DEFINITION OF TERMS

Consent = It is the meeting of the minds between the parties on the subject matter and the cause of the contract,
even if neither one has been delivered.

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.

Delegacion = This is defined as a method of novation caused by the replacement of the old debtor by a new debtor,
who (the old debtor) has proposed him to the creditor, and which replacement has been agreed to by said
creditor and by said debtor.

Novation = is the substitution or change of an obligation by another, resulting in its extinguishment or modification,
either by (1) changing its object or principal conditions; or (2) by substituting another in place of the debtor; or
(3) by subrogating a third person in the rights of the creditor.

Option = it is a contract granting a person the privilege to buy or not to buy certain objects at any time within the
agreed period at a fixed price.

Principal conditions = the term “principal conditions” in Art. 1291 of the NCC should be construed to include a
change in the period to comply with the obligation, which change in the period would only be partial novation,
since the period merely affects the performance, not the creation of the obligation. (Ong v. Bogñalbal, 501 SCRA
490 [2006])

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

-------------------------------------------------------------------------------------------

ENUMERATIONS

Two Kinds of Novation (as per lecture w/ Judge)

a) Extinctive novation

b) Modificatory novation

Requisites for Novation (in General) (p. 490)

(EX-IN-CA-VA)
a) The existence of a VALID old obligation.
[NOTE: 1) If the old obligation is VOID or NON-EXISTENT, there is nothing to novate.
2) If the old obligation is VOIDABLE, novation is still possible provided the obligation has not yet
been annulled.

b) The intent to extinguish or to modify the old obligation by a substantial difference (the extinguishment or
modification itself is a RESULT of novation).
 c) The capacity and consent of all the parties (except in the case of expromision, where the old debtor does not
participate).

d) The validity of the new obligation.

Express and Implied Novation (2 Kinds) (p. 493)

According to the manner or form in which the novation has been constituted or made, novation is classified
into:

a) Express novation – when it is declared in unequivocal terms that the obligation is extinguished by a new one
which substitutes the same.

b) Implied novation – when the old and the new obligations are incompatible with each other on every point
(Art. 1292);

Implied novation is done by making SUBSTANTIAL CHANGES –

a) In the object or subject matter of the contract (Example: delivery of a car instead of a diamond ring)

b) In the cause or consideration of the contract (Example: an upward change in the price)

(NOTE: Reduction in price implies a remission)

c) In the principal terms or conditions of the contract.

Requisites for Expromision (p. 506)

(IN-CO-EX)
a) The initiative must come from a third person (who will be the new debtor)

b) The new debtor and the creditor must consent

c) The old debtor must be excused or released from his obligation

(NOTE: The old debtor’s consent or knowledge is not required, [Art. 1293, Civil Code])
(NOTE: The mere written statement of a widow that she hoped to pray part of her husband’s bank debt does
not result in expromision)

The Parties in Delegacion

a) The delegante = the original debtor

b) The delegatorio = the creditor

c) The delegado = the new debtor

Requisites for Delegacion

a) The initiative comes from the old debtor.

b) All the parties concerned must consent or agree.

 (NOTE: The consent of the creditor:

1) may be given in any form;

2) may be express, or may be implied [from his acts but not from his mere acceptance of payment by a
third party, for there is no true transfer of the debt here];

3) may be before or after the new debtor has given his consent;

4) may be conditional, but the condition has to be fulfilled; otherwise, there is no valid delegacion.

Requisites to Hold Old Debtor Liable (In delegacion)

For the old debtor to be liable if the new debtor is insolvent, it is required that either of the following must
be present:

a) The insolvency was already existing and of PUBLIC KNOWLEDGE at the time of delegation;

b) OR the insolvency was already existing and KNOWN TO THE DEBTOR at the time of the delegation.

(NOTE that if the insolvency occurred only AFTER the delegation, the old debtor is not liable.)

May a Prescribed Obligation Be the Subject of Novation (page 516)

Yes, because unless the defense of prescription is set up by the debtor, the obligation continues, since this
failure amounts to a WAIVER (Estrada v. Villareal)

[NOTE: A prescribed debt, constituting as it does a moral or natural obligation, may be the cause or
consideration of a new obligation to pay therefor. (Villareal v. Estrada, 71 Phil. 140)

Conventional or Voluntary Subrogation (Art. 1301)

For conventional or legal subrogation, the consent of ALL the parties is required:

a) The debtor – because he becomes liable under the new obligation; and because his old obligation ends

b) The old creditor – because his credit is affected

c) The new creditor – because he becomes a party to the obligation.

[NOTE: Generally, the debtor loses the right to present against the new creditor any defense which he, the
debtor, could have set up against the old creditor]

Partial Subrogation (Art. 1304)

Here, there are two creditors:

a) The old creditor, who still remains a creditor as to balance (because only a partial payment has been made
to him);

b) The new creditor who is a creditor to the extent of what he had paid the creditor.
Limitations on the Nature of the Stipulations

a) the law

b) morals

c) good customs

d) public order

e) public policy

Limitations Imposed by Law

(CO-RE-PA UP-DE)
a) The contractual stipulations must not be contrary to mandatory and prohibitive laws (Art. 5, Civil Code).
[Directory and suppletory laws need not be complied with, since these are either discretionary, or merely
supply the omissions of the parties.]

b) Contracts must respect the law, for the law forms part of the contract.

c) In a mortgage contract, a pactum commissorium (a clause providing that the mortgagee will automatically
own the property mortgaged if the debt is not paid at maturity) is null and void.

