Revise Note Obilgation and Contract

ATENEO DE DAVAO UNIVERSITYSchool of Business and Governance

CPA Review Center

BUSINESS LAW(May 23, 2009)

REVIEW ON LAW ON OBLIGATIONS (Articles 1156-1304 of the Civil Code)

I. Obligations – General Provisions

1. Meaning of “Law on Obligations and Contracts”?

The law on obligations and contracts is the body of rules which deals with the nature and resources of obligations and rights and duties arising from agreements and contracts.

2. Source of the Law on Obligations and Contracts is the Civil Code of the Philippines (Republic Act No. 388) which took effect August 30, 1950. The Civil Code is derived from the Civil Code of Spain of 1889.

3. Meaning of obligation:Code basis Article 1158 – obligation is juridical necessity to give to do or not to do.

4. Criticism as to the definition of the Civil Code by Justice J.B.L. Reyes.

It views obligation from the debit side. There is no debt with credit and the credit is an asset in the patrimony of the creditor just as the debt is the liability of the obligor.

Better definition: the one given by Arias Ramos, one of the commentators of the Civil Code:

An obligation is a juridical relation whereby a person (called creditor) may demand from another (called debtor) the observance of a determinative conduct (the giving, doing or not doing) and in case of breach, may demand satisfaction from assets of the latter.

5. Kinds of obligations based on its definition:

Real obligation – obligation to givePersonal obligation – obligation to do or not to do

Two kinds of personal obligationa) Positive personal obligation – to dob) Negative personal obligation – not to do

6. Essential Requisites of obligation

1. Active Subject – the obligee or creditor – one who has the right and power to demand the performance of the obligation.

2. Passive Subject – the obligor or debtor – one who is obliged to perform the obligation.3. Object or Prestation – subject matter of the obligation that consists of the prestation to give, to or

not to do. The objects of contract are things, right or services. 4. Juridical or Legal Tie – It is also known as “efficient cause”, which binds the parties to the

obligation. Another name is VINCULUM JURIS.

7. Meaning of Juridical Necessity:

Obligation is a juridical necessity because in case of non-compliance, the courts of justice may be called upon to enforce its fulfillment or in default thereof, the economic value that it represents. In a proper case, the debtor may be made liable for damages for the injury or harm suffered by the creditor for the violation of the latter’s right.

8. Other Significant terms:a) Obligation – the act or performance that the law will enforce.b) Right – The power which a person has under the law to demand from another any prestation.c) Wrong – (cause of action) an act or omission of one party in violation of the legal right

(a right recognized by law) of another. It is also known as INJURY

Operative Illustrations of an obligation:

I. By virtue of a contract, D obliged himself to ship the goods of C from Manila to Cebu for P10, 000. D is the passive subject while C is the active subject. The shipping of goods to Cebu is the prestation; the contract between D and C is the efficient cause or vinculum juris.

II. (Obligation to give) Isaac Rimando and Moises Reyes signed a contract whereby Isaac Rimando obliged himself to deliver

to Moises Reyes a Toyota Corolla 2008 model on November 12, 2008.

III. (Obligation to do)

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Robert Gonzales and Angel Filamor entered into a contract whereby, Robert Gonzales obliged himself to paint the car of Angel Filamor.

IV. (Obligation not to do) Nicanor Castro insured himself with the Manila surety and Insurance Co. The parties agreed that Nicanor

would not commit suicide during the existence of the insurance.

9. Kinds of Obligations:

1. Viewpoint of sanctions:

a. Civil obligations – give a right of action to compel their performance.b. Natural obligations – not based on positive law but on equity and natural law. It does

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.

c. Moral obligations – those that cannot be enforced by action but which is binding on The party who makes it in conscience and natural law. Under our law, moral obligations are not merged with natural obligations.

2. Viewpoint of performancea. Positive – to give or to dob. Negative – not to do

3. Viewpoint of subject mattera. Real obligation – to giveb. Personal obligation – to do or not to do

10 . Sources of obligations: ( Article 1157 of the Civil Code)A - 1. Law

2. Contracts3. Quasi-contracts4. Act or omission punishable by law5. Quasi-delicts

B. Law as source of obligationsObligations derived from law are presumed. Only those expressly determined in this code or by special laws are demandable and shall be regulated by the precepts of the law which established them; and as to that has not been foreseen, by the provisions of this book. (Art.1158)

a) Obligation ex-lege (arising from law) not presumed.

b) Obligations arising from law are not presumed. To be demandable and enforceable, the obligation must be stayed by the law, which created the obligation. Such being the case the agreement of the parties under this obligation is no longer necessary because it is the law, which governs their obligation.

c) Law governing obligations derived from law. Obligations derived from law shall be governed by the law, which establishes them. In case of insufficiency, the provisions of the Civil Code shall supplement the same.

Examples:a. The obligation of husband and wife to support each other. (Art.195, Civil Code)b. The obligation of a taxpayer to file his income tax return. (Title VI. Section 44, NLRC)c. The obligation of the legitimate ascendants and descendants to support each other.(Art 195, Civil

Code)

ILLUSTRATIVE CASE. SG, while employed as a guard of a movie house by O, shot and killed a gatecrasher, X who attacked

SG with a knife after having been refused entrance without first providing himself with a ticket. SG was criminally charged with homicide but the trial court dismissed the case. For the expense incurred in his defense, SG demanded reimbursement from the owner. When the owner refused, he filed his action for the recovery of the amount paid to his lawyer plus moral damages.

Held: The owner “O” is not liable because the giving legal assistance to the employee is not a legal obligation.

While is may be true it may be considered as a moral obligation. It does not at present, count with the legal sanction of any man-made law. If the owner with is not legally obliged to give legal assistance to the employee, then the latter cannot recover the amount paid cannot be presumed, it must be stated before it become obligatory.

C. Contract as a source of obligation:Obligations arising from contracts have full force of law between the contracting parties and should be complied with in good faith. (Art.1159)

a) Validity of Contract.In contract as to their general formation this is what we call freedom to contract or autonomy of will, the “contract” entered into between the parties shall have the force of law between the parties. Any

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violation by either party shall produce a cause of action against the violator. However, in order for a contract to be valid and enforceable it must not be contrary to law, morals, good customs, public order or public policy, otherwise the contract is void. (Art.1306, 1409, Civil Code)

b) Effect if part of the contact is void.If part of the contract is void but the contract is susceptible of division, the part, which is not affected, may be enforced disregarding the part, which is void. Such that if the contract is falsified by the unauthorized insertion of additional stipulation, this falsified insertion shall be considered inexistent and part unaffected shall be enforced.

D. Quasi-Contracts as source of contract.It is judicial relation, which arises from certain lawful, voluntary, and unilateral acts, to the end that no one may be unjustly enriched or benefited at the expense of another. (Art. 2142 of the Civil Code)

Two principal kinds of Quasi-contracts.

1. Negotiorum Gestio (unauthorized management) – voluntary administration of the property, business or affairs of a third person without the consent or authority of its owner.

2. Solutio Indebiti (undue payment) – payment by mistake of an obligation that was not due when paid.

Distinction between contract and quasi-contract:The distinction of a quasi-contract from contract is that in contract, there is consent of the parties

while in quasi-contract, the obligation arises without a contract.

What law governs Quasi-Contracts?Chapter 1, Title XVII of the Civil Code ( Arts. 2142-2175) as provided under Article 1160, CC.

Some examples of Quasi-Contract.

1) Art 2144, whoever voluntarily takes charge of the agency or management of the business or property of another, without any power from the latter is obliged to continue the same until the termination of the affair and its incidents or to require the person concerned to substitute him. If the owner is in a position to do so.

Examples of Quasi-Contracts:1. A merchant-farmer and owner of a ten-hectare agricultural land left for USA on a pleasure trip. While enroute to USA typhoon “dading” devastated the entire Philippines including the land owned by D. Before the typhoon reached our area of responsibility C, a neighbor of D employed six (6) farmers to harvest the palay planted on the obligation of D upon arrival is to reimburse C P600 because he must not be enriched at the expense of another.

2) Art.2154. If something is received when there is no right to demand it and it was unduly delivered through mistake he obligation to return it arises.

3) Art. 2164. When, without the knowledge of the person obliged to give support, it is given by a stranger, the latter shall have a right to claim the same from the former, unless it appears that he gave it out of piety and without intention of being repaid.4) Art. 2167. When, through an accident or other cause, a person is injured or become seriously ill, and he is treated or helped while he is not in a condition to give consent to a contract he shall be liable to pay for the services of the physician or other person aiding him, unless the service has been rendered out of pure generosity.

5) Art. 2168. When, during a fire, flood, storm, or other calamity, property is saved from destruction by another person without knowledge of the owner, the latter is bound to pay the former just compensation.

