59229487 Notes on Prescription Obligations and Contracts

BOOK III TITLE V. – PRESCRIPTION CHAPTER 1 GENERAL PROVISIONS WHAT

IS PRESCRIPTION?

Prescription is a mode of acquiring (or losing) ownership and other real rights thru the lapse of time in the manner and under the conditions laid down by law (Article 1106). WHAT

ARE THE DIFFERENT CONCEPTS OF PRESCRIPTION?

Prescription is a legal term used to refer to a. b.

Acquisitive prescription -- the acquisition of right by the lapse of time under the conditions laid down by law (Article 1106, par. 1), which may be ordinary or extra-ordinary. Extinctive prescription (or statute of limitation or limitation of actions)—whereby rights and actions are lost by the lapse of time (Articles 1106, par. 2 and 1139). This refers to the time frame within which an action should be filed in court from the time the cause of action has accrued, failing in which, the action is deemed barred by the lapse of the prescribed time. WHAT

IS THE DIFFERENCE BETWEEN THE TWO CONCEPTS?

a. Acquisitive prescription is a mode of acquiring ownership while extinctive prescription is a way of extinguishing a cause of action for failure to file it within the required period. b. In acquisitive prescription, a party becomes the owner of a property by prescription while the previous owner loses the property. In extinctive prescription, if a party is barred to file an action because of prescription, the opposite party, on the other hand, is liberated from the obligation or liability. c. Acquisitive prescription applies to civil cases while extinctive prescription is applicable to all kinds of action whether civil or criminal. There are, however, exceptions wherein the action, by mandate of the law, does not prescribe like an action to demand a right of way (Article 1143); action to abate nuisance (Article 1143); action to declare the invalidity of a void contract (Article

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1410). [Vide Morales vs. Court of First Instance of Misamis Occidental, G.R. No. L-52278, May 29, 1980, 97 SCRA 872.] WHAT IS LACHES? Laches is unreasonable delay in the bringing of a cause of action before the courts of justice. It is failure or neglect, for an unreasonable and unexplained length of time, to do that which, by exercising due diligence, could or should have been done earlier; it is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled thereto either has abandoned it or declined to assert it. The principle of laches is a creation of equity. It is applied, not really to penalize neglect or sleeping upon one’s right, but rather to avoid recognizing a right when to do so would result in a clearly inequitable situation. WHAT

ARE THE REQUISITES OF LACHES?

The following are the requisites of laches: a. Conduct on the part of the defendant, or of one under whom he claims, giving rise to the situation of which complaint is made and for which the complaint seeks a remedy; b. Delay in asserting the complainant’s rights, the complainant having had knowledge or notice of the defendant’s conduct and having been afforded an opportunity to institute a suit; c. Lack of knowledge or notice on the part of the defendant that the complainant would assert the right which he bases his suit; and d. Injury or prejudice to the defendant in the event relief is accorded to the complainant, or the suit is not held barred (Abraham vs. Recto-Kasten, G.R. No. L-16741, January 1962). HOW

IS PRESCRIPTION DISTINGUISHED FROM LACHES?

a. Prescription is concerned with the fact of delay while laches is concerned with the effect of delay; b. Prescription is a matter of time while laches is principally a question of the inequity of permitting a claim to be enforced, this inequity being founded on some change in the condition of the property or the relations of the parties. c. Prescription is statutory; laches is not. d. Laches applies in equity, whereas prescription applies at law.

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e. Prescription is based on a fixed time; laches is not (Nielson & Co., Inc. vs. Lepanto Mining Co., G.R. No. L-21601, December 17, 1966, 18 SCRA 1040). WHAT ARE THE BASIC REQUIREMENTS OF PRESCRIPTION AS A MODE OF ACQUISITION? As a mode of acquisition, prescription requires the following essential elements: a. There must be actual possession of a property, which is susceptible of prescription; b. Possession must be in the concept of an owner and not that of a mere holder (Article 1118); c. Possession must be public or open (Article 1118); d. Possession must be peaceful (Article 1118); e. Possession must be continuous and not interrupted (Article 1118); f. Possession must be averse, that is, exclusive and not merely tolerated; and g. Possession must satisfy the full period required by law (Articles 1132; 1134; 1137). WHO

ARE THE PERSONS CAPACITATED TO ACQUIRE PROPERTY BY PRESCRIPTION?