[NOTE: The mortgage itself, however, remains valid]

d) Likewise, an “upset price” is not allowed in a mortgage contract.

e) The parties to a contract cannot deprive a competent court of its jurisdiction, [because jurisdiction is fixed by
law, and not by the will of the parties. However, venue, or the place where the action may be brought, can
be the subject of stipulation.]

Limitations Imposed by Morals (page 548)

a) Morals deal with right and wrong and with human conscience.

Limitations Imposed by Good Customs (page 552)

Good customs are those that have received for a period of time practical and social confirmation. [According
to the Code Commission, good customs and morals “overlap each other; but sometimes they do not.”]

Limitations Imposed by Public Order (page 552)

a) Public order deals with the public weal and includes public safety

b) Public order as used in the old Civil Code was synonymous with public policy.

Limitations Imposed by Public Policy (page 552)

 a) Public policy, [which varies according to the culture of a particular country,] is the “public, social and legal
interest in private law.” (Ferrazzini v. Gsell, 34 Phil. 697). It is said to be the manifest will of a State.

b) A contract is contrary to public policy if it “has a tendency to injure the public, is against the public good, or
contravenes some established interest of society, [or is inconsistent with sound policy and good morals, or
tends clearly to undermine the security of individual’s rights.]” (Gabriel v. Monte de Piedad, 71 Phil. 500).

Examples of Stipulations Which Have Been Declared Valid (page 555)

(LI-FI-IN EM-PA-CO)
a) A stipulation limiting the liability of a guarantor or surety for only one year (or as long as it is for a longer
time than the period fixed for the principal debtor).

b) A stipulation in a fire insurance policy that the action by the insured should be brought within a reasonable
time. (Macias & Co. v. China Fire Insurance Co., 46 Phil. 345)

c) A stipulation that interest on loans be compounded. (Gov’t v. Vaca, 64 Phil. 6).

d) A stipulation that an employee may be dismissed at anytime when his services are no longer needed; or that
an employee may leave the services of the employer, without previous notice. (Borrowsky v. Isako, [CA] 40
O.G. 12th Supp., p. 264)

e) A stipulation to pay a debt, incurred during the Japanese occupation in Philippine currency after liberation.
(De Leon v. Syjuco, Inc. 90 Phil. 311)

f) A stipulation in a contract of lease, allowing the tenant to retain the rents of the house for the payment of
repairs and taxes (De los Reyes v. De los Reyes, 8 Phil. 803).

The Four Kinds of Innonimate Contracts (Art. 1307, page 557)

a) do ut des (I give that you may give)

b) do ut facias (I give that you may do)

c) facio ut des (I do that you may give)

d) facio ut facias (I do that you may do)

Legal Services for a Friend (page 558)

If an attorney renders legal services for a close friend, the former can still charge attorney’s fees even in the
absence of any agreement thereon. [This is because of the innominate contract of facio ut des (I do that you may
give) which, in turn, is based on the principle that one cannot unjustly enrich himself at another’s expense].

Consequences of MUTUALITY (Art. 1308, page 559)

(REV-FUL)
a) 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 bad bargain] (Fernandez v. MRR, 14 Phil. 274)
 b) When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation is
void (Art. 1182, Civil Code) if the condition is SUSPENSIVE; If RESOLUTORY, the obligation is valid. [Hence, it is
all right for the contract to expressly give to one party the right to CANCEL the same. This is because, when
the contract is thus cancelled, the agreement is really being FULFILLED.

[NOTE: When a cancellation is made, BOTH parties must of course be released.]

Determination by Third Person (Art. 1309, page 563)

Example: In a contract of sale, the fixing of the price and the delivery date can be left to a third person.

When Decision is Binding (Art. 1309, page 563)

The decision binds the parties only after it is made known to both.

Evidently Inequitable Determination Is Not Binding (Art. 1310, page 563)

a) What is equitable is a question of fact, to be ascertained from the attendant circumstances.

b) The court is called upon to decide what is equitable.

Requisites of Consent (Art. 1319)

(2-CA-VI CO-IN)
a) There must be two or more parties

[NOTE: One person may represent two or more parties, unless there are contradictory or prejudicial
interests involved.]

b) The parties must be capable or capacitated (hence, if one party be insane, the contract is merely voidable).

c) There must be no vitiation of consent

[Example: There must be no fraud or intimidation, otherwise the contract is voidable]

d) There must be no conflict between what was expressly declared and what was really intended. [Otherwise,
the remedy may be reformation, as when the parties really intended to be bound, or else the contract is
VOID, as when the contract is fictitious or absolutely simulated.]

e) The intent must be declared properly (that is, whatever legal formalities are required must be complied
with).

