Regulatory Framework for Business Transactions

Law on Obligation

1. Definition of Obligation: Article 1156 of the Civil Code defines an obligation as a juridical necessity to
give, to do or not to do.

2. Essential Elements or Requisites of an Obligation

a. An active subject, who has the power to demand prestation, also known as the obligee or
creditor.

b. A passive subject, who is bound to perform the prestation, also known as the obligor or
debtor.

c. Object or prestation, which is the promise or particular conduct to be performed in the

performance of an obligation, and may consist of giving, doing or not doing a thing.
i. Requisites of an object or prestation of an Obligation are
1. It must be possible, physically and juridically.
2. It must be determinate, or, at least, determinable according to pre-established
elements or criteria.
3. It must have possible equivalent in money.

d. Efficient cause, the tie which binds the parties to the obligation, also known as juridical tie or
vinculum.
i. Examples of juridical tie or vinculum
1. Relation established by law
2. Relation established by contract
3. Relation established by quasi-contract
4. Relation established quasi-delict or culpa aquiliania or tort
5. Relation established by crime or delict

3. Types of Obligation based on the definition

a. Positive obligation refers to an obligation which consists of giving or doing something.

b. Real obligation refers to an obligation which consists to the delivery or giving of personal or
real object.
c. Personal obligation refers to an obligation which consists of doing a particular prestation but
not delivery of an object.
d. Negative obligation refers to an obligation which consists of abstaining from some act.

4. Distinctions between Civil Obligation and Natural Obligation

I. Civil obligations derive their binding force from positive law or substantive law, while natural
obligations derive their binding effect from equity and natural justice.
II. Civil obligations can be enforced by court action or the coercive power of public authority,
while the fulfilment of natural obligations cannot be compelled by court action but depends
exclusively upon the good conscience of the debtor. However, voluntarily fulfilment of natural
obligation by the debtor will preclude him from asking for reimbursement from the creditor of
the amount he has voluntarily paid.

5. Sources of civil obligation demandable in a court of law

a. Law refers to the principles and regulations established in a community by some authority and
applicable to its people, whether in the form of legislation or of custom and policies recognized
and enforced by judicial decision.
i. Only obligations expressly determined in the Civil Code or in special laws are
demandable.
ii. The obligations derived from law are never presumed.
iii. The law cannot exist as a source of obligations, unless the acts to which its principles
may be applied exist.
iv. The obligations and correlative rights arising from law shall be governed by the law by
which they are created.

b. Contract is a meeting of minds between two persons whereby one binds himself, with respect
to the other, to give something or to render some service.
 i. Obligations arising from contracts have the force of law between contracting parties.
ii. Obligations arising from contracts should be complied with in good faith.
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 c. Quasi-contract is a juridical relation which arises from certain lawful, voluntary and unilateral
acts, to the end that no one may be unjustly enriched or benefited at the expense of another.

i. Two Types of Quasi-Contracts

1. Negotiorum Gestio refers to the voluntary management of the property or affairs

of another without the knowledge or consent of the latter.
i. Nature of Liability of Officious Managers in Negotiorum Gestio - The
liability is generally solidary unless the officious management was done
under imminent danger.

2. Solutio Indebiti refers to the juridical relation which is created when something
is received when there is no right to demand it and it was unduly delivered
through mistake.
i. Nature of Liability of Payees in Solutio Indebiti - The liability is solidary.

ii. Examples of Quasi-Contract

1. A person voluntary takes charge of the agency or management of business or

property of another without authority or consent of the latter.
2. A person receives something when there is no right to demand it or it was unduly
delivered through mistake.
3. A stranger gives support to a child of another person without the knowledge of
the person obliged to give support.
4. A person saves the property of another person during fire, flood, storm or other
calamity without the knowledge of the owner.

d. Quasi-delict or culpa aquiliana or torts refers to a source of an obligation wherein a person

by act or omission causes damage to another, there being fault or negligence.
i. Nature of Liability joint tortfeasors - The liability is solidary.

Requisites of Civil Action based on Tort or Quasi-Delict or Culpa-Aquiliana

i. There is no pre-existing relation between the offender and offended parties. (Exceptional
cases allow filing of civil action based on quasi-delict despite the presence of contractual
relations if the act that violated the contract constitutes a tortuous act on itself.)
ii. There exists a wrongful act or omission imputable o the defendant by reason of his fault
or negligence.
iii. There exists a damage or injury which must be proved by the person claiming recovery.
iv. There must be a direct causal connection or a relation of cause and effect between the
fault or negligence and the damage or injury, or that the fault or negligence be the cause
of the damage or injury.

e. Crime or delict refers to any act or omission which is punishable by law.

i. Nature of Liability of Criminals - The liability is solidary.

i. Persons who are exempted from criminal liability but still civilly liable for their
crime committed
1. An imbecile or insane person.
2. A person under 18 of age.
3. Any person who acts under the compulsion of an irresistible force.
4. Any person who acts under the impulse of an uncontrollable fear of an equal or
greater injury.

ii. Persons who are exempt from criminal liability and civil liability
1. Any person who acts in self-defense.
2. Any person who acts in the performance of his duties or obligations.
3. Any person suffering from battered woman syndrome.

iii. Components of Civil Liability arising from Crime

1. Restitution refers to restoration of the thing itself even though it be found in the
possession of a third person who has acquired it by lawful means.
2. Reparation of the damage caused shall be determined by the Court taking into
consideration of the price of the thing and its sentimental value.
3. Indemnification for consequential damages shall include not only those
caused the injured party but also those suffered by his family or by a third person
by reason of the crime.
6. Distinctions between quasi-delict and crime
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 a. The right violated by a quasi-delict is a private right while the right violated by a crime is a
public right.
b. Every quasi-delict gives rise to liability for damages to the injured party but there are crimes
from which no civil liability arises.
c. Criminal liability can never be compromised except in criminal negligence but liability from
quasi-delict can be compromised.
d. In quasi-delict, criminal intent is not necessary, while in crime, criminal intent is necessary
except in criminal negligence.
e. Claims arising from quasi delict must be proven by preponderance of evidence while crime
must be proven by proof beyond reasonable doubt.

7. Kinds of Thing or Object

a. A generic or indeterminate thing is only indicated by its kind, without being designated and
distinguished from others of the same kind. (Note: Generic thing never perishes.)
b. A determinate or specific thing is one that is individualized and can be identified or
distinguished from others of its kind.
i. Note: Loss as a mode of extinguishing an obligation is applicable only to obligation to
deliver a determinate or specific thing but not to obligation to deliver a generic or
indeterminate thing because generic thing never perishes.

8. Incidental or accessory obligations in an obligation to deliver a determinate thing

a. Obligation to preserve the determinate thing with due care.

i. Degree of diligence to be exercised by the obligor or debtor in the preservation of

determinate thing
1. Diligence required by law
a. Contract of common carrier – Extraordinary diligence
b. Contract of bank deposits – Extraordinary diligence
2. Diligence stipulated in the contract
a. The stipulation must be valid. Waiver of future fraud or future gross
negligence is null and void.
3. Ordinary diligence or diligence of a good father of a family or diligence of a
reasonably prudent person.

b. Obligation to deliver the fruits of the determinate thing if the fruits occur after the
obligation to deliver the determinate thing arises.

i. Kinds of fruits under the Civil Code

1. Natural fruits are the spontaneous products of the soil, and the young and other
products of animals.
2. Industrial fruits are those produced by lands of any kind through cultivation or
labor.
3. Civil fruits are fruits as a result of civilization or fruit arising out of a juridical
relation or contracts such as are the rents of buildings, the price of leases of
lands and other property and the amount of perpetual or life annuities or other
similar income.

c. Obligation to deliver the accessions and accessories of the determinate thing.

i. Accessories refer to those which destined for the embellishment, use or their
preservation of another thing or more importance, have for their object the completion of
the latter for which they are indispensable or convenient.
ii. Accessions include everything which is produced by a thing, or which is incorporated or
attached thereto, either naturally or artificially.
9. Types of Rights of Creditor over the thing and its fruits (Moment the right is obtained)
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 a. A real right is the power belonging to a person over a specific thing, without a passive subject
individually determined, against whom such right may be personally exercised. It refers to a
right that can be exercised against the whole world thereby allowing an action to recover the
ownership or possession of a specific thing regardless of the possessor of such thing. Real right
over a determinate thing is acquired from the moment of its actual or constructive delivery.
b. A personal right is the power belonging to one person to demand of another, as a definite
passive subject, the fulfillment of a prestation to give, to do or not to do. It refers to a right that
can be exercised only against a specific person thereby prohibiting an action to recover the
ownership or possession of a specific thing if already with a third person but only allows action
for damages against a specific person. Personal right over a determinate thing is acquired from
the moment provided by the Civil Code or Special Law.

10. General remedies available to creditor when the debtor fails to comply with his obligation
a. Action for specific performance with damages
b. Action to rescind the obligation with damages
c. Action for damages

11. Remedies of the creditor in the case the debtor fails to comply with his obligation to deliver a
determinate or specific thing
a. Action for specific performance in addition to damages under Article 1170
b. Action for damages if action for specific performance becomes legally impossible

12. Remedies of the creditor in the case the debtor fails to comply with his obligation to deliver an
indeterminate or generic thing
a. Action for specific performance with damages
b. He may ask the obligation to be complied with by a third person at the expense of the debtor
with damages.

13. Remedy of the creditor if the debtor fails to do the prestation in obligation to do
a. The creditor or third person may do it in a proper manner at the expense of the debtor.

14. In an obligation to do whereby only the debtor can do the thing, remedy of the creditor if the
debtor fails to do the prestation
a. Action for indemnification for damages

15. In case a public official or officer of a private corporation refuses to perform his ministerial duty,
remedy of the injured person
a. Special civil action of mandamus

16. In an obligation to do, remedy of the creditor in case the debtor did it in contravention of the
tenor of the obligation or did it poorly
a. The creditor or third person may do it in a proper manner or it may be decreed that what had
been poorly done be undone at the expense of the debtor.

17. In an obligation consisting in not doing, remedy of the creditor in case the debtor does what has
been forbidden him
a. It shall be undone at the expense of debtor with indemnification for damages.

18. Definition of Delay – Default – Mora refers to the non-fulfilment of the obligation with respect to time.

19. Requisites in order that the debtor may be in default or for debtor’s delay or mora to exist
a. The obligation must be demandable and already liquidated.
b. The debtor delays performance of the obligation.
c. The creditor demands the performance either judicially or extrajudicially.
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20. As a general rule, judicial or extrajudicial demand is necessary for delay to exist. However, the
following are the cxceptional instances when demand by the creditor shall not be necessary in
order that delay may exist
a. When the obligation expressly so declares that demand is excused or waived.
b. When the law expressly so declares that demand is excused or waived.
c. When from the nature and the circumstances of the obligation it appears that the designation of
the time when the thing is to be delivered or the service is to be rendered was a controlling
motive for the establishment of the contract.
d. When demand would be useless, as when the obligor has rendered it beyond his power to
perform.

21. Moment of delay in reciprocal obligation

a. From the moment one of the parties fulfills his obligation.

22. Types of Delay or Default (Mora)

a. Mora solvendi – Debtor’s delay
i. Effects of delay on the part of the debtor
1. The debtor becomes liable for damages for the delay.
2. When it has for its object a determinate thing, the delay places the risk of the
thing on the debtor.
b. Mora accipiendi – Creditor’s delay
i. Effects of the delay on the part of the creditor
1. The creditor becomes liable for damages.
2. The debtor may relieve himself of the obligation by the consignation of the thing.
3. The creditor bears the risk of the loss of the thing.
4. The responsibility of the debtor for the thing is reduced and limited to fraud and
gross negligence.
5. All expenses for the preservation of the thing after the mora shall be chargeable
to the creditor.
c. Compensatio morae – Delay of both parties
i. Effect of compensatio morae
1. The delays of both parties are compensated or offsetted.

23. Grounds for damages in the performance of obligation under Article 1170 or Grounds for breach
of contract

a. Fraud – Dolo refers to the deliberate and intentional evasion of the normal fulfilment of
obligations.
b. Negligence - Fault – Culpa is the failure to observe for the protection of the interests of
another person, that degree of care, precaution and vigilance which the circumstances justly
demand, whereby such person suffers injury.
c. Delay – Default – Mora refers to the non-fulfilment of the obligation with respect to time.
d. Contravention of the tenor of obligation refers to illicit act which impairs the strict and faithful
fulfilment of the obligation or every kind of defective performance.

24. Types of civil damages that may be awarded by Court (MENTAL)

I. Mutually exclusive damages
a. Liquidated damages are damages agreed upon by the parties to a contract, to be paid
in case of breach thereof. It refers to the type of damages that is not assessed by the
court but merely applied based on the contractual stipulation of the parties. It refers to
the penalty in an obligation with a penal clause.
b. Actual damages or compensatory damages are those pecuniary losses suffered and
duly proved by the plaintiff. (Legal interest of 6% per annum starting July 1, 2013 and
12% before July 1, 2013)
c. Temperate damages or moderate damages are more than nominal but less than
compensatory damages. They may be recovered when the court finds that some
pecuniary loss has been suffered but its amount cannot, from the nature of the case, be
provided with certainty
d. Nominal damages are damages adjudicated in order that a right of the plaintiff, which
has been violated or invaded by the defendant, may be vindicated or recognized, and
not for the purpose of indemnifying the plaintiff for any loss suffered by him.
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 II. Additional damages to any of the mutually exclusive damages
a. Moral damages are damages awarded by reason of physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury
b. Exemplary damages or corrective damages are damages imposed, by way of
example or correction for the public good, in addition to the moral, temperate, liquidated
or compensatory damages.

25. Waiver of fraud

a. Future Fraud (Waiver of an action for future fraud is void.)
b. Past fraud (Waiver of an action for past fraud may be considered valid.)

26. Degree of Diligence to be observed by Contracting Parties in the Performance of Obligation

a. Diligence Required by Law
i. Contract of common carrier – Extraordinary diligence
ii. Contract of bank deposits – Extraordinary diligence
b. Diligence Stipulated by the Contracting parties
i. The stipulation must be valid. Waiver of future fraud or future gross negligence is null
and void.
c. Ordinary diligence or diligence of a good father of a family or diligence of a reasonably
prudent person

27. Principles on issuance of receipt

a. The receipt of the principal by the creditor, without reservation with respect to the interest, shall
give rise to rebuttable presumption that said interest has been paid.
b. The receipt of a later installment of a debt without reservation as to prior installments, shall raise
rebuttable presumption that such prior installments have been paid.

28. In order to satisfy their claims against the debtor, the unpaid creditor has the following
successive rights in order of priority after prevailing in the civil action for exact fulfillment
a. To levy by attachment and execution upon all the property of the debtor including garnishment
of bank deposits, except such as exempt by law from execution.
b. To exercise all rights and actions of the debtor, except such as are inherently personal to him.
(Accion subrogatoria)
c. To ask for the rescission of the contracts made by the debtor in fraud of his rights. (Accion
pauliana)
d. To file an action for damages against the third person who acquired the property of debtor in
bad faith.

29. Principle on transmissibility of rights acquired from an obligation

a. Subject to the provisions of laws, they are transmissible unless there is stipulation to the
contrary.

30. Types of Obligations as to Demandability

a. Pure obligation refers to an obligation which contains no term or condition whatever upon
which depends the fulfillment of the obligation contracted by the debtor.
b. Conditional obligation refers to an obligation subject to a condition.
c. Obligation with a period refers to an obligation subject to a space of time which is certain to
happen.

31. Obligations demandable at once

a. Pure obligation
b. Obligation in diem or obligation with a resolutory period
c. Obligation with a resolution condition
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32. Obligations not demandable at once
a. Obligation ex die or obligation with a suspensive period
b. Obligation when the debtor's means permit him to do so
c. Obligation with a suspensive condition

33. Distinctions between suspensive condition and resolutory condition

a. If the suspensive condition happens, the obligation arises while if the resolutory condition
happens, the rights and obligations already existing are extinguished.
b. In suspensive condition, the rights and obligations do not exist before the happening of the
condition while in resolutory condition, the rights and obligation already exist even before the
happening of the condition.
c. Obligation subject to a suspensive condition is not demandable at once while obligation
subject to resolutory condition is demandable at once.
d. Suspensive condition is known as condition precedent while resolutory condition is
condition subsequent.

34. Types of conditions

a. Potestative Condition is one which depends upon the will of one of the contracting parties. If
the suspensive condition is potestative upon debtor, the obligation that depends upon it is
void while if the suspensive condition is potestative upon creditor, the obligation that
depends upon it is valid.
b. Casual Condition is one which depends exclusively upon chance or other factors, and not
upon will of the contracting parties.
c. Mixed Condition is one which depends upon the will of the contracting parties and other
circumstances, including the will of a third person.

35. Conditions that annul the obligation which depends upon them for their existence
a. Impossible conditions
b. Suspensive conditions which depend upon sole will of debtor
c. Conditions contrary to good customs or public policy
d. Conditions prohibited by law

36. Effect if the obligor voluntarily prevented the fulfillment of the condition of an obligation subject
to a suspensive condition
a. The suspensive condition shall be deemed fulfilled and the obligation becomes demandable.

37. Retroactive effect of fulfillment of suspensive condition in conditional obligation to give subject
a suspensive condition
a. It shall retroact to the day of the constitution of the obligation once the condition has been
fulfilled.

38. Effects of fulfillment of condition on the determinate thing's fruits occurring during the
pendency of the condition
a. In conditional reciprocal obligation, the fruits and interests during the pendency of the condition
shall be deemed to have been mutually compensated.
b. In conditional unilateral obligation to give or unilateral obligation to give subject to a period, the
fruits shall inure to the sole benefit of the debtor whether the condition is suspensive or
resolutory in the absence of stipulation to the contrary.
c. In conditional obligation to do or not to do, the courts shall determine, in each case, the
retroactive effect to the fruits of the condition that has been complied with taking into account
the agreement of the parties.
d. Before the fulfillment or pendency of the suspensive condition, the creditor may bring
appropriate actions for the preservation of his right regarding the fruits.
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39. Effects of payment or delivery by mistake in a condition subject to a suspensive condition or
suspensive period
a. If during the pendency of the suspensive condition, the debtor has paid by mistake a sum of
money, the debtor can recover the sum of money but with interests only if the creditor acted in
bad faith.
b. If during the pendency of the period in an obligation with a period, the debtor has paid by
mistake a sum of money, the debtor can recover the sum of money and with interests whether
the creditor acted in good faith or bad faith.
c. If during the pendency of the suspensive condition, the debtor has delivered a determinate or
specific thing by mistake, the debtor may file (1) an accion reinvidicatoria if the thing is still with
the creditor or (2) an action for indemnification for damages if the thing is no longer with the
creditor.

