Surety Distinguished from Guarantor

SURETY GUARANTOR
directly and equally bound with the principal A guarantor's liability is secondary, meaning
debtor the creditor must first pursue the principal
debtor and exhaust all legal remedies before
turning to the guarantor.
Creditor may demand without first pursuing The contract of guaranty is usually a separate
the principal debtor undertaking from the principal obligation,
entered into before or after the principal
debtor's agreement.
surety's obligation arises simultaneously with A guarantor is entitled to the benefit of
the principal debtor's, often in the same excussion, meaning the creditor must first
instrument. pursue the principal debtor and exhaust all
legal remedies before turning to the
guarantor.
the creditor doesn't have to exhaust all
remedies against the principal debtor before
pursuing the surety.

Art. 1189. When the conditions have been imposed with the intention of suspending
the efficacy of an obligation to give, the following rules shall be observed in case of the
improvement, loss or deterioration of the thing during the pendency of the condition:

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

(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay
damages; it is understood that the thing is lost when it perishes, or goes out of
commerce, or disappears in such a way that its existence is unknown or it cannot
be recovered;

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

(4) If it deteriorates through the fault of the debtor, the creditor may choose
between the rescission of the obligation and its fulfillment, with indemnity for
damages in either case;

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

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

Article 1251
Where payment must be made
 Payment shall be made in the place designated in the obligation
  If there is no express stipulation to deliver a determinate thing it shall be made where
the thing might be at the moment of the constitution of the obligation
 Domicile of the debtor
If debtor changes domicile in bad faith after being in delay the additional expenses shall be
borne by him

Art. 1252

Special forms of Payment (ADAT)

1. Application/imputation
2. Dation in payment
3. Assignment of credit/cession
4. Tender of payment and Consignation

Application of Payment Defined – The designation of the debt to which payment should be
applied a payment made by the debtor who owes several debts in favor of the same creditor

Requisites: (TSSAP)

a) Two or more debts

b) Same debtor same creditor
c) Same kind of debt
d) All debts must be due
e) Payment is not enough to extinguish all the debts

Note:

If not all debts are due APPLICATION can be made if there is a:

 Stipulation
 When application is made by the party whose benefit the term has been constituted

Debtor gets to choose which debt to pay as provided by LAW, except:

 Valid prior but contrary agreement

 Debtor cannot choose to pay the principal ahead of the interest, UNLESS THE
CREDITOR CONSENTS

Application is made by:

 Debtor making designation (done when payment is made NOT AFTER)
 Creditor by stating in receipt (not valid if done without consent of debtor)
 If neither then by operation of law

Article 1253 – If the debt produces interest, payment of the principal shall not be deemed
to have been made until the interest have been covered

the debtor cannot insist that payment be credited to the principal debt instead of the interest,
UNLESS THE CREDITOR AGREES

Reduction of principal will reduce total interest collectible

Type of Interest

Compensatory – for use of money

Moratory – damages due to default

Art. 1254 – Payment shall be applied to the most onerous to the debtor

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

Cession – it is the process by which a debtor transfer ALL his properties not subject to the
execution in favor of his creditors so that the latter may sell them, and thus apply the proceeds
to their credits

Kinds

Legal – MAJORITY of creditors must agree

Voluntary – ALL creditors must agree

Requisites (MMCAA)
a) More than one debt
b) More than one creditor
c) Complete or partial insolvency
d) Acceptance or consent on the part of the creditors
e) Abandonment of all the debtor’s property not exempt from execution

CESSION distinguished from DACION EN PAGO

DACION EN PAGO CESSION
Does not affect all the properties Affect all the properties
Does not require more than one creditor Requires more than one creditor
Consent of the specific creditor is required Consent of all the creditors is required
May take place during SOLVENCY Requires FULL or PARTIAL insolvency
Transfers ownership Does not transfer ownership
Act of novation Not an act of novation