Requisites for the Meeting of the Minds (Art. 1319, page 598)

a) an offer that must be CERTAIN;

b) and an acceptance that must be UNQUALIFIED and ABSOLUTE

[NOTE: If the acceptance is qualified, let us say by a condition, this merely constitutes a COUNTER-OFFER].
Forms of Acceptance (Art. 1320, page 607)

Acceptance may be:

a) express;

b) implied from conduct, or acceptance of unsolicited services (Perez v. Pomar, 2 Phil. 682)

c) presumed (by law) [as when there is failure to repudiate hereditary rights within the period fixed by law; or
when there is SILENCE in certain specific cases as would intend to mislead the other party, and thus place
the silent person in estoppel].

Things that May Be Fixed by the Offerer (Art. 1321, page 609)

a) the time

b) the place

c) the manner of acceptance

Acceptance of an Offer Made Through an Agent (Art. 1322, page 610)

a) This Article applies when BOTH the offer and the acceptance are made through an AGENT (who is an
extension of the personality of the principal.

b) Any other intermediary (who is not an agent, with power to bind) is merely a sort of messenger, who must
communicate to the person who sends him; otherwise, there is as yet no meeting of the minds.

Other instances when the offer becomes ineffective (Art. 1323, page 612)

An offer becomes ineffective upon the

a) Death;
b) civil interdiction;
c) insanity; or
d) insolvency

of either party (Art. 1323)

There are other instances when the offer becomes ineffective, namely:

(RE-AC-SU PE-RE)
a) When the offeree expressly or impliedly rejects the offer.

b) When the offer is accepted with a qualification or condition (for here, there would merely arise a counter-
offer).

c) When before acceptance is communicated, the subject matter has become illegal or impossible.

d) When the period of time given to the offeree within which he must signify his acceptance has already lapsed.

e) When the offer is revoked in due time (that is, before the offeror has learned of its acceptance by the
offeree).
Two Classes of Voidable Contracts (Art. 1327, page 618)

a) Those where one party is incapacitated to give consent (Art. 1327, Civil Code)

b) Those where the consent of one party has been vitiated (such as by error, fraud, violence, intimidation, and
undue influence).

[NOTE: These contracts in general are valid until annulled; however, annulment cannot prosper when they
have been ratified.]

Some Voidable Contracts by Reason of Incapacity (Art. 1328, page 622)

The voidable contracts referred to in this Article are those entered into by:

a) Insane or demented persons (unless they acted during a lucid interval);

b) Those in the state of drunkenness (which temporarily results in complete loss of understanding, and may
therefore be equivalent to temporary insanity).

c) Those entered into during a hypnotic spell (induced by drugs, or by deliberate or unintentional hypnotism)
or while a person walks during his sleep, somnambulism, for in these cases, a person is incapable of
intelligent consent.)

Incompetents Under the Rules of Court (Art. 1329, page 623)

Under the Rules of Court, the following are considered incompetents, and may be placed under
guardianship:

CIV-HOS-PRO UN-TA
a) Those under civil interdiction;

b) Hospitalized lepers;

c) Prodigals (spendthrifts)

d) Deaf and dumb who are unable to read and write

e) Those of unsound mind even though they have lucid intervals

f) Those who by reason of age, disease, weak mind, and other similar causes, cannot without outside aide,
take care of themselves and manage their property, [becoming thereby an easy prey for deceit and
exploitation.]

Causes of Vitiated Consent (Art. 1330, page 624)

Aside from “incapacity to give consent,” the following are causes of vitiated consent: (also referred to as
vices of consent)

a) Mistake

b) Fraud

c) Violence
 d) Intimidation

e) Undue influence

[NOTE: Mistake and fraud affect the INTELLECT (which is the faculty in the mind of man, the proper object of
which is the TRUTH. They thus affect COGNITION.) Cognition must be intelligent.]

[NOTE: Violence, intimidation, and undue influence affect the WILL (which is the faculty in the mind of man, the
proper object of which is the GOOD. They thus affect VOLITION.) Volition must be free.]

-----------------------------------------------------------------------------------

RULES

Modificatory Novation (Art. 1296, page 513)

Article 1296 applies in particular to extinctive novation. If the novation is merely modificatory, are guarantors
and sureties released, if the novation is made WITHOUT their consent?

ANS:

a) If the modified obligation is now MORE ONEROUS, they are liable only for the original obligation.

b) If the modified obligation is now LESS ONEROUS, the guarantors and sureties are still responsible.

Effect on Stipulation Pour Autrui (In novation)

The rule given in Art. 1296 referring to the automatic extinction of all the accessory obligations speaks of one
exception. What is this?

ANS: Accessory obligations or stipulations made in favor of third persons (stipulations pour autrui) remain
unless said third persons have their consent to the novation.

Reason: Their rights to the accessory obligations (which for them is really a distinct one) should not be
prejudiced without their consent.