40. Rules to be observed in case of the improvement, loss or deterioration of the determinate thing
during the pendency of the suspensive condition in an obligation to give a determinate thing or
pendency of the suspensive period in obligation to give a determinate thing
a. If the thing is lost without the fault of the debtor, the obligation shall be extinguished.
b. If the thing is lost through the fault of the debtor, he shall be obliged to pay damages.
c. When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the
creditor.
d. If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the
creditor.
e. If it is improved at the expense of the debtor, he shall have no other right than that granted to
the usufructuary which means that he shall only have the right to use the improved thing for a
reasonable period.

41. Alternative remedies of creditor when the determinate thing deteriorates through the fault of the
debtor during the pendency of the suspensive condition in an obligation to give a determinate
thing or suspensive period in an obligation to give a determinate thing
a. He may ask for the rescission of the obligation with indemnity for damages.
b. He may ask for the performance of the obligation with indemnity for damages.

42. Instances when the thing is considered lost

a. When it perishes.
b. When it goes out of commerce.
c. When it disappears in such a way that its existence is unknown or it cannot be recovered.
d. When it is a destroyed specific thing.

43. Effects of fulfillment of resolutory condition to the obligation of the parties

a. There will be mutual restitution.
b. The fruits shall be returned by the person who will make the restitution with deduction for the
expenses for the production, gathering and preservation of the fruits.

44. Reciprocal obligation refers to a type of obligation which arises from the same cause and in which
each party is a debtor and creditor of the other, such than the obligation of one is dependent upon the
obligation of the other.

45. Right to ask for Rescission of Reciprocal Obligation by the Injured Party
a. The injured party can ask for judicial rescission of the obligations in case one of the obligors
should not comply with what is incumbent upon him because the power to rescind obligations is
implied in reciprocal ones.

46. Alternative remedies of Injured Party in case of breach of reciprocal obligation

a. As a general rule, the injured party may ask for the fulfillment of obligation with damages and
can no longer ask for rescission of obligation after selection of this remedy. However, if the
exact fulfillment becomes legally impossible after its selection, the injured party may
exceptionally ask for the rescission of the obligation.
b. If the injured party asks for the rescission of the obligation, he is absolutely prohibited from
asking exact fulfillment of the obligation.
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47. Principles concerning reciprocal obligations
a. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing
of a period.
b. In case both parties have committed a breach of the obligation, the liability of the first infractor
shall be equitably tempered by the courts.
c. 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.

48. Obligation with a period is an obligation which is subject to a space of time which, exerting an
influence on obligations as a consequence of a juridical act, suspends their demandability or
determines their extinguishment.

49. Distinctions between a condition and a period

a. A condition is an uncertain event while a period is an event that must necessarily come.
b. While a condition gives rise to an obligation or extinguishes one already existing, a period has
no effect upon the existence of obligation, but only its demandability or performance and thus, a
period does not carry with it any retroactive effect.
c. A condition may refer to a past event and unknown to parties while a period always refers to
the future.
d. A suspensive condition purely potestative upon the debtor’s will annuls the obligation that
depends upon it while a suspensive period which depends exclusively on the will of the debtor
does not annul the obligation that depends upon it but merely authorizes the court to fix the
suspensive period of the obligation.

50. Types of Obligation with a period

a. Obligation Ex die or Obligation with a suspensive period is an obligation already existing
but not yet demandable until the arrival of the suspensive period.
b. Obligation In diem or Obligation with a resolutory period is an obligation already
immediately demandable but will be extinguished upon the arrival of the resolutory period.

51. Benefit of the obligation with a period

a. It is presumed to be for the benefit of both creditor and debtor in the absence of contrary
agreement.

52. As a general rule, the court is not allowed to fix a period in an obligation. However, the following
are the exceptional instances wherein the court may fix the period of an obligation with a
period
a. If the obligation does not fix a period, but from its nature and the circumstances it can be
inferred that a period was intended.
b. If the period depends upon the sole will of the debtor.
c. In case of pure obligation, to prevent unreasonable interpretations of its immediate
demandability.

53. Instances wherein the debtor shall lose every right to make use of the period and therefore the
obligation with a period becomes due and demandable which allows the creditor to demand its
performance from the debtor
a. When after the obligation has been contracted, the debtor becomes insolvent and he does not
give a guaranty or security for the debt.
b. When the debtor does not furnish to the creditor the guaranties or securities which he has
promised.
c. When by debtor’s own acts he has impaired or destroyed said guaranties or securities after their
establishment, unless he immediately gives new one equally satisfactory.
d. When through a fortuitous event the guaranties or securities after their establishment
disappeared, unless the debtor immediately gives new one equally satisfactory.
e. When the debtor violates any undertaking, in consideration of which the creditor agreed to the
period.
f. When the debtor attempts to abscond.
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54. Alternative Obligation vs. Facultative Obligation vs. Conjunctive Obligation
a. Alternative Obligation is an obligation where the debtor is alternatively bound by different
prestations and it is extinguished by the complete performance of any of them.
b. Facultative Obligation is an obligation wherein only one prestation has been agreed upon but
the obligor may render another in substitution.
c. Conjunctive Obligation is an obligation where the debtor has to perform several prestations
and it is extinguished only by the performance of all of them.

55. Distinctions between alternative obligation and facultative obligation

a. In alternative obligation, several objects being due, the fulfillment of one is sufficient,
determined by the choice of the debtor who generally has the right of election while in
facultative obligation, only one thing is due, but the debtor has reserved the right to substitute
in with another.
b. In alternative obligation, the loss of one of the things due through the fault of debtor may affect
the obligation if the right of choice is given to creditor while in facultative obligation, the loss of
that which may be given as substitute does not affect the obligation if the loss occurs before the
substitution.
c. In alternative obligation, the right of choice may be granted to the creditor while in facultative
obligation, the right of choice can never be granted to creditor.
d. In alternative obligation, the loss of one of the things due through fortuitous event does not
extinguish the obligation while in facultative obligation, the loss through fortuitous event of that
which is due as the object of the obligation will extinguishes such obligation.

56. Joint Obligation vs. Solidary Obligation

a. Solidary obligation is one in which each debtor is liable for the entire obligation and each
creditor is entitled to demand the whole obligation.
b. Joint obligation is one in which each of the debtors is liable only for a proportionate part of the
debt and each creditor is entitled only to a proportionate share of the credit.

57. Instances when the obligation is considered solidary

a. When the obligation expressly so states that the obligation is solidary.
b. When the law requires the obligation to be solidary.
c. When the nature of the obligation requires it to be solidary.

58. Principal consequences of the joint character of the obligation

a. The demand by one creditor upon one debtor produces the effects of default only with respect
to the creditor who demanded and the debtor on whom the demand was made, but not with
respect to the others.
b. The interruption of prescription by the judicial demand of one creditor upon a debtor, does not
benefit the other creditors nor interrupt the prescription as to other debtors.
c. The vices of each obligation arising from the personal effect of a particular debtor or creditor do
not affect the obligation or rights of the others.
d. The insolvency of a debtor does not increase the responsibility of his co-debtors and it does not
authorize a creditor to demand anything from his co-creditors.

59. Principles concerning solidary obligations

a. The indivisibility of an obligation does not imply solidarity.
b. The solidarity of an obligation does not imply indivisibility.
c. Solidary may exist although the creditors and the debtors may not be bound in the same
manner and by the same period and conditions.
d. Each one of the solidary creditors may do whatever may be useful to the others, but not
anything which may be prejudicial to the latter.
e. A solidary creditor cannot assign his rights without the consent of the others.
f. The debtor may pay any one of the solidary creditors but if any demand, judicial or extrajudicial,
has been made by any one of the solidary creditors, payment should be made to him by the
debtor to whom demand for payment is made.
Page 10 of 21
60. Acts if made by any of the solidary creditors with any of the solidary debtors extinguish the
solidary obligation but may be subject to possible reimbursement among the solidary creditors
and solidary debtors themselves except in case of remission wherein reimbursement is not
allowed

a. Novation
b. Compensation
c. Confusion
d. Remission

61. Principles concerning the payment of solidary obligation

a. Payment made by one of the solidary debtors extinguishes the obligation and if two or more
solidary debtors offer to pay, the creditor may choose which offer to accept.
b. He who made the payment may claim from his co-debtors only the share which corresponds to
each with the interest for the payment already made.
c. If payment is made before the debt is due, no interest for the intervening period may be
demanded.
d. When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the
debtor paying the obligation, such shall be borne by the paying debtor and the other co-debtors
pro-rata.
e. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such
payment is made after the obligation has prescribed or become illegal.
f. The remission made by the creditor of the share which affects one of the solidary debtors does
not release the latter from his responsibility towards the co-debtors, in case the debt had been
totally paid by anyone of them before the remission was effected.
g. The remission of the whole obligation, obtained by one the solidary debtors, does not entitle him
to reimbursement from his co-debtors.
h. If the thing has been lost or if the prestation has become impossible without the fault of the
solidary debtors, the obligation shall be extinguished.

62. Defenses that may be availed of by the solidary debtor in actions filed by the creditor

a. Defenses which are inherent from the nature of the solidary obligation
b. Defenses personal to defendant-debtor for the whole amount of the obligation
c. Defenses personal to other debtors as regards that part of the debt for which the latter are
responsible

63. Divisible Obligation vs. Indivisible Obligation

a. Divisible Obligation is one which is susceptible of partial performance; that is, the debtor can
legally perform the obligation by parts and the creditor cannot demand a single performance of
the entire obligation.

b. Indivisible Obligation is one which is not susceptible of partial performance or the law provides
that the performance of the obligation is indivisible or the contract provides that the performance
of the obligation is indivisible.

i. Instances when the obligation is considered indivisible

1. When the obligation is not susceptible of partial performance
2. When the law provides that the performance of obligation is indivisible
3. When the contract provides that the performance of the obligation is indivisible
Page 11 of 21
64. Principles pertaining to divisible obligations and indivisible obligations
a. Divisibility or indivisibility of the obligation refers not to the object or thing but to the performance
of the obligation.
b. A divisible obligation, whatever may be the nature of the thing which is the object thereof, refers
to one which can be validly performed in parts.
c. The thing or object may be divisible, yet the obligation may be indivisible.
d. Obligations to give definite things and those which are not susceptible of partial performance
shall be deemed indivisible.
e. When the obligation has for its object the execution of a certain number of days of work, the
accomplishment of work by metrical units, or analogous things which by their nature are
susceptible of partial performance, it shall be divisible.
f. Even though the object or service may be physically divisible, an obligation is indivisible if so
provided by law or intended by the parties.
g. In obligations to do, divisibility or indivisibility shall be determined by the character of the
prestation in each particular case.

65. Principles of Joint Indivisible Obligation

a. To enforce a joint indivisible obligation, there is necessity of collective fulfillment and the action
must be against all the debtors which means that all joint indivisible debtors are indispensable
party in the action to enforce joint indivisible obligation.
b. In case of non-performance by all debtors in a joint indivisible obligation, the action for exact
fulfillment must be against all the joint indivisible debtors because they are all indispensable
party in the suit.
c. In case of non-performance by any of the debtors in a joint indivisible obligation, the obligation is
converted into a liability for losses and damages, which is divisible.
d. A joint indivisible obligation cannot be compelled by specific performance if anyone of the
debtors does not or cannot comply with this undertaking.
e. The joint indivisible debtors who may have been ready to fulfill their promises shall not
contribute to the indemnity beyond the corresponding portion of the price of the thing or of the
value of the service in which the obligation consists.

66. Obligation with a penal clause is an obligation which has an accessory undertaking to assume
greater liability in case of breach. The penalty is also known as liquidated damages which are stipulated
or predetermined by the contracting parties.
67. Principles pertaining to obligations with a penal clause
a. The debtor does not have absolute right to just pay the penalty for non-performance of the
obligation instead of fulfilling the obligation.
b. The penalty stipulated must not be contrary to law, morals, or public order to be enforceable.
c. Obligations with a penal clause must be construed strictly against the awarding of penalty.
d. In case of breach of obligations with a penal clause, the debtor cannot have both enforcement
of penalty for non-compliance of obligation and specific performance of obligation because they
are inconsistent remedies.
e. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may
be demanded because they are liquidated or predetermined damages by the contracting
parties.
f. The judge shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor and even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or unconscionable.
g. The nullity of the principal obligation carries with it that of the penal clause.
h. The nullity of the penal clause does not carry with it that of the principal obligation.

68. As a general rule, penalty or liquidated damages for breach of obligation with a penal clause are
awarded in lieu of damages and interest. However, the following are the exceptional instances
when the creditor may demand payment of damages and interest aside from penalty in
obligation with a penal clause
a. If there is stipulation that damages and interests may be demanded in addition to penalty in
case of breach of obligation with a penal clause.
b. When the debtor is guilty of bad faith or fraud in the breach of the obligation with a penal clause.
c. When the debtor fails to pay the penalty in case of breach of the obligation with a penal clause.
Page 12 of 21
69. Modes of extinguishment of obligations: (No-Co-Me-Re-Pa-Lo-Pre-Re-Ful-An)
a. No – Novation
b. Co – Compensation or Offset
c. Me – Merger or Confusion
d. Re – Remission or Donation or Condonation or Renunciation
e. Pa – Payment or Performance
f. Lo – Loss of the thing due
g. Pre – Prescription of Right to File Action converting the civil obligation to natural obligation
h. Re – Rescission of Rescissible Obligation or Rescissible Contract
i. Full – Fulfillment of Resolutory Condition or Resolutory Period
j. An – Annulment of Voidable Obligation or Voidable Contract

70. Prescription refers to the mode of extinguishment of right to file an action or obligation by the mere
lapse of time fixed by law.
a. 6 years for quasi contract
b. 6 years for oral contract
c. 10 years for written contract
d. 10 years for court judgment
e. 4 years for quasi-delict

71. Types of Estoppel

a. Estoppel in pais means a person is considered in estoppel if by his conduct, representations or
admissions or silence when he ought to speak out, whether intentionally or through culpable
negligence, causes another to believe certain facts to exist and such other rightfully relies and
acts on such belief, as a consequence of which he would be prejudiced if the former is permitted
to deny the existence of such facts.
b. Estoppel by deeds occurs when a party to a deed and his privies are precluded from denying
any material fact stated in the said deed as against the other party and his privies.
c. Estoppel by laches is considered an equitable estoppel wherein a person who failed or
neglected to assert a right for an unreasonable and unexplained length of time is presumed to
have abandoned or otherwise declined to assert such right and cannot later on seek to enforce
the same, to the prejudice of the other party, who has no notice or knowledge that the former
would assert such rights and whose condition has so changed that the latter cannot, without
injury or prejudice, be restored to his former state.

72. Payment or Performance is a mode of extinguishing obligation which refers to the fulfillment of the
prestation due.

73. Requisites of a valid payment

a. The payment must be in accordance with the obligation.
b. The person paying as well as the one receiving payment should have the requisite capacity.
c. It should be made by the debtor to the creditor.
d. It should be made at the right time and place.

74. Principles applicable to payment

a. Payment means not only delivery of money but also performance, in any other manner, of an
obligation.
b. A debt shall not be understood to have been paid unless the thing or service in which the
obligation consists has been completely delivered or rendered, as the case may be.
c. If the obligation has been substantially performed in good faith, the obligor may recover as
though there had been a strict and complete fulfillment, less damages suffered by the obligee.
d. When the obligee accepts the performance, knowing its incompleteness or irregularity, and
without expressing any protest or objection, the obligation is deemed fully complied with.
Page 13 of 21
75. Payment concepts
a. In obligations to give, payment made by one who does not have the free disposal of the thing
due and capacity to alienate it shall not be valid.
b. Payment to a person who is incapacitated to administer his property shall be valid if he has kept
the thing delivered or insofar as the payment has been beneficial to him.
c. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain
the debt shall not be valid.
d. The debtor of a thing cannot compel the creditor to receive a different one, although the latter
may be of the same value as, or more valuable than that which is due.
e. In obligations to do or not to do, an act or forbearance cannot be substituted by another act or
forbearance against the obligee’s will.
f. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality
and circumstances have not been stated, the creditor cannot demand a thing of superior quality
and the debtor cannot deliver a thing of inferior quality.

76. Rules concerning the payment of debts in money

a. The payment of debts in money can be made in other currency.
b. The payment of debts in money shall be made in the currency stipulated.
c. In case the delivery of the currency stipulated is not possible, the payment of debts in money
shall be made in the currency which is legal tender in the Philippines.
i. Legal Tender in Philippine Jurisdiction – refers to the currency which a debtor can
compel a creditor to accept in an obligation to pay a sum of money.
1. 1 centavo, 5 centavos, 10 centavos, 25 centavos – Up to P100 only.
2. P1, P5, P10 – Up to P1,000 only.
3. P20, P50, P100, P200, P500, P1,000 – Unlimited legal tender power.
d. The delivery of promissory notes payable to order or bills of exchange or other mercantile
documents shall produce the effect of payment only: (1) when they have been cashed or (2)
when through the fault of the creditor they have been impaired or (3) when the amount has been
credited to the bank account of creditor. Negotiable instruments like promissory note, bill of
exchange and checks are not legal tender and not as good as cash.
e. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the
value of the currency at the time of the establishment of the obligation shall be the basis of
payment, unless there is an agreement to the contrary.

77. Place of payment of obligation

a. Place designated in the obligation.
b. In the absence of agreement, delivery shall be made wherever the thing might be at the moment
the obligation was constituted or perfected in case of obligation to deliver a determinate thing.
c. In the absence of agreement, delivery shall be made at the domicile of debtor in case of
obligation to deliver a generic thing.

78. Right of a third person who pays for the debtor without the knowledge or against the will of the
debtor
a. The third person may recover only insofar as the payment has been beneficial to the debtor but
there is no legal subrogation.

79. As a general rule, payment to a third person is not valid. However, the following are the
exceptional instances wherein payment by a debtor to a third person is valid
a. When in good faith, the debtor pays to one in possession of the credit.
b. When, without notice of the assignment of the credit, the debtor pays to the original creditor.
c. When the payment to a third person redounded to the benefit of the creditor.
Page 14 of 21
80. Generally, it is the obligation of the debtor to prove that the payment to a third person
redounded to the benefit of the creditor in order for the payment to be valid. The following are
exceptional instances when benefit to creditor need not be proved by a debtor who pays a third
person for such payment to be valid:
a. If after the payment, the third person acquires the creditor’s rights.
b. If the third person is authorized by the creditor.
c. If the creditor ratifies the payment to the third person.
d. If by the creditor’s conduct, the debtor has led to believe that the third person had authority to
receive payment.

81. Special Forms of Payment

a. Application of payment (Not really a special form of payment)
b. Payment by cession
c. Dation in payment
d. Tender of payment and consignation

82. Dation in payment or Dacion en Pago refers to a special form of payment whereby a property is
alienated to the creditor in satisfaction of a debt in money when the loan in money is already due at the
time of change. This special mode of payment shall be governed by Law on Sales. If the change occurs
before the maturity day of the obligation to pay a sum of money, the mode of extinguishment of
obligation is not dation en pago but it will be novation.

83. Cession refers to a special type of payment which involves the voluntary abandonment of the
universality of the property of the debtor for the benefit of his creditors, in order that such property may
be applied to the payment of the credits.