Tender of Payment – the act of offering the creditor what is due him together with a demand that
the creditor accept the same

Consignation – The act of depositing the thing due with the court of judicial authorities whenever
the creditor cannot accept or refuses to accept payment. It generally requires a prior tender of
payment

Tender of Payment distinguished from Consignation:

Tender is done prior to consignation

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

Consignation alone shall produce the same effect of payment in the following cases:
(AIRTT)
a) Absent or Unkown
b) Incapacitated to receive payment
c) Refuses to issue a receipt
d) Two or more creditors are claiming right to the credit
e) Title of the obligation is lost

When Creditor is justified to refuse payment

a) Not made in legal tender
b) Paid without interest
c) Must be unconditional
d) Obligation must be due

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

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

Requisites of CONSIGNATION (EVPAS)

a) Existence of a valid debt
b) Valid prior tender of payment, unless tender is excuse
c) Prior notice of consignation
d) Actual consignation
e) Subsequent notice
f) consignation

Loss
a) Object perishes
b) Goes out of commerce
c) Disappears in such a way that its existence is unknown or it cannot be recovered

Impossibility of Performance (PLM)

a) Physical
b) Legal (directly or indirectly)
c) Moral

Art. 1262. An obligation which consists in the delivery of a determinate thing shall be
extinguished if it should be lost or destroyed without the fault of the debtor, and before
he has incurred in delay.

When by law or stipulation, the obligor is liable even for fortuitous events, the loss of
the thing does not extinguish the obligation, and he shall be responsible for damages.
The same rule applies when the nature of the obligation requires the assumption of risk.
Two kinds of Obligation to Give
a) Generic
b) Specific

Effect of Loss:

General Rule – extinguishment of the obligation

Exception:
a) Debtor is at Fault
b) Debtor is made liable for fortuitous event: Provision of law, stipulation in a contract,
assumption of risk

Instances where law requires liability even in the case of fortuitous event (DPCBAS)
a) Debtor is in DEFAULT
b) PROMISED to give the same thing to two or more persons who do not have the same
interest
c) Obligation arising from CRIME
d) BORROWER of an object lent it to someone who is not a member of his household
e) When the thing loaned was delivered with APPRAISAL of the value, unless there is a
stipulation exempting the borrower
f) When the payee is in SOLUTIO INDEBITI

Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything
of the same kind does not extinguish the obligation.

Genus nunquam perit – genus never perishes

Exceptions:

Delimited – 50 sacks of rice harvested from 2024

Segregated – set aside

Art. 1270. Condonation or remission is essentially gratuitous, and requires the

acceptance by the obligor. It may be made expressly or impliedly.

One and the other kind shall be subject to the rules which govern inofficious donations.
Express condonation shall, furthermore, comply with the forms of donation.

Remission or Condonation – is the gratuitous abandonment by the creditor of his right

Requisites (DSLACMWF)
a) The debt must be due at the time of the remission
b) There must be a subject matter
c) The Cause and consideration of the remission is liberality
d) There must be an agreement
e) The parties must be capacitated and consent
f) Must not be inofficious
g) Waiver is generally not presumed it must be clearly and convincingly shown
h) Formalities in donation are needed in case of express remission
Classes of remission

Effect or extent
a) Total/partial
Date of effectivity
b) Inter vivos/ mortis causa
Form
c) Implied, tacit/ Express, formal

Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the
creditor to the debtor, implies the RENUNCIATION of the action which the former had against
the latter.

If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs
may uphold it by proving that the delivery of the document was made in virtue of payment of the
debt.

Art. 1272. Whenever the private document in which the debt appears is found in the possession
of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the
contrary is proved. (REBUTTABLE)

Art. 1274. It is presumed that the accessory obligation of PLEDGE has been remitted when
the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of
a third person who owns the thing.

