hand, solidary obligation (Obligacion Solidaria) means that each one of
the debtors is bound to render, and/or each one of the creditors has a right to demand
entire compliance with the prestation. Joint obligation may further be joint divisible or
joint indivisible.
Obligations may also be either divisible or indivisible. Divisible obligations are those
which have as their object a prestation which is susceptible of partial performance
without the essence of obligation changed; whereas indivisible obligations are those
which have as their object a prestation which is not susceptible of partial performance,
otherwise, the essence of the obligation will be changed. The test of divisibility is
whether the prestation is susceptible of partial compliance or not.
There is also that kind of obligation with a penal cause which is an obligation to
which an accessory undertaking (penal cause/ penalty) is attached for the purpose of
insuring its performance by virtue of which the obligor is bound to pay a stipulated
indemnity or perform a stipulated prestation in case of breach.
References
Books and Laws:

60
Jurisprudences:
De Luna v. Abrigo, G.R. No. 57455, January 18, 1990
Sps. Fracisco v. DEAC Construction, Inc., G.R. No. 171312, February 4, 2008
MODULE 4
EXTINGUISHMENT OF OBLIGATIONS
Introduction
This module will discuss the different modes of extinguishment of obligations under
the Civil Code. Also, this module will deal with different principles relating to each mode of
extinguishment of obligation.
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theories and concepts regarding modes of extinguishment of obligations. In discussing
these, we will touch on the provisions of law and legal concepts and principles.
Learning Outcomes
1. Understand the different modes of extinguishing obligations and further know what
mode and rule will apply;
2. Examine the proper procedures and be familiar with requirements of law for each
mode; and
3. Explain and apply the principles relating to the different modes of extinguishing
obligations.
Lesson 1. Modes of Extinguishing Obligations under

Article 1231
Article 1231 of the Civil Code enumerates the following as the modes of
extinguishing obligations:
1. Payment/performance
2. Loss of the thing due
3. Condonation or remission of debt
4. Confusion or Merger
5. Compensation
6. Novation
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7. Annulment
8. Rescission
9. Fulfillment of a resolutory condition
10. Prescription
Apart from those enumerated above, there are other forms of extinguishment
of obligations not enumerated under Art. 1231, such as:
a. Death (for personal or intransmissible obligation)

b. Mutual desistance or withdrawal
c. Arrival of resolutory period
d. Compromise
e. Impossibility of fulfillment of condition
f. Fortuitous event (Jurado, 2010).
A. Payment or Performance
Not only the delivery of money but also the performance, in any other manner, of
an obligation (Civil Code, Art. 1232).
Juridical act which is voluntary, licit and made with the intent to extinguish the
obligation. (Jurado, 2010)
1. Burden of Proving Payment
When the existence of a debt is fully established by the evidence, the settled rule
is that the burden of proving extinguishment by payment devolves upon the debtor
who pleads payment or offers such a defense to the claim of the creditor rather
than on the latter to prove non-payment. The debtor has the burden of showing
with legal certainty that the obligation has been discharged by payment.
2. Requisites of Payment:
1. Payor or the person who pays;
2. Payee or the person to whom payment is made;
3. Thing to be paid; and
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4. Manner, time, and place of payment. (Tolentino, 2002)
3. Kinds of payment:
1. Normal- when the debtor voluntarily performs the prestationas agreed
upon ; or
2. Abnormal – when the debtor is forced by means of a judicial proceeding
either to comply with the prestation or pay indemnity
4. Characteristics of Valid Payment

1. identity – only the prestation agreed upon and no other must be complied
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with
2. Completeness - the thing or service must be completely delivered or
rendered
3. Indivisibility - payment or performance must be indivisible
5. Principle of Integrity (CIVIL CODE, Art. 1233)

General Rule: 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.
Exceptions:
1. When 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 (CIVIL CODE, Art.
1234); and
2. When the obligee accepts performance, knowing its incompleteness or
irregularity and without expressing any protest or objection; based on
the principle of estoppel (CIVIL CODE, Art. 1235).
6. Who must pay in general:
1. Debtor;
2. Anyone acting on the debtor's behalf
1. Duly authorized agent or legal representative
2. He's (provided that the debtor is already dead for otherwise they are
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considered as third persons interested in the obligation); and
3. Successors-in-interest and assignees (JURADO, Obligations and
Contracts, supra at 239)
7. Effects of Payment:
1. The obligation is extinguished;
2. The debtor is to fully reimburse the third person who is an interested
party; and
3. The third person interested is subrogated to the rights of the creditor.
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8. Third person who is an Interested Party . This refers to one who has an interest
in the extinguishment of the obligation such as:
1. Co-debtors;
2. Sureties;
3. Guarantors and
4. Owners of mortgages property or pledge
9. The creditor is not bound to accept payment or performance by a third person

who has no interest in the fulfillment of the obligation (CIVIL CODE, Art. 1236,
par. 1).
Effects of Payment:
a. Third person is entitled to full reimbursement; and
b. There is legal subrogation as the third person, i.e. steps into the shoes
of the creditor.
10. Third Person who is Not an Interested Party and without Knowledge or Against
the Will of the Debtor
General Rule: Whoever pays for another may demand from the debtor what
he has paid (CIVIL CODE, Art. 1236, par. 2).
Exception: If payment was made without the knowledge or against the will
of the debtor.
Effects of Payment: Third person can only be reimbursed insofar as

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payment been beneficial to the debtor.
Benefit to the creditor is presumed in the following cases (CIVIL CODE,