84. Distinctions between dation in payment and payment by cession

a. Whereas dation in payment transfers the ownership over the thing alienated to the creditor,
while in payment by cession, only the possession and administration (not ownership) are
transferred to the creditors, with an authorization to convert the property into cash with which
the debts shall be paid.
b. While dation in payment may totally extinguish the obligation and release the debtor, the
payment by cession only extinguishes the credits to the extent of the amount realized from the
properties assigned, unless otherwise agreed upon.
c. While dation in payment involves only some specific thing, payment by cession involves all
the property of the debtor.
d. While in dation in payment, the transfer is only in favor of one creditor to satisfy a debt, in
payment by cession, there are various creditors.
e. While dation in payment is governed by Law on Sales, payment by cession is governed by
FRIA of 2010.

85. Application of payment refers to the designation of the debt which is being paid by a debtor who has
several obligations of the same kind in favor of the creditor to whom payment is made. The right of
application of payment belongs to the debtor.

86. Principles on Application of Payment

a. Unless the parties so stipulate, or when the application of payment is made by the party for
whose benefit the term has been constituted, application shall not be made as to debts which
are not yet due.
b. If the debtor accepts from the creditor a receipt in which an application of the payment is made,
the former cannot complain of the same, unless there is a cause for invalidating the contract.
Page 15 of 21
87. Limitations to the preferential right of the debtor to choose the debt to which his payment is to
be made
a. If the debtor owes two debts, one for P50 and another for P200, and he makes a payment of
P50, he cannot choose to apply it to the P200 debt because the creditor cannot be compelled to
accept partial payment.
b. If there is only one obligation bearing stipulated interest, the debtor can apply the payment to
the interest before the capital.
c. The debtor cannot apply the payment to a debt that is not yet liquidated.
d. He cannot choose a debt with a period for the benefit of the creditor, when the period has not
yet arrived.
e. When there is an agreement as to the debts which are to be paid first, the debtor cannot vary
the agreement.

88. Rules for application of payments

a. If the debt produces interest, payment of the interest shall not imply that the principal is already
paid.
b. When the payment cannot be applied in accordance with the preceding rules, or if application
cannot be inferred from other circumstances, the debt which is most onerous to the debtor,
among those due, shall be deemed to have been satisfied.
c. If the debts due are of the same nature and burden, the payment shall be applied to all of them
proportionately.
d. If at the time of payment the debtor does not exercise his right to apply it to any of his debts, the
application made by the creditor shall be followed even if the debtor does not consent to such
application.

89. Tender of Payment and Consignation

a. Tender of payment is the manifestation made by the debtor to the creditor of his desire to
comply with his obligation with the offer of immediate performance.
b. Consignation is the deposit of the object of the obligation in a competent court in accordance
with rules prescribed by law. It refers to the remedy available to the debtor if the creditor is guilty
of delay also known as mora accipiendi.

90. As a general rule, consignation shall be preceded by valid tender of payment for consignation
to be valid. However, the following are the exceptional instances of valid consignation releasing
the debtor from liability even without valid tender of payment:
a. When the creditor is absent or unknown, or does not appear at the place of payment
b. When the creditor is incapacitated to receive the payment at the time it is due
c. When, without just cause, the creditor refuses to give a receipt
d. When two or more persons claim the same right to collect
e. When the title of the obligation has been lost

91. Essential requisites of valid consignation as a special mode of payment:

a. There debt must be due.
b. The consignation was made because of some legal cause provided by law.
c. Previous notice of the consignation has been given to the persons interested in the performance
of the obligation. (1 st notice of the intent to consign)
d. The amount or thing was placed at the disposal of the court.
e. After the consignation, the persons interested were notified thereof. (2 nd notice of actual
consignation)

92. Principles of tender of payment and consignation

a. Once the consignation has been duly made, the debtor may ask the judge to order the
cancellation of the obligation.
b. Before the creditor has accepted the consignation, or before a judicial declaration that the
consignation has been properly made, the debtor may withdraw the thing or the sum deposited,
allowing the obligation to remain in force.
Page 16 of 21
93. Effects once the consignation has been accepted by the creditor or the court has declared that
it has been validly made
a. The debtor is released in the same manner as if he had performed the obligation at the time of
the consignation, because this produces the same effect as a valid payment.
b. The accrual of interest on the obligation is suspended from the moment of consignation.
c. The deterioration or loss of the thing or amount consigned occurring without fault of the debtor
must be borne by the creditor, because the risks of the thing are transferred to the creditor from
the moment of deposit.
d. Any increment or increase in value of the thing after the consignation inures to the benefit of the
creditor.

94. Effects if, after the consignation has been made, the creditor should authorize the debtor to
withdraw the same
a. The creditor shall lose every preference which he may have over the thing.
b. The co-debtors shall be released of its solidary obligation but not of their respective shares in
the obligation. It means that the obligation of the other co-debtors is converted into joint
obligation. However, it will remain to be solidary obligation of the part of the consigning debtor.
c. The guarantors and sureties shall be released.

95. Loss of generic thing vs. Loss of specific thing

a. An obligation which consists in the delivery of a determinate thing shall be extinguished if it
should be lost or destroyed due to fortuitous event.
b. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind
does not extinguish the obligation because generic thing never perishes.

96. Requisites of fortuitous events to exempt the obligor/debtor from liability

a. The cause of the unforeseen and unexpected occurrence or the failure of the debtor to comply
with his obligation must be independent of the debtor’s will.
b. It must be impossible to foresee the event which constitutes the case fortuito or if it can be
foreseen, it must be impossible to avoid.
c. The occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a
normal manner.
d. The obligor must not participate in the aggravation of the injury resulting to the creditor.

97. Exceptional instances when the debtor is liable even there is fortuitous event at the time of loss
a. When the law expressly provides that the debtor shall be liable even if the loss is due to
fortuitous event.
b. When by express stipulation, the obligor is made liable even if loss occurs through fortuitous
events.
c. When the nature of the obligation requires the assumption of risk.
d. When the fault or negligence of the debtor concurs with the fortuitous event in causing the loss.
e. When the loss occurs after the debtor has incurred in delay.
f. When the debtor has promised to deliver the same thing to two or more different parties.
g. When the obligation to deliver a determinate object arises from a criminal act.

98. Effects of loss of the object of the obligation

a. The courts shall determine whether, under the circumstances, the partial loss of the object of
the obligation is so important as to extinguish the obligation.
b. The debtor in obligations to do shall also be released when the prestation becomes legally or
physically impossible without the fault of the obligor.
c. When the service has become so difficult as to be manifestly beyond the contemplation of the
parties, the obligation may also be released therefrom, in whole or in part.
d. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor
shall not be exempted from the payment of its price, whatever may be the cause for the loss,
unless the thing having been offered by him to the person who should receive it, the latter
refused without justification to accept it.
e. The obligation having been extinguished by the loss of the thing, the creditor shall have all the
rights of action which the debtor may have against third persons by reason of the loss meaning
there will be legal subrogation.
Page 17 of 21
99. Remission or Donation or Condonation or Renunciation is a mode of extinguishing obligation which
is an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces the
enforcement of the obligation, which is extinguished in its entirety or in that part or aspect of the same.
It is essentially gratuitous and requires acceptance by the debtor.

100. Essential requisites for validity of donation

a. If the donation of movable involves P5,000 or less, there must be simultaneous delivery and
acceptance.
b. If the donation of movable exceeds P5,000, the donation and acceptance must be both in
writing.
c. If the donation involves immovable property, the donation and acceptance must be both in
public instrument.

101. Requisites of remission or condonation

a. The debt must be existing and demandable at the time the remission is made.
b. The renunciation of the debt must be gratuitous.
c. The debtor must accept the remission.
d. The remission or condonation may be expressed or implied.

102. Principles of condonation or remission

a. Whenever the private document in which the debt appears is found in the possession of the
debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is
proved.
b. The renunciation of the principal debt shall extinguish the accessory obligations.
c. The renunciation of the accessory obligation shall not extinguish the principal debt.
d. It is presumed that the accessory obligation of pledge has been remitted when the thing is
pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third
person who owns the thing.

103. Confusion or merger is a mode of extinguishing obligation that occurs where there is meeting
in one person of the qualities of creditor and debtor with respect to the same obligation.

104. Requisites of merger or confusion

a. It must take place between the creditor and the principal debtor.
b. The very same obligation must be involved, for if the debtor acquires rights from the creditor, but
not the particular obligation in question, there will be no merger.
c. The confusion or merger must be total or as regards the entire obligation.

105. Principles concerning merger or confusion

a. The effect of merger is to extinguish the obligation.
b. Merger which takes place in the person of the principal debtor or creditor benefits the guarantor.
c. Merger which takes place in the person of the guarantor does not extinguish the principal
obligation.
d. Confusion does not extinguish a joint obligation except as regards the share corresponding to
the creditor or debtor in whom the two characters concur.

106. Compensation or Offset is a mode of extinguishing to the concurrent amount, the obligations
of those persons who in their own right are reciprocally debtors and creditors of each other.

107. Types of Compensation

a. Legal compensation is a compensation which takes place by operation of law because the
requisites provided by law are present.
b. Facultative compensation is a compensation which can be claimed by one of the parties who,
however, has the right to object to it, such as when one of the obligations has a period for the
benefit of one party alone and who renounces that period so as to make the obligations due.
c. Conventional compensation is a compensation wherein the parties agree to compensate their
mutual obligations even if some requisite is lacking.
d. Judicial compensation is a compensation decreed by the court in a case where there is a
counterclaim.
Page 18 of 21
108. Requisites of legal compensation or compensation by operation of law
a. Each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other.
b. Both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated.
c. Both debts must be due.
d. Both debts must be liquidated and demandable.
e. That over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor.

109. Debts that can be the subject of legal compensation

a. Valid
b. Rescissible
c. Voidable

110. Principles concerning compensation

a. The guarantor may set up compensation as regards what the creditor may owe the principal
debtor.
b. Compensation may be total or partial and when the two debts are of the same amount, there is
a total compensation.
c. The parties can agree upon compensation of debts which are not yet due.
d. If one of the parties to a suit over an obligation has a claim for damages against the other, the
former may set it off by proving his right to said damages and the amount thereof.
e. When one or both debts are rescissible or voidable, they may be compensated against each
other before they are judicially rescinded or avoided.

111. Instances wherein the debtor may still set up compensation against the assignee of
creditor in case of assignment of credit
a. When the creditor communicated the assignment of his right to the third persons to the debtor
and the latter did not consent thereto.
b. When the debtor has consented to the assignment of rights made by a creditor in favor of a third
person and the assignor reserved his right to the compensation at the time he gave his consent.
c. When the assignment is made without the knowledge of the debtor.
d. When the debtor has consented to the assignment of rights made by a creditor with reservation
as to his right to compensation.

112. Instances when legal compensation is prohibited by law but facultative compensation is
allowed
a. When there is a renunciation of the effect of compensation by a party.
b. When one of the debts arises from obligation of depositary in depositum
c. When one of the debts arises from or of a bailee in commodatum.
d. When the one of the creditor has a claim for future support due by gratuitous title.
e. When one of the debts consists in civil liability arising from a crime.
f. When one of the debts pertains to taxes.

113. Principles pertaining to legal compensation

a. When all the requisites for legal compensation are present, compensation takes effect by
operation of law even without the consent or awareness of the parties to the obligation.
b. Legal compensation takes place by operation of law even though the debts may be payable at
difference places, but there shall be an indemnity for expenses of exchange or transportation to
the place of payment.
c. If a person should have against him several debts which are susceptible of compensation, the
rules on the application of payments shall apply to the order of the legal compensation.
Page 19 of 21
114. Novation is the extinguishment of an obligation by the substitution or change of the obligation
by a subsequent one which extinguishes or modifies the first.

115. Requisites of Novation of Obligation

a. There must be a previous valid obligation.
b. There must be agreement of all parties to the new contract.
c. There must be extinguishment of the old contract.
d. The new obligation must be valid.

116. Types of Novation of Obligation

a. Changing their object or principal conditions
b. Substituting the persons of the debtor (Delegacion or Expromission)
c. Subrogating a third person in the rights of the creditor (Legal Subrogation or Conventional
Subrogation)
d. Shortening the term of the obligation

117. Types of novation

a. Subjective or personal novation is the modification of the obligation by the change of the
subject; it is passive if there is substitution of the debtor, and it is active when a third person is
subrogated in the rights of the creditor.
b. Objective or real novation is the change of the obligation by substituting the object with
another or changing the principal conditions.
c. There is partial novation when there is only a modification or change in some principal
conditions of the obligation.
d. There is implied novation when there is such an incompatibility between the old and the new
obligations that they cannot stand together.

118. Concepts of novation

a. In order that an obligation may be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms.
b. Novation is never presumed.
c. Novation may be expressed or implied.
d. There is implied novation if the old and new obligations are on every point incompatible with
each other.
e. When the principal obligation is extinguished in consequence of a novation, accessory
obligations may subsist only insofar as they may benefit third person who did not give their
consent.
f. If the new obligation is void, the original obligation was not extinguished, unless the parties
intended that the former should not subsist in any event.
g. The novation is void if the original obligation was void, except when annulment may be claimed
only by the debtor, or when ratification validates acts which are voidable.
h. If the original obligation was subject to a suspensive condition or resolutory condition, the new
obligation shall be under the same condition, unless it is otherwise stipulated.

119. Types of Novation by substitution of person of Debtor

a. In Expromission, the initiative for the change does not emanate from the original debtor and
may be made even without his knowledge, since it consists in a third person assuming the
obligation and it logically requires the consent of the third person (new debtor) and the creditor.
b. In Delegacion, the original debtor (delegante) offers and the creditor (delegatario) accepts a
third person (delegado) (new debtor) who consents to the substitution, so that the consent of the
three parties is necessary.
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120. Effects of Insolvency of New Debtor to liability of Old Debtor
a. In Expromission the insolvency of new debtor or non-fulfillment of the obligation shall not
generally give rise to any liability on the part of the original debtor because the original debtor
did not have the initiative in making the change, which might have been made even without his
knowledge. However, if the original debtor gives consent to the substitution, he may become
liable to the insolvency of the new debtor especially of the original debtor acted in bad faith.
b. In delegacion the insolvency of new debtor does not generally revive the obligation of old
debtor unless (1) when said insolvency of new debtor was already existing and of public
knowledge when he delegated his debt, or (2) when said insolvency of new debtor is known to
the debtor, when he delegated his debt.

121. Subrogation refers to the transfer of all the rights of the creditor to a third person, who
substitute him in all his rights.

122. Types of Subrogation or Substitution of Creditor

a. Conventional subrogation refers to substitution of creditor by agreement of original parties

and the new creditor.
i. Conventional subrogation must be clearly established in order that it may take effect.
ii. Conventional subrogation of a third person requires the consent of the original parties
and of third person.

b. Legal subrogation is the substitution of new creditor in exceptional cases provided by law.
Legal subrogation is never presumed and available only in cases provided by law.
i. Instances wherein legal subrogation is presumed or instances of legal
subrogation
1. When a creditor pays another creditor who is preferred, even without the debtor’s
knowledge.
2. When, even without the knowledge of the debtor, a person interested in the
fulfillment of the obligation pays, without prejudice to the effects of confusion as
to the latter’s share.
3. The obligation having been extinguished by the loss of the thing, the creditor
shall have all the rights of action which the debtor may have against third
persons by reason of the loss.
4. In contract of property insurance, when the insurance company pays the insured.
5. Under Negotiable Instruments Law, when there is a valid payment for honor
supra protest.

123. Principles concerning subrogation

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

b. Effect of Partial Subrogation of a third Person

i. A creditor, to whom partial payment has been made, may exercise his right for the
remainder, and he shall be preferred against the person who has been subrogated in his
place in virtue of the partial payment of the same credit.
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 REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

Law on Contracts

1. Contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to
give something or to render some service. It is one of the five sources of civil obligations.

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

2. Stages of a contract

a. Conception or preparation stage involves preliminary negotiations and bargaining, discussion of

terms and conditions, with no arrival yet of a definite agreement.
b. Perfection or birth stage is the point when there is meeting of minds between the parties on a
definite subject matter and valid cause.
c. Termination or consummation stage is the point when the contract has been fulfilled resulting in
its accomplishment.

3. Characteristics of contracts

a. Obligatory force of contract means that the contractual agreement constitutes the law as between
the parties.

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

b. Mutuality of contract means that the validity and performance cannot be left to the will of only one
of the parties.

i. Determination of the performance of contract

1. The determination or validity or compliance of a contract cannot be left to the

judgment of one the parties only because it violates mutuality of contract.
2. The determination of the performance of contract may be left to a third person,
whose decision shall not be binding until it has been made known to both contracting
parties.
3. If the determination of the performance of the contract of a third person is evidently
inequitable, the court shall decide what is equitable under the circumstances.

c. Relativity of contract means that contract is binding only upon the parties and their successors
such as heirs and assignees.

a. The heirs are liable to the debts of decedent but only up to the extent of
the property they inherited. It is only the natural obligation of the heirs to
pay the unpaid debts of their predecessors beyond the value of the
properties they inherited.

i. Rights and obligations arising from contracts which are

intransmissible

1. Those which are purely personal.

2. Those which are provided by law to be intransmissible.
3. Those which are stipulated by the party to be intransmissible.
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 1. Exceptions to Relativity of Contract – Instances wherein third parties may be
bound or may be affected by contracts

a. Stipulation in favor of third person or stipulation pour autrui

ii. Requisites of stipulation pour autrui or stipulation in favor of

third person

a. There must be stipulation in favor of a third person.

b. The stipulation should be a part, not the whole, of the contract.
c. The contracting parties must have clearly and deliberately
conferred a favor upon a third person and not a mere incidental
benefit or interest.
d. The favorable stipulation should not be conditioned or
compensated by any kind of obligation whatever.
e. The third person must have communicated his acceptance to the
obligor before its revocation.
f. One of the contracting parties does not bear the legal
representation or authorization of the third party.

Concepts of Stipulation Pour Autrui

a. A stipulation in favor of third person has no binding effect in itself

before its acceptance by the party favored.
b. Before acceptance by the third person, the contracting parties; by
mutual agreement, may modify the contract or revoke it.
c. A mere incidental interest or benefit is not within the doctrine of
stipulation pour autrui.
d. The stipulation pour autrui does not exist if the contract is considered
null and void.

b. Contracts creating real rights which are registered such as registered

real estate mortgage or registered pacto de retro sale/ sale with a right
to repurchase – The registration to Registry of Property/Deeds is
constructive notice to the whole world. Any person who will acquire such
property will be bound by the annotated lien.

c. Contracts intended to defraud creditor – The defrauded creditor may file

an action for cancellation of contract entered by the debtor to defraud the
creditor.

d. When third person induces a party to the contract to violate the

contract – A contracting party may file an action for damages to a third
person who induced a contracting party to violate a contract.

e. Void contract that directly affects a third person – A third person affected
by a void contract may file an action for declaration of nullity of a contract.