Under Article 1107, the following may acquire property by prescription: a. Persons who can acquire property rights through the other modes of acquiring ownership. When a person is capable of becoming an owner under Article 712, generally such a person has full civil capacity and does not suffer from disqualification. b. Minors or other incapacitated persons, either personally or through their parents, guardians or legal representatives. Minors and incapacitated persons may acquire property by prescription personally if they have discernment. This means the presence of an intention to appropriate the property to become their own. This intention is an essential ingredient of possession – the principal element of prescription. However, if the minor or incapacitated person has no discernment, he can become an owner by prescription only through representatives.

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WHO

ARE THE PERSONS AGAINST WHOM PRESCRIPTION MAY RUN?

Acquisitive and extinctive prescriptions run against certain persons: (1)Minors and other incapacitated persons who have parents, guardians or other legal representatives; (2)Absentees who have administrators, either appointed by them before their disappearance, or appointed by the courts; (3)Persons living abroad, who have managers or administrators; (4) Juridical persons, except the State and its subdivisions (Article 1108). (5) Prescription, acquisitive and extinctive, runs in favor of, or against a married woman (Article 1110). This presupposes a situation where the parties involved are a married woman and another person not her husband. Prescription may be in favor of or against the married woman. Persons who are disqualified from administering their property have a right to claim damages from their legal representatives whose negligence has been the cause of prescription. MAY

PRESCRIPTION RUN BETWEEN HUSBAND AND WIFE OR BETWEEN PARENTS AND

CHILDREN OR BETWEEN GUARDIAN AND WARD?

Prescription does not run between husband and wife, even though there be a separation of property agreed upon in the marriage settlements or by judicial decree. Neither does prescription run between parents and children, during the minority or insanity of the latter, and between guardian and ward during the continuance of the guardianship (Article 1109). Note that the prescription contemplated here is acquisitive and not extinctive. Thus, in the filing of actions against each other, extinctive prescription is applicable. EXAMPLES: Legal separation must be filed within five (5) years from the occurrence of the ground for legal separation (Article 57, FC); Generally, action for annulment of marriage by a spouse against the other must be filed within five (5) years (Article 47, FC);

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Alienation made by the husband without the wife’s consent provided that the marriage was celebrated under the Civil Code (Article 173, CC). WHAT OWNER?

IS THE EFFECT OF PRESCRIPTION OBTAINED BY A CO-PROPRIETOR OR A CO-

Prescription obtained by a co-proprietor or a co-owner shall benefit the others (Article 1111). Thus, if a co-owner obtained a property by prescription which property incidentally must be related to the property held in common, the prescription benefits them all. MAY

PRESCRIPTION RUN AGAINST CO-OWNERS?

Prescription does not run against co-owners except when a coowner made a definite repudiation of the co-ownership disclosed to the other co-owners (Article 494). WHO

CAN RENOUNCE PRESCRIPTION ALREADY OBTAINED?

Persons with capacity to alienate property may renounce prescription already obtained, but not the right to prescribe in the future (Article 1112, par. 1). The renouncing must not prejudice the rights of others (Article 6). WHEN

IS THERE TACIT RENUNCIATION?

Prescription is deemed to have been tacitly renounced when the renunciation results from acts which imply the abandonment of the right acquired (Article 1112, par. 2). WHAT

THINGS MAY BE SUBJECT OF PRESCRIPTION?

All things which are within the commerce of men are susceptible of prescription, unless otherwise provided. Property of the State or any of its subdivisions not patrimonial in character shall not be the object of prescription (Article 1113). EXAMPLES

OF EXCEPTION:

a. Movables possessed through a crime can never be acquired by prescription by the offender (Article 1133); b. Lands covered by Torrens Title; c. Those outside the commerce of men (Article 1133); d. Properties of spouses, parents and children, wards and guardians, under the restrictions imposed by law (Article 1109).

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WHAT

ARE THE RIGHTS OF CREDITORS AND ALL OTHER PERSONS INTERESTED IN

MAKING THE PRESCRIPTION EFFECTIVE?