6) Art. 2174. When, in a small community a majority of the inhabitants of age decided upon a measure for protection against lawlessness, fire, flood, storm or other calamity, anyone who objects to the plan and refuses to contribute to the expenses shall be liable to pay his share of said expenses.

Difference between Quasi-contract and Natural Obligation:Quasi-contracts are certain lawful, voluntary and unilateral acts which give rise to the juridical

relations of the party to the end that no person shall be unjustly enriched or benefited at the expense of another while natural obligations are those not based on positive law but on equity and natural law. They are not demandable in the courts of justice however when they are voluntarily performed or fulfilled, they can already be retained and the debtor cannot recover what has been paid or performed.

Example: If the debtor pays by mistake or not knowing that the condition or period has not yet arrived, he can recover based on undue payment (quasi-contract). A debtor paid his creditor knowing that his obligation to pay has already expired cannot anymore recover what he paid by reason of natural obligation.

E. Delict as a source of obligation This is an act or omission punishable by law. The principle is that if a person committed an act or omitted to do an act and the act or omission is punishable by law he is civilly-liable. (Art. 1161)

a) Felony or crime: It is an act or omission punishable by law. A violation of the Revised Penal Code is called a felony while violation of any penal statutes including the Revised Penal Code is called a crime.

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b) Rules governing Delicts:

1) Philippine revised Penal code and other penal laws subject to the provisions of Article 2177 of the Civil Code.

2) Chapter II, Preliminary Title, on Human Relations of the Civil Code.3) Civil Code on damages, Title 18 of Book IV

c) Civil Liability Arising from Delicts or Acts or Omissions Punishable by Law:

a. Restitution – The thing itself shall be restored.b. Reparation of the damage caused- The court determines the amount of damage taking into

consideration the value of the thing, improvements and fruits and reparation shall be made accordingly.

c. Indemnification for Consequential Damages- It shall include not only those suffered by the injured party but also those suffered by his family and third person by reason of the crime.

d) Commission of a crime as a source of an obligation.

Every person who is criminally liable is also civilly liable under Art. 100 of the Revised Penal Code. If a person therefore is guilty of the crime charged he must not only be imprisoned but he shall also answer for damages as a civil obligation. Such civil obligation is a necessary consequence of a criminal responsibility and it to be declared and enforced in the same criminal proceeding except when the injured party reserved his right to file the civil action independently from the criminal action. (Sec. I, Rule III, Revised Rules of Court)

e) Enforcement of Civil liability arising from crimes or delicts:

Ordinarily, when the offended party files the criminal action, he is deemed to have filed simultaneously the civil action for the civil liability of the offender unless he reserves his right to institute a separate civil action of the civil liability of the offender. Meaning the civil liability shall be heard separately from the criminal action.

F. Quasi-delict or culpa aquiliana or tort as a source of obligation One which causes damage to another, there being fault or negligence, but there is no pre-existing

contractual relation between the parties. (Art. 1162)

A) Meaning of Culpa – Negligence (Culpa Aqulliana, torts) – omission of that diligence required by the circumstances of person, place and time. Negligence is a question of FACT.

The failure of a person to exercise or observe for the protection of the interests of another person the degree of care, precaution & vigilance which circumstances justify demand whereby such person suffers injury.

B.) Requisites of Quasi-Delicts

a) There must be act or omission;b) There must be fault or negligence;c) There must be damage causedd) There must be direct relation of cause and effect: between act or omission and the damage.e) There is no pre-existing contractual relation between the parties.

C.) Meaning of Proximate Cause: Adequate and efficient cause which in the natural order of events necessarily produces the damage or injury complained of

D.) What are the different kinds of Culpa (Negligence)?a) Culpa contractual (Contractual negligence)- negligence in the performance of the contract.

Example: A passenger in a taxi who was not able to bring the passenger to his destination due to the malicious act of the driver which caused the delay or damage to the vehicle. This is culpa contractual because of the existence of contract of carriage between the owner of the taxi and the passenger.

b) Culpa Aquiliana (Civil Negligence) – wrong or negligence committed independent of a contract and without criminal intent.Example: A pedestrian was hit by an over speeding taxi and suffered physical injuries. This is an example of culpa aquiliana because of the absence of any contractual relation between the pedestrian and owner of the taxi.

c) Culpa Criminal (Criminal negligence) – Those resulting to the commission of the crime punishable under Article 365 of the Revised Penal Code)

II. NATURE AND EFFECT OBLIGATIONS (ARTS. 1163-1178)

1. Duty to preserve the thing.

Classification of the thing ( subject matter) in a real obligation.a) Specific or determinate thing – when the thing is particularly designated or

segregated from all others of the same class.

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b) Generic or indeterminate thing –when it is not particularly designated or segregated. Hence, it still belongs to the class or genus.

A) Duty to exercise diligence in obligation to deliver specific or determinate thing.

Article 1163 provides, “every person obliged to give something is obliged to take care of it with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care.”

2nd paragraph of Article 1173 also provides, “if the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of family shall be required.”

In other words Diligence required is:a. The one stipulated by the parties or required by law and in the absence thereof,b. Diligence of a good father of the family.

Meaning of Diligence of a Good father of the Family

a. That which is required by the nature of the obligation and corresponds with the circumstances of person, time and place (Art. 1173, Civil Code). This is also called as Ordinary Diligence or Diligence of a Good Father of the family or Diligence of a Prudent Man.

b. However, if the law or contract provides for a different standard of care, said law or stipulation must prevail (Art. 1163)

Other names for Diligence of a Good Father of the Family - a) Ordinary Diligenceb) Diligence of a Prudent Manc) Diligence that depends on the nature of the obligation and corresponds with the circumstances of

person, of time and of the place.

When EXTRAORDINARY DILIGENCE IS REQUIRED? If it is stipulated or required by law

Example of a case where the law requires extraordinary care (not merely that of a prudent man):

“A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of a very cautious persons, with due regard for all the circumstances.” Art. 1755 of the Civil Code.

B) Duty of a person obliged to give generic thing:a) To deliver a thing which is of the quality intended by the parties taking into consideration the

purpose of the obligation and other circumstances (Art. 1246) Rule on Medium Quality

Liability:

To be liable for damages in case of fraud, negligence or delay, in the performance of his obligation or contravention of the tenor thereof (Art. 1170)

2. Duty to deliver the thing and the fruits of the said thing to be delivered. (Article 1164)

a. When creditor is entitled to the fruits?The rule is the creditor has a right to the fruits from the time the obligation to deliver arises. Meaning the creditor is entitled to the fruits of the thing to be delivered from the time the obligation to make delivery arises. The intention of the law is to protect the interest of the creditor should the debtor commits delay purposely or otherwise, in the fulfillment of the obligation.

In Article 1537 specifically in a contract of law, the right to the fruits begins “ from the day on which the contract was perfected”. It clearly defined the meaning of obligation to deliver arises as far as the contract of sale is involved.

The vendor is bound to deliver the thing sold and its accessions and accessories in the condition in which they were upon the perfection of the contract.All the fruits shall pertain to the vendee from the day on which the contract was

perfected.

b. When does the obligation to deliver arises?- if there is no term or condition, from the perfection of the contract.- If there is a term or condition, from the moment the term arrives or the condition

happens.

c. Personal right (jus in personam) – power demandable by one [person to another – to give, to do or not to do.

d. Real right (jus in re) – power over a specific thing.

Kinds of fruits:a. Natural fruits – spontaneous product of nature without human intervention.

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b. Civil fruits (like rents) a result of civilization arising from juridical transactions.c. Industrial fruit – products of nature bolstered with human intervention.

3. Duty to deliver the accessories and accessions (Art. 1166) – The obligation to give a determine thing includes:

a) Accessories- Those joined to or included with the principal for the latter’s better use, perfection, or enjoyment.

b) Accessions – additions to or improvements upon a thing.

As a rule, accessories and accessions are included in the delivery of the thing even if they are not mentioned.

Effect of stipulation: If there is a stipulation and accessories are not included, such stipulations are valid and binding upon the parties.

4. Deliver of the thing itself (Article 1165): Kinds of Delivery:

Delivery may be either actual or constructive.

I. Actual delivery (tradition) – where physically the property changes hands. Example: If A sells to B a fountain pen, the giving of the fountain pen by A to B is actual tradition.II. Constructive Delivery – That where the physical transfer is implied. This may be done by:

a. Traditio symbolica (symbolic tradition) – as when the keys of a bodega are given.b. Traditio longa manu (delivery by mere consent or the pointing of the object.c. Traditio brevi manu – (delivery by short hand; that kind of delivery whereby a possessor of a

thing not as an owner becomes the possessor as an owner. Example: when a tenant already in possession of the house buys the house from the owner.

d. Traditio Constitutom Possessorium – the opposite of brevi manu; thus the delivery whereby a possessor of a thing as an owner retains possession no longer as an owner, but in some other capacity (like a house owner who sells a house but remains in possession as tenant of the same house)

e. Tradition by the execution of legal forms and solemnities.