SECTION 4. - Confusion or Merger of Rights

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

Merger or Confusion defined – the meeting in one person of the character of a debtor and
creditor for the same obligation

Requisites: (PCO)
a) Principal debtor and creditor
b) Clear and definite
c) Obligation must be identical

Note:

If the reason for the confusion CEASES the obligation is REVIVED

Art. 1276. Merger which takes place in the person of the principal debtor or creditor benefits the
guarantors. Confusion which takes place in the person of any of the latter does not extinguish
the obligation.

Accessory follows the principal

Art. 1277. Confusion does not extinguish a joint obligation except as regards the share
corresponding to the creditor or debtor in whom the two characters concur.
 SECTION 5. – Compensation

Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other. (1195)

Abbreviated payment

Compensation distinguished from Payment

Payment Compensation
Complete and indivisible Partial extinguishment is permitted
Involves action and delivery Takes place by operation of law

Compensation distinguished from Merger/Confusion

Compensation Confusion/Merger
As to number of persons – As to number of persons –
Two persons who are mutually creditor and only one person in whom is merged the
debtor to each other qualities of a creditor and debtor

Number of obligations – Number of obligations –

One Two

Compensation distinguished from Counter-claim or Set off

Compensation Set off
Takes place by operation of law and Must be pleaded to be effectual
extinguished reciprocally two debts
Works as judicial compensation

Kinds of Compensation

Effect or Extent:
a) Total – both obligation are extinguished, same or equal amount
b) Partial – Balance remains

Origin or Cause:
a) Legal – by operation of law
b) Voluntary or conventional – agreement of parties (Art. 1282)
c) Judicial – set off must be pleaded, made effective by order of the court (Art. 1283)
d) Facultative – one of the parties may choose between claiming compensation or
opposing it

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

(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other; (exception is Art 1280)
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

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

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

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

Art. 1284. When one or both debts are rescissible or voidable, they may be compensated
against each other before they are judicially rescinded or avoided. (n)

Note: Valid until annulled and applies retroactively

Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor
of a third person, cannot set up against the assignee the compensation which would pertain to
him against the assignor, unless the assignor was notified by the debtor at the time he gave his
consent, that he reserved his right to the compensation.

If the creditor communicated the cession to him but the debtor did not consent thereto, the latter
may set up the compensation of debts previous to the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may set up the compensation
of all credits prior to the same and also later ones until he had knowledge of the assignment.

Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or
from the obligations of a depositary or of a bailee in commodatum.

Neither can compensation be set up against a creditor who has a claim for support due by
gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301.

When Legal Compensation Cannot Take Place:

a) Debts arise from depositum (depositor is allowed to claim)

b) Debts arising from obligations of depository
c) Baille in commundatum
d) Support for gratuitous title

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

Note: Victim can claim compensation

Art. 1289. If a person should have against him several debts which are susceptible of
compensation, the rules on the application of payments shall apply to the order of the
compensation. (1201)

Art. 1290. When all the requisites mentioned in Article 1279 are present, compensation takes
effect by operation of law, and extinguishes both debts to the concurrent amount, even though
the creditors and debtors are not aware of the compensation. (1202a)

SECTION 6. – Novation

Art. 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor. (1203)

Definition of Novation – the substitution or change of an obligation by another, which
extinguishes or modifies the first either changing its object or principal condition or substituting
another in the place of the debtor and subrogating another in the place of the creditor

Kinds of Novation

According to Object or Purpose:

1. Real or Objective – changing the object or principal obligation

2. Personal or Subjective – substituting debtor or subrogating creditor
3. Mixed – change of Object and Parties

According to Form or Constitution:

1. Express
2. Implied – incompatible obligations

According to Extent or Effect:

1. Total or Extinctive
2. Partial or Modificatory

Note:
Extinctive novation:
a) never presumed
b) there must be express intention to novate
c) if implied, parties must clearly demonstrate their intent to dissolve the old obligation