Art. 1241, par 2):
1. Ratification - If the creditor ratifies the payment to the third person;
2. Estoppel - If by the creditor's conduct, the debtor has been led to
believe that the third person had authority to receive the payment; and
3. Subrogation - If after the payment, the third person acquires the
creditor's rights.
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Art. 1237 states that 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.
11. Payment Made by a Third Person Who Does Not Intend to be Reimbursed by
the Debtor
Effects of Payment:
1. Presumed to be a donation. Therefore, the consent of the debtor is
necessary, as in the case of a donee in ordinary donations;
2. Once the consent is secured, the rules on ordinary donations will apply;
and
3. If the consent is not secured, Art. 1236 and 1237 will apply (Jurado,
2010)
12. To whom Payment must be Made (CIVIL CODE, Art. 1240)

1. The person in whose favor the obligation has been constituted;
2. His successor in interest, or
3. Any person authorized to receive it.
13. Effect of Payment to Unauthorized Persons in Obligation to Give

General Rule: It shall not be valid, even though made in good faith.
Exceptions:
1. Payment made to a third person, provided that it has redounded to the
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benefit of the creditor. Benefit to the creditor is presumed in the following
cases (CIVIL CODE, Art. 1241):; and
2. Payment to the possessor of the credit, made in good faith (CIVIL CODE,
Art. 1242) This refers to the possession of credit not the document
evidencing it.
Payment made to the creditor by the debtor after the latter has been judicially
ordered to retain the debt shall not be valid (CIVIL CODE, Art. 1243); unless
otherwise stipulated. Extrajudicial expenses required by the payment shall be
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for the account of the debtor (CIVIL CODE, At. 1247)
14. Rule in Monetary Obligations (CIVIL CODE, Art 1249)

1. Must be made in the currency stipulated ; if it is not possible to deliver
such currency, then in the currency which is legal tender in the
Philippines.
2. Delivery of promissory notes payable to order or bills of exchange or other
mercantile documents shall not produce the effect of payment except:
1. When they have been cashed or credited; or
2. When through the fault of the creditor they have been impaired.
15. Legal Tender: Such currency which may be used for the payment of all debts,
whether private or public. Its significance is manifested by the fact that it is such
which the debtor may compel a creditor to accept in payment of the debt (ld. at
251).
Legal tender in the Philippines would be all notes and coins issued by the
Bangko Sentral (Circular No. 537, series of 2006):
1. 1-Peso, 5-Pesos and 10-Peso coins: in amounts not exceeding
P1,000.00; or
2. 25 centavo coin or less: in amounts not exceeding P100.00;
3. Bills, regardless of denomination, are legal tender up to whatever
amount.
R.A. 8183 provides that all monetary obligations shall be settled in the
Philippine currency which is legal tender in the Philippines. However, the
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parties may agree that the obligation or transaction shall be settled in any
other currency at the time of payment (R.A. 8183, Sec. 1)
16. Extraordinary Inflation or Deflation (CIVIL CODE, Art. 1250)

Requisites:
1. There must be a decrease or increase in the purchasing power of the
currency which is unusual or beyond the common fluctuation in the
value of the currency, and
2. Such decrease or increase could not have been reasonably foreseen or
which was manifestly beyond the contemplation of the parties at the
time the obligation was established.
There must be a declaration of such extraordinary inflation or deflation by the

Bangko Sentral. Without such declaration, the creditors cannot demand an
increase, and debtors a decrease, of what is due to or from them (Ramos v. CA,
G.R. No. 119872, July 7, 1997 and Mobil Oil Phils. v. CA, G.R. No. 103072, August
20, 1993).
17. Rule when the Obligation Consists in the Delivery of a Determinate or Specific
Thing
Debtor cannot fulfill his obligation by delivering a thing which is a different
one, although the latter maybe of the same value as, or more valuable than that
which is due (CIVIL CODE, Art. 1244, par. 1).
18. Rule when the Obligation is to Do or Not to Do and the Object is an Act or
Forbearance which is Specific or Determinate
Obligor cannot fulfill his obligation by substituting another act or
forbearance against the obligee's will (CIVIL CODE At. 1244, par.2).
19. Rules when the Obligation Consists in the Delivery of Indeterminate or Generic
Things
If contract does not specify the quality and circumstances:

b. Creditor cannot demand a thing of superior quality (but he may demand
and accept one of inferior quality);
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c. Debtor cannot deliver a thing of inferior quality, but if he so desires, he
may deliver one of superior quality (provided it is not of a different kind)
(CIVIL CODE Art. 1246).
Exceptions:
a. When the obligation expressly stipulates the contrary;
b. When the different prestations which constitute the objects of the
obligation are subject to different terms and conditions; or
c. 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 (CIVIL CODE, Art. 1248 par. 2). Art.
1248 only applies when there is only one creditor and one debtor.
20. Place of Payment

1. Place stipulated but the parties;
2. If there is no stipulation and the obligation is to deliver a determinate
thing, payment shall be made at the place where the thing might be at
the time the obligation was constituted; or
3. In any other case, the payment shall be made at the domicile of the
debtor (CIVIL CODE, Art. 1251).
21. Special Forms of Payment
1. Application of Payment (CIVIL CODE, Art. 1252) Designation of the debt
to which the payment must be applied when the debtor has several
obligations of the same kind in favor of the same creditor.
Requisites:
1. There must be only debtor and only one creditor;
2. There must be two or more debts of the same kind; All the debts must
be due; and
Exceptions:
a. When there is a stipulation to the contrary
b. The application of payment is made by the party for
whose benefit the term or period has been constituted
(CIVIL CODE, Art. 1196).
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3. Amount paid by the debtor is insufficient to cover the total amount of
all the debts (JURADO, Obligations and Contracts, supra at 268).
Rules on Application of Payment

