DIVINE WORD COLLEGE OF CALAPAN

SCHOOL OF ACCOUNTANCY
MODULE - LAW ON OBLIGATION AND CONTRACTS
Atty. Ma. Ellen C. Abas, CPA

LEARNING OVERVIEW

This course is the introductory subject for business laws. It includes an

introduction to law that systematically leads to the main subject in a
gradual manner. It also shows the practical applications of the different
legal provisions for obligations and contracts with numerous examples
typical of everyday life.

LEARNING OUTCOMES

At the end of the lesson, the students should be able to:

Learn obligation, its nature, effects and kinds.
Enumerate the causes why obligations are terminated.
Interpret certain contracts and give the reasons for their reformation.
Determine if a certain contract is valid or defective.

SUGGESTED READING MATERIALS

De Leon, Hector. Law On Obligations and Contracts (Latest Edition)
Agpalo, Ruben E. Obligations and Contracts (Latest Edition)

GENERAL INSTRUCTIONS:

1. Read the Module Discussion.

2. For offline mode - in all the activities, your answers must be
legibly handwritten in a separate paper. The submission date is found
at the start of each activity.
3. Submission may be done thru
a) Online (scan or photograph your answer), in MS word form with file
name, “law1 (your schedule) activity1 (your surname)”(e.g. law1
mwf4-5 activity1 abas) then send it to [email protected] OR
b) send it to our drop-off box at RJF Café, DWCC, Calapan City stating
therein your name, activity number, subject and schedule.

MODULE 3

Part 1
REQUIRED READING
De Leon, Hector. Law On Obligations and Contracts (Latest Edition) –
Chapter on Rescissible Contracts

KINDS OF DEFECTIVE CONTRACTS:

1. RESCISSIBLE CONTRACTS – Those which have caused a particular economic

damage either to one of the parties or to a 3 rd person and which may be
set aside even if valid. It may be set aside in whole or in part, to the
extent of the damage caused'

REQUISITES:
a. Contract must be rescissible
Page 1
 (1) Under art 1381:
i. Contracts entered into by persons exercising fiduciary capacity
(a) Entered into by guardian whenever ward suffers damage by
more than 1/4 of value of object
(b) Agreed upon in representation of absentees, if absentee
suffers lesion by more than ¼ of value of property
(c) Contracts where rescission is based on fraud committed on
creditor (accion pauliana)
(d) Objects of litigation; contract entered into by defendant
w/o knowledge or approval of litigants or judicial authority
(e) Payment by an insolvent – on debts w/c are not yet due;
prejudices claim of others
(f) Provided for by law - art 1526, 1534, 1538, 1539, 1542,
1556, 1560, 1567 and 1659
ii.Under art 1382 - Payments made in a state of insolvency
b. Plaintiff has no other means to obtain reparation
b. Plaintiff must be able to return whatever he may be obliged to return
due to rescission
c. The things must not have been passed to 3 rd parties who did not act in
bad faith
d. It must be made within the prescribed period

OBLIGATION CREATED BY THE RESCISSION OF THE CONTRACT: Mutual Restitution

1. Things w/c are the objects of the contract & their fruits
2. Price with interest

Note: Mutual restitution N.A. when:

1. creditor did not receive anything from contract
2. thing already in possession of party in good faith; subject to
indemnity only; if there are 2 or more alienations – liability of
1st infractor

Part 2

REQUIRED READING
De Leon, Hector. Law On Obligations and Contracts (Latest Edition) –
Chapter on Voidable Contracts

2. VOIDABLE CONTRACTS – intrinsic defect; valid until annulled; defect is

due to vice of consent or legal incapacity

CHARACTERISTICS:
a. Effective until set aside
b. May be assailed or attacked only in an action for that purpose
c. Can be confirmed ( Note: CONFIRMATION IS THE PROPER TERM FOR CURING
THE DEFECT OF A VOIDABLE CONTRACT)
d. Can be assailed only by the party whose consent was defective or his
heirs or assigns

WHAT CONTRACTS ARE VOIDABLE:

a. THOSE WHERE ONE OF THE PARTIES IS INCAPABLE OF GIVING CONSENT TO A
CONTRACT (legal incapacity)
(1) minors ( below 18 )
(2) insane unless acted in lucid interval
(3) deaf mute who can’t read or write
(4) persons specially disqualified: civil interdiction
(5) in state of drunkenness
(6) in state of hypnotic spell