5. Answer for damages in case of non-fulfillment of the obligation:

Under the Civil Code, what are the different acts or omissions of the obligor or debtor that will result in the breach of the obligation for he can be held liable for damages?

a. Default (Mora) – delay on the part of the debtor ( See discussions of mora below)

b. Fraud (Dolo) in the performance of the obligation.

Kind of Dolo:

a) Incidental Fraud (dolo incidente) – referred to under Article 1170. b) Causal Fraud ( dolo causante) –fraud employed in the execution of the

contract under Article 1338 which vitiate consent.

Note: The law refers to incidental fraud only as reiterated in Article 1344, 2nd paragraph, “incidental fraud obliges the person employing it to pay damages.”

c.Negligence (Culpa)

d.Contravention of the tenor of the obligation (Art. 1170)

KINDS OF DAMAGES

M – Moral damages referring to mental and physical anguish;E - Exemplary – corrective or to set exampleN - Nominal -to vindicate a right -when no other kind of damages may be recovered.T – Temperate – when the exact amount of damage cannot be determinedA – Actual losses as well as unrealized profitL – Liquidated (predetermined beforehand – by agreement)

Measure of liability for damages.

Article 2201 of the Civil Code states:

In contracts and quasi-contracts, the damages fir which the obligor who acted in good faith is liable shall be those that are the natural and probable consequences of the breach of obligation and which the parties have foreseen or could have reasonably foreseen at the time obligation was constituted.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation.

REMEDIES OF THE CREDITOR AGAINST DEBTOR:

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In obligations to give what are the different rights, which are available to the creditor?

If the obligation is an obligation that is determinate, the creditor may:1. Compel specific performance (Art. 1165)2. To recover damages in case of breach of the obligation (Art 1170)

If the obligation is indeterminate or generic, the creditor may:

a. Ask for the performance of the obligation (Art. 1246)b. To ask that the obligation be complied with at the expense of the debtor (Art. 1165, par. 2 CC)c. To recover damages in case of breach of obligations. (Art. 1170)

If obligation is to do and debtor fails to perform it, the creditor maya. Ask another person to perform the obligation at the expense of the debtor ( Art. 1167) unless act

is personal in character and/orb. He may also demand damages from the debtor. Damages only when obligation is personal in

character.

If debtor performs it but in contravention of the tenor of the obligation or done in a poor manner, creditor may:

a. Have the same be undone at the debtor’s expense (Art. 1167) andb. Demand damages from the debtor (Art. 1170)

If debtor does what has been forbidden, creditor maya. Demand what has been done be undone.b. Demand damages from the debtor

What is the requirement before a debtor is liable of delay?

Under Article 1169 of the Civil Code, demand (judicial or extra-judicial) is required before a debtor is considered in legal delay or mora.

Judicial demand – is when a complaint is filed in court.Extrajudicial demand – when oral or written demand was conveyed or sent to the debtor.

What is the meaning of Mora?

Default or mora signifies the idea of delay in the fulfillment of an obligation. In other words, it is the non-fulfillment of an obligation with respect to time.

The different kinds of default or mora:

A. Mora solvendi – or delay of the obligator or debtor to perform his obligation. This delay is called mora solvendi ex re when the obligation is an obligation to give or mora solvendi ex persons when the obligation is an obligation to do.

B. Mora Accipiendi – or delay of the obligee or creditor to accept the delivery of the thing, which is the object of the obligation.

C. Compensatio Morae, or delay of the parties or obligors or debtor incur in delay.

In obligations to give or to do, when does the obligor or debtor incur in delay?

The debtor incurs in delay from the time the creditor judicially or extra judicially demands from him the fulfillment of the obligation. And in spite of demand, he is unable to observe the obligation. (Art. 1189 par. 1, CC)

When is demand by the creditor not necessary in order that delay may exist?

a. When the obligation or the law expressly so declares;b. When from the nature and the circumstances of the obligation it appears that the designation of

the time when the thing to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract.

c. When demand was be useless, as when the obligor has rendered it beyond his power to perform (Art 1169 par. 2)

In reciprocal obligations when does one of the parties incur in delay?

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the time one of the parties fulfills his obligation, delay by the other begins. (Art 1169, par 3)

Effect of waiver of fraud or negligence in an obligation:

a) If fraud is present in the obligation, the same is immediately demandable. WAIVER OF FUTURE FRAUD IS VOID. Waiver of past fraud is allowed. (Art. 1171) Reason: Fraud is absolutely not encouraged by the law because of its evil effects. Past fraud because the act was already done. Such waiver is an act of liberality on the part of the creditor.

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b) If negligence is present in the obligation, it is likewise demandable. Waiver of future negligence may be allowed except where the nature of the obligation requires exercise of extraordinary diligence as in the case of common carriers and also where negligence shows bad faith. (Art. 1172)

What is fortuitous event?

A fortuitous event is an event, which cannot be foreseen, or which though foreseen, is inevitable (Art 1174 CC). Ordinarily, the terms “fortuitous event and force majeure” are used interchangeably.

There is however a technical difference. “Force majeure” is a term that is applicable only to those fortuitous events which are dependent upon human intervention, such as wars, strikes, riots, etc., while fortuitous event” is the general term that is applicable regardless of whether the event is independent of or dependent upon human intervention.

GENERAL RULE: No liability for FORTUITOUS EVENT (CASO FORTUITO, ACT OF GOD, FORCE MAJEURE & UNAVIODABLE ACCIDENT) if obligation refers to give a determinate thing and debtor acted without fault.

Exceptions:- When expressly declared by stipulation or contract;- When the nature of the obligation requires the assumption of risk (the doctrine of

Created Risk)- When the law expressly provides:a. When the object of the obligation is lost and the loss occurs after the debtor has incurred

in delay. (Art. 1165)b. When the debtor promises to deliver the same thing to two or more persons at the same

time who do not have common interest; (Art. 1165) c. When debtor is guilty of fraud, negligence, delay and contravention of the tenor of the

obligation ( Article 1170)d. When the obligation to deliver arises from a criminal offense ( Article 1268); ande. When the obligation is generic (Art. 1263)

Essential Characteristics of a Fortuitous Event:a) The cause must be independent of the will of the debtor; b) Impossibility of foreseeing or impossibility of avoiding it, even if foreseen; c) The occurrence must be such as to render it impossible for the debtor to fulfill his

obligation in a normal manner.

Usury Law governed by special law.

The law governing usurious transactions is Act No. 2655 otherwise known as the Usury Law as amended by Act Nos. 3291, 3998, 4070, Commonwealth Act No. 339. However, the Monetary Board of the Central Bank is empowered to change the rates of interest from time to time “whenever economic and social conditions warrant or may eliminate, exempt or suspend the same. The ceiling of interest may not be uniform.

Central Bank circular 905-A dated December 10, 1982, suspended application of the Usury law when it provided that rate of interest and other charges in loan or forbearance of money, goods or credits, regardless of maturity and whether secured or unsecured, that may be charged or collected shall not be subject to any ceiling prescribed under the Usury law.

Note: Usury law has not been repealed but merely suspended. Only Congress can repeal laws.

Rules on interest payments:

The rule is “no interest” shall be due unless it has been expressly stipulated in writing.

There being a stipulation as to interest but the rate is not fixed, then the creditor may only recover the legal rate.

Meaning of legal Rate: Legal rate of interest is that rate which will prevail in the absence of any special agreement as to the rate of interest between the parties to a contract.

Central Bank Circular on Interest Rates.

The Monetary Board of the Central Bank issued December 3, 1982, Circular No. 905, fixing the rates of interest on loans or forbearance of money goods or credit. Section 1 of the circular provides as follows:

“The rate of interest, including commissions, premiums, fees and other charges on a loan or forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured that may be charged or collected by any person, whether natural or juridical shall not be subject to any ceiling prescribed under or pursuant to the Usury Law as amended.”

Applicable Presumptions:

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Meaning of Presumption – By presumption is meant the inference as to the existence of certain facts which if not contradicted is considered true.

Two kinds of Presumption

a) Conclusive – one which cannot be contradictedb) Disputable (Rebuttable) – one which may be contradicted by presenting satisfactory proof to

the contrary.

Presumptions:A. Receipt of the Principal without Reservation would give rise to a presumption that interest

has been paid. (Art. 1176)B. Receipt of the later installment without reservation as to prior installment shall likewise

raise the presumption that the prior installments have been paid. (1176)

Remedies which are available to the creditors in order to protect his rights against the debtor act defrauding the former: (Art. 1177)

a) Exact payment (specific performance) with right of damagesb) Exhaust or pursue debtor’s properties generally by attachment (except properties exempted by law)c) after having pursued the property in possession, exercise all rights and be subrogated by all

the rights and actions of the debtor save those that are inherent his person (accion subrogatoria)

d) To ask the court to rescind or impugn all acts which the debtor may have done to defraud the creditor (accion pauliana)

Principle of Transmissibility of Rights (Article 1178)

General Rule:

Subject to the laws, all rights acquired in virtue of an obligation are transmissible if there has been no stipulation to the contrary.