General Rule: The right to designate the debt to which the payment shall
be applied belongs primarily to the debtor (JURADO, Obligations and
Contracts, supra at 270). The right is only available to the debtor at the
time when payment is made (id).
Exception:
If the debtor does not apply, the creditor may designate which debt is paid
by specifying in the receipt. Thus, the creditor has the right to propose
subject to the express or tacit approval of the debtor (JURADO,
Obligations and Contracts, supra at 271). If the creditor did not apply or
if application is void, debt which is the most onerous, is the one satisfied.
It is evident in the circumstances laid by Art. 1254, that it is the law which
makes the application.
Legal application of Payment (CIVIL CODE, Art. 1254)

The debt which is more onerous to the debtor, among those due, shall be
deemed to have been satisfied.
The rules applies:

1. When the payment cannot be applied in accordance with the preceding
rules; or
2. If the application cannot be inferred from the circumstances (JURADO,
Obligations and Contracts, supra at 272-273).
Which is more onerous:

i. Oldest debts are more onerous than more recent ones;
ii. Interest bearing debts are more onerous than those which do not,
even if the latter were incurred at an earlier date;
iii. Between interest bearing debts, the debt with a higher rate of
interest is more onerous.
iv. A secured debt is more onerous than that which is not.
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v. A debt in which the debtor is principally bound is more onerous
than that which he is merely a guarantor or surety;
vi. A debt in which he is solidary bound is more onerous than that
which he is only a sole debtor;
vii. Within a solidary obligation, the share which corresponds to a
solidary debtor would be most onerous;
viii. An obligation for indemnity is more onerous than that which is by
the way of penalty; or
ix. Liquidated debts are more onerous than unliquidated ones
(JURADO, Obligations and contracts, supra at 273-274)
B. Dation in Payment (Dacion en pago)
Dation in payment means the delivery and transmission of ownership of a thing

by the debtor to the creditor as an accepted equivalent of the performance of the
obligation. (Jurado, 2010)
Requisites:
1. Existence of a money obligation;
2. Alienation to the creditor of a property by the debtor with the consent of
the former; and
3. Satisfaction of the money obligation of the debtor.
C. Payment by Cession (CIVIL CODE, Art. 1255)

This is a special form of payment whereby the debtor assigns or abandons
all of his property for the benefit of his creditors in order that from the proceeds
thereof, the latter may obtain payment of their credits.
Requisites:
1. Plurality of debts;
2. Partial or relative insolvency of the debtor; and
3. Acceptance of the cession by the creditors (JURADO, Obligations
and Contracts, supra at 275).
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Kinds of payment by Cession:
1. Contractual (CIVIL CODE, Art. 1255);
2. Judicial (Governed by Insolvency Law)
a. Voluntary
b. Involuntary
D. Tender of Payment and Consignation
Tender of Payment consists in the manifestation made by the debtor to the

creditor of his decision to comply immediately with his obligation (JURADO,
Effect on Interest:
1. When a tender of payment is made in such a form that the creditor
could have immediately realized payment if he had accepted the
tender, followed by a prompt attempt of the debtor to deposit the
means of payment in court by way of consignation, the accrual of
interest on the obligation will be suspended from the date of such
tender; or
2. When the tender of payment is not accompanied by the means of
payment, and the debtor did not take any immediate step to make a
consignation, then interest is not suspended from the time of such
tender (TOLENTINO, Civil Code, supra at 321).
Consignation refers to the deposit of the object of the obligation in a

competent court in accordance with the rules prescribed by law, after refusal or
inability of the creditor to accept the tender of payment. It is a principal act and
judicial in character.
Consignation, being a form of payment, presupposes that there must be

a debt that must be paid. Tender of payment alone would be sufficient to preserve
the right of the redemptioner or the vendee a retro.
Special Requisites of Consignation (Civil Code, Art 1256-1258);

1. Existence of a valid debt which is due;
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2. Tender of payment by the debtor, creditor’s refusal to accept payment
without just cause to accept it.
a. Tender must precede consignation;
b. It must have been unconditional; and
c. Refusal must be without just cause.
3. Previous notice of consignation to person interested in the fulfillment of

the obligation, in order to give the creditor the opportunity to reconsider
his unjustified refusal and to accept payment to avoid consignation and
the subsequent litigation.
Lack of previous notice does not invalidate the consignation, but
simply makes the debtor liable for the expenses occasioned thereby
(Tolentino, 2002).
4. Consignation- amount or thing due placed at the disposal of the court
This requirement is complied with if the debtor deposits the thing or
amount with the Clerk of Court. Normally, this requirement is
accompanied by the filing of the complaint itself ((Jurado, 2010)
5. Subsequent notice of consignation to enable the creditor to withdraw
the goods or money deposited.
Instances where consignation shall produce the effects of payment

without prior tender of payment (CIVIL CODE, art. 1256, par. 2);
i. Creditor is absent or unknown or does not appear at the place of
payment.
ii. Creditor in incapacitated to receive the payment at the time it is due.
iii. When without just cause, the creditor refuses to give a receipt.
iv. When two or more persons claim the same right to collect (as in the
case of interpleader)
v. When the title of the obligation has been lost.
Effects of consignation
1. If the creditors accept the thing or amount deposited without

contesting the validity or efficacy of the consignation, the obligation is
cancelled/extinguished.
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2. If the creditor contests the validity of the consignation or if the creditor
is not interested or unknown or is absent, the result is litigation if
during the trial, the plaintiff-debtor is able to establish that all the
requisites of consignation have been, complied with, the obligation is
extinguished (JURADO, obligations and Contracts, supra at 287).
Effects of Withdrawal of the Object/Amount Deposited
1. Before creditor has accepted consignation or before a judicial