Contracts that may be not assailed by a third person

a. Perfectly valid contract
b. Voidable contract
c. Unenforceable contract

Exceptional contracts that may be assailed by a third person

a. Rescissible contract intended to defraud creditor
b. Void contract that directly affects a third person

d. Liberality of Contract or Freedom to Contract or Autonomy of Contract means that the parties
may establish such stipulations, clauses, terms, and conditions as they may deem convenient
provided they are not contrary to any of the following:
i. Law
ii. Morals
iii. Good customs
iv. Public order
v. Public policy

e. Consensuality of contract means that contracts are perfected by mere consent except in real
contracts and formal or solemn contracts which require additional requirements.
 f. Legality of contract means that contracts should not be contrary to law.

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4. Types of elements of a contract

a. Essential elements refer to those which are required in order for a contract to exist. They are
necessary for validity of contract and may not be waived by the parties. Absence of any of the
essential elements will make the contract void the remedy of which of injured party is declaration of
nullity.

i. Consensual Contract
1. Consent of the contracting parties
2. Object certain which is the subject matter of the contract
3. Cause of the obligation which is established

ii. Real Contract

1. Consent of the contracting parties
2. Object certain which is the subject matter of the contract
3. Cause of the obligation which is established
4. Delivery of the subject matter

iii. Solemn or Formal Contract

1. Consent of the contracting parties
2. Object certain which is the subject matter of the contract
3. Cause of the obligation which is established
4. Formality required by law

b. Natural elements refer to those which already exist in certain contract unless set aside or
suppressed by the parties. They may be waived by the parties as long as the waiver is made in good
faith.
i. Warranty against eviction in a contract of sale.
ii. Warranty against hidden defects in a contract of sale.
iii. Warranty for merchantability in a contract of sale.
iv. Warranty against hidden and unregistered encumbrance in a contract of sale.

c. Accidental elements refer to those that do not normally exist in a contract unless stipulated or
provided by the parties.
i. Terms of payment in a contract of sale.
ii. Conventional interest in a contract of loan.

5. Types of Contracts

a. As to Perfection of Contract

i. Consensual contract is a contract perfected by mere consent.

1. Contract of lease.
2. Contract of sale
3. Contract of partnership
4. Contract of agency
5. Contract of real estate mortgage
6. Contract of common carrier

ii. Real contract is a contract perfected by the delivery of the object of the contract.
1. Contract of deposit
2. Contract of pledge
3. Contract of loan or mutuum
4. Contract of commodatum

iii. Solemn or Formal contract is a contract perfected by the execution of the formality
required by law.

1. Negotiable instruments must be made strictly in the form provided by the

Negotiable Instruments Law in ordered to be considered negotiable.
2. Contract of marriage must have all the solemnities required by Family Code of the
Philippines for it to be valid such as marriage license, capacity of contracting parties,
authority of solemnizing officer and personal appearance of contracting parties.
3. Contract of donation of personal property in excess of P5,000 must be made
and accepted in writing to be valid.
4. Contract of donation of real property must be made and accepted in public
instruments to be valid.
5. Contract of antichresis requires that the agreement of antichresis including the
principal and interest of secured contract of loan a must be specified in writing to be
valid.
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 6. Agreement or stipulation to pay interest in contract of loan must be in writing in
order for such agreement to be valid.
7. Contract of chattel mortgage requires it to be registered with Chattel Mortgage
Registry to be valid.
8. Contract of partnership to which real properties or real rights are contributed must
be in a public instrument, with an inventory of real property attached thereto, for the
contract of partnership to be valid.
9. Sale of a piece of land by the agent in the name of the principal, the authority of
the agent to sell the land must be in writing for the contract sale of such land to be
valid.
10. Sale of community or conjugal property by one of the spouses, there must be
authority given by the other spouse to the selling spouse.
a. Remedy to compel the other party to observe the formality for mere
convenience
b. Contracts required to be in Public Document for mere convenience but
not for validity
i. Acts or contracts which have for their object the creation,
transmission, modification or extinguishment or real rights over
immovable property.
ii. The cession, repudiation or renunciation of hereditary rights or of
those of the conjugal partnership of gains.
iii. The power to administer property, or any other power which has for
its object an act appearing or which should appear in a public
document, or should prejudice a third person
iv. The cession of actions or rights proceeding from an act appearing in
a public document
c. Contracts required to be in written instrument, whether public
instrument or private instrument, for mere convenience but not for
validity
i. Contracts where the amount involved exceeds five hundred pesos

b. As to Cause of the Contract

i. Onerous contract is a contract whereby there is an exchange of valuable consideration. For

each contracting party, the cause is the prestation or the promise of a thing or service by the
other.
1. Contract of sale
2. Contract of lease
3. Contract of barter

ii. Gratuitous contract is a contract whereby one party receives no equivalent consideration.
These contracts are referred to as contracts of pure beneficence, the cause of which is the
liberality or generosity of the benefactor.
1. Contract of donation
2. Contract of commodatum

iii. Remuneratory contract is a contract whereby the cause here is the service or benefit
remunerated.
1. Contract of service or employment

c. Other Contracts

i. Principal contract is a contract that can stand by itself.

1. Contract of sale
2. Contract of loan.

ii. Accessory contract is a contract whose existence depends upon another contract known
as principal contract.
1. Contract of pledge,
2. Contract of chattel mortgage
3. Contract of antichresis
4. Contract of real estate mortgage
5. Contract of guarantee

iii. Preparatory contract is a contract which serves as a means by which other contracts may
be entered into.
1. Contract of agency
2. Contract of partnership.
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 iv. Nominate contract is a contract which has a name under the Civil Code or special law.
1. Contract of sale
2. Contract of agency
3. Contract of partnership
4. Contract of insurance
5. Contract of marriage

v. Innominate contract is a contract without any name under the Civil Code or special law.
1. Do ut des (I give that you may give.)
2. Do ut facias (I give that you may do.)
3. Facio ut des (I do that you may give.)
4. Facio ut facias (I do that you may do.)

a. Order of Priority on Rules that shall govern innominate contract

i. The stipulation of the parties
ii. The provisions of Obligations and Contracts
iii. The rules governing the most analogous contracts
iv. The customs of the place

vi. Commutative contract is a contract whereby the parties give almost equivalent values;
hence, there is real fulfillment.
1. Contract of sale
2. Contract of lease
3. Contract of barter

vii. Aleatory contract is a contract whose fulfillment depends upon chance.

1. Contract of insurance

viii. Unilateral contract is a contract whereby only one of the parties is obligated to give or to do
something.
1. Contract of commodatum (bailee)
2. Contract of gratuitous deposit (depositary)

ix. Bilateral contract is a contract whereby both parties are required to give or to do something.
1. Contract of sale
2. Contract of lease

x. Reciprocal contract is a contract whereby the cause on the other party is the object on the
other party.
1. Contract of sale
2. Contract of barter

xi. Auto-contract is a contract wherein one person contracts with himself.

xii. Contract of adhesion is a contract wherein one party has already prepared the form of the
contract, containing the stipulations he desires, and he simply asks the other party to agree
to them if he wants to enter into the contract. In case of ambiguity or doubt, it shall be
construed strictly against the preparer of the document of the contract.
1. Contract of insurance
2. Contract of enrollment

xiii. Executory contract is a contract that has not yet been performed. Certain executory
contracts are covered by Statute of Fraud and required to be in writing in order for them to be
enforceable.

xiv. Executed contract is a contract which has been performed. It is a contract not covered by
Statute of Fraud.

6. Moment of Perfection of contract

a. Upon consent of contracting parties in case of consensual contract
b. Upon delivery of the subject matter in case of real contract
c. Upon execution of formalities required by law in case of formal or solemn contract

7. Extent of binding effect of contract

a. The parties are bound not only to the fulfillment of what has been expressly stipulated in the contract
but also to all the consequences which, according to their nature, may be in keeping with good faith,
usage and law.

8. Nature of contract
a. Contract is determined by the principles of law.
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9. Consent is one of the essential elements of contract. It refers to the meeting of minds between the contracting
parties as regards to the object and cause of contract.

10. Principles of Consent

a. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause
which are to constitute the contract.
b. The offer must be certain and the acceptance absolute.
c. A qualified acceptance constitutes a counter-offer.
d. Consent may be expressed or implied.

11. Binding effect of acceptance through telegram

a. The contract entered into through telegram is perfected from the time the acceptance came to the
knowledge of the offerer also known as Cognitive Theory.

12. Place of perfection of contract entered through telegram, letter or telephone

a. In the place where the offer was made.

13. Requisites of an offer

a. It must be definite.
b. It must be certain.
c. It must be complete.
d. It must be intentional.

14. Concepts concerning Acceptance

a. An acceptance may be expressed or implied.
b. The person making the offer may fix the time, place and manner of acceptance, all of which must be
complied with.
c. An offer made through an agent is accepted from the time acceptance is communicated to the agent
not necessarily to the principal.
d. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at
any time before acceptance by communicating such withdrawal, except when the option is founded
upon a consideration, something paid or promised.

15. Instances which if happened to either party before acceptance make the offer ineffective
a. Civil interdiction
b. Insanity
c. Death
d. Insolvency

16. Principles of Acceptance

a. An option contract supported by consideration or option premium is valid and binding and may not
be withdrawn.
b. Business advertisements are mere invitations to make an offer.
c. Advertisements for bidders are simply invitations to make proposals.

17. Absolutely incapacitated person to enter into contract

a. Unemancipated minors
b. Insane except during lucid interval
c. Demented persons
d. Deaf-mutes who do not know how to write
e. Drunken person
f. Hypnotized person

18. Status of Contract entered into by absolutely incapacitated person

a. Only one party is incapable (Voidable on the part of incapacitated person)
b. Both parties are incapable (Unenforceable)

19. Difference between contract wherein consent is wanting and contract wherein consent is vitiated
a. The contract is void if the consent is wanting requiring declaration of nullity of contract.
b. The contract is voidable if the consent is vitiated requiring annulment of contract.

20. Requisites of consent

a. It should be intelligent.
b. It should be free.
c. It should be spontaneous.
d. It should not be vitiated.
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21. Vices of Consent (FUMIV) which make the contract voidable

I. There is violence when in order to wrest consent, serious or irresistible force is employed.
a. Requisites of violence to vitiate consent
i. There must be physical force.
ii. The physical force must be irresistible.
iii. The force must be the determining cause in giving the consent to the contract.

II. There is intimidation when one of the contracting parties is compelled by a reasonable and well-
grounded fear of an imminent and grave evil upon his person or property, or upon the person or property
of his spouse, descendants or ascendants, to give his consent.
a. Requisites of intimidation to vitiate consent
i. The intimidation must be the determining cause of the consent.
ii. The threatened act must be unjust or unlawful.
iii. The threat must be real and serious.
iv. It must produce a reasonable and well-grounded fear.

III. There is undue influence when a person takes improper advantage of his power over the will of
another, depriving the latter of a reasonable freedom of choice.

IV. There is causal fraud when, through insidious words or machinations of one of the contracting parties,
the other is induced to enter into a contract which, without them, he would not have agreed to.
a. Requisites of fraud to vitiate consent
i. It must have been employed by one of the contracting parties only.
ii. It must have induced the other party to enter into the contract.
iii. It must have been serious.
iv. It may or may not result to damage or injury to the contracting parties.

V. Mistake which should be substantial

22. Difference between causal fraud (Dolo causante) and incidental fraud (Dolo incidente)
a. In causal fraud, the contract is voidable requiring annulment of contract.
b. In incidental fraud, the contract is perfectly valid but action for damages is the proper remedy.

23. Principles governing Vices of Consent

a. Violence or intimidation shall annul the obligation, although it may have been employed by a third
person who did not take part in the contract.
b. Failure to disclose facts, when there is duty to reveal them, as when the parties are bound by
confidential relations, constitutes fraud.
c. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not
in themselves fraudulent.
d. A mere expression of an opinion does not signify fraud, unless made by an expert and the other
party has relied on the former’s special knowledge.

24. Principles governing causal fraud

a. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has
created substantial mistake and the same is mutual.
b. Misrepresentation made in good faith is not fraudulent but may constitute error.
c. In order that fraud may make a contract voidable, it should be serious and should not have been
employed by both contracting parties.
d. Causal fraud may entitle the injured party for annulment of contract while incidental fraud may entitle
the injured party to action for damages.
e. In case both parties use fraud reciprocally, the fraud of one compensates that of the other, and
neither party can ask for annulment of the contract because they are in pari delicto.

25. Absolutely simulated contract vs. Relatively simulated contract

I. In absolute simulation, there is color of a contract, without any substance thereof, the parties not
having any intention to be bound. The proper legal remedy is action for declaration of nullity.
II. In relative simulation, the parties have an agreement which they conceal under the guise of another
contract. The proper legal remedy is action for reformation of instrument.

26. Object or Prestation is one of the essential elements of contract. It refers to the promise or conduct to be
performed in the performance of the contractual, and may consist of giving, doing or not doing a thing.

27. Requisites of an object of a contract (Prestation)

a. The object must be within the commerce of men.
b. It must be licit, or not contrary to law, morals, good customs, public order or public policy.
c. It must be possible.
d. It must be determinate as to its kind.
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28. Allowed objects of a contract
a. Future things
b. All rights which are not intransmissible
c. All services not contrary to law, morals, good customs, public order or public policy

29. Cause of contract is one of the essential elements of contract. It refers to the immediate and proximate
purpose of the contract or the essential reason which impels the contracting parties to enter into it and which
explains and justifies the creation of the obligation through such contract.

30. Causes of different types of contract

a. In onerous contract the cause is understood to be, for each contracting party, the prestation or
promise of a thing or service by the other.
b. In remuneratory contract, the cause is the service or benefit which is remunerated.
c. In contract of pure beneficence or gratuitous contract, the cause is the mere liberality of the
benefactor.
d. The cause of accessory contract is the very cause or consideration of the principal contract.

31. Difference between cause and motive

I. Contracts without cause or with unlawful cause produce no effect whatever and are considered null and
void.
II. Contracts without motive or with unlawful motive remain to be valid.

32. Principles concerning cause

a. The statement of a false cause in contracts shall render them void, if it should not be proved that
they were founded upon another cause which is true and lawful.
b. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the
debtor proves the contrary.
c. As a general rule, lesion or inadequacy of cause does not invalidate a contract.
d. The particular motives of the parties in entering into a contract are different from the cause thereof.

33. Reformation of instrument is the legal remedy available to the injured party in a contract when the instrument
or document that serves as tangible evidence of the contract does not express the true intention of the contracting
parties.

34. Instances wherein reformation of the instrument is the proper remedy

a. When a mutual mistake of the parties results to the failure of the instrument to disclose their real
agreement.
b. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the
instrument does not show their true intention.
c. When one party was mistaken and the other knew or believed that the instrument did not state their
real agreement, but concealed that fact from the former.
d. When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting
the instrument or of the clerk or typist, the instrument does not express the true intention of the
parties.
e. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument
states that the property is sold absolutely or with a right of repurchase.

35. Documents or Instrument which cannot be reformed or reformation of instrument is not allowed
a. Simple donation inter vivos wherein no condition is imposed or unconditional donation inter vivos
b. Last will and testament whether holographic will or notarial will
c. When the real agreement is void

36. Parties who may ask for the reformation of an instrument

a. Either party if the mistake is mutual.
b. Injured party
c. Successors in interest, heirs and assigns of injured party

37. Action for reformation of instrument and Action for exact fulfillment or specific performance are
inconsistent remedies and the complainant cannot have both.

38. Rules on Interpretation of Contract

a. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal
meaning shall be applied by the court.
b. If there is conflict between evident intention and words of contract, the intention of the parties shall prevail.
c. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the
obscurity.
d. Incidental circumstances of a gratuitous contract shall be interpreted with the least transmission of rights and
interest.
e. Incidental circumstances of an onerous contract shall be interpreted with greatest reciprocity of interest.
f. In case of doubt whether the contract is one of loan with mortgage or one of pacto de retro sale, it shall be
 interpreted as loan with equitable mortgage in favor of social justice.

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 g. If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what
may have been the intention or will of the parties, the contract is void.
h. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall
be principally considered.
i. However general the terms of a contract may be, they shall not be understood to comprehend things that
are distinct and cases that are different from those upon which the parties intended to agree.
j. If some stipulation of any contract should admit several meanings, it shall be understood as bearing that
import which is most adequate to render in effectual.
k. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense
which may result from all of them taken jointly.
l. Words which may have different significations shall be understood in that which is most in keeping with the
nature and object of the contract.
m. The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract,
and shall fill the omissions of stipulations which are ordinarily established.

39. Types of Defective Contracts from Least Defective to Most Defective

I. Rescissible contract is a contract that has caused a particular damage to one of the parties or to a
third person, and which for equitable reasons may be set aside even if it is valid. The proper legal
remedy is action for rescission of rescissible contract.
II. Voidable or annullable contract is a contract in which the consent of one party is defective, either
because of want of capacity or because it is vitiated, but which contract is valid until set aside by a
competent court. The proper legal remedy is action for annulment of voidable contract.
III. Unenforceable contract is a contract that for some reason cannot be enforced, unless it is ratified in
the manner provided by law. There is no legal remedy required but to leave the contract as it is.
IV. Void or inexistent contract is an absolute nullity and produces no effect, as if had never been
executed or entered into and cannot be ratified. The proper legal remedy is action for declaration of
nullity of void contract.

40. Rescissible contract is a contract that has caused a particular damage to one of the parties or to a third
person, and which for equitable reasons may be set aside even if it is valid. The proper legal remedy is action for
rescission of rescissible contract.

41. Characteristics of Rescissible Contracts

a. They are valid and binding until rescinded.
b. They are not susceptible of ratification but convalidated by prescription.
c. After the rescission, they are no longer effective and will result to mutual restitution.
d. The prescriptive period of an action for rescssion is 4 years.
e. The proper legal remedy is action for rescission of contract.
f. They may be assailed by a third person affected by it.

42. Examples of Rescissible Contracts

A. Those contracts wherein the ward or absentee suffered by more than ¼ the value of the things on
the contracts entered into by their guardian or representative.
a. Those which are entered into by guardians whenever the wards they represent suffer lesion by more
than ¼ the value of the things which are the object thereof.
b. Those agreed upon in representation of absentees, if the latter suffer more than ¼ the value of the
things which are the object thereof.

B. Those contracts entered into to defraud creditors.

a. Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims
due them.
b. Those which refer to things under litigation if they have been entered into by the defendant without
the knowledge and approval of the litigants or of competent judicial authority.
c. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be
compelled at the time they were effected.
d. All contracts by virtue of which the debtor alienates property by gratuitous title when the donor did
not reserve sufficient property to pay all debts contracted before the donation.
e. Alienations by onerous title when made by persons against whom some judgment has been
rendered in any instance or some writ of attachment has been issued.
f. Contracts entered into by an insolvent person to defraud creditors.