Effect if the New Obligation Is Void (In Novation)

This Article highlights one of the essential requisites of a valid novation, namely, the new obligation must be
VALID and EFFECTIVE. Thus, if the new obligation is void, there is no novation, and the old obligation generally will
subsist.
Rule if New Obligation Is Merely Voidable (In Novation)

Suppose the new obligation is voidable, what happens to the old obligation?

ANS:

a) The old obligation is novated because a voidable obligation is valid until it is annulled .

b) If the new obligation is annulled, the old obligation subsists , and whatever novation has taken place
will naturally have to be set aside (Encomienda v. Mendieta, [CA] 8 A.C.R. 438)

Rule if the Old Obligation Was Voidable (Art. 1298, page 515)

Suppose the old obligation was VOIDABLE and has not yet been annulled, may there be a valid novation?

ANS: YES, provided that:

a) Annulment may be claimed only by the debtor;

b) Or when ratification validates acts which are voidable.

Rule if the Old Obligation Was Extinguished by Loss (Art. 1298, page 516)

May an old obligation that has been extinguished by LOSS of the subject matter be novated?

ANS: It depends:

a) If the loss was purely because of a fortuitous event without liability on the part of the debtor, the novation is
VOID for there would be NO obligation to novate.

b) If the loss made the debtor liable, there is still an existing monetary obligation that may be the subject of
novation.

Effect if the Original Obligation Was Conditional (Art. 1299)

General Rule:

The conditions attached to the old obligation are also attached to the new obligation.

Exception:

If there is a CONTRARY STIPULATION.

Governing Rules for Innominate Contracts

(STI-TIT ANA-CUS)
a) stipulations
 b) Titles I and II of Book IV – Obligations and Contracts

c) Rules on the most ANALOGOUS nominate contracts

d) Customs of the place

Rule if Contract is Violated Through Inducement of Third Person

This Article gives an instance when a stranger to a contract can be sued in view of his unwarranted
interference. Whoever is injured may properly sue for damages. (Gilchrist v. Cuddy, 29 Phil. 542)

General Rule on Options (Art. 1324, page 612)

If the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at any time
before acceptance (or the thing being offered) by communicating such withdrawal.

Exception (Art. 1324, page 613)

When the option is founded upon a consideration as something paid or promised.

-------------------------------------------------------------------------------------------

QUESTIONS

Define Novation.

Novation is the substitution or change of an obligation by another, resulting in its extinguishment or

modification, either by:

1. Changing its object or principal conditions, or

2. By substituting another in place of the debtor, or

3. By subrogating a third person in the rights of the creditor (Art. 1291).

[It is one of the modes of extinguishing obligations through the creation of a new one effected by the change
or substitution of an obligatory relation by another with the intention of substantially extinguishing or modifying the
same.]
What requisites must concur in order that an obligation shall be extinguished or modified by novation?

In order that an obligation may be extinguished by another which substitute the same, there are four
requisites:

a) The existence of a VALID old obligation;

b) The intent to extinguish or to modify the old obligation by a substantial difference;
c) The capacity and consent of all the parties; and
d) The validity of the new obligation (Tiu Siuco v. Habana, 45 Phil. 707)

When can an obligation be impliedly extinguished by another which substitute the same?

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

[The test of incompatibility between the old and the new obligations is to determine whether or not both of
them can stand together, each having its own independent existence. If they can stand together, there is no
incompatibility; consequently, there is no novation. If they cannot stand together, there is incompatibility;
consequently, there is novation (Borja v. Mariano, 66 Phil. 93; Guerrero v. Court of Appeals, 29 SCRA 791; Millar v.
Court of Appeals, 38 SCRA 642).]

Suppose that in a second and new contract, the debtor acknowledges or ratifies the old contract, is there
novation?

There is no novation. It is clear that the first contract and the second contract can stand together; and
consequently, there can be no incompatibility between them (Ramos vs. Gibbon, 67 Phil. 371; Padilla vs. Levy
Hermanos, Inc., 69 Phil. 681; Pablo vs. Sapungan, 71 Phil. 145; Magdalena Estate, Inc. vs. Rodriguez, 18 SCRA
967; Millar vs. Court of Appeals, supra).

Suppose that in the second and new contract, there is a postponement of the date of payment or an extension of
the period, is there a novation?

There is no novation because in such cases there is no clear case of incompatibility between the 2
obligations; neither is there a change in the obligatory relation between the parties which will alter the essence of
the old obligation (Ynchausti & Co., vs. Yulo, 34 Phil. 978; Pascual vs. Lacsamana, 100 Phil. 381; La Tondeña, Inc.
vs. Alto Surety & Insurance Co., 101 Phil. 879).

Suppose that in a second and new contract, there is another method of payment agreed upon, or there is an
additional security, is there a novation?

There is no novation. It is clear that the two contracts can stand together; and consequently, there can be no
incompatibility between them (Zapanta vs. De Rotaeche, 21 Phil. 154; Bank of the P.I. vs. Herridge, 47 Phil. 57;
Millar vs. Court of Appeals, supra).

Suppose that in a second and new contract, a surety bond is filed, or a third person assumes payment of the
obligation and the creditor accepts partial payments from such third person, is there a novation?