declaration of consignation (CIVIL CODE, Article 1264, par. 2),
obligation remains in force. Withdrawal by the debtor at this stage is
a matter of right because he still owns the things.
2. With consent of the creditor (CIVIL CODE, Art. 1261):

a. Creditor loses every preference which he may have over the
thing;
b. Solidary co-debtors, guarantors and sureties are released;
c. Solidary debtors are released only from their solidary liability but
not from their shares of their obligation; and
d. The obligation is revived, but without prejudice to other interested
parties.
Lesson 2. Loss of the Thing Due
Effect of Loss in Determinate Obligation to Give : (CIVIL CODE, Art. 1262)
Obligation is extinguished if the thing is lost or destroyed without the fault of the
debtor and before he has incurred in delay.
Requisites:
a. The thing which is lost must be determinate;
b. The thing is lost without any fault of the debtor; and
c. The thing is lost before the debtor incurred in delay (JURADO,
obligations and Contracts, supra at 288)
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General Rule: Loss of a determinate thing through fortuitous event shall
extinguish the obligation.
Exceptions:
1. When the law so provides;
2. When the stipulation so provides;
3. When the nature of the obligation requires an assumption of risk
4. Loss of the thing is partly due to the fault of the debtor;
5. Loss of the thing occurs after the debtor incurred in delay;
6. When the debtor promised to deliver the same thing to two persons who
do not have the same interest;
7. When the obligation to deliver arises from a criminal offense; and
8. When the obligation a generic (Jurado, 2010)
Loss of Generic Things (CIVIL CODE, art. 1263)
General Rule: Loss of generic thing does not extinguish obligation.

Reason: the genus never perishes (Genus nunquam perit).
Exception: Delimited Generic Thing- When there is a limitation of the generic
object to a particular existing mass or a particular group of things, the
obligation is extinguished by the loss of the particular mass or group or
limited quantity from which the prestation has to be taken (Tolentino, 2002)
Effect of Partial Loss (CIVIL CODE, art. 1264)
General Rule: Partial loss does not extinguish the obligation.
Exception: when the partial loss or destruction of the thing is of such

importance that would be tantamount to a complete loss or destruction
(Jurado, 2010)
Rule if the thing is in Debtor’s Possession (CIVIL CODE, art. 1265)
General Rule: if the thing is lost while in the possession of the debtor, it shall
be presumed that the loss was due to his fault, unless there is proof to the
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contrary and without prejudice to the provisions of Art. 1165.
Exception: No such presumption in case of earthquake, flood, storm or other

natural calamity.
Effect of Impossibility of Performance in Obligation to Do
When the obligation becomes legally or physically impossible without the

fault of the debtor, obligor is released from the obligation (civil CODE, Art.
1266) take note that the provision mentions that the prestation becomes
impossible and thus, would contemplate subsequent impossibility.
Doctrine of Unforeseen Events (CIVIL CODE, Art. 1267)
When the service has become so difficult as to be manifestly beyond the

contemplation of the parties, the court should be authorized to release the
obligor in whole or in part (This is also referred to as the Doctrine of
Frustration of Enterprise).
Doctrine of Rebus Sic Stantibus
The parties stipulate in the light of certain prevailing conditions and once
these conditions cease to exist, the contract also ceases to exist (Naga
Telephone co., et al. v. CA, G.R. no. 107112, February 24, 1994)
Principle of subjective Impossibility
When there is no physical or legal loss but the object of the obligation belongs
to another, the performance by the debtor of the obligation undoubtedly
impossible. Failure of performance is imputable to the debtor. Thus, the
debtor must indemnify the creditor for the damages suffered by the latter
(Tolentiono, 2002)
Rule if the Obligation arises from the Criminal Offense (CIVIL CODE, Art.
1268)
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General Rule: Debtor shall not be exempted from the payment of the price
whatever may be the cause for the loss.
Exception: when the thing having been offered by the debtor to the person
who should receive it, the latter refused without justification.
Lesson 3. Condonation or Remission of the Debt
Condonation or remission of debt is an act of liberality by virtue of which

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 of
aspect of the same to which the remission refers (Id. At 289).
Requisites of Remission:
1. It must be gratuitous;
2. It must be accepted by the obligor (bilateral act);
3. The obligation must be demandable;
4. Parties must have the capacity;
5. Not inofficious; and
6. Must comply with the forms of donation should it be express (CIVIL
CODE, Art. 748 and 749).
When renunciation of action against the debtor is presumed:

i. 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 (CIVIL CODE,
Art. 1271).
ii. When such private document is found in possession of the debtor, it shall
be presumed that the creditor delivered it voluntarily, unless the contrary
is proved (CIVIL CODE, Art. 1272).
iii. When the obligation is joint, and the private document evidencing a debt
is found in the possession of one of the debtors, the presumption of
remission can refer only to the portion of the debtor who is in the
possession of the instrument. If the obligation is solidary, Articles 1215,
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1219, and 1220 shall apply. (Jurado, 2010)
Rules when Accessory Obligations are involved

If the remission refers to the principal obligation, all the accessory obligations
are extinguished. However, if remission refers only to the accessory
obligation, the principal obligation continues to subsist (CIVIL CODE, Art.
1273).
It is presumed that the accessory obligation of pledge has been remitted

when the thing pledged, possession of the debtor, or of a third person who
owns the thing (CIVIL CODE, Art. 1274).
Application of the Rules on Donation