Implied Novation:
a) Old obligation must be superseded by the new one
b) Test of incompatibility – must be irreconcilable with the old obligation

Extinctive Novation twin effect of extinguishing the old obligation and creating a new obligation

Requisites:
1. Previous Valid Obligation
 2. Agreement of all parties
3. Extinguishment of the old obligation
4. Birth of a new valid obligation

Requisites In General:
1. Valid Old Obligation
2. Intention of the parties to extinguish the old obligation
3. Capacity and consent of all the parties

Art. 1292. In order that an obligation may be extinguished by another which substitute the same,
it is imperative that it be so declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other. (1204)

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one,
may be made even without the knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles
1236 and 1237. (1205a)
Requisites of Expromision (ICE)
1. Initiative must come from a third person
2. The new debtor and creditor must consent
3. Excuse or release from the obligation of the old debtor

Requisite of Delegacion (ICE)

1. Initiative come from the old debtor
2. All parties must consent
3. Old debtor must be released from the obligation

The Parties of Delegacion:

1. Delegante – old debtor
2. Delegatario - creditor
3. Delegado – new debtor

Art. 1294. If the substitution is without the knowledge or against the will of the debtor, the new
debtor's insolvency or non-fulfillment of the obligations shall not give rise to any liability on the
part of the original debtor. (n)

Art. 1295. The insolvency of the new debtor, who has been proposed by the original debtor and
accepted by the creditor, shall not revive the action of the latter against the original obligor,
except when said insolvency was already existing and of public knowledge, or known to the
debtor, when the delegated his debt. (1206a)

This article does not apply: (GASJ)

1. Third person acted as a Guarantor or surety
2. Agent, messenger or employee
3. New debtor merely agreed to be a solidary debtor
4. Merely agreed for joint responsibility

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

accessory obligations may subsist only insofar as they may benefit third persons who did not
give their consent. (1207)
Pour Autrui – stipulation beneficial to others

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

Art. 1298. The novation is void if the original obligation was void, except when annulment may
be claimed only by the debtor or when ratification validates acts which are voidable. (1208a)

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

Art. 1300. Subrogation of a third person in the rights of the creditor is either legal or
conventional. The former is not presumed, except in cases expressly mentioned in this Code;
the latter must be clearly established in order that it may take effect. (1209a)

Subrogation – (extinctive novation by change of the creditor) is the transfer to a third person all
the rights appertaining to the creditor, including the right to proceed against guarantors, or
possessor of mortgages, subject to any legal provision or any modification that may be agreed
upon

Kinds of Subrogation:

Viewpoint of Origin
1. Conventional or Voluntary – requires agreement and consent of ALL parties
2. Legal – takes place by operation of law

Viewpoint of Extent
1. Total
2. Partial

Distinction Between Conventional Subrogation and Assignment of Credit

ASSIGNMENT OF CREDIT CONVENTIONAL SUBROGATION

Mere transfer of the same right to the Extinguishes the obligation and creates a
CREDITOR new one
Does not require the debtors consent Requires debtors consent
The defect in the credit or right is not cured Defect of the old obligation may be cured in
simply by assigning the same (debtor still has such a way that the new obligation becomes
right to any available defense as against the entirely valid(no right to setup defense which
old debtor the debtor could have setup against the old
creditor)

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

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

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

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

(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of confusion as to the latter's share. (1210a)

Art. 1303. Subrogation transfers to the persons subrogated the credit with all the rights thereto
appertaining, either against the debtor or against third person, be they guarantors or possessors
of mortgages, subject to stipulation in a conventional subrogation. (1212a)

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

CONTRACTS

Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself,
with respect to the other, to give something or to render some service. (1254a)

CONSTITUTION - Article III Sec. 10. No law impairing obligation of contracts shall be passed

Voidable Contracts
a) Unenforceable Contract
b) Rescissible Contract
c) Voidable Contract
d) Void abinitio