Creditors and all other persons interested in making the prescription effective may avail themselves thereof notwithstanding the express or tacit renunciation by the debtor or proprietor (Article 1114). Thus, where a current creditor of a corporation which had obtained prescription of its debts, may interpose and plead prescription to stop the corporation from paying prescribed debts to the prejudice of the said creditor. This complements Article 6 of the Civil Code. WHAT

IS

THE

RULE

IN

CASE

OF

CONFLICT

PRESCRIPTION AND SPECIFIC PROVISIONS IN THE SAME

BETWEEN

CODE,

THE

PROVISIONS

ON

OR IN SPECIFIC LAWS?

The provisions of the present Title are understood to be without prejudice to what in this Code or in special laws is established with respect to specific cases of prescription (Article 1115). Thus, specific provisions on prescription separately found in the Code and in special laws shall prevail over the general provisions on prescription provided under Title V of the Code. WHAT

ARE THE TRANSITIONAL RULES FOR PRESCRIPTION?

Prescription already running before the effectivity of this Code shall be governed by laws previously in force; but if since the time this Code took effect the entire period herein required for prescription should elapse, the present Code shall be applicable, even though by the former laws a longer period might be required (Article 1116). Thus: a. If the period for prescription began and ended under the old laws, said old laws govern. b. If the period for prescription began under the new Civil Code, the new Civil Code governs. c. If the period began under the old law, and continues under the new Civil Code, the old law applies. EXCEPTION:

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In this third rule, it is the new Civil Code that will apply, provided two conditions are present: a. The new Civil Code requires a shorter period; and b. This shorter period has already elapsed since August 30, 1950. NOTE: It is more than fifty years since the new Civil Code became effective. The transitional rules may no longer find application today, although the same were applied before in several cases.

PRESCRIPTION WHAT

OF

CHAPTER 2 OWNERSHIP AND OTHER REAL RIGHTS

ARE THE KINDS OF ACQUISITIVE PRESCRIPTION?

Acquisitive prescription of dominion and other real rights may be ordinary or extraordinary (Article 1117). WHAT

ARE ORDINARY AND EXTRA-ORDINARY PRESCRIPTIONS?

Prescription where there is good faith is called ordinary prescription; whereas prescription where there is bad faith is called extra-ordinary prescription. Prescription may arise even if the possessor is in bad faith. However, when the possessor is in bad faith, the period required for the actual possession is much longer to the case of a possessor in good faith. WHAT

ARE THE ADDITIONAL REQUISITES IN ORDINARY PRESCRIPTION?

Aside from the basic requirements of acquisitive prescription already stated, if prescription is ordinary, the additional requisites are: a. Good faith (Article 1128), and b. Just title (Article 1129) Note that the title for prescription must be true and valid (Article 1130); and for the purposes of prescription, just title must be proved; it is never presumed (Article 1131). WHEN IS A POSSESSOR CONSIDERED IN GOOD FAITH? A possessor is considered in good faith, if he is not aware of the existence of any flaw or defect in his title or mode of acquisition which

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invalidates it (Article 526 in relation to Article 1128). Good faith consists in the reasonable belief that the person from whom he received the thing was the owner thereof, and could transmit his ownership (Article 1127). The related Articles which must be considered in the determination of good faith in prescription of ownership are the following: a. Article 526 -- He is deemed a possessor in good faith who is not aware that there exists in his title or mode of acquisition any flaw which invalidates it. He is deemed a possessor in bad faith who possesses in any case contrary to the foregoing. Mistake upon a doubtful or difficult question of law may be the basis of good faith. b. Article 527 -- Good faith is always presumed, and upon him who alleges bad faith on the part of a possessor rests the burden of proof. c. Article 528 -- Possession acquired in good faith does not lose this character except in the case and from the moment facts exist which show that the possessor is not unaware that he possesses the thing improperly or wrongfully. d. Article 529 -- It is presumed that possession continues to be enjoyed in the same character in which it was acquired, until the contrary is proved. WHAT

IS MEANT BY

“JUST

TITLE”?