Condonation or remission is essentially a donation of credit to the debtor. It
must be subject to the rule on donations with respect to acceptance (CIVIL
CODE, Art. 745 and 76), amount (civil CODE, Art. 750 and 752) and
revocation (CIVIL CODE, Art. 760, 761, 764 and 765) TOLENTINO, Civil
Code, supra at 364).
Lesson 4. Confusion
Concept: It is the merger of the characters of the creditor and the debtor in one
and the same person by virtue of which the obligation is extinguished.
Requisites of Merger:
a. Merger of the characters of the creditor and debtor must be in the same
person;
b. Must take place in the person of either the principal creditor or the
principal debtor; and
c. Whether the merger refers to the entire obligation or only part thereof,
there must be complete and definite meeting of all qualities of creditor
and debtor in the obligation or in the part thereof affected by the merger
(Jurado, 2010).
Effects of Confusion/Merger (CIVIL CODE, Art. 1276-1277):

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i. If confusion takes place in the person of either the principal creditor or
principal creditor or principal debtor extinguishment of entire obligation; or
ii. If confusion takes place in the person of a subsidiary creditor or subsidiary
debtor (e.g. guarantor) – no extinguishment of principal obligation; only
substitution of creditor or debtor; or
iii. If confusion takes place in one of the joint debtors – principal obligation is
extinguished up to the share which corresponds to him; or
iv. If confusion takes place in one of the solidary debtors – entire obligation is
extinguished. However, the debtor in whom confusion took place may claim
reimbursement from co-debtors for the shares which correspond to them
(Jurado, 2010).
Lesson 5. Compensation
Concept: Mode of extinguishing in the concurrent amount of the obligation of

those persons who are reciprocally debtors and creditors of each other (Jurado,
2010).
Effect: it extinguishes both debts to the extent that amount covered by the
amount of the other.
Kinds of Compensation:
i. As to cause
1. Legal- takes effect by operation of law from the moment all of the
requisites are present.
2. Voluntary – when parties who are mutually creditors and debtors
agree to compensate their respective obligations, even though all of
the requisites for compensation may not be present.
3. Judicial – takes effect by judicial decree
4. Facultative
ii. As to effect
1. Total – debts to be compensated are equal in amount.
2. Partial – debts to be compensated are not equal in amount.
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Requisites of compensation (CIVIL CODE, Art. 1279)
a. There must be two parties, who, in their own right, are principal creditors
and principal debtors of each other except in case of a guarantor (CIVIL
CODE, Art. 1280);
b. Both debts must consist in sum of money, or if the things due are
fungibles (consumables), they must be of the same kind and quality;
c. Both debts must be due;
Exception: Voluntary compensation or the parties may nevertheless
agree upon the compensation of the obligations (CIVIL CODE, Art. 1282).
d. Both debts must be liquidated and demandable;
Liquidated Debts – those amount of which may be determined by a simple
arithmetical operation (Jurado, 2010)
Debts which cannot be Compensated (CIVIL CODE, Art. 1286-1287):

a. Debts arising from contracts of depositum;
b. Debts arising from contracts of commadatum;
c. Claims for support due by gratuitous title;
d. Obligations arising from criminal offenses (CIVIL CODE, art. 1288);
e. Certain obligations in favor of government (e.g., taxes, fees duties and
others of a similar nature).
When compensation takes effect:

a. Legal Compensation – from the moment all the essential requisites
prescribed by law are present (CIVIL CODE, Art. 1290);
b. There must be no retention or controversy commenced by third persons

over either of the debts and communicated in due time to the debtor;
c. The compensation must not be prohibited by law.
Right of Guarantor to Set-up Compensation
The guarantor, in case the payment of the debt is demanded from him, may
set up compensation, not only for what the creditor owes him, but also for
what the creditor owes the principal debtor (CIVIL CODE, Art. 1280).
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Rule in case of Rescissible or Voidable Debts
Rescissible or voidable obligations may be compensated against each other

before they are judicially rescinded or avoided (CIVIL CODE, Art. 1284).
Effects of Assignment of Rights:

a. If with consent of debtor – debtor cannot set-up compensation unless
he reserved his right to compensation;
b. If with knowledge but without consent of debtor – debtor may set-up
compensation prior to the assignment but not subsequent ones; or
c. If without knowledge of the debtor – may set-up compensation of all
credits which he may have against the assignor and which may have
become demandable, before he was notified of the assignment (CIVIL
CODE, Art. 1285).
d. Voluntary Compensation – from the moment agreed upon by the parties;

or
e. Judicial Compensation – from the moment the judgment becomes final
and executory.
Facultative Compensation
Compensation which can be set up only at the option of the creditor when
legal compensation cannot take place because of want of some legal
requisites for the benefit of the creditor. The latter can renounce his right to
oppose the compensation and he himself can set it up. It differs from
conventional compensation because it is unilateral while the latter depends
upon the agreement of both parties (Jurado, 2010).
Lesson 6. Novation and Compromise
I. Novation
It is 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
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third person in the rights of the creditor (Jurado, 2010)
Requisites of Novation:
i. Previous valid and existing obligation;
ii. Capacity of the contracting parties ( to the new contract);
iii. Animus novandi or intent to novate (especially for implied novation and
substitution of debtors);
iv. Substantial difference between the old obligation and the new obligation
(especially for implied novation), consequently, extinguishment of the
obligation; and
v. Validity of the new obligation (Jurado, 2010).
Two-fold Purpose of Novation:
1. Original obligation is extinguished; and