43. Rescission of contract is a remedy granted by law to the contracting parties and even to third persons, to
secure the reparation of damages caused to them by a contract, even if this should be valid, by means of the
restoration of things to their condition at the moment prior to the celebration of said contract.
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 pledge to bind third persons - Contract of pledge may be in any form for its validity to bi
contracting parties because it is a real contract perfected by the delivery of the thing pledged but it mu
be notarized with the description of the thing pledged and its date stated in the notarized contract
order to bind third persons.

10. Nature of a contract to constitute a pledge vs. nature of contract of pledge - Contract to constitu
a pledge is a consensual contract perfected by mere consent while contract of pledge is a real contra
perfected by the delivery of the thing pledged.

11. Rights of the debtor-pledgor

a. To alienate, with the consent of the pledgee, the thing pledged but the thing pledged will still b
subject to the contract of pledge.
b. To continue to be the owner of the thing pledged unless it is expropriated or sold in pub
auction after default by the principal debtor.
c. To ask for the return of the thing pledged after he has paid the debt and its interest, w
expenses in a proper case.
d. To ask that the thing pledged be judicially or extra-judicially deposited if it is used witho
authority or for purposes other than for its preservation.
e. To require that the thing be deposited with a third person if it is in danger of being lost
impaired through the negligence or willful act of the pledgee.
f. To demand the return of the thing pledged, upon offering another thing in pledge, provided th
latter is of the same kind and quality, if there are reasonable grounds to fear the destruction
impairment of the thing pledged without the fault of the pledgee. This right is without prejudice
the right of the pledgee to have the thing sold at a public sale. However, the pledgee is bound
advise the pledgor, without delay, of any danger to the thing pledged.
g. In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of anima
pledged, but shall be subject to the pledge, if there is no stipulation to the contrary.

12. Obligations of the debtor-pledgor

a. To pay the debt and its interest, with expenses, in a property case, when they are due if th
pledgor is also the debtor.
b. To pay damages that the pledgee may suffer by reason of the flaws of the thing pledged, if h
was aware of such flaws but did not advise the pledgee of the same.
c. To pay for the expenses which are necessary for the preservation of the thing pledged.

13. Rights of the creditor-pledgee

a. To retain in his possession the thing pledged until the debt is paid.
b. To demand reimbursement of the expenses made for the preservation of the thing pledged.
c. To bring actions which pertain to the owner of the thing pledged in order to recover it from,
defend it against third person.
d. To use the thing pledged if he is authorized to do so, or when its use is necessary of t
preservation of the thing.
e. To cause the sale of the thing pledged at a public sale, if there is a danger of destructio
impairment or diminution of value of the thing pledged without his fault.
f. To collect and receive the amount due if the thing pledged is a credit which becomes due befo
it is redeemed, and to apply the same to the payment of his claim.
g. To sell the thing pledged upon default of the debtor.
h. To appropriate the thing pledged in case the thing pledged is not sold in at least two pub
auctions.
i. To exercise the right of choice in selecting among the things pledged that one that be sold
public auction in satisfaction of the secured debt.

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14. Obligations of creditor-pledgee
a. To take care of the thing pledged with the diligence of a good father of a family.
b. To be liable for the loss or deterioration of the thing pledged unless it is due to a fortuito
event.
c. Not to deposit the thing pledged with a third person unless ordered by the court.
d. To be responsible for the acts of his agents or employees with respect to the thing pledged.
e. Not to use the thing pledged except when he is authorized by the owner or when the use of th
thing is necessary for its preservation.
f. To deliver to the debtor the surplus after paying his claim from what he has collected on a cre
that was pledged and which has become due before it is redeemed.
g. If the pledge earns or produces fruits, income, dividends, or interests, the creditor sh
compensate what he receives with those which are owing him; but if none are owing him,
insofar as the amount may exceed that which is due, he shall apply it to the principal. Unle
there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of th
right pledged.

15. Instances when a third person who pledges his own movable property to secure the debt
another shall be released from liability
a. If the creditor voluntarily accepts immovable or other property in payment of the debt even if t
creditor thereafter loses the same by eviction.
b. If an extension of time is granted to the debtor by the creditor without pledgor’s consent.
c. If through some act of the creditor, the pledgor cannot be subrogated to the rights, mortgag
and preferences of the creditor.
d. If the thing pledged is deteriorated on the fault of the pledgee.

16. Modes of extinguishment of a contract of pledge

a. Indirect Mode of Extinguishment

i. When the principal obligation or contract of loan secured by the contract of pledge
extinguished.

b. Direct Modes of Extinguishment of contract of pledge that do not extinguish the secur
 contract of loan
i. Return by the pledgee of the thing pledged to the pledgor or owner.
ii. Renunciation or abandonment in writing by the pledgee of the contract of pledge.

c. Direct Modes of Extinguishment of contract of pledge that also extinguish the secur
contract of loan

i. Sale of the thing pledged regardless of the net proceeds of the sale.

1. Rule in case of deficiency

a. The pledgee can never recover the deficiency despite stipulation
recovery. Any stipulation for recovery of deficiency is null and void.

2. Rule in case of excess

a. The pledgee is generally entitled to the excess in the absence
stipulation to the contrary.

ii. Appropriation of the thing pledged by the pledgee if the thing pledged is not sold in
least two public auctions.

17. Null and void stipulations in a contract of pledge

I. A stipulation which provides that the pledge is not extinguished by the return of the thing pledged.
II. A stipulation allowing the automatic appropriation by the pledgee of the thing pledged in case
default of the debtor.
III. A stipulation for the recovery of deficiency in case the proceeds from the sale of the thing pledged
less than the amount of the obligation.

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18. Legal Pledge is a type of pledge which refers to the right of a person to retain a thing until he receive
payment of his claim.

19. Examples of legal pledge

a. A possessor in good faith may retain the movable upon which he has incurred necessary a
useful expenses until he has been reimbursed therefore.
b. He who has executed work upon movable has a right to retain it by way of pledge until he
paid.
c. The depositary may retain the thing deposited until the full payment of what may have been d
from him by reason of the deposit.

20. Contract of or Conventional pledge vs. Legal pledge

a. The deficiency in foreclosure sale in contract of pledge can never be recovered by the pledge
but the deficiency in public sale in legal pledge can be recovered by the creditor.
b. The excess in foreclosure sale in contract of pledge will generally go to the pledgee in t
absence of stipulation to the contrary but the excess in the public sale in legal pledge will go
the debtor.

21. Real Estate Mortgage is a contract whereby the debtor or third person secures to the creditor t
fulfillment of a principal obligation, specially subjecting to such security immovable property or re
rights over immovable property in case the principal obligation is not complied with at the tim
stipulated.

22. Contracting Parties in a Contract of Real Estate Mortgage

a. Mortgagor refers to the person who uses his real property as collateral for the principal contra
of loan.
b. Mortgagee refers to the person whose loan receivable is secured by the real property.

23. Essential requisites of a contract of real estate mortgage

a. That it be constituted to secure the fulfillment of a principal obligation or contract of loan.
b. That the mortgagor be the absolute owner of the thing mortgaged.
c. That the person constituting the mortgage must have the free disposal of his property, and
the absence thereof, that he be legally authorized for the purpose.

24. Important characteristics of real estate mortgage

a. Accessory – It cannot exist without a principal obligation such as contract of loan.

b. Indivisible – It creates a lien on the whole or all of the properties mortgaged, which li
continues until the obligation it secures has been fully paid.
c. Inseparable – It subjects the property upon which it is imposed, whoever the possessor m
be, to the fulfillment of the obligation for whose security it was constituted.
d. Real right – It creates a lien on the property mortgaged.
e. Consensual contract – It is perfected by mere consent.
f. Nominate – It has a name given to it by law.

25. Types of real estate mortgage

a. Conventional real estate mortgage is one which is created by the agreement of the parties.
b. Legal mortgage is one executed pursuant, to an express requirement of a provision of law.
c. Equitable mortgage is one which although lacks certain formality, form or words or oth
requisites provided by statute, but the facts show the intention of the parties to charge the re
property as a security for a debt and contains nothing contrary to law. The remedy of the injur
 property as a security for a debt and contains nothing contrary to law. The remedy of the injur
party is to file an action for reformation of instrument.

26. Subject matter of contract of real estate mortgage

a. Immovable property
b. Rights on immovable property

27. Formality of a contract of real estate mortgage for validity vs. Formality of a contract of re
estate mortgage to bind third persons - Contract of real estate mortgage may be in any form for
validity to bind contracting parties because it is a consensual contract perfected by mere consent but
must be notarized and registered with Registry of Deeds in order to affect or to bind third persons.

28. Foreclosure refers to the remedy available to the mortgagee by which he subjects the proper
mortgaged to the satisfaction of the obligation secured when the principal obligation is not paid whe
due or when there is any violation of any condition, stipulation or warranty by the mortgagor.

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29. Types of Foreclosure of Real Estate Mortgage

a. Judicial Foreclosure is a type of foreclosure made through the filling of a petition in cou
under Rule 68 of Rules of Court and availed of when the deed of real estate mortgage does n
provide for special power of attorney (SPA) authorizing the mortgagee-creditor to foreclosure
extrajudicially.
 i. Equity of Redemption – The judgment debtor/mortgagor has a period of not less th
90 days nor more than 120 days from the entry of judgment to pay his liability to preve
the public sale of his mortgaged property.

ii. Right of Redemption – The judgment debtor/mortgagor is not generally allowed

repurchase the property sold in public auction in judicial foreclosure unless a special la
allows. As an exception to the general rule, a mortgagor in judicial foreclosure made
mortgagee-bank may still exercise the right of redemption in accordance to t
redemption period provided by General Banking Law.

b. Extrajudicial Foreclosure is a type of foreclosure made in compliance with Act No. 3135 a
available when there is a stipulation in the mortgage contract that the mortgage may
foreclosed extrajudicially or when such foreclosure sale is made under a special power
attorney inserted in the contract of mortgage.

i. Equity of Redemption – The mortgagor may pay his obligation to prevent the pub
sale of his property in the grace period given by the mortgagee.

ii. Right of Redemption – The mortgagor may repurchase the property sold in pub
auction within a period of:

1. Generally within 12 months or 1 year from public sale (Act No. 3135 - R
Estate Mortgage Law)
2. Exceptionally within 3 months or 90 days from public sale if the mortgagee is
bank and the mortgagor is a juridical or artificial person. (General Banking Law

30. Rules in deficiency or excess in foreclosure of real estate mortgage

a. Rule in case deficiency

i. The mortgagee can recover the deficiency in the absence of stipulation to the contrary.

b. Rule in case of excess

i. The mortgagor is entitled to the excess in the absence of stipulation to the contrary.

31. Null and void stipulations in a contract of mortgage

I. A stipulation which provides for tipo or upset price in the foreclosure sale of mortgaged property.
II. A stipulation allowing the automatic appropriation by the mortgagee of the thing pledged in case
default of the debtor.
III. A stipulation prohibiting the mortgagor from disposing or selling his property.

32. Chattel mortgage is a conditional sale of personal property as security for the payment of a debt,
the performance of some other obligation specified therein, the condition being that the sale shall b
void upon the seller paying to the purchaser a sum of money or doing some other act named. If th
condition is performed according to its terms the mortgage and sale immediately become void, and t
mortgagee is thereby divested of his title.

33. Contracting Parties in a Contract of Chattel Mortgage

a. Mortgagor refers to the person who uses his personal property as collateral for the princip
contract of loan.
b. Mortgagee refers to the person whose loan receivable is secured by the personal property.

34. Essential requisites of contract of chattel mortgage

a. That it be constituted to secure the fulfillment of a principal obligation or contract of loan.
b. That the mortgagor be the absolute owner of the thing mortgaged.
c. That the person constituting the mortgage must have the free disposal of his property, and
the absence thereof, that he be legally authorized for the purpose.
d. That the document in which the mortgage appears be recorded in the Chattel Mortga
Register.
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35. Important characteristics Contract of chattel mortgage

a. Accessory – It cannot exist without a principal obligation such as contract of loan.
b. Indivisible – It creates a lien on the whole or all of the properties mortgaged, which li
continues until the obligation it secures has been fully paid.
c. Inseparable – It subjects the property upon which it is imposed, whoever the possessor m
be, to the fulfillment of the obligation for whose security it was constituted.
d. Formal contract – It is perfected by the registration to chattel mortgage register.
e. Nominate – It has a name given to it by law.

36. Subject matter of chattel mortgage

a. Personal property
b. Movable property

37. Rules for the place of registration of Chattel Mortgage

a. As a general rule, it must be recorded in the Chattel Mortgage Register of the province whe
the mortgagor resides.
b. If must be recorded in the both Chattel Mortgage Registers of the provinces where t
mortgagor resides and where the property is located if the property is not located in the provin
of domicile of the mortgagor.
c. If the mortgagor is domiciled outside the Philippines, the mortgage must be registered in t
Chattel Mortgage Register where the property is located.
d. With respect to motor vehicles, it must be registered Chattel Mortgage Register of the provin
where the mortgagor resides and in Land Transportation Office where the motor vehicle
registered.
e. With respect to shares of stock, Chattel Mortgage Register in the province where t
 corporation has its principal office and in the domicile of the mortgagor.
f. With respect to vessel, Bureau of Customs at port of entry.

38. Rules in deficiency or excess in foreclosure of chattel mortgage

a. Rule in case of deficiency
i. The mortgagee can recover the deficiency in the absence of stipulation to the contrary.
b. Rule in case of excess
i. The mortgagor is entitled to the excess in the absence of stipulation to the contrary.

39. Antichresis is a contract whereby the creditor acquires the right to receive the fruits of an immovab
of his debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter
the principal of his credit. It is a formal contract perfected by the execution of the written instrume
containing the antichretic agreement together with the amount of the principal and interest of the loan

40. Contracting Parties in a Contract of Antichresis

a. Antichretic debtor refers to the person who uses his real property as collateral for the princip
contract of loan.
b. Antichretic creditor refers to the person whose loan receivable is secured by the real propert

41. Important characteristics Contract of Antichresis

a. Accessory – It cannot exist without a principal obligation such as contract of loan.
b. Indivisible – It creates a lien on the whole or all of the properties mortgaged, which li
continues until the obligation is secures has been fully paid.
c. Inseparable – It subjects the property upon which it is imposed, whoever the possessor m
be, to the fulfillment of the obligation for whose security it was constituted.
d. Formal contract – It is perfected by the written agreement on the contract of antichres
including the principal and interest of the loan.
e. Nominate – It has a name given to it by law.

42. Subject matter of contract of Antichresis

a. Land
b. Immovable Property

43. Principles of Contract of Antichresis

a. The basis for application of the fruits to the interests and principal is the actual market value
the fruits at the time of application.
b. In the absence of stipulation to the contrary, the antichretic creditor shall generally be liable
pay the real property taxes and expenses necessary for the repair and preservation of the re
property used as collateral in contract of antichresis by applying the fruits harvested.
c. Upon non-payment or default of the antichretic debtor of the principal obligation, the antichre
creditor cannot automatically appropriate the real property used as security because it is pactu
commissorium which is contrary to law and public policy.

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 Comparison of Pledge, Real Mortgage, Chattel Mortgage and Antichresis
Basis of Conventional Pledge Real Estate Chattel Mortgage Antichresis
Difference Mortgage
Type of Real – By delivery of Consensual – By Formal – By Formal – By execut
Contract as to object mere consent registration of the of written agreem
perfection contract of chattel of antichresis w
mortgage in the statement of
Chattel Mortgage amount of princ
Registry and interest of
contract of loan.
To bind third Must be in a public Must be registered in Must be Must be registered
persons instrument showing the Registry of accompanied by the Registry
a description of the Property affidavit of good faith Property
thing pledged and
the date of the
pledge
Object of Movable or personal Immovable or real Movable or personal Immovable or r
contract property property property property
Prohibition Applicable Applicable Applicable Applicable
against
pactum
commissorium
Indivisibility of Indivisible Indivisible Indivisible Indivisible
the contract
Remedy of Foreclose security Foreclose security Foreclose security Gather the fruits of
Creditor in and sell the and sell the collateral and sell the collateral land and apply the
case of collateral in public in public action with in public action with market value of
Debtor’s action with the the proceeds to be the proceeds to be fruits at the time
default proceeds to be applied to the unpaid applied to the unpaid application first to
applied to the obligation obligation interest of the lo
unpaid obligation and the remainder
the principal of
loan.
As to Deficiency can Deficiency can be Deficiency can be Deficiency can
deficiency never be recovered recovered unless recovered unless recovered thro
even if there is a there is stipulation to there is stipulation to continuous gather
stipulation. Any the contrary. the contrary. (Except of fruits.
stipulation for in case of personal
recovery of property sold in
deficiency is null and installment under
void. (Exception – Recto Law)
Legal Pledge)
As to excess Excess belongs to Excess belongs to Excess belongs to Excess fruits belo
of proceeds the pledgee-creditor the mortgagor unless the mortgagor unless to the owner of
unless there is there is stipulation to there is stipulation to land or antichr
stipulation to the the contrary. the contrary. debtor.
contrary. (Exception
– Legal Pledge)
As to The pledgee may The mortgagee The mortgagee The antichr
appropriation appropriate the thing cannot appropriate cannot appropriate creditor can
of property pledged if the same the thing mortgaged. the thing mortgaged. appropriate the la
is not sold in two used as collateral
public auctions. may sell the fruits
be applied to inter
and principal of loan
As to selling The pledgor may The mortgagor can The mortgagor can The antichretic deb
of property only sell the property sell the property. Any sell the property. Any can sell the land.
after the with the consent of stipulation prohibiting stipulation prohibiting
pledge or the pledgee. the mortgagor to sell the mortgagor to sell
mortgage by the property is void. the property is void.
the owner.

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 Comparison of Special Contracts
Name of Contract of Contract of Loan or Contract of Contract of Lease
Contract Commodatum Mutuum Deposit
Definition It is a contract It is a contract It is a contract It is a cont
wherein one of the wherein one of the wherein a person wherein one pa
parties delivers to parties delivers to receives a thing binds himself to g
another, either another money or belonging to another the enjoym
something not other consumable another, with the or use of a thing fo
consumable so that thing, upon the obligation of safely price certain, and fo
the latter may use condition that the keeping it and of period which may
the same for a same amount of the returning the same definite or indefinite
certain time and same kind and quality and the the
return it. shall be paid. safekeeping of the
thing delivered is
the principal
purpose of the
contract.

Subject matter 1. Non-consumable 1. Money 1. Consumable 1. Real property

thing 2. Consumable thing thing 2. Personal propert
2. Consumable thing 2. Non-consumable
but only for purpose thing
of exhibit
Characteristics 1. Real 1. Real 1. Real 1. Consensual
2. Essentially 2. Onerous if there is 2. Onerous if there 2. Onerous
gratuitous interest or gratuitous if depositary fee or
there is no interest. gratuitous if for free.
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44. Agency is a contract, whereby a person binds himself to render some service or to do something
representation or in behalf of another, with the consent and authority of the latter.

45. Contracting Parties in a Contract of Agency

a. Principal refers to the person who gives trust and confidence to the other party.
b. Agent refers to the person who acts or represents the other party.