There is no novation so long as there is no agreement that the first debtor shall be released from
responsibility. This is so even when a surety bond is filed, for the simple reason that such bond is not a new and
separate contract but merely an accessory of the original contract. In such a case, the third person who has assumed
payment of the obligation merely becomes a co-debtor or surety. [If there is no agreement as to solidarity, the first
and second debtors are considered obligated jointly. (Dungo vs. Lopena, 6 SCRA 1007; Magdalena Estate, Inc. vs.
Rodriguez, supra).]

What are the two (2) forms of novation by substitution of the person of the debtor? Define them and give their
essential requisites.

There are 2 forms of novation by substitution:

a) Expromision = if the substitution of debtors is effected with the consent of the creditor at the instance of
the new debtor even without the knowledge or against the will of the debtor. There are two kinds of
substitution by expromision:

a) Substitution with the knowledge and consent of the old debtor; and

b) Substitution without the knowledge or against the will of the old debtor.

b) Delegacion = if the substitution of debtors is effected with the consent of the creditor at the instance of
the old debtor with the concurrence of the new debtor. [In other words, delegacion refers to the
substitution of debtors effected when the original debtors offers and the creditor accepts a third
person who consents to the substitution.]

REQUISITES OF EXPROMISION:

a) The initiative for the substitution must emanate from the new debtor; and
b) There must be consent of the creditor to the substitution.

REQUISITES OF DELEGACION:

a) The initiative for the substitution must emanate from the old debtor;
b) Consent of the debtor; and
c) Acceptance by the creditor.

In expromision, suppose that the new debtor eventually paid the obligation when it became due and demandable,
what are the rights which are available to him?

The law says that payment by the new debtor gives him the rights mentioned in Arts. 1236 and 1237;
namely, beneficial reimbursement, if payment was made without the knowledge or against the will of the old
debtor; reimbursement and subrogation, if it was made with the old debtor’s consent.

According to Article 1293, payment by the new debtor gives him the right mentioned in Article 1236 and
1237. Consequently –

a) If the substitution is effected with the knowledge and consent of the original debtor; and consequently,
payment is made by the new debtor with or without the knowledge and consent of the original debtor, the
new debtor cannot demand reimbursement from the original debtor the entire amount which he has paid
and, at the same time, be subrogated to all the rights of the creditor (Article 1236, 1237, 1302, 1303).

b) If the substitution was effected without the knowledge and consent of the original debtor, and
consequently, payment is made by the new debtor again without the knowledge and consent of the original
debtor; the new debtor can demand reimbursement from the original debtor only insofar as the payment
has been beneficial to such debtor; but he cannot be subrogated to the rights of the creditor. However, if
payment is made with the knowledge and consent of the original debtor, although the substitution had been
 effected without his knowledge and consent, the new debtor can still demand reimbursement from the
original debtor of the entire amount which he has paid and, at the same time, be subrogated to all the rights
of the creditor (Article 1236, 1237, 1302, 1303)

In delegacion, suppose that the new debtor eventually paid the obligation when it became due and demandable,
what are the rights which are available to him?

The law says that (Article 1293) payment by the new debtor gives him the rights mentioned in Articles 1236
and 1237. Consequently, since the substitution was effected with the consent of all the parties, the new debtor
(delegado) can demand reimbursement from the original debtor (delegante) of the entire amount which he has paid
(Article 1236) as well as compel the creditor (delegatorio) to subrogate him in all of his rights (Articles 1302 and
1303).

In expromision, if the new debtor is unable to pay the obligation by reason of insolvency, can the creditor then
proceed against the old debtor for payment?

The law says (Article 1294) that if the substitution was effected without the knowledge or against the will of
the original debtor, the new debtor’s insolvency or non-fulfillment of the obligation shall not revive the original
debtor’s liability to the creditor. Thus, if the substitution was effected with the knowledge and consent of the
original debtor, the new debtor’s insolvency or non-fulfillment of the obligation shall revive the original debtor’s
liability to the creditor.

In delegacion, if the new debtor is unable to pay the obligation by reason of insolvency, can the creditor then
proceed against the old debtor for payment?

If the substitution was effected by delegacion, [according to Article 1295], the right of action of the creditor
can no longer be revived except in the following cases:

a) The insolvency was already existing and of PUBLIC KNOWLEDGE at the time of the delegation; or

b) The insolvency was already existing and KNOWN TO THE DEBTOR at the time of delegation.

PURPOSE OF THE TWO EXCEPTIONS:

The purpose of the two exceptions is to prevent the commission of fraud. With regard to the first exception,
the condition of the insolvency of the delegado was of public knowledge and should exist at the time the
delegation was made, because if it were otherwise, the delegante cannot then be held responsible since he
himself was not aware of it.

What is the effect of novation on accessory obligation?