2. A new obligation is created.
Kinds of Novation:
1. As to it essence
a) Objective/Real
b) Subjective/Personal – substitution of debtor or subrogation.
c) Mixed – change in the object or principal condition and change in the
persons of either creditor and debtor of an existing obligation.
2. As to its form/constitution
a) Express- when it is declared in unequivocal terms that the old obligation

is extinguished by a new one which substitutes the same.
b) Implied – when the old and new are incompatible with each other on
every point.
Test of incompatibility: Whether or not the old and new obligations

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can stand together, each having its own independent existence. If
they can stand together, there is no incompatibility hence, no
novation.
If they cannot stand together, there is incompatibility; consequently,

there is no novation (JURADO, Obligations and Contracts, supra at
333). Changes that breed incompatibility must be essential in nature
and not merely incidental (Jurado, 2010)
3. As to extent/effect
a) Total
b) Partial
Objective Novation (CIVIL CODE, Art. 1291, par. 1) According to Jurado (2020),
objective novation is effected by:
1. Changing the cause of the obligation;
2. Changing the object of the obligation; or
3. Changing the principal or essential conditions of the obligation.
Requisites:
a. New obligation expressly declares that the old is extinguished or
b. New obligation is on every point incompatible with the old one (Ajax
Marketing & Development Corp. v. CA, G.R. no. 118585, September 14,
1995).
Novation by Substitution of Debtors (CIVIL CODE, Art. 1293)

A subjective/personal novation consists in the substitution of a new debtor
in place of the original debtor.
Forms of Novation by Substitution of Debtors:
1. Expromision – effected with the consent of the creditor at the instance

of the new debtor even without the consent or even against the will of
the old debtor (beneficial reimbursement).
Requisites:
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a. Initiative for substitution must emanate from the new debtor;
b. Consent of the creditor top the substitution; and
c. Old debtor must be released from obligation (JURADO,
Kinds of Substitution by Expromision:

a. Substitution with knowledge and consent of the old debtor; and
b. Substitution without the knowledge or against the will of the old
debtor.
Example: Atoy owes Eugene P1,000.00. Joey, a friend of Atoy

approaches Eugene and tells him: “I will pay you what Atoy owes you.
From now on, consider me your debtor. Atoy is to be excused.” Take
note that in this example, there is an agreement that Atoy will be
released from the obligation. Sans such agreement, there is no
novation and the creditor (Eugene) can still enforce the obligation
against the original debtor (Atoy).
2. Delegacion – effected with the consent of the creditor at the instance

of the old debtor (delegante), with the concurrence of the new debtor
(delegado) (reimbursement and subrogation).
Requisites:
a. Initiative for substitution must emanate from the old debtor;
b. Consent of the new debtor;
c. Acceptance by the creditor; and
d. Old debtor must be released from his obligation (JURADO,
Parties in delegacion:
a. Delegante- original debtor;
b. Delegatorio -creditor; and
c. Delegado – the new debtor
Example: Atoy owes Eugene P1,000.00. Atoy texted Eugene that his friend
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Joey will pay the debt, and he wishes to be released from the obligation.
Both Joey and Eugene agreed such terms. Take note again that the
substitution must be made with the intention to release the original debtor.
Rights of New Debtor:
1. Expromision
a. Substitution with knowledge and consent of original debtor and
payment made by new debtor with or without knowledge and
consent of original debtor:
i. Reimbursement from the original debtor of the entire
amount paid
ii. Subrogation in all the rights of the creditor
b. Substitution without the knowledge and consent of the original
debtor, and payment is made by the new debtor without the
knowledge and consent of the original debtor.
i. Reimbursement from the original debtor only insofar as the
payment has been beneficial to such debtor
ii. No subrogation
2. Delegacion – since substitution was effected with the consent of all

the parties, the new debtor can demand reimbursement from the
original debtor of the entire amount which he has paid as well as
compel the creditor to subrogate him to all of his rights.
Effect of insolvency or Non-fulfillment by New Debtor (CIVIL CODE, Art.

1294- 1295)
1. In case of expromision – if the substitution was effected without the

knowledge and against the will of the original debtor, the new debtor’s
insolvency or non- fulfillment shall not revive the original debtor’s
liability to the creditor (JURADO, Obligations and Contracts, supra at
345). If the substitution was effected with the knowledge and consent
of the original debtor, it shall revive the original debtor’s liability to the
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creditor (Id. at 345).
2. In case of delegacion – the right of the creditor can no longer be

revived except in the following cases:
a. Insolvency already existing and of public knowledge at the time
when the original debtor delegated his debt.
b. Insolvency was already existing and known to the original debtor
when he delegated his debt (Id. At 345).
Effects of Novation upon Accessory Obligations (Art. 1296)
When the principal obligation is extinguished in consequence of a novation,

accessory obligation may subsist only insofar as they may benefit third
persons who did not give consent (civil CODE, Art. 1296). Art. 1296 has no
application to novation, effected by subrogating a third person to the rights of
the creditor. Such novation is regulated by Art. 1303-1304.
Effects of Condition in Novation:
1. If the original obligation was subject to suspensive or resolutory

condition, the new obligation shall be under the same condition, unless
otherwise stipulated (CIVIL CODE, Art. 1299).
2. If the new obligation and the old obligation are subject to different
conditions:
a) If the conditions can stand together-
i. If both are fulfilled – the new obligation becomes demandable
ii. If only the condition affecting the old obligation is fulfilled – old
obligation is revived while the new obligation loses its force.
iii. If only the condition affecting the new obligation is fulfilled –
there is no novation since the requisite of a previous valid and
effective obligation would be lacking.
b) If the conditions are incompatible – the effect is to extinguish the old

