Contracts and Obligations: Basic Rules of the Civil Code

The Civil Code starts from a strong rule:

A contract needs three things: consent of the parties, an object certain that is the subject matter of the contract, and a cause (Article 1318). The form is usually free:

So a spoken agreement can bind as much as a written one, and a signed promissory note can bind even without a notary. The exception is when a law requires a certain form for validity or enforceability, as Article 1356 goes on to say. See Is a verbal agreement binding? and Is a promissory note valid without a notary?

The Civil Code sorts defective contracts into groups:

The Statute of Frauds covers six agreements, such as a lease longer than one year or a sale of land, that need a note or memorandum signed by the party being sued. See Void vs voidable vs unenforceable contracts and Can a minor sign a contract?

Article 1169 says:

No demand is needed when the obligation or the law expressly says so, when the date was the controlling motive for the contract, or when demand would be useless. In a contract where both sides owe something, neither is in delay while the other has not complied. A written demand letter also interrupts the period to sue (Article 1155). See Do you need to send a demand letter before suing?

In reciprocal obligations, yes, within limits. Under Article 1191, the injured party may choose between fulfillment and rescission, with damages in either case, and the court decrees the rescission unless there is just cause to give the other side more time. In Spouses Kaw v. Heirs of Nodalo (2024), the Supreme Court said rescission is allowed only for a breach so substantial that it defeats the object of the contract, not for a slight or casual breach, and that even a clause allowing one side to cancel on its own needs court validation. See The other party did not pay: can you cancel? and rescission.

When it was caused by a fortuitous event. Article 1174 says that, as a rule, no one is responsible for events that could not be foreseen, or that were foreseen but could not be avoided, unless the law, the contract or the nature of the obligation puts the risk on him. In Sicam v. Jorge (2007), the Supreme Court said that robbery by itself is not a fortuitous event and held a pawnshop liable for pawned jewelry taken while its vault was open. See Force majeure and fortuitous event.

• Guarantor or surety. Under Article 2047, a guarantor pays only if the debtor fails, and as a rule only after the creditor has gone after the debtor first. A person who binds himself solidarily with the debtor is a surety, and the creditor may collect from him directly. In Palmares v. Court of Appeals (1998), a co-maker who signed as "jointly and severally" liable was held to be a surety. See Guarantor vs surety and Are you liable as co-maker?
• Collateral. A lender cannot simply keep mortgaged or pledged property when the debtor fails to pay. Article 2088 says:

The forbidden clause is called pactum commissorium; the lender's remedy is foreclosure. Movable collateral is now also governed by the Personal Property Security Act (RA 11057). A "sale with right to repurchase" may be presumed a loan with a mortgage in the cases of Article 1602. See Can a lender keep the collateral? and Sale with right to repurchase.

Article 1484, the Recto Law, protects buyers of movables on installment. If the buyer fails to pay, the seller chooses one of three remedies: exact fulfillment of the obligation; or, when two or more installments are unpaid, cancel the sale or foreclose the chattel mortgage on the thing sold. If it forecloses, it can no longer recover the unpaid balance. In Elisco Tool Manufacturing v. Court of Appeals (1999), the Supreme Court said the remedies are alternative: choosing one bars the others. See Item bought on installment was repossessed.

It must be returned. Under Article 2154, a person who receives something he had no right to demand, delivered by mistake, must return it. This is solutio indebiti, a quasi-contract. Article 22 adds the general rule against keeping what was obtained at another's expense without just or legal ground. See Sent money to the wrong account.

It depends on the kind of action. An action upon a written contract must be brought within ten years (Article 1144); an action upon an oral contract, within six years. Each period is in the prescription of civil actions table. See How many years can you collect a debt?

These are made-up examples to show how the rules work. They are not advice for any real case.

Carlo agrees by text message to rent a stall to Dina for six months. Under Article 1356, the agreement binds even though it was never notarized, because a lease of one year or less is not among the agreements the Statute of Frauds requires to be in writing.

Nena paid half the price of a used van, but the seller never delivers it. Under Article 1191, she may ask the court to order delivery or to rescind the sale and return her money, with damages in either case. A substantial breach like non-delivery supports rescission.

Arnel signed his cousin's loan as co-maker, "jointly and severally". When the cousin stops paying, the lender asks Arnel for the whole balance. Following Article 2047 and Palmares, Arnel is a surety, and the lender may collect from him directly.

Get legal help before you sign a contract with large amounts or long terms, before you sign as co-maker or give property as collateral, and when you plan to cancel a contract or sue on one. The wording of the contract and the dates of demand and payment often decide the case. If you cannot afford a lawyer, see Free legal help in the Philippines.