Principle of Transmissibility of Rights to be read together with Article 1311 on the Principle of Relativity of Contracts. (“Contracts bind only the contracting parties, their heirs and assigns”)

INTANCES WHERE PRINCIPLE OF TRANSMISSIBILITY WILL NOT APPLY (Exceptions):a) If the law provides otherwise

In contract of partnership, agency & commodatum, there is no transmissibility of rights.b) If the contract provides otherwisec) If the obligation is purely personal

III. DIFFERENT KINDS OF OBLIGATIONS (Arts. 1179-1230)

1. A. Primary Classes of Obligations:a) Pureb) Conditionc) With a term or a periodd) Alternativee) Facultativef) Jointg) Solidaryh) Divisiblei) Indivisible j) With a Penal Clause

PURE OBLIGATION

Pure Obligation is defined as one whose performance does not depend on a future or uncertain event, or upon a past event unknown to the parties, hence demandable at once. (Art.1179) In other words, this is one, which contains neither period nor a condition; hence the obligation is effective immediately.

Examples:“I’ll pay you P20,000 on demand.”“I’ll pay you P20,000.”

CONDITIONAL OBLIGATION

Conditional obligation is one where there is a condition imposed.

Meaning of condition – It is an uncertain event, which wields an influence on a legal relationship.

Characteristics of condition:A. It refers to future and uncertain event.B. It may also refer to past event but unknown to the parties.

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A condition is either:

a) Suspensive – the happening of the condition give rise to an obligation. Example : I’ll buy you a land for P 1M if you pass the CPA Board Exam in October 2009.

(This is suspensive for the result has to be awaited) See Article 1181 b) Resolutory – the happening of the condition extinguishes the obligation.

Example : I’ll give you my land now, but should you fall in the CPA Board this coming October 2009, your ownership will cease and it shall revert back to me. (Article 1181)

Therefore, there are three (3) instances when an obligation and demandable at once thus:a) When it is a pure obligation andb) When the obligation has a resolutory condition.c) When the obligation is subject to a resolutory period.

CLASSIFICATION OF CONDITIONS

As to effect:

1. Suspensive – the happening of the condition give rise to the obligation.2. Resolutory – the happening of the condition extinguishes the obligation.

As to cause or origin:

1. Potestative – depends upon the will of the one of the contracting parties. a) If it is suspensive and dependent on the will of the debtor (Example: I’ll sell you my car if I

like), both the condition and obligation are VOID. (Article 1182)b) Where the condition depends upon will of creditor, obligation is valid.

Example: I will pay you upon your demand.c) Where resolutory condition depends upon the will of the debtor, the obligation is valid.

Example is pacto de retro sale. The position of the debtor when the condition is resolutory is exactly the same as of the creditor when the condition is suspensive.

2. Casual – depends on chance or hazard or the will of third person – VALID Example; I’ll give you P 10,000 if I win 1st prize in the lotto.

3. Mixed – depends party on the will of one of the parties and party on chance or will of the 3 rd

person (If I pass the bar) VALIDExample: I will give you P 10,000 if you marry Miss Black or if I win the lotto.

As to divisibility:

1. Divisible – capable of partial performance2. Indivisible – not capable of partial performance because of the nature of the thing or

because of the intention of parties.

As to mode:

4. Positive – an act is to be performed.The condition that some event happen at a determinate time shall extinguish the obligation as soon as the time expires or it has become indubitable that he event will not take place. (Art. 1184)

5. Negative – something will be omitted.If condition is negative which means the event will not happen at a determinate time. The obligation shall become effective and binding from the moment the time indicated has lapsed without the event taking place; or from the moment it has become evident that the event cannot occur, although the time indicated has not yet elapsed. (art. 1185)

As to form:

1. Express – the condition is stated.2. Implied - the condition is merely inferred.

As to possibility:

1. Possible – capable of fulfillment in nature and in law2. Impossible – not capable of fulfillment due to nature or due to the operation of the law or

morals or public policy; or due to a contradiction in its terms.

Note is condition is impossible, legally or physically obligation is also void.If condition is negative, that is not to do an impossible thing, the condition is disregarded and the obligation is rendered pure and valid.

As to numbers:

1. Conjunctive – if all the conditions must be performed2. Alternative – if only a few of the conditions have to be performed.

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Constructive Fulfillment of a Condition

If the debtor prevents voluntarily the fulfillment of the condition the said act would result to CONSTRUCTIVE FULFILLMENT SAID CONDITION UNDER Art. 1186.

Note: It is not even required that debtor is in bad faith. It is sufficient that he prevented the happening of the condition.

Effect if suspensive condition takes place:

Rule is retroactive effects of fulfillment of suspensive condition. In an obligation to give subject to a suspensive condition becomes demandable only upon the fulfillment of the condition. However, once the condition is fulfilled, its effects shall retroact to the day when the obligation is constituted. Reason: condition is mere accidental element of the contract.

If obligation is reciprocal, there is no retroactivity because the fruits and interests received during the pendency of the condition are deemed to have been mutually compensated.

In unilateral obligation, there is usually no retroactive effect because they are gratuitous. The debtor receives nothing from the creditor unless from the nature and other circumstances it can be inferred that the intention is to apply retroactivity.

In obligation to do or not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been complied with. (Article 1187)

Rights of creditor /debtor pending fulfillment of suspensive condition:

Creditor may bring appropriate actions of preservation of his right.

Debtor may recover what has been paid by mistake in case of a suspensive condition. (Article 1188)If subject to a period and there is payment by mistake Article 1195 provides that aside from recovery of what was paid by mistake, debtor can also recover fruits and interests, if any.

LOSS DETERIORATION AND IMPROVEMENT DURING THE PENDENCY OF CONDITION.

(The same rule applies for both obligations with suspensive and resolutory condition and obligation with a period) Article 1189

a. For conditional obligation, if suspensive, it is required that condition is fulfilled and the object is specific. For resolutory condition, the happening of the condition extinguishes the obligation, hence mutual restitution follows.

b. The above rules also apply to suspensive and resolutory period except that in a period, it will necessarily come.

a) The object may be lost:6. without the fault of the debtor - extinguishes obligation7. with the fault of the debtor – require debtor payment of damages.

b) The object deteriorates without the fault of the debtor, the impairment is borne by the creditor. If it deteriorates thru the fault of the debtor, creditor may choose either rescission of the contract or of the fulfillment, with claim for damages either of the selected remedy.

c) If the object improves by nature, the improvement inures to the benefit of the creditor and if the debtor at his expense improve it, the debtor’s right is merely of a usufructuary.

RECIPROCAL OBLIGATIONS:

The power to rescind obligations implied in reciprocal ones, in case one of the obligors should not comply what is incumbent upon him. (Art. 1181, par. 1)

Remedies of the injured party in reciprocal obligations:a. Action for specific performance of the obligation with damages; orb. Action for rescission of the obligation also with damages.

The above remedies are alternative. He may however choose rescission if after he has chosen fulfillment, the latter become impossible.

RESCISSION contemplated by the law is JUDICIAL RESCISSION.

Further, the court in some instance may instead grant the party a term for performance instead of ordering rescission such as in case when the breach is slight or when right of third person is affected. Hence court may deny rescission.

When it is the court rescinds the obligation, this is known as JUDICIAL RESCISSION, which is initiated upon the filing of complaint in court by the injured party.

Rule when both parties are guilty of breach

Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first

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violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. Application of the “pari delicto rule”

Obligation with a Term or Period

A space of time which has an influence on obligations as a consequence of a juridical act and either suspends their demandability or produces their extinguishment.

It is one that arises upon the arrival of the term or period agreed upon, hence demandable only on that instance.

Term or Period is that time or event which necessarily must come, whether the parties know when it would happen/come or not

Day certain – means one, which must necessarily come although it may not be known when.

Examples:1) “I’ll pay you P20,000 on the 25th of December next year.”2) “I’ll pay you P20,000 if Imelda Marcos dies”. Death is certain even if we cannot really ascertain when it will come.

But this one is conditional:

“I’ll pay you P20,000 if Imelda Marcos dies of malaria “ Reason: She might die of “bangungot”.

NOTE: When the debtor binds himself to pay when his means permit him to do so, the obligation is deemed to be one with a Term or Period (Article 1180).

Example : “I’ll pay you P10,000 when my means permit me to do so. “I’ll pay you P10,000 little by little “I’ll pay you P10,000 as soon as possible. “I’ll pay you as soon as I have the money.

Kinds of Period-1) Legal – period fixed by law2) Voluntary – Fixed by the parties3) Judicial – period imposed or fixed by the court

Other classifications1) Ex die (suspensive) – a period which must lapse before the obligation can be

demanded2) In diem (resolutory)- a period when it arrives extinguishes the obligation.