obligation o that only the new obligation remains and whose
demandability/effectively depend upon the fulfillment/non-fulfillment
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of the condition affecting it (Jurado, 2010).
Novation by Subrogation (CIVIL CODE, art. 1300). A personal novation effected

by subrogating a third person in the rights of the creditor.
1. Conventional – takes place by agreement of the original creditor, the

third person substituting the original creditor, and the debtor (CIVIL
CODE, Art. 1301).
2. Legal- takes place by operation of law (CIVIL CODE, Art. 1302)
Legal Subrogation
General Rule: Legal subrogation is not presumed.
Exceptions:
1. When a creditor pays another creditor who is preferred, without
debtor’s knowledge;
2. When a third person, not interested in the obligation, pays its the
express or tacit approval of the debtor; or
3. When, even without knowledge of the debtor, a person interested in
the fulfillment of the obligation pays, without prejudice to the effects
of confusion as to the latter’s share.
Effects of Subrogation (CIVIL CODE, Art. 1303-1304)

1. Total subrogation – transfers to the person subrogated the credit with all
the rights the original creditor had against the debtor or third persons.
2. Partial subrogation - 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.
II. Compromise
A. Concept. A compromise is a contract whereby the parties, by making reciprocal

concessions, avoid litigation or put an end to one already commenced (civil
Code, Art. 2028).
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B. Requisites:
1. Uncertainty of juridical relation; and
2. An agreement to eliminate the uncertainty through reciprocal concessions.
C. Kinds:
1. Judicial – end a pending litigation; and
2. Extra-judicial – prevent litigation from arising.
D. Characteristics:
1. Consensual;
2. Reciprocal
3. Onerous
4. Nominate
5. Accessory (in the sense that a prior conflict is presupposed);
6. Once accepted, binding upon the parties except if consent is vitiated; and
7. Principally, settlement of controversy; incidentally, settlement of claim.
E. Instances there can be no valid compromise:

1. The civil status of persons;
2. The validity of a marriage or a legal separation;
3. Any ground for legal separation;
4. Future support;
5. The jurisdiction of courts; and
6. Future legitimate (CIVIL CODE, art. 2035).
F. Effects of Compromise
a. Forms of Novation by Subrogation:
b. A compromise has upon the parties the effect and authority of res judicata;
but there shall be no execution except in compliance with a judicial
compromise (CIVIL CODE, Art. 2037).
c. If one of the parties fails or refuses to abide by the compromise, the other
party may either enforce the compromise or regard it as rescinded and insist
upon his original demand (CIVIL CODE, Art. 2041).
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A compromise extinguishes the rights and actions which gave rise to it and new
obligations are created is substitution of those extinguished (TOLENTINO, Civil Code,
supra at 492). If a writ of execution is issued to enforce a judgment based on compromise,
the writ cannot be enforced against a person who although a party to the case, was not a
party to the compromise agreement, and who in fact was absolved from liability. (Jurado,
2010)
Assessment Task 4
CASE STUDY. (Read the case very carefully, then objectively and
comprehensively answer the succeeding questions:
Problem 1. X had a savings deposit with Y Bank in the amount of

P5,000,000.00. Subsequently, X obtained a car loan from the same bank in
the amount of P1,200,000.00 payable in 12 equal monthly installments. X
issued in favor of Y Bank post-dated checks, each in the amount of
P100,000.00 to cover the 12 monthly installment payments. On the third,
fourth, and fifth months, the corresponding checks bounced. Is compensation
applicable?
Problem 2. X obtained a loan of P1,000.00 from Y, payable within a year.

Ten days after maturity date, X tendered a manager’s check to Y. The latter
refused to accept payment on the ground that he wanted payment in cash. Is
Y’s refusal justified?
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Summary
Article 1231 of the Civil Code enumerates the following as the modes of extinguishing
obligations:
1. Payment/performance
2. Loss of the thing due
3. Condonation or remission of debt
4. Confusion or Merger
5. Compensation
6. Novation
7. Annulment
8. Rescission
9. Fulfillment of a resolutory condition
10. Prescription
The enumeration above is not exclusive and there are other forms of extinguishment
of obligations not enumerated under Art. 1231, such as:
a. Death (for personal or intransmissible obligation)

b. Mutual desistance or withdrawal
c. Arrival of resolutory period
d. Compromise
e. Impossibility of fulfillment of condition
f. Fortuitous event (Jurado, 2010).
In application of payment, the right to designate the debt to which the payment shall
be applied belongs primarily to the debtor at the time when payment is made. It should
be noted also that in payment, the debt which is more onerous to the debtor, among
those due, shall be deemed first to have been satisfied. Thus, we should remember
which obligation is more onerous.
Dation in payment, in turn, means the delivery and transmission of ownership of a

thing by the debtor to the creditor as an accepted equivalent of the performance of the
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obligation.
Payment by cession on the other hand is a special form of payment whereby the
debtor assigns or 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.
Tender of payment consists in the manifestation made by the debtor to the creditor
of his decision to comply immediately with his obligation; whereas consignation refers to
the deposit of the object of the obligation in a competent court in accordance with the
rules prescribed by law, after refusal or inability of the creditor to accept the tender of
payment.
Obligation is extinguished if the thing is lost or destroyed without the fault of the
debtor and before he has incurred in delay. Thus, loss of a determinate thing through
fortuitous event shall extinguish the obligation. However, loss of generic thing does not
extinguish obligation.
Condonation or remission of debt is an act of liberality by virtue of which 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 of aspect of the same
to which the remission refers.
On the other hand, confusion is the merger of the characters of the creditor and the
debtor in one and the same person by virtue of which the obligation is extinguished.
Another mode of extinguishing obligation is compensation in the concurrent amount

of the obligation of those persons who are reciprocally debtors and creditors of each
other. It extinguishes both debts to the extent that amount covered by the amount of the
other.
There is also another mode which is novation. It is 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. 91
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Last one is compromise, whereby the parties, by making reciprocal concessions,
avoid litigation or put an end to one already commenced.
References
Books and Laws:

Bangko Sentral Circular No. 537, series of 2006
Jurado, D. (2010). Comments and Jurisprudence on Obligations and Contracts. Manila,

Philippines, Rex Bookstore.