46. Characteristics of a contract of agency

a. Principal – It can stand by itself.
b. Preparatory – It is a means by which other contracts may be entered into.
c. Consensual – It is perfected by mere consent.
d. Onerous – It is presumed to be onerous unless declared to be gratuitous.
e. Nominate – It has a name given to it by law.
f. Bilateral – The parties are bound reciprocally to it by law.
g. Commutative – The parties give and receive almost equivalent values.

47. Contract of agency may be express or implied.

 a. Circumstances that may imply existence of contract of agency:
a. Acts of the principal
b. Silence of the principal
c. Lack of action of the principal
d. Failure of the principal to repudiate the agency knowing that another person is acting in h
behalf without authority.

48. Principles on the authority of agent

a. If the agency is couched in general terms, only general power of attorney is required even if t
principal should state that he withholds no power or that the agent may execute acts he m
consider appropriate or even though the agency should authorize a general or unlimit
management.
b. If the agent exceeded his authority, the contract is unenforceable against the principal unle
ratified by the latter.

49. Acts requiring special power of appointment to the agent (Acts of Strict Ownership or Str
Dominion)
a. To make such payments as are not usually considered as acts of administration
b. To effect novations which put an end to obligations already in existence at the time the agency
was constituted
c. To compromise, to submit questions to arbitration, to renounce the right to appeal from a
judgment, to waive objections to the venue of an action or to abandon a prescription already
acquired
d. To waive any obligation gratuitously
e. To enter into any contract by which the ownership of an immovable is transmitted or acquired
either gratuitously or for a valuable consideration
f. To make gifts, except customary ones for charity or those made to employees in the business
managed by the agent
g. To loan or borrow money, unless the latter act be urgent and indispensable for the preservatio
of the things which are under administration
h. To lease any real property to another person for more than one year
i. To bind the principal to render some service without compensation
j. To bind the principal in a contract of partnership
k. To obligate the principal as a guarantor or surety
l. To create or convey real rights over immovable property
m. To accept or repudiate an inheritance
n. To ratify or recognize obligations contracted before the agency
o. Any other act of strict dominion or strict ownership.

50. The acceptance by the agent of the contract of agency may be express or implied.
a. Instances of implied acceptance by agent of the agency:
a. Acts of the agent to carry out the agency.
b. Silence or inaction by the agent according to the circumstances.
c. Between persons who are absent, when the principal transmits his power to the agent, a
the latter returns it without objection.
d. Between persons who are absent, when the principal entrusts to him by letter or telegram
power of attorney with respect to the business in which he is habitually engaged as
agent, and he did not reply to the letter or telegram.

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51. Rules regarding appointment and revocation of agency
a. When a person is appointed as special agent through special information, the person appointe
will be considered a duly authorized agent with respect to the person who received the spec
information.
b. When a person is appointed as special agent through a public advertisement, the perso
appointed will be considered a duly authorized agent with respect to all persons whether or n
they read the newspaper.
c. If the announcement of the appointment is by special information, revocation shall be made al
by special information.
d. If the announcement of the appointment is by public advertisement, revocation of t
appointment shall also be made by public advertisement.

52. Basic principles of contract of agency

a. The agent must act within the scope of his authority.
b. The agent may do such acts as may be conducive to the accomplishment of the purpose of t
agency.
c. The limits of the agent’s authority shall not be considered exceeded if it has been performed in
manner more advantageous to the principal than that specified by him.
d. The agent must act in behalf of his principal and should disclose the principal.

53. Effects if the agent acts within the scope of his authority but in his (agent’s) behalf or witho
disclosing the principal
a. The principal has no right of action against the person with whom the agent has contracted.
b. The person with whom the agent has contracted has no right of action against the principal.
c. The agent is directly bound in favor of the one with whom he has contracted.
d. The contract binds the third person and the principal if the contract involves thing belonging
the principal.

54. General obligations of an agent

a. To carry out the agency unless the execution would manifestly result in loss or damage to t
principal.
b. To be liable for damages through the non-performance, the principal may suffer.
c. To finish the business already begun on the death of the principal, should delay entail a
danger.
d. To observe diligence of a good father of a family in the custody and preservation of the goods
case he declines the agency.
 case he declines the agency.

55. Special obligations of an agent

a. To advance the necessary funds if there was stipulation to that effect except when the princip
is insolvent.
b. To act in accordance with the instructions of the principal in the execution of the agency and
the absence of instructions of the principal, he shall exercise the diligence of a good father of
family.
c. To be liable for damages if there being a conflict between interest and that of the principal,
should prefer his own.
d. To lend money to the principal at current interest rate if he has been authorized to borro
money.
e. Not to borrow money of the principal at current interest rate without the principal’s consent, if t
latter has authorized him to lend principal’s money at interest.
f. To render an accounting of his transactions and to deliver to the principal whatever he m
have received by virtue of the agency, even though it may not be owing to the principal. A
obligation exempting the agent from the obligation to render an account shall be void.
g. To be liable for interest on the sums he has applied to his own use from the day on which he d
so and those which he still owes after the extinguishment of the agency.
h. To be responsible not only for fraud, but also for negligence which shall be judged with more
less right by the court.

56. Rules that shall be observed as regards to the liability of agent when he appoints a substitute
a. If the agent is not prohibited to appoint a substitute, the agent may appoint a substitute but h
shall be responsible for the acts of the substitute.
b. If the agent is authorized to appoint a substitute and the principal designated the person to b
appointed as substitute, the agent is not responsible for the acts of the substitute.
c. If the agent is authorized to appoint a substitute and the principal does not designate the perso
to be appointed as a substitute, the agent shall be liable if the person appointed as substitute
notoriously incompetent or insolvent man.
d. If the agent is prohibited to appoint a substitute, the agent cannot appoint a substitute. If h
appoints one, all the acts of the substitute shall be void against the principal.

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57. The general rule is that the agent who acts in the name of the principal shall not be liable to t
party with whom he contracts. The following are the instances wherein the agent is persona
liable for the contract he entered into for the principal:
a. If the agent expressly binds himself.
b. If the agent exceeds the limits of his authority without giving the other party sufficient notice
his powers.
c. If the agent acts without the authority of the principal.

58. Rights and obligations of third persons who have contracted with an agent who has exceed
his authority
a. As to third persons, an act is deemed to have been performed within the scope of the agen
authority, if such act is within the power of attorney, as written, even if the agent has in fa
exceeded the limits of his authority according to an understanding between the principal and t
agent.
b. A third person cannot set up the fact that the agent has exceeded his powers, if the princip
has ratified or has signified his willingness to ratify the agent’s acts.
c. A third person may require the agent to present his power of attorney or the instructions
regards the agency.
d. Private or secret orders and instructions of the principal do not prejudice third persons who ha
relied upon the power of attorney or instructions shown them.

59. Commission agent or Consignee is a person who buys and sells goods or chattels consigned
delivered to him by his principal, for a compensation known as commission.

60. The following are the obligations of a commission agent or consignee

a. To be responsible for the goods received by him in the terms and conditions and as described
the consignment unless upon receiving them he should make a written statement of the dama
and deterioration suffered by the same.
b. To distinguish by countermarks goods of the same kind and mark which belong to differe
owners, and designate the merchandise respectively belonging to each principal.
c. Not to sell the goods on credit.
d. To bear the risk of collection and to pay the principal the proceeds of the same on the sam
terms agreed upon with the purchaser if he receives on a sale, in addition to the ordina
commission, another called a guarantee commission.
e. To be liable for damages if he does not collect the credits of the principal at the time th
become due and demandable, unless he proves that he exercised due diligence for th
purpose.

61. Obligations of the principal in the contract of agency

a. To comply with all the obligations which the agent may have contracted within the scope of h
authority.
b. To be bound for any obligation wherein the agent exceeded his power if he ratifies su
obligation expressly or tacitly.
c. To be solidarily liable with the agent if he allowed the latter to act as though he had full powe
when the agent exceeded his authority.
d. To advance to the agent the sums necessary for the execution of the agency should the age
so request.
e. To reimburse the agent the sums advanced by the seller even if the business or undertaki
was not successful provided that the agent is free from fault including the interest on the sum.
f. To indemnify the agent for all damages which the execution of the agency may have caused t
latter, without the fault or negligence on his part.

62. Degree of liability of two or more agents if they have been appointed simultaneously
a. Joint or proportionate unless agreed otherwise.
 63. Degree of liability of two or more persons who have appointed a single agent to the sam
transaction
a. Solidary unless agreed otherwise.

64. Instances wherein the principal shall not be liable for the expenses incurred by the agent
a. When the agent acted in contravention of the principal’s instructions and the principal does n
himself of the benefits derived from the contract.
b. When the expenses were due to the fault of the agent.
c. When the agent incurred them with knowledge that an unfavorable result would ensue if t
principal was not aware thereof.
d. When it was stipulated that the expenses would be borne by the agent, or that the latter wou
be allowed only a certain amount.

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65. Right to retain in pledge the property or legal pledge is the right of the agent over the object of t
agency until the principal reimburses him for the sums necessary for the execution of the agency whi
he had advanced and until the principal pays him the indemnity for all damages in the execution of th
agency.

66. Modes of extinguishment of contract of agency: (EDWARD)

a. E – Expiration of the period for which the agency was constituted.
b. D – Death, Civil interdiction, Insanity or Insolvency of the principal or agent.
c. W – Withdrawal of the agent.
d. A – Accomplishment of the object or purpose of the agency.
 e. R – Revocation of the agency by the principal.
f. D – Dissolution of the firm or corporation which entrusted or accepted the agency.

67. Revocation refers to the act of the principal of terminating the agency at will. The principal may revo
the agency at will and compel the agent to return the document evidencing the agency. The revocatio
may be express or implied. The following acts are considered implied revocation by principal
the contract of agency:
a. When a new agent is appointed for the same business or transaction.
b. If the principal directly manages the business entrusted to the agent by dealing directly with th
persons.
c. When a special power of attorney is granted to an agent with a general power of attorney.

68. As a general rule, the principal may revoke the contract of agency at will. The following are t
exceptional instances when contract of agency may not be revoked at will by the principal
a. If a bilateral contract depends upon an agency.
b. If the agency is a means of fulfilling an obligation already contracted.
c. If a partner is appointed as a manager of the partnership in the articles or contract of partnersh
and his removal from the management is unjustifiable.
d. If the agency is coupled with interest.

69. Principles concerning revocation of the agency by the principal

a. If the agency has been entrusted for the purpose of contracting with specified persons, t
principal must give a timely notice of the revocation to such third persons.
b. If the agent had general powers, he was entrusted to contract with general public or any perso
revocation of the agency does not prejudice third persons who acted in good faith and witho
knowledge of the revocation.
c. Notice of revocation of general powers in a newspaper of general circulation is sufficie
warning to third persons.
d. Revocation binds third persons who had knowledge thereof.

70. Principles concerning withdrawal by the Agent in the Agency

a. The agent must give notice to the principal of the withdrawal.
b. The agent must indemnify the principal for any damage the principal suffered by reason of t
agent's withdrawal.
c. The agent shall not be liable for withdrawal if it is based upon the impossibility of continuing t
performance of the agency without grave detriment to himself.
d. The agent who withdraws should take care of the object of the agency with diligence of goo
father of a family whether his reason for withdrawal is valid or invalid.

71. As a general rule, the death of the principal extinguishes the agency. However, the agency is n
extinguished by the death of the principal in the following exceptional instances
a. If the agency has been constituted in the common interest of the principal and the agent.
b. If the agency has been constituted in the interest of a third person who has accepted th
stipulation in his favor.
c. In so far as to finish the business already begun on the death of the principal, should del
entail any danger.

72. Status of the acts done by the agent after the death of the principal or other cause
extinguishment of the agency
a. The acts are valid if done without the knowledge of the death of the principal or of any oth
cause of extinguishment and shall be fully effective with respect to third persons who may ha
contracted in good faith.

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 REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

Law on Sales

1. Contract of Sales is a contract whereby one of the contracting parties, known as the seller or vendo
obligates himself to transfer the ownership of and to deliver a determinate thing, and the other part
known as the buyer or vendee, obligates himself to pay therefore a price certain in money or
equivalent.

2. Contracting Parties in a Contract of Sale

a. Seller or Vendor refers to the person who obligates himself to transfer the ownership of and
deliver a determinate thing.
b. Buyer or Vendee refers to the person who obligates himself to pay therefore a price certain
money or its equivalent.

3. Essential elements of the contract of sale – These are elements necessary for validity a
perfection of contract of sale.

a. Subject matter which should be a determinate thing

i. Requisites of subject matter of a contract of sale

1. It must be within the commerce of men.

2. It must be not contrary to law, morals, good customs, public order or pub
policy.
3. It must be determinate.
 4. It must be owned by the vendor at the time of delivery.

ii. Things that may become the subject matter of a contract of sale

1. Existing goods owned or possessed by the seller.

2. Goods to be manufactured, raised or acquired by the seller after the perfection
the contract of sale or “future goods” subject to the condition that it mu
materialize. If the future things do not materialize, the contract of sale w
become inefficacious or void for absence of subject matter which is an essent
element of contract of sale.
3. Goods whose acquisition by the seller depends upon the contingency which m
or may not happen.
4. Things subject to resolutory condition which if happens, the contract of sale w
be extinguished.
5. Hereditary rights
6. Undivided interest in co-owned property which will result to co-ownership on t
part of buyer and seller.

iii. Things not allowed to become the subject matter of a contract of sale making t
contract null and void

1. Those contrary to law, morals or public policy.

2. Those outside the commerce of men.
3. Future inheritance
4. Vain hope

iv. Distinctions between emptio rei speratae and emptio spei

1. Emptio rei speratae is the sale of future thing while emptio spei is a sale
hope or expectancy.
2. Sale of future harvest is emptio rei speratae while sale of lottery ticket No. 1
is emptio spei.
3. In emptio rei speratae the thing expected will definitely come into existence, b
its quality or quantity unknown; while in emptio spei it is not certain that the thi
will exist much less its quantity or quality.
4. Emptio rei speratae is subject to the condition that the thing should exist, so th
if it does not, there will be no contract of sale by reason of the absence of
essential element of subject matter while emptio spei produces effects ev
though the thing does not come into existence because the subject matter is t
hope itself.
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 Comparison of Pledge, Real Mortgage, Chattel Mortgage and Antichresis
Basis of Conventional Pledge Real Estate Chattel Mortgage Antichresis
Difference Mortgage
Type of Real – By delivery of Consensual – By Formal – By Formal – By execution
Contract as to object mere consent registration of the of written agreement
perfection contract of chattel of antichresis with
mortgage in the statement of the
Chattel Mortgage amount of principal
Registry and interest of the
contract of loan.
To bind third Must be in a public Must be registered in Must be Must be registered in
persons instrument showing the Registry of accompanied by the Registry of
a description of the Property affidavit of good faith Property
thing pledged and
the date of the
pledge
Object of Movable or personal Immovable or real Movable or personal Immovable or real
contract property property property property
Prohibition Applicable Applicable Applicable Applicable
against
pactum
commissorium
Indivisibility of Indivisible Indivisible Indivisible Indivisible
the contract
Remedy of Foreclose security Foreclose security Foreclose security Gather the fruits of the
Creditor in and sell the and sell the collateral and sell the collateral land and apply the fair
case of collateral in public in public action with in public action with market value of the
Debtor’s action with the the proceeds to be the proceeds to be fruits at the time of
default proceeds to be applied to the unpaid applied to the unpaid application first to the
applied to the obligation obligation interest of the loan
unpaid obligation and the remainder to
the principal of the
loan.
As to Deficiency can Deficiency can be Deficiency can be Deficiency can be
deficiency never be recovered recovered unless recovered unless recovered through
even if there is a there is stipulation to there is stipulation to continuous gathering
stipulation. Any the contrary. the contrary. (Except of fruits.
stipulation for in case of personal
recovery of property sold in
deficiency is null and installment under
void. (Exception – Recto Law)
Legal Pledge)
As to excess Excess belongs to Excess belongs to Excess belongs to Excess fruits belongs
of proceeds the pledgee-creditor the mortgagor unless the mortgagor unless to the owner of the
unless there is there is stipulation to there is stipulation to land or antichretic
stipulation to the the contrary. the contrary. debtor.
contrary. (Exception
– Legal Pledge)
As to The pledgee may The mortgagee The mortgagee The antichretic
appropriation appropriate the thing cannot appropriate cannot appropriate creditor cannot
of property pledged if the same the thing mortgaged. the thing mortgaged. appropriate the land
is not sold in two used as collateral but
public auctions. may sell the fruits to
be applied to interest
and principal of loan.
As to selling The pledgor may The mortgagor can The mortgagor can The antichretic debtor
of property only sell the property sell the property. Any sell the property. Any can sell the land.
after the with the consent of stipulation prohibiting stipulation prohibiting
pledge or the pledgee. the mortgagor to sell the mortgagor to sell
mortgage by the property is void. the property is void.
the owner.
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 Comparison of Special Contracts
Name of Contract of Contract of Loan or Contract of Contract of Lease
Contract Commodatum Mutuum Deposit
Definition It is a contract It is a contract It is a contract It is a contract
wherein one of the wherein one of the wherein a person wherein one party
parties delivers to parties delivers to receives a thing binds himself to give
another, either another money or belonging to another the enjoyment
something not other consumable another, with the or use of a thing for a
consumable so that thing, upon the obligation of safely price certain, and for a
the latter may use condition that the keeping it and of period which may be
the same for a same amount of the returning the same definite or indefinite.
certain time and same kind and quality and the the
return it. shall be paid. safekeeping of the
thing delivered is
the principal
purpose of the
contract.

Subject matter 1. Non-consumable 1. Money 1. Consumable 1. Real property

thing 2. Consumable thing thing 2. Personal property
2. Consumable thing 2. Non-consumable
but only for purpose thing
of exhibit
Characteristics 1. Real 1. Real 1. Real 1. Consensual
2. Essentially 2. Onerous if there is 2. Onerous if there 2. Onerous
gratuitous interest or gratuitous if depositary fee or
there is no interest. gratuitous if for free.
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44. Agency is a contract, whereby a person binds himself to render some service or to do something in
representation or in behalf of another, with the consent and authority of the latter.

45. Contracting Parties in a Contract of Agency

a. Principal refers to the person who gives trust and confidence to the other party.
b. Agent refers to the person who acts or represents the other party.

46. Characteristics of a contract of agency

a. Principal – It can stand by itself.
b. Preparatory – It is a means by which other contracts may be entered into.
c. Consensual – It is perfected by mere consent.
d. Onerous – It is presumed to be onerous unless declared to be gratuitous.
e. Nominate – It has a name given to it by law.
f. Bilateral – The parties are bound reciprocally to it by law.
g. Commutative – The parties give and receive almost equivalent values.

47. Contract of agency may be express or implied.

a. Circumstances that may imply existence of contract of agency:
a. Acts of the principal
b. Silence of the principal
c. Lack of action of the principal
d. Failure of the principal to repudiate the agency knowing that another person is acting in his
behalf without authority.