Distinction between Period and Condition:

Period ConditionAs to fulfillment

It is sure to happen or the event would necessarily happen

It is uncertain event

As to influence on the obligation:

Fixes the time of efficaciousness of an obligation. Causes the obligation to arise or to cease.

As to time:

Refers to the future. Refers future or a past event unknown tot he parties.

Period is generally for the benefit of both parties, unless otherwise stipulated (Art.1196)

Meaning: The debtor cannot pay prematurely and the creditor cannot demand prematurely.

If term is for the benefit of the debtor alone. He may only be required to pay only at the end of the term, but he may pay even before the period.If term is for the benefit of the creditor. Creditor can demand anytime even before the expiration of the period and he cannot be compelled by the debtor to accept payment before the term.

Instances wherein the debtor losses his right to make use of the period. Art 1198

Meaning the term is extinguished and obligation is demandable at once.

a) Insolvency, unless a guaranty or security is givenb) Failure to furnish the promised guaranty or security

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c) Impairment of the guaranty or security by debtor’s act or its loss due to fortuitous event, unless a satisfactory guaranty or security is given.

d) Violation of any undertaking in consideration of which the creditor agreed to the periode) Attempt to abscond.

ALTERNATIVE & FACULTATIVE OBLIGATIONS

ALTERNATIVE OBLIGATION – OBLIGATION WHEREIN VARIOUS THINGS ARE DUE, BUT THE PAYMENT OF ONE OF THEM IS SUFFICIENT, DETERMINED BY THE CHOICE, WHICH AS A GENERAL RULE BELONGS TO THE DEBTOR (Art.1199).

Right of Choice:

Generally belongs to the DEBTOR. (Art. 1200) UNLESS expressly agreement granted to the creditor (Art.1200)

Debtor cannot choose those prestations which are impossible, unlawful or which cannot be an object of obligation.

When choice of the debtor becomes effective:

It becomes effective from the time selection was communicated to the creditor the said time is the reckoning date of determining when legal effects are produced.

If debtor has no choice as there is only one choice left, the obligation is converted to simple obligation. (Art. 1202)

If the debtor cannot choose through the acts of the creditor, he may rescind the contract with damages. (Art.1203)

If the choice is given to the debtor, the loss of the thing is governed as follows:a) Loss of all – obligation is extinguished provided debtor is without faultb) Loss of some – the debtor may deliver any of the remainder or that which remains if only

one subsists, without obligation to pay damages. (If debtor is without fault)

If loss was due to debtor’s fault:

Loss of all – debtor shall pay the value of the last thing lost, plus damages. However if all of them were lost at the same time, the debtor may choose the value of any of them, plus damages.

Loss of some – debtor may, without incurring any liability to pay damages, deliver any of the remainder, or that which remains if only one subjects.

Loss of some due to debtor’s fault and the last thing due to fortuitous event.

From and after the lost except one of the various things, whether due to fortuitous event or the debtor’s fault, the debtor shall loss the right of choice. (Art.1202) and the obligation is converted to a simple obligation. Hence, the loss of the last subsisting prestation due to fortuitous event extinguishes the obligation.

If Right of Choice is given to the CREDITOR:

Loss of things

Due to fortuitous event

a) Loss of all – obligation is extinguished IF DEBTOR IS NOT AT FAULT. b) Loss of some – the debtor shall deliver that which the creditor should choose any of those

subsisting IF DEBTOR IS NOT AT FAULT. Otherwise, he shall any of those subsisting or the price of any of those that have been lost through the fault of the debtor plus payment of damages.

FACULTATIVE OBLIGATION – obligation where only one prestation has been agreed upon but the debtor may ender another substitution.

Example : D obliged himself to give C a specific Rolex watch with the understanding that D could give a diamond ring as a substitute

Loss of the principal things: a) Due to fortuitous event – the obligation is extinguished and the debtor is not obliged to

give the substitute.b) Due to debtor’s fault – the debtor shall answer for the loss of the thing due to his fault.

Loss of the substitute:a) Before substitution

The loss of the substitute before the substitution is made does not affect the obligation as the principal can still delivered

b) After substitutionDue to fortuitous event – obligation is extinguished

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Due to debtor’s fault – debtor is liable for damages JOINT AND SOLIDARY OBLIGATIONS

Kinds of Obligation according to number of parties:1. Individual obligation – one where there is only one obligor an one oblige;

and2. Collective obligation – one where there are two or more debtors and/or

two or more creditors.Joint obligationSolidary obligation

Joint obligation – each of the debtors is liable only for a proportionate part of the debt and each creditor is entitled to a proportionate part of the credit.

NOTE:

In the absence of stipulation, when there are multiplicity of parties or collective obligation, said obligation is presumed JOINT. Meaning, the share in the obligation is specified, the correlative rights and obligation of the parties are known. Implications:

a) There are as many debts as there are debtors;b) There are as many credits as there are creditors;c) The debts/credits are considered distinct and separate from one another.d) Each creditor is entitled only for a proportionate part of the credit.e) Each debtor is liable only for his proportionate part of the debt.

Presumption established under Article 1208 is only disputable.Other terms for joint obligation:

a) mancomunadab) mancomunada simplec) proportionatelyd) pro-rata

Examples:

Joint obligation

A, B and C jointly executed a promissory note worded as follows:

We promise to pay to the order of X P9,000.00 Sgd. A, B and C

Solidary obligation – each debtor is liable for the entire obligation and each creditor is entitled to demand the whole obligation.

When solidarity exists:

As a general rule, the mere concurrence of two or more creditors or two or more debtors in one and the same obligation does not imply solidarity. By presumption of the law, the obligation is joint, unless:

a) Solidarity is expressly agreed upon (Conventional Solidarity)b) Solidarity is declared by law (Legal Solidarity)c) Solidarity is required by the nature of the obligation (Real Solidarity)

Kinds of Solidarity

a) Active - solidarity among creditorsb) Passive – solidarity among debtorsc) Mixed – solidarity on the part of the creditors and debtors

Example:

1.

A, B, & C jointly executed a promissory note worded as follows:

I promise to pay to the order of X P9,000.000

Sgd. A, B & C

X can collect the entire P 9,000 from any of A, B or C.

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2. A, B and C joint debtors are obliged to give x, Y and Z, solidary creditors of P 18,000. How much can X collect and from whom? X being a solidary creditor can entirely collect P 18,000. But since A, B and c are joint debtors, X may collect only P 6,000 from each of them. After collecting the sum of P 18,000, X must give Y and Z’s share of P 6,000. 3. A, B and C solidary debtor are obliged to give X,Y and Z joint creditors of P 18,000. How much may A be made liable? A being a solidary debtor may be held liable for P 18,000. But since the creditors are merely joint ones, each one of them can collect from A up to P 6,000.

Other terms for solidary obligation:a) In solidumb) Jointly and severallyc) Juntos o separadamented) Solidariase) Mancomumanda o in solidumf) Mancomunada soldariasg) Individually and collectively

Effects if obligation is JOINT and INDIVISIBLE. Art 1209 and Art.1224

A JOINT INDIVISIBLE OBLIGATION IS AN OBLIGATION WHERE THERE ARE SEVERAL DEBTORS OR CREDITORS WHO ARE JOINTLY BOUND BUT THE PRESTATION IS INDIVISIBLE.

The debt can be enforced by the collective acts of the debtors or creditors in view of the indivisibility of the object. Like in the case of the joint debtors the creditor has to proceed against all of them, otherwise, failure of the other debtors to comply the obligation would call for the conversion of the obligation to its monetary value or indemnity for damages plus payment of damages as to defaulting debtors. The same rule applies to joint creditors they have to proceed to the debtor jointly to ensure the fulfillment of the obligation.

Rules Governing Solidary Obligations:

Solidarity does not imply indivisibility. An obligation may be divisible even if it is solidary. Indivisibility does not imply solidarity. It is the intention of the parties that provides for the

nature of obligation (Art. 1210)

Solidarity may exist although the creditor and debtor may not be bound in the same manner same period and conditions. ( Art. 1211)

Each one of the solidary creditors may do whatever may be useful to others but not anything that is prejudicial to the others ( Art. 1212). A solidary creditor cannot assign his rights without the consent of the others (Art. 1213) – Essential feature is Mutual Agency.

The debtor may pay any one of the solidary creditors; but if any demand, judicial or extrajudicial, has been made by one of them, payment should be made to him. (Article 1214)

Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of Article 1219. The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the others for the share in the obligation corresponding to them. ( Article 1215)

Solidary creditors can collect from some or all of the debtors at one given time. If the creditor fails to collect from one debtor, he can go against the other or others, until the whole obligation is paid. It was held that the creditor may sue any of the solidary debtors or all of them simultaneously. An action instituted against one shall not a bar to those, which may be subsequently brought against others, as long as the debt has not been entirely satisfied (Article 1216)

Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept.