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. (Art. 1296)

This Article applies to extinctive novation. If the novation is merely modificatory, the rules as to guarantors
who did not consent are as follows:

a) If the modified obligation is more onerous, they are liable only for the original obligation;

b) If the modified obligation is now less onerous, the guarantors and sureties are still responsible.
What is the effect of novation if:,

(1) the new obligation is void

a) 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 may be agreed upon. (Article 1297)]

or (2) if the old obligation was void

b) 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. (Article 1298)]

or (3) if the original obligation was conditional?

c) The conditions attached to the old obligation are also attached to the new obligation, [except if there is a
CONTRARY STIPULATION. (Article 1299)]

Define Subrogation.

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

What are the 2 forms of novation by subrogating a third person in the rights of the creditor?

a) CONVENTIONAL SUBROGATION – that which takes place by the agreement of the original creditor, the third
person substituting the original creditor and the debtor (Articles 1300 and 1301).

b) LEGAL SUBROGATION – that which takes place by operation of law (Articles 1300 and 1302).

Distinguish between conventional subrogation and assignment of rights.

a) AS TO THE Rules WHICH GOVERN – Conventional subrogation is governed by Articles 1300 to 1304, whereas
assignment of rights is governed by Articles 1624 to 1627.
b) AS TO THE NECESSITY OF DEBTOR’S CONSENT – In conventional subrogation, the debtor’s consent is
required, whereas in assignment of rights it is not.
c) AS TO EFFECT UPON THE OBLIGATION – Conventional subrogation has the effect of extinguishing the
obligation and giving rise to a new one, whereas assignment of rights has the effect of transmitting the rights
of the creditor to another person without modifying or extinguishing the obligation.
d) AS TO EFFECT UPON VICES – In conventional subrogation, defects or vices in the original obligation are
cured, whereas in assignment of rights they are not.
e) AS TO THE TIME OF EFFECTIVITY – In conventional subrogation, the effect arises from the moment of
novation or subrogation, whereas in assignment of rights the effect, as far as the debtor is concerned, arises
from the moment of notification.

What are the different exceptions to the rule that legal subrogation cannot be presumed?

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

b) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor;
and
 c) 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 (Article 1302)

What is the effect of subrogation?

If the subrogation is total, it transfers to the person subrogated the credit with all the appurtenant rights
either against the debtor or, against third persons, [be they guarantors or possessors of mortgages, subject to
stipulation in a conventional subrogation (Art. 1303)]

If the subrogation is partial, the same rule is applicable, but the creditor to whom partial payment has been
made may exercise his right for the remainder. [In other words, both the right of the subrogee and the right of the
creditor shall co-exist. In case of conflict between the 2, however, the right of the latter shall be preferred. (Article
1304).]

Distinguish a contract from an obligation.

Contract is the cause, whereas obligation is the effect. There are five sources of obligations, one of which is
contract. Consequently, there can be an obligation without a contract, but there can be no contract without a
resultant obligation.

What are the elements of a contract?

The elements of a contract may be classified as follows:

a) Essential elements = the essential elements are those without which there can be no contract

a. Common – those which are present in all contracts, such as consent, subject matter (object certain),
cause or consideration
b. Special – those which are present only in certain contracts, such as delivery in real contracts or form
in solemn ones.
c. Extraordinary – those which are peculiar to a specific contract, such as the price in a contract of sale.

b) Natural elements – those found in certain contracts, and presumed to exist, unless the contrary has been
stipulated.

(example: warranty against eviction and against hidden defects in the contract of sale)

c) Accidental elements – these are the various particular stipulations that may be agreed upon by the
contracting parties in a contract. They are called accidental, because they may be present or absent,
depending upon whether or not the parties have agreed upon them.

(examples: conditions, terms and modes)

What are the different phases/stages in the life of the contract?

a) Preparation (or Conception or “Generacion) – where the parties are progressing with their negotiations; they
have not yet arrived to any definite agreement, although there may have been a preliminary offer and
bargaining. [Negotiation covers the period from the time the prospective contracting parties indicate
interest in the contract to the time the contract is concluded (perfected)].
 b) Perfection (or birth) – where the parties have at long last came to a definite agreement, the elements of
definite subject matter and valid cause have been accepted by mutual consent. [The perfection takes place
upon the concurrence of the essential elements thereof.]

c) Consummation (or death or termination) – where the terms of the contract are performed, and the contract
may be said to have been fully executed. [The stage of consummation begins when the parties perform their
respective undertakings under the contract culminating in the extinguishment thereof.]

What are the basic principles or characteristics of a contract?

a) Both Parties are Mutually Bound [or Mutuality of Contracts] – the essential equality of the contracting
parties whereby the contract must bind both of them.

b) Freedom (or liberty) to Stipulate [or autonomy of contracts] – the contracting parties are free to enter into a
contract and to 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.

c) Perfection by Mere Consent as a rule (Consensuality).

d) Relativity – generally, it is binding only between the parties, their assigns and heirs.

e) Obligatory Force [or character of contracts] and Compliance In Good Faith – once the contract has been
perfected, it shall be of obligatory force upon both of the contracting parties.

What are the limitations upon the right of the contracting parties to establish such stipulations, clauses, terms,
and conditions as they may deem convenient?

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 (Article 1306).