48. Principles on the authority of agent

a. If the agency is couched in general terms, only general power of attorney is required even if the
principal should state that he withholds no power or that the agent may execute acts he may
consider appropriate or even though the agency should authorize a general or unlimited
management.
b. If the agent exceeded his authority, the contract is unenforceable against the principal unless
ratified by the latter.

49. Acts requiring special power of appointment to the agent (Acts of Strict Ownership or Strict
Dominion)
a. To make such payments as are not usually considered as acts of administration
b. To effect novations which put an end to obligations already in existence at the time the agency
was constituted
c. To compromise, to submit questions to arbitration, to renounce the right to appeal from a
judgment, to waive objections to the venue of an action or to abandon a prescription already
acquired
d. To waive any obligation gratuitously
e. To enter into any contract by which the ownership of an immovable is transmitted or acquired
either gratuitously or for a valuable consideration
f. To make gifts, except customary ones for charity or those made to employees in the business
managed by the agent
g. To loan or borrow money, unless the latter act be urgent and indispensable for the preservation
of the things which are under administration
h. To lease any real property to another person for more than one year
i. To bind the principal to render some service without compensation
j. To bind the principal in a contract of partnership
k. To obligate the principal as a guarantor or surety
l. To create or convey real rights over immovable property
m. To accept or repudiate an inheritance
n. To ratify or recognize obligations contracted before the agency
o. Any other act of strict dominion or strict ownership.

50. The acceptance by the agent of the contract of agency may be express or implied.
a. Instances of implied acceptance by agent of the agency:
a. Acts of the agent to carry out the agency.
b. Silence or inaction by the agent according to the circumstances.
c. Between persons who are absent, when the principal transmits his power to the agent, and
the latter returns it without objection.
d. Between persons who are absent, when the principal entrusts to him by letter or telegram a
power of attorney with respect to the business in which he is habitually engaged as an
agent, and he did not reply to the letter or telegram.
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51. Rules regarding appointment and revocation of agency
a. When a person is appointed as special agent through special information, the person appointed
will be considered a duly authorized agent with respect to the person who received the special
information.
b. When a person is appointed as special agent through a public advertisement, the person
appointed will be considered a duly authorized agent with respect to all persons whether or not
they read the newspaper.
c. If the announcement of the appointment is by special information, revocation shall be made also
by special information.
d. If the announcement of the appointment is by public advertisement, revocation of the
appointment shall also be made by public advertisement.

52. Basic principles of contract of agency

a. The agent must act within the scope of his authority.
b. The agent may do such acts as may be conducive to the accomplishment of the purpose of the
agency.
c. The limits of the agent’s authority shall not be considered exceeded if it has been performed in a
manner more advantageous to the principal than that specified by him.
d. The agent must act in behalf of his principal and should disclose the principal.

53. Effects if the agent acts within the scope of his authority but in his (agent’s) behalf or without
disclosing the principal
a. The principal has no right of action against the person with whom the agent has contracted.
b. The person with whom the agent has contracted has no right of action against the principal.
c. The agent is directly bound in favor of the one with whom he has contracted.
d. The contract binds the third person and the principal if the contract involves thing belonging to
the principal.

54. General obligations of an agent

a. To carry out the agency unless the execution would manifestly result in loss or damage to the
principal.
b. To be liable for damages through the non-performance, the principal may suffer.
c. To finish the business already begun on the death of the principal, should delay entail any
danger.
d. To observe diligence of a good father of a family in the custody and preservation of the goods in
case he declines the agency.

55. Special obligations of an agent

a. To advance the necessary funds if there was stipulation to that effect except when the principal
is insolvent.
b. To act in accordance with the instructions of the principal in the execution of the agency and in
the absence of instructions of the principal, he shall exercise the diligence of a good father of a
family.
c. To be liable for damages if there being a conflict between interest and that of the principal, he
should prefer his own.
d. To lend money to the principal at current interest rate if he has been authorized to borrow
money.
e. Not to borrow money of the principal at current interest rate without the principal’s consent, if the
latter has authorized him to lend principal’s money at interest.
f. To render an accounting of his transactions and to deliver to the principal whatever he may
have received by virtue of the agency, even though it may not be owing to the principal. Any
obligation exempting the agent from the obligation to render an account shall be void.
g. To be liable for interest on the sums he has applied to his own use from the day on which he did
so and those which he still owes after the extinguishment of the agency.
h. To be responsible not only for fraud, but also for negligence which shall be judged with more or
less right by the court.

56. Rules that shall be observed as regards to the liability of agent when he appoints a substitute
a. If the agent is not prohibited to appoint a substitute, the agent may appoint a substitute but he
shall be responsible for the acts of the substitute.
b. If the agent is authorized to appoint a substitute and the principal designated the person to be
appointed as substitute, the agent is not responsible for the acts of the substitute.
c. If the agent is authorized to appoint a substitute and the principal does not designate the person
to be appointed as a substitute, the agent shall be liable if the person appointed as substitute is
notoriously incompetent or insolvent man.
d. If the agent is prohibited to appoint a substitute, the agent cannot appoint a substitute. If he
appoints one, all the acts of the substitute shall be void against the principal.
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57. The general rule is that the agent who acts in the name of the principal shall not be liable to the
party with whom he contracts. The following are the instances wherein the agent is personally
liable for the contract he entered into for the principal:
a. If the agent expressly binds himself.
b. If the agent exceeds the limits of his authority without giving the other party sufficient notice of
his powers.
c. If the agent acts without the authority of the principal.

58. Rights and obligations of third persons who have contracted with an agent who has exceeded
his authority
a. As to third persons, an act is deemed to have been performed within the scope of the agent’s
authority, if such act is within the power of attorney, as written, even if the agent has in fact
exceeded the limits of his authority according to an understanding between the principal and the
agent.
b. A third person cannot set up the fact that the agent has exceeded his powers, if the principal
has ratified or has signified his willingness to ratify the agent’s acts.
c. A third person may require the agent to present his power of attorney or the instructions as
regards the agency.
d. Private or secret orders and instructions of the principal do not prejudice third persons who have
relied upon the power of attorney or instructions shown them.

59. Commission agent or Consignee is a person who buys and sells goods or chattels consigned or
delivered to him by his principal, for a compensation known as commission.

60. The following are the obligations of a commission agent or consignee

a. To be responsible for the goods received by him in the terms and conditions and as described in
the consignment unless upon receiving them he should make a written statement of the damage
and deterioration suffered by the same.
b. To distinguish by countermarks goods of the same kind and mark which belong to different
owners, and designate the merchandise respectively belonging to each principal.
c. Not to sell the goods on credit.
d. To bear the risk of collection and to pay the principal the proceeds of the same on the same
terms agreed upon with the purchaser if he receives on a sale, in addition to the ordinary
commission, another called a guarantee commission.
e. To be liable for damages if he does not collect the credits of the principal at the time they
become due and demandable, unless he proves that he exercised due diligence for that
purpose.

61. Obligations of the principal in the contract of agency

a. To comply with all the obligations which the agent may have contracted within the scope of his
authority.
b. To be bound for any obligation wherein the agent exceeded his power if he ratifies such
obligation expressly or tacitly.
c. To be solidarily liable with the agent if he allowed the latter to act as though he had full powers
when the agent exceeded his authority.
d. To advance to the agent the sums necessary for the execution of the agency should the agent
so request.
e. To reimburse the agent the sums advanced by the seller even if the business or undertaking
was not successful provided that the agent is free from fault including the interest on the sum.
f. To indemnify the agent for all damages which the execution of the agency may have caused the
latter, without the fault or negligence on his part.

62. Degree of liability of two or more agents if they have been appointed simultaneously
a. Joint or proportionate unless agreed otherwise.

63. Degree of liability of two or more persons who have appointed a single agent to the same
transaction
a. Solidary unless agreed otherwise.

64. Instances wherein the principal shall not be liable for the expenses incurred by the agent
a. When the agent acted in contravention of the principal’s instructions and the principal does not
himself of the benefits derived from the contract.
b. When the expenses were due to the fault of the agent.
c. When the agent incurred them with knowledge that an unfavorable result would ensue if the
principal was not aware thereof.
d. When it was stipulated that the expenses would be borne by the agent, or that the latter would
be allowed only a certain amount.
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65. Right to retain in pledge the property or legal pledge is the right of the agent over the object of the
agency until the principal reimburses him for the sums necessary for the execution of the agency which
he had advanced and until the principal pays him the indemnity for all damages in the execution of the
agency.

66. Modes of extinguishment of contract of agency: (EDWARD)

a. E – Expiration of the period for which the agency was constituted.
b. D – Death, Civil interdiction, Insanity or Insolvency of the principal or agent.
c. W – Withdrawal of the agent.
d. A – Accomplishment of the object or purpose of the agency.
e. R – Revocation of the agency by the principal.
f. D – Dissolution of the firm or corporation which entrusted or accepted the agency.

67. Revocation refers to the act of the principal of terminating the agency at will. The principal may revoke
the agency at will and compel the agent to return the document evidencing the agency. The revocation
may be express or implied. The following acts are considered implied revocation by principal of
the contract of agency:
a. When a new agent is appointed for the same business or transaction.
b. If the principal directly manages the business entrusted to the agent by dealing directly with third
persons.
c. When a special power of attorney is granted to an agent with a general power of attorney.

68. As a general rule, the principal may revoke the contract of agency at will. The following are the
exceptional instances when contract of agency may not be revoked at will by the principal
a. If a bilateral contract depends upon an agency.
b. If the agency is a means of fulfilling an obligation already contracted.
c. If a partner is appointed as a manager of the partnership in the articles or contract of partnership
and his removal from the management is unjustifiable.
d. If the agency is coupled with interest.

69. Principles concerning revocation of the agency by the principal

a. If the agency has been entrusted for the purpose of contracting with specified persons, the
principal must give a timely notice of the revocation to such third persons.
b. If the agent had general powers, he was entrusted to contract with general public or any person,
revocation of the agency does not prejudice third persons who acted in good faith and without
knowledge of the revocation.
c. Notice of revocation of general powers in a newspaper of general circulation is sufficient
warning to third persons.
d. Revocation binds third persons who had knowledge thereof.

70. Principles concerning withdrawal by the Agent in the Agency

a. The agent must give notice to the principal of the withdrawal.
b. The agent must indemnify the principal for any damage the principal suffered by reason of the
agent's withdrawal.
c. The agent shall not be liable for withdrawal if it is based upon the impossibility of continuing the
performance of the agency without grave detriment to himself.
d. The agent who withdraws should take care of the object of the agency with diligence of good
father of a family whether his reason for withdrawal is valid or invalid.

71. As a general rule, the death of the principal extinguishes the agency. However, the agency is not
extinguished by the death of the principal in the following exceptional instances
a. If the agency has been constituted in the common interest of the principal and the agent.
b. If the agency has been constituted in the interest of a third person who has accepted the
stipulation in his favor.
c. In so far as to finish the business already begun on the death of the principal, should delay
entail any danger.

72. Status of the acts done by the agent after the death of the principal or other cause of
extinguishment of the agency
a. The acts are valid if done without the knowledge of the death of the principal or of any other
cause of extinguishment and shall be fully effective with respect to third persons who may have
contracted in good faith.
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 REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

Law on Sales

1. Contract of Sales is a contract whereby one of the contracting parties, known as the seller or vendor,
obligates himself to transfer the ownership of and to deliver a determinate thing, and the other party,
known as the buyer or vendee, obligates himself to pay therefore a price certain in money or its
equivalent.

2. Contracting Parties in a Contract of Sale

a. Seller or Vendor refers to the person who obligates himself to transfer the ownership of and to
deliver a determinate thing.
b. Buyer or Vendee refers to the person who obligates himself to pay therefore a price certain in
money or its equivalent.

3. Essential elements of the contract of sale – These are elements necessary for validity and
perfection of contract of sale.

a. Subject matter which should be a determinate thing

i. Requisites of subject matter of a contract of sale

1. It must be within the commerce of men.

2. It must be not contrary to law, morals, good customs, public order or public
policy.
3. It must be determinate.
4. It must be owned by the vendor at the time of delivery.

ii. Things that may become the subject matter of a contract of sale

1. Existing goods owned or possessed by the seller.

2. Goods to be manufactured, raised or acquired by the seller after the perfection of
the contract of sale or “future goods” subject to the condition that it must
materialize. If the future things do not materialize, the contract of sale will
become inefficacious or void for absence of subject matter which is an essential
element of contract of sale.
3. Goods whose acquisition by the seller depends upon the contingency which may
or may not happen.
4. Things subject to resolutory condition which if happens, the contract of sale will
be extinguished.
5. Hereditary rights
6. Undivided interest in co-owned property which will result to co-ownership on the
part of buyer and seller.

iii. Things not allowed to become the subject matter of a contract of sale making the
contract null and void

1. Those contrary to law, morals or public policy.

2. Those outside the commerce of men.
3. Future inheritance
4. Vain hope

iv. Distinctions between emptio rei speratae and emptio spei

1. Emptio rei speratae is the sale of future thing while emptio spei is a sale of
hope or expectancy.
2. Sale of future harvest is emptio rei speratae while sale of lottery ticket No. 113
is emptio spei.
3. In emptio rei speratae the thing expected will definitely come into existence, but
its quality or quantity unknown; while in emptio spei it is not certain that the thing
will exist much less its quantity or quality.
4. Emptio rei speratae is subject to the condition that the thing should exist, so that
if it does not, there will be no contract of sale by reason of the absence of an
essential element of subject matter while emptio spei produces effects even
though the thing does not come into existence because the subject matter is the
 hope itself.
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b. Price certain in money or its equivalent

i. Requisites of price in a contract of sale

1. It must be certain.
2. It must be real
3. It must not be fictitious.

ii. Instances when the price is certain

1. If the parties have agreed upon a definite amount for the sale.

2. If it be certain with reference to another thing certain.

3. If the determination of the price is left to the judgment of a specified person or

persons.

a. Remedies of the injured party if:

i. The third person is unable or unwilling to fix the price.

1. The contract is inefficacious or null and void requiring
declaration of nullity.

ii. The third person acted in bad faith or by mistake.

1. The injured party may ask the court to fix the reasonable
price.

iii. The third person is prevented from fixing the price or terms by
fault of the seller or the buyer.
1. The injured party may ask for damages.

4. If the price is fixed by the court which price may no longer be changed by the
contracting parties.

5. If the price fixed is that which the thing sold would have on a definite day, or in a
particular exchange or market, or when an amount is fixed above or below the
price on such day, or in such exchange or market, provided said amount is
certain.

6. If the price is fixed by one of the contracting parties and accepted by the other.

iii. Effects of inadequacy of price in a contract of sale

1. It does not affect a contract of sale, except as it may indicate a defect in the
consent which makes the contract voidable requiring annulment of contract.
2. It renders the contract one of donation if that is the real intention of parties. Thus,
it will require reformation of instrument.

iv. Effects of simulated price in a contract of sale

1. If the price is absolutely simulated, the contract of sale is null and void requiring
declaration of nullity.
2. It the price is relatively simulated, the intent of the parties is hidden requiring
reformation of instrument.

c. Consent of the contracting parties on the determinate thing and the price certain in
money

i. Moment of perfection of contract of sale

1. At the moment there is a meeting of minds upon the thing which is the object of
the contract and upon the price.
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 ii. Moment of perfection of contract of sale by auction

1. When the auctioneer announces its perfection by the fall of the hammer or
in any other manner.
a. Rights of auctioneer and highest bidder before the perfection of
contract of sale by auction
i. Before perfection, any bidder may retract his bid.
ii. Before perfection, the auctioneer may generally withdraw the
goods from the sale unless the auction has been announced
without reservation by auctioneer.
b. Rights of auctioneer and highest bidder after the perfection of
contract of sale by auction
i. After perfection, the winning bidder cannot retract his bid.
ii. After perfection, the auctioneer cannot withdraw the goods.
c. Requisites before auctioneer may participate in bidding or auction
i. The right to bid must have been reserved expressly by or on
behalf of the seller.
ii. The right to bid must not be prohibited by law or stipulation.
iii. Notice must be given that the sale is subject to a right to bid by or
on behalf of the seller.
d. By bidders or puffers refer to persons employed by the seller to bid in
his behalf, the purpose of which is to raise the price, but the said persons
are not in themselves bound by their bids. The employment by the seller
of by-bidders or puffers without notice to the other bidders may make the
perfected contract of sale voidable because the consent of the highest
bidder is vitiated by causal fraud.

4. Natural elements of the contract of sale – These are elements which are presumed to exist in a
contract of sale unless validly waived by the contracting parties.

a. Warranty against eviction

b. Warranty against hidden defects
c. Warranty against non-apparent and unregistered servitude or encumbrance
d. Warranty for merchantability

5. Accidental elements in the contract of sale – These are elements which do not exist in a contract of
sale unless provided by the contracting parties.

a. Place of delivery and payment

b. Time of delivery and payment
c. Terms or conditions of payment
d. Interest of the price

6. Characteristics of a contract of sale

a. Principal – It can exist by itself without being dependent upon another contract.
b. Consensual – It is perfected by mere consent upon the price certain and determinate thing
except in case of sale of a piece of land by the agent in the name of the principal which is a
formal or solemn contract which requires that the authority of the agent to sell the land must be
in writing for the contract to be valid.
c. Bilateral – The parties are bound by reciprocal obligations.
d. Onerous – Valuable considerations are given by both parties to acquire rights.
e. Commutative – The parties exchange almost equivalent values.
f. Nominate – It has special name given to it by law.

7. Distinctions between contract of sale and dacion en pago

a. In sale, there is no pre-existing credit, while in dacion en pago, there is pre-existing credit.
b. A sale creates obligations while dacion en pago extinguishes obligations.
c. In sale, there is greater freedom in fixing the price, while in dacion en pago, there is less
freedom in fixing the price because of the amount of the pre-existing credit which the parties
seek to extinguish.
d. In sale, the cause or consideration is the price from the seller’s point of view, and the delivery of
the object from the buyer’s view point, while in dacion en pago, the cause or consideration is
the extinguishment of the obligation, from the debtor’s point of view and the delivery of the
object given in place of the credit, from the creditor’s point of view.
Note: Both contract of sale and dacion en pago are governed by Law on Sales.
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 8. Distinctions between contract of sale and payment by cession

a. In sale, there is no pre-existing credit while in payment by cession, there are pre-existing
credits.
b. A sale creates obligations while payment by cession extinguishes obligations.
c. In sale, the cause or consideration is the price from the seller’s point of view, and the delivery of
the object, from the buyer’s point of view while in payment by cession, the cause or
consideration is the extinguishment of the obligation from the debtor’s point of view and the
assignment of the things to be sold from the creditor’s point of view.
d. In sale, there is greater freedom in fixing the price while in payment by cession there is less
freedom in fixing the price because of the fixed amount of the pre-existing credits which the
parties seek to extinguish.
e. In sale, the buyer becomes the owner of the thing transferred upon delivery while in cession,
the creditors do not become the owners of the property assigned to them but are merely given
the right to sell such property and apply the proceeds to their claims.
f. Contract of sale is governed by Law on Sales while payment by cession is governed by
Financial Rehabilitation and Insolvency Act, a special law.