Ultra vires - beyong the power

Elements of a Contract
a) Essential elements – consent, subject matter, cause or consideration
b) Natural elements – presumed to exist in a contract, unless the contrary has been
stipulated
c) Accidental elements – various stipulations agreed upon by parties

Classification of Contracts
a) Perfection or formation:
1. Consensual – by consent
2. Real – perfected by delivery examples: depositum, pledge, commundatum
3. Formal or solemn – special formalities are essential before the contract may be
perfected

b) Cause or equivalence of the value or prestation

1. Onerous – interchange is equivalent valuable consideration
2. Gratuitous – FREE, one party receives no equivalent
3. Remunerative – one prestation is given for a service that has already been delivered

c) Importance or dependence
 1. Principal – the contract may stand alone Example: sales lease
2. Accessory – depends its existence upon another contract example: mortgage
3. Preparatory – means for future transaction Example: agency partnership

d) Parties Obliged
1. Unilateral – only one of the parties has an obligation example commundatum
2. Bilateral – both are required to render reciprocal prestations
e) Name or designation
1. Nominate – with a particular name
2. Innominate

f) Risk of fulfillment –
1. Commutative – real fulfilment of equivalent values
2. Aleatory – fulfillment dependent upon chance

g) Time of performance or fulfillment

1. Executed – one completed at the time of the contract
2. Executory – the prestations are complied with at some future time

h) Subject Matter
1. Contract involving THINGS(SALE)
2. RIGHTS OR CREDITS(usufruct, assignment of credit)
3. SERVICES(agency, lease of services, contract of common carriage)

i) Obligations imposed and regarded by the law

1. Ordinary – (sale)
2. Institutional – contract of marriage

j) Evidence required
1. Oral or parol evidence – (word of mouth)
2. Written proof – contracts

k) Number of persons actually and physically entering into the contracts

1. Ordinary – two parties are represented by different persons
2. Auto-contracts – one person represent two opposite parties (agent selling cars buys
the car)

l) Number of persons who participated in the drafting of the contract

1. Ordinary – like an ordinary sale
2. Contract of adhesion – take it or leave it(insurance, real estate)

m) Nature
1. Personal – life insurance
2. Impersonal – does not reference specific individuals, standard form used by a large
company to purchase goods or services/does not reference specific individuals

Stages of a Contract
a) Preparation – parties are progressing with their negotiations and have not yet arrived at
a definite term
b) Perfection – parties have come into an agreement of the terms of the contract
c) Consummation – the terms of the contract are performed
Basic Principles or Characteristics of a Contract (FOPBR)
a) Freedom
b) Obligatory Force and Compliance in Good Faith
c) Perfection by mere consent
d) Both parties are mutually bound
e) Relativity – binding between the parties

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy. (1255a)

Pari delicto – in equal fault

Dolo malo non oritor action – an action cannot arise from fraud
In pari delicto potior est – in equal fault the possessor is more favorable
The law will not aid either party to an illegal agreement. It leaves the parties where it found
them,

Limitations imposed by Law

- Contract stipulations must not be contrary to mandatory and prohibitive law
- Contracts must respect the law, for the law forms part of the contract

Limitations imposed by Morals

- Morals deals with right and wrong and with human conscience

Limitations imposed by Good Customs

- Are those that have received for a period of time practical and social confirmation. Good
customs and moral overlap each other, but sometimes they do not

Limitations imposed by Public Order

- Deals with public welfare and includes public safety

Limitations imposed by Public Policy

- Varies according to the culture of a particular country, is the public and social legal
interest in private law
- A contract is contrary to Public Policy if it has tendency to injure the public, is against the
public good, or contravenes some established interest of society, or inconsistent with
sound policy and good morals, or tends clearly to undermine the security of individual’s
rights.
(Art. 1606 – 4 years with no express provision to repurchase
10 years with express provision