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 b. THOSE WHERE THE CONSENT IS VITIATED BY MISTAKE, VIOLENCE,
INTIMIDATION, UNDUE INFLUENCE OR FRAUD (vice of consent)

(1) mistake – false belief into something

REQUISITES:
1. Refers to the subject of the thing which is the object of the
contract
2. Refers to the nature of the contract
3. Refers to the principal conditions in an agreement
4. Error as to person - when it is the principal consideration of
the contract
5. Error as to legal effect - when mistake is mutual and frustrates
the real purpose of parties

(2) violence – serious or irresistible force is employed to wrest

consent

(3) intimidation – one party is compelled by a reasonable & well-

grounded fear of an imminent & grave danger upon person & property
of himself, spouse, ascendants or descendants (moral coercion)

(4) undue influence – person takes improper advantage of his power

over will of another depriving latter of reasonable freedom of
choice

(5) fraud – thru insidious words or machinations of contracting

parties, other is induced to enter into contract w/o w/c he will
not enter (dolo causante)

PERIOD TO BRING ACTION FOR ANNULMENT

Intimidation, violence, 4 years from time defect of

undue influence consent ceases

Mistake, fraud 4 years from time of discovery

Incapacity from time guardianship ceases

EFFECTS OF ANNULMENT:
1. Obligation to give – mutual restitution
2. Obligation to do – value of service

PRESCRIPTION IN ACTION FOR ANNULMENT OF VOIDABLE CONTRACTS:

Intimidation/Violence/undu 4 years from time defect of

e Influence consent ceases

Mistake/Fraud 4 years from time of discovery

Contracts entered into by 4 years from time guardianship

minors/incapacitated ceases
persons

ACTIVITY 1 (to be submitted on ________)

Please practice Integrity in answering the activity.

(link will be provided at Google classroom)

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 Part 3

REQUIRED READING
De Leon, Hector. Law On Obligations and Contracts (Latest Edition) –
Chapter on Unenforceable Contracts.

3. UNENFORCEABLE CONTRACT – valid but cannot compel its execution unless

ratified; extrinsic defect; produce legal efefcts only after ratified

KINDS/VARIETIES:
1. Unauthorized/No sufficient authority – entered into in the name of
another when:
a. no authority conferred
b. in excess of authority conferred ( ultra vires )

Note: Curable by RATIFICATION

2. Both parties incapable of giving consent -2 minor or 2 insane persons

Note: Curable by ACKNOWLEDGEMENT

3. Failure to comply with Statute of Frauds

a. Agreement to be performed within a year after making contract
b. Special promise to answer for debt, default or miscarriage of
another
c. Agreement made in consideration of promise to marry
d. Agreement for sale of goods, chattels or things in action at price
not less than 500; exception: auction when recorded sale in sales
book
e. Agreement for lease of property for more than 1 year & sale of real
property regardless of price
f. Representation as to credit of another

2 WAYS OF CURING UNENFORCEABLE CONTRACTS:

1. Failure of defendant to object in time, to the presentation of parole
evidence in court, the defect of unenforceability is cured
2. Acceptance of benefits under the contract. If there is performance in
either part and there is acceptance of performance, it takes it out of
unenforceable contracts; also estoppel sets in by accepting
performance, the defect is waived

Part 4

REQUIRED READING
De Leon, Hector. Law On Obligations and Contracts (Latest Edition) –
Chapter on Void Contracts.

4. VOID OR INEXISTENT – of no legal effect

CHARACTERISTICS:
a. It produces no effect whatsoever either against or in favor of anyone

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 b. There is no action for annulment necessary as such is ipso jure. A
judicial declaration to that effect is merely a declaration
c. It cannot be confirmed, ratified or cured
d. If performed, restoration is in order, except if pari delicto will
apply
e. The right to set up the defense of nullity cannot be waived
f. Imprescriptible
g. Anyone may invoke the nullity of the contract whenever its juridical
effects are asserted against him

KINDS OF VOID CONTRACT:

1) Those lacking in essential elements: no consent, no object, no cause

(inexistent ones) – essential formalities are not complied with ( ex:
donation propter nuptias – should conform to formalities of a donation
to be valid )
(a) Those w/c are absolutely simulated or fictitious – no cause
(b) Those which cause or object did not exist at the time of the
transaction – no cause/object
(c) Those whose object is outside the commerce of man – no object
(d) Those w/c contemplate an impossible service – no object
(e) Those w/c intention of parties relative to principal object of
the contract cannot be ascertained

2) Prohibited by law
(f) Those expressly prohibited or declared void by law - Contracts w/c
violate any legal provision, whether it amounts to a crime or not

3) Illegal/Illicit ones – Those whose cause, object or purpose is

contrary to law, morals, good customs, public order or public policy ;
Ex: Contract to sell marijuana

KINDS OF ILLEGAL CONTRACTS

CONTRACT CONSTITUTE CONTRACT DOES NOT

CRIMINAL OFFENSE CONSTITUTE CRIMINAL
OFFENSE BUT IS ILLEGAL
OR UNLAWFUL PER SE

Parties are  No action for  No action for

in pari specific performance specific performance
delicto  No action for  No action for
restitution on either restitution on either
side. The law will side. The law will
leave you where you leave you where you
are are
 Both shall be  No confiscation
prosecuted
 Thing/price to be
confiscated in favor
of government
Only one  No action for  No action for
party is specific performance specific performance
guilty  Innocent party is  Innocent party is
entitled to entitled to
restitution restitution
 Guilty party is not  Guilty party is not
entitled to entitled to
restitution restitution
 Guilty party will be

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 prosecuted
 Instrument of crime
will be confiscated
in favor of govt

PARI DELICTO DOCTRINE -both parties are guilty, no action against each
other; those who come in equity must come with clean hands; applies only
to illegal contracts & not to inexistent contracts; does not apply when
a superior public policy intervenes

EXCEPTION TO PARI DELICTO RULE

1. If purpose has not yet been accomplished & If damage has not been
caused to any 3rd person
Requisites:
a) contract is for an illegal purpose
b) contract must be repudiated by any of the parties before purpose
is accomplished or damage is caused to 3rd parties
c) court believes that public interest will be served by allowing
recovery (discretionary upon the court ) – based on remorse;
illegality is accomplished when parties entered into contract;
before it takes effect – party w/c is remorseful prevents it

2. Where laws are issued to protect certain sectors: consumer protection,

labor, usury law
a) Consumer protection – if price of commodity is determined by
statute, any person paying an amount in excess of the maximum price
allowed may recover such excess
b) Labor – if law sets the minimum wage for laborers, any laborer who
agreed to receive less may still be entitled to recover the
deficiency; if law set max working hours & laborer who undertakes
to work longer may demand additional compensation
c) Interest paid in excess of the interest allowed by the usury law
may be recovered by debtor with interest from date of payment

3. If one party is incapacitated, courts may allow recovery of money,

property delivered by incapacitated person in the interest of justice;
pari delicto cannot apply because an incapacitated person does not
know what he is entering into; unable to understand the consequences
of his own action

4. If agreement is not illegal per se but merely prohibited & prohibition

is designated for the protection of the plaintiff – may recover what
he has paid or delivered by virtue of public policy

MUTUAL RESTITUTION IN VOID CONTRACTS

General Rule: parties should return to each other what they have given
by virtue of the void contract in case where nullity arose from defect
in essential elements
1. return object of contract & fruits
2. return price plus interest

Exception: No recovery can be had in cases where nullity of contract

arose from illegality of contract where parties are in pari delicto;
except:
a. incapacitated – not obliged to return what he gave but may
recover what he has given
b. other party is less guilty or not guilty

ACTIVITY 2 (to be submitted on ________)

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Please practice Integrity in answering the activity.

(link will be provided at Google classroom)

Part 5

REQUIRED READING
De Leon, Hector. Law On Obligations and Contracts (Latest Edition) –
Chapter on Natural Obligations.

NATURAL OBLIGATIONS

Four types of obligations in juridical science (reduced to two by

jurisprudence)
1. Moral obligations - duties of conscience completely outside the
field of law
2. Natural obligations - duties not sanctioned by any action but
have a relative judicial effect
3. Civil obligations - juridical obligations that are in
conformity with positive law but are contrary to juridical
principles and susceptible of being annulled; enforceable by
action
4. Mixed obligations - full juridical effect; falls under civil
obligations

Definition Art 1423 - not being based on positive law but on equity
and natural law, do not grant a right of action to enforce their
performance, but after voluntary fulfillment by the obligor, they
authorize the retention of what has been delivered or rendered by reason
thereof.
• Midway between civil and the purely moral obligation. "Obligation
without a sanction," susceptible of voluntary
performance, but not through compulsion by legal means.
• Real obligation which law denies action, but which the debtor may
perform voluntarily.
• Patrimonial and presupposes a prestation.