Jurisprudences:
Naga Telephone co., et al. v. CA, G.R. no. 107112, February 24, 1994
Ramos v. CA, G.R. No. 119872, July 7, 1997 and Mobil Oil Phils. v. CA, G.R. No. 103072,
August 20, 1993
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Uploaded by

Uploaded by

Business Law with Focus on

Micro, Small, and Medium

Atty. Jill B. Manangkil-Benitez

Course Description: The course is an introductory subject for business

Course Intended Learning Outcomes (CILO):

1. Acquire basic knowledge on the general principles of law in relation

 Assessment Tasks - 60%

Periodic Grade 100%

PRELIM GRADE : 60% (Activity 1-4) + 40% (Prelim exam)

Module 2: Nature and Effects of Obligations 15

Module 3: Different Kinds of Obligations 30

Module 4: Extinguishment of Obligations 61

In this module, an introduction on the basic principles of law of obligations including

At the end of this module, students should be able to:

1. Elucidate the general concepts of obligations;

2. Determine the sources of obligations in the Philippines and discuss each;

3. Familiarize on the basic principles on obligation.

Jurado (2010) on Comments and Jurisprudence on Obligations and Contracts

1. A civil obligation is based on positive law, while a natural obligation is based

B. Requisites of Obligations (Jurado, 2010)

4.1 Requisites of Prestation:

1. Pure and Conditional (Civil Code, Art. 1179-1192)

3. Alternative and Facultative (Civil Code, Art. 1199-1206)

4. Joint and Solidary (Civil Code, Art. 1207-1222).

5. Divisible and Indivisible (Civil Code, Art. 1223-1225).

6. With a penal clause (Civil Code, Art. 1226-1230).

7. Individual and collective (Civil Code , Art. 1207, 1223)

8. Accessory and principal (Civil Code, Art. 116, 1226)

D. Secondary Classifications under the New Civil Code:

1. Legal (Civil Code, Art. 1158) – arises from law;

1. Law (Ex-Lege), (Civil Code, Art. 1158)

2. Contracts (Ex-Contractu) (Civil Code, Art. 1159).

3. Quasi-contracts (Quasi Ex-Contractual) (Civil Code, Art. 2142)

4. Delict (Ex-Delictu, Culpa Criminal) (Civil Code, Art. 1161).

5. Quasi-delict (Quasi Ex-Delicto) (Civil Code, Art. 2176)

Whoever by act or omission causes damage to another, there being fault or

Lesson 3. Solutio In debiti and Negotiorum Gestio

1. Negotiorum Gestio (or Officious Management)

Whoever voluntarily takes charge of the agency or management of the

In this type of quasi-contract, once the gestor or officious manager has

Requisites of Negotiorum Gestio as per Jurado (2010):

If something is received when there is no right to demand it, and it was

It should also be remembered that when the property delivered or money

3. Other Quasi-contracts (also known as support given by strangers) (Articles

Article 2166. When the person obliged to support an orphan, or an insane or

Article 2167. When through an accident or other cause a person is injured or

Article 2170. When by accident or other fortuitous event, movables separately

Article 2174. When in a small community a majority of the inhabitants of age

Lesson 4. Proximate Cause in Quasi-Delicts

Proximate cause is defined as that cause, which, in natural and continuous

In relation to proximate cause under the provisions on quasi-delicts, we should

3. The owners and managers of an establishment or enterprise are likewise

Requisites of Liability (Jurado, 2010):

a) The fault or negligence of the defendant;

Facts: Xavier by mistake delivered to Amara and Basti a sum of money

Quasi-delict is also known as “tort” and obligations or liabilities arising therefrom

Jurado, D., (2010). Comments and Jurisprudence on obligations and Contracts.

Tolentino, A. (2002). Commentaries and Jurisprudence on the Civil Code of the

NATURE AND EFFECTS OF OBLIGATIONS

At the end of this module, students should be able to:

1. Understand the rights of a creditor in obligations, such as rights to the fruits, as

well as the rights in relation to obligations to give, to do or not to do;

2. Familiarize on the kinds of breach of obligations and discuss each;

3. Comprehend and discuss the rules applicable on extinguishment of interest and

installments affecting obligations.

Lesson 1. Rights of a Creditor in Obligations

A. Rights of Creditor to the Fruits

Specific performance is an action available to the creditor to ask that a real

Jurado (2010) differentiated personal right and real right as follows:

2. Personal right is a right pertaining to the person to demand from another, as a

B. Obligations of the Debtor (Jurado, 2010)

Everything that is attached to naturally or artificially, or even temporarily

d) To be liable for damages in cases of breach due to delay, fraud, negligence

b) To be liable for damages in case of breach due to delay, fraud, negligence

C. Rights of a Creditor in Real Obligations to Give (Jurado, 2010)

c) To demand payment of damages when it is the only feasible remedy.

2. If the thing is generic, the rights of a creditor are the following:

c) To recover damages in case of breach of obligation.