He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded.

When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each. ( Article 1217)

Note:In action filed by the creditors, a solidary debtor may avail of the following defenses:

Defenses derived from the nature of the obligation which constitute total defenses, such as absolute simulated contract

a. illegal cause or considerationb. illegal object or subject matterc. non-fulfillment of the suspensive conditionsd. other defenses which will nullify the contract which is the basis of creditor’s action.

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Defenses personal in nature – which may constitute a total or partial defensec. factor which vitiate consent such as minority, insanity, fraud, violence, intimidation, etc.

Defenses personal to the other co-debtors – which will constitute a partial defense for the solidary debtor being sued, thus exempting him from paying the proportionate share of the co-debtor whose personal defense he is invoking. He is exempted to pay the proportionate share of the invoking co-debtor but is still liable of his share and of those co-debtors whose shares are not in question.

DIVISIBLE AND INDIVISIBLE OBLIGATION:

Divisible obligation – one which capable of partial performanceIndivisible obligation – one which is not capable of partial performance

Test for the distinction:

In determining whether an obligation is divisible or indivisible, the controlling circumstance is not the possibility or impossibility of partial prestation but the purpose of the obligation or the intention of the parties.

What determined divisibility or indivisibility:a) Intentionb) Lawc) Character of the prestation

When obligation is presumed indivisible.a) Obligation to give definite things, such as an obligation to give a specific carb) Those which are not susceptible of partial performance.

When obligation is presumed divisiblea) Execution of a certain number of days of work, such as an obligation to work for 30 daysb) Accomplishment of work by metrical unit, such as when five debtors are obliged to deliver five

tons of sand and gravel. The debtors are obliged to deliver one ton each.c) Analogous thing which by their nature are susceptible of division.

Obligation with Penal Clause

Penal clause –An accessory undertaking to assume greater liability in case of breach.

Purpose: a. To ensure performance of the obligation by creating an effective deterrent against breach, making

the consequences of such breach as onerous as it may be possible.b. To substitute a penalty for indemnity for damages and the payment of interests in case of non-

compliance (art. 1226); or to punish the debtor for non-fulfillment or violation of his obligation. In the first case, the purpose is reparation; in the second, punishment.

Rules:

a. Penalty is not a substitute for performance except only when this right has been expressly reserved for him.

b. Penalty clause is presumed subsidiary. Penal clause is joint or the debtor has the right to pay penalty in lieu of performance only when this right has been expressly reserved for him.

Kinds of penal clause:

According to source:a) Legal- penalty imposed by lawb) Conventional – penalty agreed upon by parties

According to extent of liabilitya) Subsidiary – when only the penalty can be recovered in case of non-performance of the obligationb) Joint – when in case of non-performance of the obligation both the principal obligation and the penalty can be recovered.

Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded (Art. 1228)

Right to recover damages and interest in addition to the penalty

The penalty shall substitute the indemnity for damages, and interest in case the obligation is not fulfilled. Hence as a general rule, the creditor cannot demand damages and interests in addition to the penalty except:

a) When the parties so agreed;b) When the debtor refuses to pay the penalty;c) When the debtor is guilty of fraud in the fulfillment of the obligation.

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- Nullity of the principal carries with it the nullity of the accessory.

- Penalty may be reduced by the court when there is partial or irregular performance of the obligation or Even when there has been no performance when the penalty agreed upon is iniquitous or unconscionable. (Article 1229)

MODES OF EXTINGUISHMENT OF OBLIGATIONS

1. Obligations are extinguished by: (Enumeration under Article 1231 of the Civil Code)a) Payment or performanceb) Loss of the thing duec) Condonation or remissiond) Confusion or merger of rights of the creditor and debtore) Compensation f) Novation

Other causes of extinguishment of obligations are (h) annulment, (I) rescission, (j) fulfillment of a resolutory condition and (k) prescription. The following are found in other chapters of the Civil Code.

Other forms of Extinguishment of the obligationa) Death of a party in case the obligation is personalb) Mutual desistance or withdrawal from contract or agreementc) Compromise

PAYMENT OR PERFORMANCE

Payment (ART.1232-1261) – means not only the delivery of money but also the performance, in any other manner, of an obligation. (Art.1232)

General Rule: Completeness of Payment. Payment should be complete. (Art. 1233)

Exceptions:a.Recovery allowed in case of substantial performance in good faith. (Art. 1234)b.Recovery allowed when incomplete or irregular performance is waived. (Art.1235)c. Instances when partial performances are allowed. (art. 1248)

2. when there is an express stipulation to that effect.3. When the debt is part liquidated (definitely and determined or computed) and in part

liquidated.4. When the prestations in which the obligation consists are subject to different terms or

conditions which affect some of them.

3. Third person cannot compel the creditor to accept payment or performance of an obligation except:a) When it is made by a third person who has interest in the fulfillment of the obligation;b) When there is a stipulation to the contrary (Art.1236, CC). In this case, the creditor waives his

right to refuse to deal with strangers to the obligations

4. If a third person pays an obligation with the knowledge and consent of the debtor he can recover from the debtor the entire amount, which he has paid (reimbursement) and he is subrogated of all the rights of the creditor. Subrogation of the rights, such as those arising from a mortgage, guaranty or penalty (Art. 1237). If payment was made without the consent of the debtor, he can recover only insofar as the payment has been beneficial to the debtor.

5. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which requires the debtor's consent. But the payment is in any case valid as to the creditor who has accepted it. (Art. 1238)

6. Art. 1239. In obligations to give, payment made by one who does not have the free disposal of the thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of Article 1427 under the Title on "Natural Obligations."

a. Free disposal of the thing due means that the thing to be delivered must not be subject to any claim or lien or encumbrance of a third person.

b. Capacity to alienate means that the person is not incapacitated to enter into a contract and for that reason, to make a disposition of the thing due.

7. Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it.

b. Creditorc. His successor in interestd. Person authorized to receive it. It refers to both authorized by the creditor or authorized by

the court such as the guardian, executor or administrator of the estate)

5. Payment to an incapacitated person is valid only if the latter kept the thing delivered or insofar as the payment has been beneficial to him. Payment made to third person shall be valid insofar as it redounded to the benefit of the creditor. It is presumed in the following:

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b. If after the payment, the third person acquires the creditor’s rights (Subrogation of the payer in the creditor’s right).

c. If the creditor ratifies the payment to the third person (Ratification by the creditor).d. If by the creditor’s conduct, the debtor has been led to believe that the third person had

authority to receive payment. (Estoppel on the part of the creditor) (Art.1241 par.2)

6. Art. 1242. Payment made in good faith to any person in possession of the credit shall release the debtor.

7. Art. 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid.

8. Art. 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value as, or more valuable than that which is due. In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee's will.

9. Payment of debts in money shall be made only in the Philippine currency which the legal tender pursuant to Art. 1249 of the Civil Code in relation to Republic Act No. 8183. Obligation shall now be payable in the legal tender in the Philippines. Legal tender means the currency which the debtor may compel his creditor to accept payment of his debt. However, the parties may stipulate that the payment may be made in currency under than the legal tender of Philippines at the time of payment. ( R.A. No. 8183)

Note that under the New Central Bank Act:a. Centavo (0.25) and above is legal tender up to P 50.00b. Centavo (0.10) and below is legal tender up to P 20.00c. All coins P 1.00 and above including bills are legal tender up to any amount

10. In case of extraordinary inflation and deflation of the Philippine currency should supervene the basis of the value of the currency for payment shall be the value of the currency at the time of the establishment of the obligation. Unless there is a stipulation to the contrary (Art. 1250)

Two interpretations:

a. Basis of payment shall be the value of the currency at the time of the establishment of the obligation. Hence if the value at the time of establishment is P 5,000 and later on extraordinary inflation or deflation supersedes, the amount remains the same unless there is a contrary agreement.

b. Value of the currency at the time of the establishment of the obligation is computed by using the following formula.

Amount to be paid at maturity = Amount of the obligation x Amount of ObligationValue at the date of Maturity

Example:

D borrowed P 1 Million from c payable at the end of 10 years. Suppose that before maturity of the loan, an extraordinary inflation supervened causing the value of the debt to fall to P 500,000 on the date of maturity. Following the above formula:

A = ( 1 million/500,000.00) x P 1Million = 2 x P 1 M

= P 2 Million is the equivalent value of P 1 M in the date of maturity

Suppose that before maturity of the loan, an extra-ordinary deflation supervened causing the value of the debt to rise to P 4 Million on the date of the maturity of the loan, how much must D pay C on maturity?