[This is the principle of freedom to stipulate or autonomous nature of contracts. Freedom to stipulate terms
and conditions is the essence of the contractual system provided such stipulations are not contrary to law, morals,
good customs, public order, or public policy. This freedom also prohibits a party from coercing or intimidating or
unduly influencing another to enter into a contract.]

What laws govern contracts?

It is a rule that only laws existing at the time of the execution of a contract are applicable thereto and that
later statutes do not govern contracts unless the latter is specifically intended to have a retroactive effect. A later law
which enlarges, abridges or in any manner changes the intent of the parties to the contract necessarily impairs the
contract itself and cannot be given retroactive effect without violating the constitutional prohibition against
impairment of contracts. However, non-impairment of contracts or vested rights clauses will have to yield to the
superior and legitimate exercise by the State of police power.

How are the innominate contracts regulated?

Innominate contracts shall be regulated by:

1) The stipulations of the parties,

2) The provisions of Titles I and II of this Book,

3) The rules governing the most analogous nominate contracts, and

4) The customs of the place (Article 1307).

What is meant by mutuality of contracts?

The mutuality of contracts refers to the position of essential equality which must be occupied by both of the
contracting parties in relation of the contract.

The mutuality of contracts means that the contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them (Article 1308).

Can the determination of the performance be left to a third person?

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 (Article 1309).

When is the decision of the third person binding?

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

What is meant by Relativity of Contracts?

Relativity of contracts refers to the principle of the civil law that a contract can only bind the parties who had
entered into it or their successors who have assumed their personality or their judicial position, and that, as a
consequence, such contract can neither favor or prejudice a third person, [in conformity with the axiom res inter
alios acta aliis nocet prodest (the act, declaration, or omission of another, cannot affect another, except as otherwise
provided by law or agreement) [Vide Section 25, Rule 130, Rules of Evidence].] Thus Article 1311 declares that
“contracts take effect only between the parties, their assigns and heirs.”

What are the exceptions to the principle of relativity (where a contract may either favor or prejudice a third
person)?

(RIG-STI IN-AF-DE-LA)
a) 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 ( Article
1311).]

b) Where there is a Stipulation Pour Autrui (a stipulation in favor of a third party).

c) Where the third person induces another to violate his contract. [The third person who induces another to violate
his contract shall be liable for damages to the other contracting party ( Article 1314). This is called TORT
INTERFERENCE.]
d) Where, in some cases, third persons may be adversely affected by a contract where they did not participate. (See
Arts. 1312, 2150, 2151, Civil Code)

e) Where the contract is entered into in order to defraud a third person, [in which case, creditors are protected in
cases of contracts intended to defraud them (Article 1313).]

f) Where the law authorizes the creditor to sue on a contract entered into by his debtor (Accion Directa).

What is meant by stipulation pour autrui?

A stipulation pour autrui is a stipulation in a contract, clearly and deliberately conferred by the contracting
parties as a favor upon a third person who must accept it.

What requisites must concur in order that such a stipulation may be enforced?

Before such a stipulation may be enforced, it is necessary that the following requisites must concur:

a) There must be a stipulation in favor of a third person;

b) The contracting parties must have clearly and deliberately conferred a favor upon a third person;

c) That such benefit or interest must not be merely incidental;

d) The stipulation must be PART of the contract;

e) The third person communicated his acceptance to the obligor before its revocation; and

f) There must be no relation of agency between either of the parties and the third person.

It is not, however necessary that such third person be always named in the contract.

What are the requisites for tort interference?

a) Existence of a valid contract;

b) Knowledge on the part of the third person of the existence of contract; and

c) The interference of the third person is without legal justification or excuse.

How are contracts perfected?

Distinguish:

a) Consensual contracts - by mere consent (this is the general rule) (Art. 1315) (Example: contract of sale)

[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, maybe in keeping with good faith, usage and law (Article 1315).]

b) Real contracts – perfected by delivery (Examples: deposit and pledge). (Art. 1316, Civil Code)
 c) Formal or solemn contracts – here a special form is required for perfection. (Example: a simple donation
inter vivos of real property, to be valid and perfected, must be in a public instrument).

May a person contract in the name of another? (Requisite for a Person to Contract in the Name of Another)

No one may contract in the name of another, except when:

1) He has been duly authorized (expressly or impliedly); or

2) He must have by law a right to represent him (like the guardian, or the administrator); or

3) The contract must be subsequently ratified [expressly or impliedly, by word or by deed, by the person on
whose behalf it has been executed before it is revoked by the other contracting party (Art. 1317).

What are the effects?

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 (Art. 1317, par. 2)

What are the essential requisites of a contract?

There is no contract unless the following requisites concur:

(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 (Article 1318).

[This applies to consensual contracts. If the contract is real, a fourth requisite – delivery – is required, if
the contract is formal or solemn, there must be compliance with the formalities required by law.]

[When the law uses the word “concur”, it means that all the three (3) requisites must be present. The
absence of one requisite negates the existence of a contract.]

What is meant by consent?

As applied to contracts, consent signifies the concurrence of the wills of the contracting parties with
respect to the object and the cause which shall constitute the contract.