Requisites of Natural Obligation

1. Juridical tie between two persons.
2. Tie is not given effect by law but instead by the conscience of
man and distinguishes it from civil obligations.

As distinguished from Civil Obligations

NATURAL CIVIL

As to Not by court actions, Court action or the

enforceabilit but by good conscience coercive power of
y of debtor public authority

As to basis Equity and natural Positive law

justice

As distinguished from Moral Obligations

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 NATURAL PURELY MORAL

There is a juridical tie There is no juridical tie

Performance by the debtor is a Act is purely liberality

legal fulfillment of the
obligation

A true obligation with a Matter is entirely within the

legal tie between debtor domain of morals
and creditor

Conversion to Civil Obligation

GENERAL RULE: Partial payment of a natural obligation does not make it

civil; the part paid cannot be recovered but the payment of the balance
cannot be enforced. (applicable only to natural obligation because of
prescription or lack of formalities (nullity due to form e.g. Art 1430)
and not to natural obligation subject to ratification or confirmation.

• Payment by mistake is not voluntary and may be recovered. Payment is

voluntary when the debtor knew that the obligation is a natural one.
One who pays a natural obligation, believing it to be civil, does not
thereby recognize the natural obligation; and there being no civil
obligation either, he can recover what he has paid. The debtor however
has the burden of proving the mistake.

1. By novation
2. By confirmation or ratification

Examples of Natural Obligations

Art 1424. When the right to sue upon a civil obligation has lapsed by
extinctive prescription, the obligor who voluntarily performs the
contract cannot recover what he has delivered or the value of the service
he has rendered.
Art 1425. When without the knowledge OR against the will of the debtor,
a 3rd person pays a debt which the obligor is not legally bound to pay
because the action thereon has prescribed, but the debtor later
voluntarily reimburses the third person the obligor cannot recover what
he has paid.

Art 1426. When a minor 18-21 entered into a contract without the
consent of the parent or guardian, after the annulment of the contract,
voluntarily returns the whole thing or price received, notwithstanding
that he has not been benefited thereby, there is no right to demand the
thing or price thus returned.

Art 1427 When a minor 18-21 entered into a contract without the consent
of the parent or guardian, voluntarily pays a sum of money or delivers a
fungible thing in fulfillment of an obligation, there shall be no right
to recover the same from the oblige who has spent or consumed it in good
faith.
- Not the voluntary payment that prevents recovery, but the
consumption or spending of the thing or money in good faith.
- This article creates an exception to the rule of mutual
restitution. Minor would have been required to return
whatever he received upon annulment of contract.

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 - Good faith: belief that debtor has capacity to deliver the
object of contract
- Fungible thing: consumable
- Non-consummable: debtor cannot recover if no longer in the
possession of the creditor, because the right to recover
presupposes existence of thing.

Art 1428 When after an action to enforce a civil obligation has

failed, the defendant voluntarily performs the obligation, he cannot
demand the return of what he has delivered or the payment of the value
of the service he has rendered.

Art 1429 When a testate or intestate heir voluntarily pays a debt of a

decedent exceeding the value of the property which he received by will
or by the law of testacy from the estate of the deceased, the payment is
valid and cannot be rescinded by the payer.

Art 1430 When a will is declared void because it has not been executed
in accordance with the formalities required by law, but one of the
intestate heirs, after the settlement of the debts of the deceased, pays
a legacy in compliance with a clause in the defective will, the payment
is effective and irrevocable.

ACTIVITY 3 (to be submitted on ________)

Please practice Integrity in answering the activity.

(link will be provided at Google classroom)

MODULE QUIZ/FORMATIVE ASSESSMENT

Two (2) set of quizzes will be sent on

_____________________________________.

EVALUATION/REFLECTION

1. What am I learning from this module?

2. Which topics I have understand better?
3. Which topics are still unclear to me or I am finding hard or
challenging?
4. What was the most important thing I learned from this module?

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