Just title means that the possessor obtained the possession of the property through one of the modes recognized by law for acquiring ownership (as enumerated under Article 712) but the transferor or grantor was not the owner of the property or he has no power to transmit the right (Article 1129). The just title is intended to transmit ownership and could have actually transmitted ownership had the transferor or grantor been the true owner of the property. This kind of possession arising from a just title can ripen into ownership if the other elements of prescription are present. WHAT

ARE THE CHARACTERISTICS OF POSSESSION NEEDED FOR PRESCRIPTION?

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Possession has to be in the concept of an owner, public, peaceful and uninterrupted (Article 1118). a. Possession in the CONCEPT OF AN OWNER means the possessor is exercising the attributes of ownership over the property. He does not recognize any ownership over the property except his own. b. Possession of a property is considered PUBLIC when the employment thereof is visible to all, especially to the very person against whom possession is being asserted. The possession must be publicly known to the community. c. Possession is PEACEFUL when it is acquired without force or intimidation, and such character is maintained all throughout the period fixed by law. d. Possession is UNINTERRUPTED OR CONTINUOUS when the possessor has not stopped exercising the rights of an owner over the property during the time fixed by law. However, if the right is exercisable at intervals, and the right is so exercised, there is still continuity in the possession of the property. Example: Harvesting of seasonal fruits from fruit bearing trees. e. The possession must be ADVERSE. Thus, mere possession with juridical title, such as by a lessee, mortgagee, usufructuary, trustee, or agent does not hold the proper adversely and in the concept of an owner, unless the juridical relationship is first expressly repudiated and such repudiation has been communicated to the other party. f. The acts of possessory character must not be executed in virtue of LICENSE OR BY MERE TOLERANCE of the owner because the acts shall not be available for the purposes of possession (Article 1119). HOW

IS POSSESSION INTERRUPTED FOR PURPOSES OF PRESCRIPTION?

Possession is interrupted for the purposes of prescription, naturally or civilly (Article 1120). WHEN a. b.

IS POSSESSION INTERRUPTED?

Possession is naturally interrupted when through any cause it should cease for more than one year (Article 1121, par. 1). Civil interruption is produced by judicial summons to the possessor (Article 1123), except: a) If it should be void for lack of legal solemnities;

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b) If the plaintiff should desist from the complaint or should allow the proceedings to lapse; c) If the possessor should be absolved from the complaint (Article 1124). Any express or tacit recognition which the possessor may make of the owner's right also interrupts possession (Article 1125).

c.

WHAT

ARE THE CONSEQUENCES OF INTERRUPTION?

a. The old possession is not revived if a new possession should be exercised by the same adverse claimant (Article 1121, par. 2). b. If the natural interruption is for only one year or less, the time elapsed shall be counted in favor of the prescription (Article 1122). AGAINST

A TITLE RECORDED IN THE

REGISTRY

OF

PROPERTY,

MAY ORDINARY

PRESCRIPTION OF OWNERSHIP OR REAL RIGHTS TAKE PLACE TO THE PREJUDICE OF A THIRD PERSON?

Against a title recorded in the Registry of Property, ordinary prescription of ownership or real rights shall not take place to the prejudice of a third person, except in virtue of another title also recorded; and the time shall begin to run from the recording of the latter. As to lands registered under the Land Registration Act, the provisions of that special law shall govern (Article 1126). WHAT

IS THE PERIOD OF PRESCRIPTION OF MOVABLES?

a. The ownership of movables prescribes through uninterrupted possession for FOUR YEARS IN GOOD FAITH. b. The ownership of personal property also prescribes through uninterrupted possession for EIGHT YEARS, WITHOUT NEED OF ANY OTHER CONDITION. c. With regard to the right of the owner to recover personal property lost or of which he has been illegally deprived, as well as with respect to movables acquired in a public sale, fair, or market, or from a merchant's store the provisions of Articles

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559 1 and 1505 2 of this Code shall be observed (Article 1132). d. Movables possessed through a crime can never be acquired through prescription by the offender (Article 1133). WHAT

IS THE PRESCRIPTIVE PERIOD FOR IMMOVABLE?

a. Ownership and other real rights over immovable property are acquired by ordinary prescription through possession of TEN YEARS (Article 1134). b. Ownership and other real rights over immovables also prescribe through uninterrupted adverse possession thereof for THIRTY YEARS, without need of title or of good faith (Article 1137). WHAT

IS THE RULE WHEN THERE IS DISCREPANCY IN THE AREA POSSESSED AND IN

THE AREA EXPRESSED IN THE TITLE?