A = ( 1M/4 M) x 1 M = P 250,000 equivalent value of P 1 M on the date of maturity

11. What are the different special forms of payment?

a) Dation in Payment or dacion en pago (Art. 1245)b) Application of Payment ( Arts. 1252-1254)c) Payment by Cession (Art.1255)d) Tender of Payment and Consignation Arts. 1256-1261)

12. Dation in Payment of Dacion en pago, adjudicacion en pago or datio in solutum is a special form of payment where the debtor conveys to the creditor ownership a thing belonging to him as accepted equivalent to payment or performance of the obligation.Dation in payment is governed by the law on sales.

13. What is Application of Payment?Application of payment may be defined as the designation of debt to which payment must be applied when the debtor has several obligations of the same kind in favor of the same creditor.

Requisites:a) There must be only one debtor and only one creditor;

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b) There must be two or more debts of the same kind;c) All debts must be due;d) The amount paid by the debtor must not be sufficient to cover the total amount of all the

debts.

The right to make an application of payment belongs to the debtor. However if he does not avail himself of this right, the creditor may wrest the initiative from him by giving to him a receipt designating the debt to which the payment shall applied. But even this does not really constitute an exception because the debtor may either accept or reject the application. (See Art. 1252)

* Strictly speaking, it is not a form of payment but more of a mode of payment.

What is meant by legal application of payment?Legal application of payment refers to the following the rules, both of which are enunciated in Art. 1254 of the Civil Code;

a) When neither the debtor nor the creditor makes any application of payment or if it cannot be inferred from other circumstances, the debt which is most onerous to the debtor among those which are due shall be deemed to have been satisfied. The following may be given

Examples.5. Where there are various debts, which are due and they were incurred at different dates the

oldest are more onerous.6. Where there are various debts, which are due and they were incurred at different dates the

oldest are more onerous.7. Where one bears interest and the other does not, the former is more onerous8. Where one s secured the other is not, the former is more onerous9. Where the debtor is bound as principal in one and as guarantor or surety in another, the

former is more onerous10. Where the debtor is bound as solidary debtor in one and as a sole debtor in another, the

former is more onerous.b) If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately

14. Payment by Cession or Assignment – it is a special form of payment whereby the debtor abandons all of his property for the benefit of his creditor in order that from the proceeds thereof the latter may obtain payment of their credits. Also known as voluntary cession or insolvency.

There is no transfer of ownership but merely grants the creditors of a debtor to sell properties of said insolvent debtor and apply the proceeds to their respective credit. Debtor is released only up to the net proceeds of the sale. He remains liable to the creditor as to the remaining balance unless otherwise agreed to release him to his entire obligation.

Compare Cession from Insolvency under Act No. 1956. Cession has no court intervention while Insolvency either Voluntary or Involuntary requires court proceeding. Petition is filed in court and insolvent can be permanently discharged from liability.

DISTINCTIONS:

Dation in Payment Payment by Cession

1. There is usually only one creditor 1. There are several creditors

2. It does not presuppose the insolvency of the debtor

2. Debtor is insolvent at the time of assignment

3. It does not involve all the properties of the debtor

3. Involves all the properties of the debtor

4. The creditor becomes owner of the thing given by the debtor

4. The creditors only acquire the right to sell the thing and apply to their credits proportionately

5. Dation is really an act of novation 5. Cession is not novation

15. Meaning of Tender of payment – consists in the manifestation made by the debtor to the creditor of his decision to comply immediately with the obligation.

Meaning of Consignation: refers to the deposit of the object of the obligation in a competent court in accordance with the rules prescribed by law after refusal or inability of the creditor to accept tender of payment.

As a rule, there must be tender of payment first before consignation can be effected.

Distinguish Tender of Payment from Consignation:

Tender of payment is antecedent of consignation; in order words, while the first is preparatory act, the second is the principal act, which will produce the effects of payment.

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Tender of payment is by its very nature extra judicial in character, wile consignation is judicial.

Requisites for Consignation:a) That there is a debt that is due:b) That the consignation has been made either because the creditor to whom tender of payment was

made refused to accept the payment without just cause or because any of the stated by law for effective consignation without previous tender of payment exists. (Art.1256)

c) That previous notice of the consignation has been given to the persons interested in the fulfillment of the obligation. (Art.1256)

d) That the thing or amount due had been placed at the disposal or judicial authority (Art.1258 par. 1)e) That after the consignation has been made the person interested in the fulfillment of the obligation

had been notified thereof. (Art. 1258 par. 2)f) Judicial declaration that the consignation is proper with prayer on the part of the debtor to be

discharged from the obligation.g) Payment by the creditor of the expenses for consignation if properly made by the debtor.

Even without Tender of Payment, Consignation may be validly pursued in the following:a) When the creditor is absent or unknown or does not appear at the place of payment;b) When he is incapacitated to receive the payment at the time it is due;c) When without just cause he refuses to give a receipt;d) When two or more persons claim the right to collect and;e) When the title of the obligation has been lost. (Art.1256)

Debtor can withdraw the thing deposited as a matter of right before the creditor accepts or before a judicial declaration is made by the court. In effect, obligation remains (Art. 1260). If the consignation has been made properly, creditor should authorize the debtor to withdraw the same and he shall lose every preference which he may have over the thing. The co-debtor, guarantors and sureties shall be released. ( Art. 1261)

16. LOSS OF THE THING DUE (Arts. 1262-1269) – means that the thing which constitutes the object of the obligation perishes, or goes out of the commerce of man or disappears in such a way that its existence is unknown or it cannot be recovered. (Art. 1189. NO. 2) In its broad sense, it means impossibility of compliance or performance with the obligation through any cause.

Kinds of Loss

a. Physical loss – when a thing perishes as when the house is burned and reduced to ashes.b. Legal loss – when the thing goes out of commerce.c. Civil loss –when the thing disappears in such a way that its existence is unknown or even if known, it

cannot be recovered, whether as a matter of fact or of law.d. Physical or legal impossibility

Art. 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor.

e. Difficulty of performanceArt. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part

In order that an obligation shall be extinguished by the loss or destruction of the thing if is essential that the following requisites must concur:a) The thing, which is lost, is specific or determinateb) The thing is loss without any fault of the debtor if that thing is lost through the fault of the debtor the

obligation is transformed into an obligation to indemnify the obligee or creditor for damages.c) The debtor is not guilty of delay

Exceptions to the above rule are as follows:a) When by law the obligor is liable for fortuitous events (Arts. 1174 and 1262 par 2)b) When by stipulation the obligor is liable even for fortuitous events. (Arts 1174 and 1262 par 2)c) When the nature of the obligation requires the assumption of risk. (Arts. 1174 and 1262 par 2)d) When the loss of the thing is due party to the fault of the debtor (Art 1262 par 1 CC)e) When the loss of the thing occurs after the debtor has incurred in delay. (Art 1262 par.1 and Art 1135

par. 3)f) When debtor promised to deliver the same thing to two or more persons who do not have the same

interest (Art. 1165 par 3)g) When the obligation is generic (Art.1263)h) When the debt of a certain and determinate thing proceeds from a criminal offense (Art 1268)

Art. 1265 provides that “whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of article 1165. This presumption does not apply in case of earthquake, flood, storm, or other natural calamity.

Art. 1269 provides that “the obligation having been extinguished by the loss of the thing, the creditor shall have all the rights of action which the debtor may have against third persons by reason of the loss. “   this right is transferred by operation of law.

17. CONDONATION AND REMISSION (Arts. 1270 – 1274) – Is an act of liberality by virtue of which the obligee, without receiving any price or equivalent, renounces the enforcement of the obligation as a

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result of which it is extinguished in its entirely or in that part or aspect of the same to which the remission refers. It is gratuitous abandonment by the creditor of his right.

Requisites:a) It must be gratuitousb) It must be accepted by the obligorc) The parties must have capacity.d) It must not be Inofficious; ande) If made expressly, it must comply with the forms of donations. Otherwise, remission or

condonation is not valid. Example:

a) Express Condonation involving real property must be in public instrument together with the acceptance of donee.

b) Express Condonation of personal property amounting to P 5,000 above must be in writing together with the acceptance of donee

Important principles on Remission:

a. While a person may make donations, no one can give more than which he can give by will; otherwise, the excess shall be Inofficious and shall be reduced by the Court as it may impair the legitime of the compulsory heirs of the donor.

b. The delivery of a private document evidencing credit made voluntarily by the creditor gives a disputable presumption that there is a renunciation of the action which the creditor has against the debtor. (Art. 1271) Example of implied remission

c. Whenever the private document is found in possession of the debtor, it is presumed that the creditor delivered the document voluntarily. (Art. 1272).

d. If the thing pledged is found in the possession of the debtor, there is a disputable presumption that the contract of pledge has been renounced. This however does not extend to the principal contract. Example of Implied remission

18. CONFUSION OR MERGER (Arts. 1275-1277) - Merger of the characters of creditor and debtor in the same person by virtue of which the obligation is extinguished. Meeting in the same person of the qualities of the creditor and the debtor with respect to one and the same obligation.