Art. 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the
provisions of Titles I and II of this Book, by the rules governing the most analogous nominate
contracts, and by the customs of the place. (n)

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them. (1256a)

Mutuality of Contracts –
a) Both parties are bound
 b) Based on the essential equality of the parties
c) It is repugnant to bind one party and yet leave the other free

Consequences of MUTUALITY
A party cannot revoke or renounce a contract without the consent of the other, nor can it have it
set aside on the ground that he had made a bargain

Art. 1309. The determination of the performance may be left to a third person, whose decision
shall not be binding until it has been made known to both contracting parties. (n)

Art. 1310. The determination shall not be obligatory if it is evidently inequitable. In such case,
the courts shall decide what is equitable under the circumstances. (n)

Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case
where the rights and obligations arising from the contract are not transmissible by their nature,
or by stipulation or by provision of law. The heir is not liable beyond the value of the property he
received from the decedent.

If a contract should contain some stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere
incidental benefit or interest of a person is not sufficient. The contracting parties must have
clearly and deliberately conferred a favor upon a third person. (1257a)

PRINCIPLE OF RELATIVITY –
A contract can only bind the parties who had entered into it or their successors who assumed
their personalities or their juridical positions, and that as a consequence no contract can neither
favor nor prejudice a third person.

The obligations of contracts is limited to the parties making them and, ordinarily, only those who
are parties to contracts are liable for their breach. Parties to a contract cannot thereby impose
any liability on one who, under its terms, is a stranger to the contract, and, in any event, in order
to bind a third person contractually, an expression of assent by such person is necessary.

Res inter alios acta aus neque nocet prodest – a thing done between others does not harm
or benefit others/ a contract cannot affect the rights of a non – party

SEC 25 Rule 130 – the act, declaration, or omission of another, cannot affect another except as
otherwise provided by law or agreement

Exceptions to the Principle of RELATIVITY

a) Nature, Stipulation, provision of law
b) Stipulation Pour autrui
c) Third person induces another to violate terms of the contract
d) Third person may be adversely affected by a contract he did not participate
e) Where the law authorizes the creditor to sue on a contract entered into by his debtor
(Accion Directa)

Requisites of a stipulation Pour Autrui

a) Stipulation in favor of a third person
b) Stipulation must be a part, not the whole contract
 c) Contracting parties must clearly and deliberately confer favor upon a third person, not
mere incidental benefit
d) Third Person must have communicated his acceptance to the obligor before its
revocation
e) Neither contracting parties bear legal representation or authorization of the third party
Art. 1312. In contracts creating real rights, third persons who come into possession of the object
of the contract are bound thereby, subject to the provisions of the Mortgage Law and the Land
Registration Laws. (n)

Art. 1313. Creditors are protected in cases of contracts intended to defraud them. (n)

Art. 1314. Any third person who induces another to violate his contract shall be liable for
damages to the other contracting party. (n)

Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are
bound not only to the fulfillment of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in keeping with good faith, usage and
law. (1258)

Consensuality of Contracts - perfection by mere consent

How contracts are perfected

a) Consensual contract – by mere consent
b) Real contracts – perfected by delivery
c) Formal or solemn contracts – special form is required

Perfection of Consensual Contracts

Perfected from the moment there is an agreement (consent) on the subject matter, and the
cause or consideration.

Art. 1316. Real contracts, such as deposit, pledge and Commodatum, are not perfected until the
delivery of the object of the obligation. (n)

Art. 1317. No one may contract in the name of another without being authorized by the latter, or
unless he has by law a right to represent him.

A contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is
revoked by the other contracting party. (1259a)

Requisites for a Person to Contract in the Name of Another: (DLS)

a) Duly authorized (expressly or impliedly)
b) Or by LAW a right to represent him (guardian or administrator)
c) Subsequently ratified

Effect of Ratification – cleanses the contract from all of its defects from the moment the contract
was entered into. Hence, there is a retroactive effect.