In case the adverse claimant possesses by mistake an area greater, or less, than that expressed in his title, prescription shall be based on the possession (Article 1135). WHAT

IS THE EFFECT OF POSSESSION IN WAR TIME ON PRESCRIPTION?

Possession in wartime, when the civil courts are not open, shall not be counted in favor of the adverse claimant (Article 1136). WHAT

ARE

THE

RULES

IN

THE

COMPUTATION

OF

TIME

NECESSARY

FOR

PRESCRIPTION?

Article 559. The possession of movable property acquired in good faith is equivalent to a title. Nevertheless, one who has lost any movable or has been unlawfully deprived thereof, may recover it from the person in possession of the same. If the possessor of a movable lost or which the owner has been unlawfully deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid therefor. 1

2

ARTICLE 1505. Subject to the provisions of this Title, where goods are sold by a person who is not the owner thereof, and who does not sell them under authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller's authority to sell. Nothing in this Title, however, shall affect: (1) The provisions of any factors' acts, recording laws, or any other provision of law enabling the apparent owner of goods to dispose of them as if he were the true owner thereof; (2) The validity of any contract of sale under statutory power of sale or under the order of a court of competent jurisdiction; (3) Purchases made in a merchant's store, or in fairs, or markets, in accordance with the Code of Commerce and special laws. (n) casia

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In the computation of time necessary for prescription the following rules shall be observed: (1) When the possession of the present possessor is just a continuation of the possession of the predecessor in interest - The present possessor may complete the period necessary for prescription by tacking his possession to that of his grantor or predecessor in interest; (2) When the character of the possession of the possessor has changed from good faith to bad faith - It is presumed that the present possessor who was also the possessor at a previous time, has continued to be in possession during the intervening time, unless there is proof to the contrary; (3) The first day shall be excluded and the last day included (Article 1138). WHAT

IS MEANT BY TACKING OF POSSESSIONS OF TWO OR MORE POSSESSORS?

Tacking of possession is the linking of the possession of the present possessor to the possession of the immediate past possessor of an identical property for the purpose of completing the period needed for the prescription. The condition for the tacking of possession is that privity must exist between the present possessor and the predecessor in interest. In brief, the present possessor got his possession from the predecessor in interest. Consequently, a mere usurper cannot invoke the possession of the previous possessor. There is no privity of interest where the present possessor came into possession of the disputed land by virtue of a void and fictitious sale (Ruiz vs. CA, 79 SCRA 525). Tacking is not allowed if the predecessor in interest has not satisfied the requirements of prescription. Otherwise, there can be no continuity in the nature of the possession. WHAT

IS THE RULE TO FOLLOW WHEN THE CHARACTER OF THE POSSESSION OF

THE PREDECESSOR IS DIFFERENT FROM THAT OF THE PRESENT POSSESSOR?

The law does not provide any solution to such kind of contingency. Thus, sound judgment must be resorted to, thus: a. If the predecessor was in good faith but the successor is in bad faith, should there be any tacking of possession?

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There are different views. Some writers say there must be no tacking. Others say, the good faith of the predecessor should not be set at naught. The second is the better view. The computation of the periods to be tacked should be proportionate, that is, in the proportion of what the period of possession in good faith bears to the period of extraordinary prescription. So it is in the proportion of 2:1 as regards movables and 3:1 for immovables. b. If the possession of the predecessor was in bad faith and the possession of the successor is in good faith, should there be tacking of possession? Possession of the predecessor in bad faith cannot be counted and added to that of the present possessor. Here, the possession of the predecessor cannot be considered ordinary prescription because such requires good faith all throughout the period fixed by law. However, for purposes of extraordinary prescription, the possession in bad faith of the predecessor can be tacked to the possession in bad faith of the successor. There is no prohibition to this. CHAPTER 3 PRESCRIPTION OF ACTIONS HOW

DO ACTIONS PRESCRIBE?

Actions prescribe by the mere lapse of time fixed by law (Article 1139). WHEN

DO ACTIONS PRESCRIBE?