Requisites:a) That the merger of the characters of the creditor and debtor must be in the same person.

(Art.1275)b) That it must take place in the person of either the principal creditor or principal debtor

(Art.1276)c) That it must be complete and definite.

Notes:

Merger in the person of the guarantor does not extinguish the obligation. Only the contract of guaranty is extinguished. There is in fact a novation where the guarantor now becomes the new creditor of the debtor.

Merger in the person of one of the solidary debtor shall extinguish the entire obligation because it is also merger in the other solidary debtors. Merger in joint obligation pertains only to the share of the debtor to which merger takes place. Only the share corresponding to the creditor or debtor in whom the characters concur. The creditor or debtor whose share was subject to confusion actually becomes the new creditor of the other joint debtors pertaining to their share in the original obligation.

19. COMPENSATION – Compensation may be defined as a mode of extinguishing in their concurrent amount those obligations persons who in their own right are creditors and debtors of each other.

Requisites for legal compensation under Article 1279:a) There must be two parties, who in their own right, are principal creditors and principal debtors of

each other. (Arts. 1278, 1279. No. 1)b) Both debts must consist in money, or if the things due are fungibles (consumables), they must be of

the same kind and quality (Art. 1279. NO.2)c) Both debts must be due (Art. 1279. NO. 3)d) Both debts must be liquidated and demandable ( Art 1279 NO. 4)e) There must be no retention or controversy commenced by third persons over either of the debts and

communicated in due time to the debtor (Art.1279 NO. 5 CC)f) The compensation must not be prohibited by law (Arts 1278, 1288)

Under Article 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.

Instances when legal compensation is not allowed by law: a. When one of the debts arises from depositum or from the obligation of a depositary or of a bailee in

commodatum.b. Where one of the debts arises from a claim for support due by gratuitous title.c. Where on of the debts consists in civil liability from a penal offense.

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Different classification of Compensation:a) Legal – when it takes place by operation of law from the moment all of the requisites prescribed

by law are present (Arts 1278 & 1279)b) Voluntary – when the parties who are mutuality creditors and debtors agree to compensate their

respective obligations even if the requisites of compensation may not be present.c) Judicial – when it takes effect by judicial decree.d) Facultative – when it can only be set up by one of the parties.

In contract of deposit, the depositary cannot set up compensation against the depositor if he fails to return the object of deposit as against any amount which the depositor owes the depositary. In contract of commodatum, the bailee cannot set up compensation but the bailor can.Reason: This is because it would violate the fiduciary character of the contract of deposit or commodatum. But the depositor or bailor can set up by way of compensation against the depositary’s or bailee’s credit. Here, only one party can set up compensation. (Art. 1287)

Person obliged to give support cannot also set up compensation unless support has developed into arrears. In such case, compensation is possible.(Art. 1287)

Neither shall there be compensation if one of the debts consists in civil liability arising of a crime. The one whose obligation arose from said liability cannot set up compensation against the other but the latter can. (Art. 1288)

Art. 1286. Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment.

AS TO EFFECT:

Total – when the debts to be compensated are equal in amount:Partial – when the debts to be compensated are not equal in amount.

Note: The rule on application of payment is also applicable in compensation.In case there are several debts, when the debtor cannot set up compensation against the assignee if

he knows that assignment was made by the creditor/assignor and he did not notify the assignor that he reserves his right to set up compensation. He can however collect from the creditor what he could have set off against the creditor had there been no assignment made by the latter. If the debtor knows about the assignment but did not consent, he can set up compensation against the assignee to obligations previous to the assignment. But he has no knowledge of the assignment, he can set up compensation of all credits prior, subsequent to the assignment until he obtains knowledge of the assignment. (Art. 1285)

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.

20. NOVATION (Arts. 1291 – 1304)

Novation is the substitution or change of an obligation by another, resulting in its extinguishment or modification, either by changing its object or principal conditions or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor

Classification of Novation:a) Objective or real – refers to the change either in the cause object or principal conditions of the

obligationb) Subjective or personal – refers to the substitution of another person of the debtor (passive) or

subrogating a third person of the rights of the creditor (active). (Arts. 1291, Nos. 2 and 3) c) Mixed – refers to the combination of objective and subjective novation.

Requisites of Novation:a) A previous valid obligation;b) Agreement of the parties to the new obligation;c) Extinguishment of the old obligation andd) Validity of a new obligation

Test of incompatibility – in order an obligation may be impliedly extinguished by another, which substitutes the same, it is imperative that the old and new obligation must be incompatible with each other on every point. It is then imperative to determine whether or not both can stand together, each having its own independent existence. If they can stand together, there is no incompatibility consequently there could be no novation.

NOVATION is not presumed. If must be clearly and unmistakably established either by the express agreement of the parties or acts of equivalent import.

Kinds of Novation:

According to origin:

1. Legal – that which takes place by operation of law.

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2. Conventional – that which takes place by agreement of the parties.

According to how it is constituted:

1. Express- when it is so declared in unequivocal terms.2. Implied - when the old and the new obligations are essentially incompatible with each other.

According to extent or effect:

1. Total or extinctive - when the old obligation is completely extinguished.2. Partial or modificatory-when the old obligation is merely modified.

According to the subject:

1. Real or objective- when the object (or cause) or the principal conditions of the obligation are changed.

2. Personal or subjective- when the person of the debtor is substituted and/or when a third person is subrogated in the rights of the creditor.

3. Mixed –when the object and/or principal conditions of the obligation and the debtor or the creditor, or both the parties, are changed. It is a combination of real and personal novations.

Kinds of substitution:

A. Expromission – or that which takes place when a third person of his own initiative and without the knowledge or against the will of the original debtor assumes the latter’s obligation with the consent of the creditor.Effect – the new debtor’s insolvency or non-fulfillment of the obligation will not revive the action of the creditor against the old debtor whose obligation is extinguished by the assumption of the debt by the new debtor. If the new debtor pays the creditor, he is not subrogated with the rights of the creditor; he is only entitled to be beneficial reimbursement.

B. Delegation – one which takes place when the creditor accepts a third person to take place of the debtor at the instance of the latter. The creditor may withhold approval. (art. 1295) In delegacion, all the parties the old debtor, the new debtor and the creditor must agree. If the payment was made with the consent of the original debtor or on his own initiative (delegacion), the new debtor is entitled to reimbursement and subrogation under Art.1237

Effect of new debtor’s insolvency or non-fulfillment of the obligation in delegacion:

General Rule: Original debtor is not liable to the creditor in case of insolvency of the new debtor. The exceptions are:

1. The said insolvency was already existing and of public knowledge (although it was not known to the old debtor) at the time of the delegacion; or

2. The insolvency was already existing and known to the debtor (although it was not of public knowledge) at the time of the delegacion.

The exceptions are intended to prevent fraud on the part of the old debtor.

Other pertinent provisions:

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. Referring to Stipulation Pour Autrui.

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.

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.

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)

KINDS OF SUBROGATION (Art. 1300)

Conventional Subrogation – when it takes place by express agreement of the original parties. (The debtor, the original creditor and the third person) Consent of all parties required.

Conventional Subrogation requires consent of all of the parties, to wit, the debtor, the old creditor and the new creditor.

Distinction between conventional subrogation and assignment of credit.

Assignment of Credit Conventional SubrogationThere is mere transfer of the same right or credit. The transfer did not extinguish credit.

Extinguishes the obligation and creates a new one

It does not require the debtor’s consent. Mere Requires debtor’s consent

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notification to him is sufficient.The defect in the credit or right is not cured simply by assigning the same. Here, the debtor generally has still the right to present against new creditor any defense available as against old debtor.

The defect of the old obligation may be cured in such a way that the new obligation becomes entirely valid. Thus here, there is no right to present against new creditor any defense which he, the debtor or could have set up against the old creditor.

Here creditor is the one ceding or transferring his rights.

Here, somebody makes payment in behalf of the debtor with the latter’s consent.

Legal Subrogation– when it takes place without agreement but by operation by law

Cases of Legal Subrogation:1. When a creditor pays another creditor who is preferred (see arts. 2236, 2251)2. When a third person without interest in the obligation pays with the approval of the

debtor;3. When a third person with interest in the obligation pays with the approval of the debtor.

What comprises subrogation?

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. Under article 1235 subrogation includes rights arising from

a. Mortgage or pledge or other forms of securityb. Guarantyc. Penalty or penal clause

Effect of Total Subrogation:It transfer to the new creditor the credit and all of the rights and actions that could have been

exercised by the former creditor either against the debtor or against third persons, be they guarantors or mortgagors. (Art. 1303)

Effect of Partial Subrogation:

The creditor to whom partial the new creditor has made payment remains a creditor to the extent of the balance of the debt. In case of insolvency of the debtor, old creditor is given preferential right to recover the remainder as against the new creditor. (Art, 1304)

Jgbdfabrero/may 2009

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