9. Distinctions between contract of sale and contract for a piece of work

a. It is a contact of sale if it is for the delivery at a certain price of an article which the vendor in
the ordinary course of business, manufactures or procures for the general market, whether the
same is on hand or not while it is a contract for a piece of work if the goods are to be
manufactured especially for the customer upon his special order and not for the general market.
b. Contract of sale of movable property with a price of at least P500 or sale of immovable
regardless of price is covered by Statute of Fraud while contract for a piece of work at a price
of P500 is not covered by Statute of Fraud.

10. Distinctions between contract of sale and contract of barter

a. In a contract of sale, the cause is cash while in a contract of barter, the cause is a noncash
asset.
b. Contract of sale of movable property with a price of at least P500 or sale of immovable
regardless of price is covered by Statute of Fraud while contract of barter of movable with
price of at least P500 or barter of immovable regardless of price is not covered by Statute of
Fraud.

11. Rules for determining whether a contract is one of sale or barter if the cause is a combination of
cash and noncash asset.

a. Determine the manifest or evident intention of the parties.

b. If the evident intention of the parties is not present, apply the following rules:
i. The contract is one of barter if the value of the thing given as part of the consideration
exceeds the monetary consideration.
ii. The contract is one of sale if the monetary consideration is more than the value of the
thing given as part of the consideration.
iii. The contract is one of sale if the monetary consideration is equal to the value of the
thing given as part of the consideration.

12. Distinctions between contract of sale and contract to sell

a. In contract of sale, ownership passes to the buyer upon delivery while in contract to sell, the
title to the goods does not pass to the buyer until some future time and oftentimes upon
payment of the price.
b. In contract of sale, the risk of loss or damage to the goods upon delivery is on the buyer, under
the rule “res perit domino”, or the thing perished with the owner; while in contract to sell, the
risk is borne by the seller after delivery based on the same principle that the thing perishes with
the owner.
c. In contract of sale, the non-payment of the price is a resolutory condition while in contract to
sell, the payment in full of the price is a suspensive condition.

Note: The rule on double sale applies only if both contracts are of sale but it is not applicable to contract to
sell.
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 73. The time and place of payment of the price of the contract of sale

a. At the time and place stipulated

b. At the time and place of delivery of the thing.

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74. Instances wherein the buyer shall pay interest for the period between the delivery of the thi
and the payment of the price
a. If there is stipulation for payment of interest and if the rate is not provided, it should be 12
before July 1,2013 and 6% afterwards.
b. If the thing sold produces fruits or income.
c. If the buyer is in default, from the time of judicial or extrajudicial demand for the payment of t
purchase price.

75. Grounds for the suspension of the payment of the price by the vendee
a. Disturbance in the vendee’s possession or ownership of the thing purchased.
b. Reasonable grounds to fear such disturbance, by a vindicatory action or foreclosure
mortgage.
c. Loss of the thing due to the fault of the vendor.

76. Instances wherein the right to suspend payment by the vendee is not available
a. If the vendor gives security for the return of the price.
 b. If it has been stipulated that the vendee shall pay the price notwithstanding the existence
disturbance or danger.
c. If the disturbance is a mere act of trespass.

77. Remedy of vendor to sue for immediate rescission of the contract of sale of immovable

a. If there are reasonable grounds to fear the loss of the immovable property sold and its price.

78. Alternative remedies of vendor in case there is reasonable ground to fear the loss of t
immovable property or its price

a. Fulfillment of the contract with damages or

b. Rescission of the contract with damages.

79. Effects if the buyer failed to pay the price of the contract of sales of immovable at maturity dat

a. The contract of sale is not automatically cancelled.

b. The buyer may still pay the price provided notarial or judicial demand for rescission has not y
been made by the seller.

80. Grounds for immediate rescission of the sale of a movable at vendor’s option
I. If at the time of the delivery of the thing, the vendee does not appear to receive the thing.
II. If at the time of the delivery of the thing, the vendee having appeared, does not pay the pric
unless a longer period is stipulated for its payment.

81. Remedies or Actions by the seller for breach of contract of sale of goods committed by buyer
a. Assuming the goods have already been delivered, maintain an action for the price of the goo
if the buyer wrongfully neglects or refuses to pay.
b. Maintain an action for damages if the buyer wrongfully neglects or refuses to accept and pay f
the goods.
c. Rescind the contract if the buyer has repudiated the sale or manifested his inability to perfor
his obligation or has committed a breach of contract, where the goods have not been deliver
to buyer.

82. Proper Action or remedy by the buyer if the seller has broken the contract to deliver specific
ascertained goods by not delivering the goods
a. Bring an action for specific performance plus damages.
b. Action for rescission plus damages.
c. Action for damages.

83. Modes for extinguishment of contract of sale:

a. No-Co-Me-Re-Pa-Lo-Pre-Re-Ful-An
b. Cancellation of sale of personal property payable in installments
c. Resale of the goods by the unpaid seller
d. Rescission of the sale by the unpaid seller
e. Rescission by the buyer in case of partial eviction
f. Rescission by the buyer in case of breach of warranty against hidden defects
g. Rescission by the buyer of sale of animals with redhibitory defects
h. Rescission by the buyer of sale of land with non-apparent servitude or encumbrance
i. Rescission by the buyer of sale of land with lacking area or area with poor quality
j. By redemption, whether conventional redemption or legal redemption

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84. Types of Redemption in a Contract of Sale

a. Conventional redemption is a type of redemption that occurs when the vendor reserved t
right to repurchase the thing sold with the obligation to return to the vendee the price of the sa
expenses of the contract and necessary and useful expenses made on the thing sold and
comply with other stipulations which may have been agreed upon.

i. Period for exercise of right of redemption in conventional redemption or pacto

retro sale of immovable property
1. If a period is not stated in the contract, it will be 4 years.
2. If a period less than 10 years is stated, follow the stated period.
3. If a period more than 10 years is stated, it will be 10 years because that is t
maximum period.
4. If there is a pending case before the court to determine whether the contract
one pacto de retro sale or equitable mortgage, it will be 30 days from t
decision of the court declaring it to be pacto de retro sale.

ii. Rules in case of exercising conventional redemption in Pacto de retro sale

1. A co-owner of an undivided immovable which is essentially indivisible who se
his share with a right to repurchase to a third person who subsequently acquir
the whole thereof, may be compelled by the latter to redeem the whole proper
if the former wishes to make use of the right of redemption.
2. If several persons, jointly and in the same contract, should sell an undivid
immovable with a right of repurchase, none of them may exercise this right
more than his respective share.
3. If the person who sold an immovable alone has left several heirs, each heir m
redeem only the part which he may have acquired.
4. In cases of 1 and 2, the vendee may demand that the co-owners or co-he
come to an agreement upon the repurchase of the whole thing, and if they fail
do so, the vendee cannot be compelled to consent to a partial redemption.
5. Each one of the co-owners of an undivided immovable who may have sold h
share separately, may independently exercise the right of repurchase as regar
his own share and the vendee cannot compel him to redeem the whole property

b. Legal Redemption is a type of redemption in a contract of sale that is available only

 exceptional cases provided by law. It refers to the right of a third person to repurchase a re
property sold by another person in exceptional cases provided by law. It is defined as the rig
to be subrogated upon the same terms and conditions stipulated in the contract, in the place
one who acquires a thing by purchase, or dation in payment, or by any other transacti
whereby the ownership is transmitted by onerous title.

i. Instances of Legal Redemption or Redemption by operation of Law

1. By a co-owner. A co-owner of a thing may exercise the right of redemption

case the shares of all the other co-owners or of any of them, are sold to a th
person. All co-owners may exercise on the basis of their proportionate share.

2. By an adjoining rural lot owner. If a piece of rural land not exceeding o

hectare is alienated to a person who is not landless, the adjoining rural own
shall have the right of legal redemption unless the grantee does not own a
rural land. Order of Preference:
a. Adjoining rural owner with smallest area
b. Adjoining rural owner who first exercised the right

3. By adjoining urban lot owner. If a small piece of urban land which was boug
for speculation has been resold, the owner of the adjoining land has a right
redemption at a reasonable price.
a. The adjacent urban land owner whose intended use of the land
question appears best justified shall be preferred.
Note: It is only the adjoining urban lot owner who has the right of legal p
emption which is the right to be given the first opportunity before being offered
other person.
Note: A co-owner has better right over adjoining rural or urban lot owner in t
exercise of right of legal redemption.

ii. Period for the exercise of right of legal redemption

1. 30 days from the notice given by the vendor or prospective vendor

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85. Instances wherein a contract of sale with a right to repurchase and other contract purporting
be an absolute sale shall be presumed to be an equitable mortgage thereby requiri
reformation of instrument

a. When the price of a sale with a right to repurchase is unusually inadequate.

b. When the vendor remains in possession as lessee or otherwise
c. When the period for the exercise of the right of repurchase is extended.
d. When the purchaser retains for himself part of the purchase price.
e. When the vendor binds himself to pay the real property taxes on the thing sold.
f. When the real intention of the parties is that the transaction shall secure the payment of a de
or the performance of any other obligation.

86. Remedy of injured party in equitable mortgage

a. Action for reformation of instrument

87. Assignment of credit is a contract whereby a person transfers his credit, right or action against a th
person to another person for a consideration which is certain in money or its equivalent. It is perfect
by mere consent.

88. Nature of Assignment of Credit

a. It is a consensual contract perfected by mere consent.

89. Formality of Assignment of Credit to bind or to affect third persons

a. For assignment of credit involving personal property, it must be in a public instrument.

b. For assignment of credit involving real property, it must be recorded in the Registry of Property

90. Warranties of the vendor in good faith or assignor in assignment of credits

a. Existence of the credit at the time of sale

b. Legality of the credit at the time of sale

91. Exceptional instances when the vendor or assignor of credit is liable for the insolvency of t
debtor of the credit

a. When the assignor expressly warrants the solvency of the debtor of the credit.
i. Prescriptive period of warranty for solvency of debtor in assignment of credit
1. 1 year from the maturity date of credit or date of assignment whichever is later

b. When the assignor acted in bad faith because the insolvency of the debtor of the credit is
public knowledge when he assigned the credit.

92. Difference between Assignment of Credit by Assignor and Negotiation of Negotia

Instruments by a General Indorser

a. Assignment is applicable to non-negotiable promissory note while negotiation is applicable

negotiable promissory note.
b. The transferee in assignment is called an assignee while the transferee in negotiation
called a holder.
 c. The transferor in assignment is called an assignor while the transferor in negotiation is call
a general indorser if there is indorsement.
d. The assignee in assignment is subject to personal defenses available to prior parties while t
holder in due course in negotiation holds the instrument free from personal defenses availab
to prior parties.
e. The assignor does not warrant the solvency of maker unless expressly stated while t
general indorser guarantees the solvency of maker as long as notice of dishonor will be giv
to him.

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REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

Law on Partnership

1. Contract of Partnership is a contract of two or more persons who bind themselves to contribu
money, property, or industry to a common fund, with the intention of dividing the profits amo
themselves. It may also be formed by two or more persons for the exercise of a profession.
 2. Characteristics of a contract of partnership
a. Consensual – It is generally perfected by mere consent except if real property is contribut
wherein it must be notarized and inventory of real property must be attached to the pub
instrument.
b. Principal – It does not depend upon any other contract for its validity or existence.
c. Bilateral or Multilateral – It is entered into by two or more persons whose rights a
obligations are reciprocal.
d. Nominate – It has a special name given to it by law.
e. Preparatory – It is a means by which other contracts will be entered into as the partnersh
pursues its business.
f. Onerous – The partners contribute money, property or industry to a common fund except
case of universal partnership which is actually a contract of donation classified as gratuito
contract.

3. Essential requisites of partnership

a. There must be a valid partnership contract.
b. There must be a mutual contribution of money, property or industry to a common fund.
c. It must have a lawful object or purpose.
d. The partnership must be established for the common benefit or interest of the partners which
to obtain profits and to divide the profits among the partners.

4. Delectus Personae means that a partner has a right to choose those whom he wants to be associate
with the partnership.

5. Form of contract of partnership

a. As a general rule, it may be in any form because it is perfected by mere consent.
b. If immovable or real property is contributed, the contract of partnership must be notarized a
inventory of the said real property must be attached to the contract of partnership for t
contract to be valid. It must also be registered to SEC to affect and bind third persons.
c. If the contributed capital is at least P3,000, the contract of partnership must be notarized an
registered for SEC in order to prejudice and affect third persons but not for validity of t
contract. Noncompliance with this formality will not affect the liability of the partners to th
persons.
d. If the partnership is a limited partnership, a certificate of limited co-partnership must be sign
under oath by the partners and must be recorded with the SEC, otherwise the partnership w
be considered as a general partnership. Noncompliance with this formality will make the limit
partners as general partners to partnership creditors but will remain to be limited partners to t
partners themselves.

6. Cases that do not establish a partnership

a. Persons who are not partners to each other.
b. Co-ownership or co-possession, whether such co-owners or co-possessors do or do not sha
any profits made by the use of the property.
c. Sharing of gross returns, whether or not the persons sharing them have a joint or common rig
or interest in any property from which the returns are derived.

7. Generally, receipt by a person of share of the profits of a business is a prima facie evidence th
he is a partner. However, these are exceptional instances when the receipt by a person of
share of the profits of a business shall not be considered a prima facie evidence that he is
partner in a business:
a. As a debt by installment or otherwise
b. As wages of an employee
c. As rent to a landlord.
d. As an annuity to a widow or representative of a deceased partner.
e. As interest on a loan, though the amounts of payment vary with the profits of the business.
f. As the consideration for the sale of a goodwill of a business or other property by installment
otherwise.

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8. Universal partnership of all present property is a partnership wherein all the partners contribute
the property which actually belonged to them to the common fund, with the intention of dividing th
same among themselves, as well as the profits which they acquire therewith.

9. Properties that shall belong to the common fund in a universal partnership of all prese
property
a. Property belonging to the partners at the time of the constitution of the partnership.
b. Profits that may be acquired from the present property.
c. Property acquired by each partner after the formation of the partnership if stipulated.
d. Profits and fruits from property acquired by each partner, even those from property acquired
inheritance, legacy or donation after the formation of the partnership if stipulated.

10. Universal partnership of profits is a partnership whereby the common fund comprises all that t
partners may acquire by their work or industry during the existence of the partnership.

11. Properties that shall belong to the common fund in a universal partnership of profits
a. Profits obtained by the partners by their work or industry during the existence of the partnershi
b. The usufruct or use of the property belonging to each partner at the time of the constitution
the partnership.
c. The profits and fruits from the properties mentioned in letter a and b.
d. The profits and fruits, if stipulated, of the property acquired by each partner after t
constitution of the partnership.

12. Persons who cannot enter into a universal partnership but can enter into a particu
partnership
a. Husband and wife
b. Persons who were guilty of adultery or concubinage at the time of formation
 c. Persons who were guilty of the same criminal offense
d. Public officer or his wife, descendants or ascendants and another person by reason of t
public officer’s position

13. In case Universal Partnership is entered into without specification of the type of Universal Partnership
shall be presumed to be a Universal Partnership of Profits. Since Universal Partnership is
gratuitous contract of donation, the ambiguity shall be interpreted in favor of least transmission of righ
and Universal Partnership of Profits involves lesser transmission of rights.

14. Particular partnership is a partnership which has for its object determinate things, their use or frui
or a specified undertaking, or the exercise of a profession. Example is General Profession
Partnership.

15. Kinds of partnership

a. General partnership is a partnership where all the partners are liable to the extent of th
separate property after the partnership assets have been exhausted.
b. Limited partnership is a partnership where there is at least one general partner and at lea
one limited partner who is liable to the extent of his investment in the partnership.
c. Ordinary partnership is a partnership which actually exists among the partners as well as
third persons.
d. Partnership by estoppel or nominal partnership is a partnership which in reality is n
partnership but is considered as one with respect to those who, by reason of their conduct
admission, are precluded from denying its existence.
e. Partnership by prescription is a partnership which is established by the lapsing of time.
f. De jure partnership is a partnership that exists both in fact and in law.
g. De facto partnership is a partnership that exists in fact but not in law.
h. Partnership with a fixed term is one for which a period for its duration is fixed by the partners
i. Partnership for a particular undertaking is one which is organized for a certain undertaki
which, when attained, will cause the termination of the partnership.
j. Partnership at will is one where no period is fixed by the parties for its duration.

16. Kinds of partners

a. General partner is one who is liable for partnership debts to the extent of his separate prope
after all the assets of the partnership have been exhausted.
b. Limited partner is one who is liable for partnership debts to the extent of his capital contributi
only.
c. General-limited partner is one who has all the rights and powers and is subject to all t
restrictions of a general partner, except that, in respect to his contribution, he shall have t
rights against the other members which he would have had if he were not also a gene
partner.
d. Capitalist partner is one who contributes money or property to the common fund.

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 e. Industrial partner is one who contributes his services or industry to the partnership.
f. Capitalist industrial is one who contributes not only money or property but also his services
the partnership.
g. Managing partner manages the business or affairs of the partnership.
h. Liquidating partner takes charge of the winding up of the affairs of the partnership after it
dissolved.
i. Nominal partner or partner by estoppel is not actually a partner but who may become liab
as such to third persons.
j. Ostensible partner is one who is active in management of partnership business and known
the public as a partner, such as by allowing his name to be included in the firm name.
k. Secret partner is one whose connection with the partnership is kept from the public.
l. Silent partner is one who has no voice in the management of the business.
m. Dormant partner is who does not participate in the management of the business and n
known to the public as a partner.
n. Quasi-partner is one who is no longer a partner of business but has left his capital in t
business as loan. He receives interest on such as long as the loan is not paid off.
o. Retiring partner is one who decided to leave the partnership after reaching the age
retirement.
p. Newly admitted partner refers to a partner accepted by the present partners in an existi
partnership.
q. Substituted limited partner is a person admitted to all the rights of a limited partner who h
died or has assigned his interest in a partnership.

17. Commencement of Juridical Personality of a Partnership

a. From the date stipulated or agreed by the partners
b. From the moment of the execution of the contract of partnership

18. Rules on Division of partnership profits

a. It should be divided based on profit agreement
b. In the absence of profit agreement
i. The industrial partner shall first receive a just and equitable share in the profits befo
distribution to capitalist partners. (Old Civil Code: Share of the least capitalist partner)
ii. The remaining profits after distribution to industrial partners of his just and reasonab
share in profits shall be distributed to the capitalist partners based on the following
order of priority:
1. Capital contribution ratio
2. Equally
iii. In case of capitalist-industrial partner, he shall receive a just and equitable share in t
profit for being an industrial partner and then he shall also share in the remaining prof
as a capitalist partner on the basis of capital contribution ratio.

19. Rules on Division of partnership losses

a. It should be divided based on loss agreement
b. In the absence of loss agreement
i. The industrial partner shall be exempted from sharing in losses.
ii. The losses shall be distributed to the capitalist partners based on the following by ord