1. ACTIONS

TO

RECOVER MOVABLES:

Actions to recover movables shall prescribe EIGHT YEARS from the time the possession thereof is lost, unless the possessor has acquired the ownership by prescription for a less period, according to Articles 1132, and without prejudice to the provisions of articles 559, 1505, and 1133 (Article 1140), thus: The ownership of movables prescribes through uninterrupted possession for FOUR YEARS IN GOOD FAITH. 2. The ownership of personal property also prescribes through uninterrupted possession for EIGHT YEARS, WITHOUT NEED OF ANY OTHER CONDITION. 1.

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With regard to the right of the owner to recover personal property lost or of which he has been illegally deprived, as well as with respect to movables acquired in a public sale, fair, or market, or from a merchant's store the provisions of Articles 559 and 1505 of this Code shall be observed (Article 1132). 4. Movables possessed through a crime can never be acquired through prescription by the offender (Article 1133). 3.

2. REAL ACTIONS

OVER IMMOVABLES:

Real actions over immovables prescribe after THIRTY YEARS. This provision is without prejudice to what is established for the acquisition of ownership and other real rights by prescription (Article 1141). 3. MORTGAGE ACTION: A mortgage action prescribes after 4. ACTIONS UPON A JUDGMENT:

A

WRITTEN CONTRACT; UPON

AN

TEN YEARS

(Article 1142).

OBLIGATION CREATED BY LAW; UPON

They must be brought within TEN right of action accrues (Article 1144).

YEARS

from the time the

5. ACTIONS UPON AN ORAL CONTRACT; ACTIONS UPON A QUASI-CONTRACT : They must be commenced within SIX YEARS (Article 1145). 6. ACTIONS UPON DELICT:

AN

INJURY

TO THE

RIGHTS

OF THE

They must be instituted within

PLAINTIFF; ACTIONS UPON

A

QUASI-

FOUR YEARS.

However, when the action arises from or out of any act, activity, or conduct of any public officer involving the exercise of powers or authority arising from Martial Law including the arrest, detention and/or trial of the plaintiff, the same must be brought within ONE (1) YEAR. (Article 1146 as amended by PD No. 1755, Dec. 24, 1980.) 7. FORCIBLE ENTRY

AND

DETAINER; FOR DEFAMATION:

They must be filed within

ONE YEAR

(Article 1147).

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NOTE: The limitations of action mentioned in Articles 1140 to 1142, and 1144 to 1147 are without prejudice to those specified in other parts of this Code, in the Code of Commerce, and in special laws (Article 1148). The phrase “without prejudice” means that, in proper cases, the prescriptive period in this chapter may be availed of notwithstanding other special provisions in other parts of the Civil Code, in the Code of Commerce and in special laws. Thus, even though the claim falls under the prescriptive period provided for in the Labor Code because of illegal and unlawful dismissal, the case may still fall within the ambit of “injury to the rights of the plaintiff (Virgilio Callanta vs. Carnation Phi., Inc., G.R. No. L-70615, October 28, 1986, 145 SCRA 286). WHAT RIGHTS ARE NOT EXTINGUISHED BY PRESCRIPTION? The following rights, among others specified elsewhere in this Code, are not extinguished by prescription: (1) To demand a right of way, regulated in Article 649; (2) To bring an action to abate a public or private nuisance (Article 1143). OTHERS: (1)An action to declare a contract null and void; (2)An action to quite title initiated by the person having possession of the property; (3)An action to partition a property among co-heirs; (4)When the trust is merely an implied one, unless expressly repudiated by the trustee. WHAT

IS THE PRESCRIPTIVE PERIOD FOR FILING ACTIONS WHOSE PERIODS ARE

NOT FIXED BY THE

CIVIL CODE

AND OTHER LAWS?

All other actions whose periods are not fixed in this Code or in other laws must be brought within five years from the time the right of action accrues (Article1149). EXAMPLES: a. Action to impugn the recognition of a natural child (Article 296 Civil Code); b. Action to impugn the legitimation of a child (Article 275, Civil Code); c. Action to reduce inofficious donations (to be counted from the death of the donor) (Vide Article 772, Civil Code).

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FROM a.

b.

c.

d.

e.

f.