It is the concurrence of the will of the offerer and the acceptor as to the thing and the cause which
constitute a contract. An offer is a manifestation of a willingness to enter into a bargain so made as to justify
another person in understanding that his assent to that bargain is invited and will conclude it.

It is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are
to constitute the contract (Article 1319).

It is the meeting of the minds between the parties on the subject matter and the cause of the contract, even if
neither one has been delivered.

When are contracts perfected?

 In general, contracts are perfected from the moment there is a manifestation of the concurrence
between the offer and the acceptance with respect to the object and the cause which shall constitute the
contract (Article 1319, par. 1).

However, if the acceptance is made by letter or telegram, we must distinguish. According to Article
1319, par. 2, the contract is perfected from the moment that the offeror has knowledge of such acceptance.
The said article provides that “Acceptance made by letter or telegram does not bind the offerer except from
the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the
place where the offer was made.

An acceptance may be express or implied (Article 1320).

“X SENT A LETTER TO Y AND OFFERED HIS HOUSE AND LOT FOR SALE . TWO DAYS AFTER RECEIPT, Y SENT X A
LETTER ACCEPTING THE OFFER, BUT WHEN THE LETTER OF ACCEPTANCE REACHED X’S RESIDENCE, HE WAS
ALREADY DEAD. WAS THERE A MEETING OF THE MINDS?”

None. Acceptance made by a letter does not bind the offerer except from the time it came to his
knowledge (Article 1319). Since X was already dead when the letter of acceptance reached his residence, he
could not have known the said acceptance.

“SUPPOSE THE ACCEPTANCE WAS COMMUNICATED TO THE AGENT OF X WHO WAS ALIVE AT THE TIME HIS
AGENT CAME TO KNOW OF SUCH ACCEPTANCE, IS THERE A BINDING CONTRACT?

Yes, because the act of the agent or knowledge acquired by the agent duly authorized is also the act
of the principal, provided that he acted within the scope of his authority.

If there is an offer and there is an acceptance with conditions, is there a perfected contract?

None, because an offer must be clear and definite while an acceptance must be unconditional in
order that their concurrence can give rise to a perfected contract. If there are conditions imposed, there is
no meeting of the minds, as the same is a mere counter-offer.

What are the things that may be fixed by the offeror?

The person making the offer may fix the time, place, and manner of acceptance, all of which must be
complied with (Article 1321).

When is there acceptance when offer is made thru an agent?

An offer made through an agent is accepted from the time acceptance is communicated to him (Article
1322).

When does an offer become ineffective?

An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party
before acceptance is conveyed (Article 1323)

The phrase “before acceptance is conveyed” means before acceptance has come to the actual
knowledge of the offeror.
What is the rule on options?

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,

Exception:

when the option is founded upon a consideration, as something paid or promised (Article 1324).

[Thus, we must distinguish between the effect of an option which is without a consideration and
one which is founded upon a consideration upon the right of the offeror to withdraw his offer or proposal.
If the option is without any consideration, the offeror may withdraw his offer by communicating such
withdrawal to the offeree at any time before acceptance; if it is founded upon a consideration, the offeror
can not withdraw his offer. Upon the expiration of the option period and the person given such option does
not manifest his or her acceptance, the offeror may offer the intended contract to somebody else.]

What is the rule with respect to business advertisement and advertisements for bidders?

a) Unless it appears otherwise, business advertisements of things for sale are not definite offers, but
mere invitations to make an offer (Article 1325).

b) Advertisements for bidders are simply invitations to make proposals, and the advertiser is not
bound to accept the highest or lowest bidder, [unless the contrary appears] (Article 1326).

Who are incapacitated to give their consent?

The following cannot give consent to a contract:

a) Unemancipated minors;

b) Insane or demented persons, and deaf-mutes who do not know how to write (Article 1327) ;

c) Deaf-mutes who do not know how to write;

d) Married women of age in cases specified by law;

e) Persons suffering from civil interdiction; and

f) Incompetents under guardianship (Rules 93-94, Rules of Court).

The incapacity declared in article 1327 is subject to the modifications determined by law, and is
understood to be without prejudice to special disqualifications established in the laws (Article 1329).

Under the Family Code, emancipation takes place by the attainment of the age of majority and,
unless otherwise provided, majority commences at the age of eighteen years.

What is the status of a contract entered into during lucid intervals, in a state of drunkenness or during hypnotic
spells, or when consent was given through mistake, violence, intimidation, undue influence or fraud?

Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of
drunkenness or during a hypnotic spell are voidable (Article 1328).
 Lucid interval is that period of time when an insane person acts with reasonable understanding,
comprehension and discernment with respect to what he is doing.

Contracts entered into a state of drunkenness may likewise be annullable. However, the intoxication
must be of such character as to perpetuate undue advantage over the drunken person.

A contract where consent is given through mistake, violence, intimidation, undue influence, or
fraud is voidable (Article 1330)

What are the vices of consent?

a) VICES OF THE WLL - mistake, violence, intimidation, undue influence, or fraud (Article 1330)

b) VICES OF DECLARATION – comprehends all forms of simulated contracts.