WHEN

WHAT TIME SHALL THE PERIOD OF PRESCRIPTION BE COUNTED?

The time for prescription for all kinds of actions, when there is no special provision which ordains otherwise, shall be counted from the day they may be brought (Article 1150). The time for the prescription of actions which have for their object the enforcement of obligations to pay principal with interest or annuity runs from the last payment of the annuity or of the interest (Article 1151). The period for prescription of actions to demand the fulfillment of obligation declared by a judgment commences from the time the judgment became final (Article 1152). The period for prescription of actions to demand accounting runs from the day the persons who should render the same cease in their functions (Article 1153). The period for the action arising from the result of the accounting runs from the date when said result was recognized by agreement of the interested parties (Article 1153, 2nd par.). The period during which the obligee was prevented by a fortuitous event from enforcing his right is not reckoned against him (Article 1154). IS PRESCRIPTION OF ACTIONS INTERRUPTED UNDER THE

CIVIL CODE?

The prescription of actions is interrupted when: a. They are filed before the court; or b. When there is a written extrajudicial demand by the creditors, and when there is any written acknowledgment of the debt by the debtor (Article 1155).

BOOK IV OBLIGATIONS AND CONTRACTS TITLE I OBLIGATIONS OVERVIEW OF LAW

Page 17 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

I.

SOURCES A. B. C. D. E.

OF

LAW

Constitution Legislative Enactment Executive Issuance International Law Supreme Court Decisions ARTICLE 8. Judicial decisions applying or interpreting the laws or the Constitution shall form part of the legal system of the Philippines.

II.

EFFECTIVITY A.

AND

INTERPRETATION

OF

LAWS

EFFECTIVITY ARTICLE 2. Laws shall take effect after fifteen days following the completion of their publication in the Official Gazette, unless it is otherwise provided. While law may provide for the date of its effectivity, the requirement of publication may not be dispensed with. (Tanada vs. Tuvera) ARTICLE 3. Ignorance of the law excuses no one from compliance therewith. ARTICLE 4. Laws shall have no retroactive effect, unless the contrary is provided. ARTICLE 5. Acts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity. ARTICLE 7. Laws are repealed only by subsequent ones, and their violation or non-observance shall not be excused by disuse, or custom or practice to the contrary. ARTICLE 14. Penal laws and those of public security and safety shall be obligatory upon all who live or sojourn in Philippine territory, subject to the principles of international law and treaty stipulations. ARTICLE 16. Real property as well as personal property is subject to the law of the country where it is situated.

Page 18 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

B.

INTERPRETATION ARTICLE 10. In case of doubt in the interpretation or application of laws, it is presumed that the lawmaking body intended right and justice to prevail. ARTICLE 7. When the courts declare a law to be inconsistent with the Constitution, the former shall be void and the latter shall govern. Administrative or executive acts, orders and regulations shall be valid only when they are not contrary to the laws or the Constitution.

III.

KINDS

OF

LAWS

A.

PENAL Those which prescribe imprisonment as a penalty in case of violation.

B.

Civil Those which govern relations between persons.

C.

COMMERCIAL Those which deal with transactions entered into by

persons. D.

REMEDIAL Those which prescribe the procedure to be followed in order to seek remedies in law.

IV.

CONCEPT A.

OF

PERSONS

NATURAL PERSONS ARTICLE 40. Birth determines personality; but the conceived child shall be considered born for all purposes that are favorable to it, provided it be born later with the conditions specified in the following articles.

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ARTICLE 41. For all civil purposes, the foetus is considered born if it is alive at the time it is completely delivered from the mother’s womb. However, if the foetus had an intra-uterine life of less than seven months, it is not deemed born if it dies within twenty-four hours after its complete delivery from the maternal womb. B.

ARTICLE 42. Civil personality is extinguished by death. JURIDICAL PERSONS ARTICLE 44. The following are juridical persons: (1) (2)

(3)

The State and its political subdivisions; Other corporations, institutions and entities for public interest or purpose, created by law; their personality begins as soon as they have been constituted according to law; Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each share-holder, partner or member.

ARTICLE 46. Juridical persons may acquire and possess property of all kinds as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organization. ARTICLE 47. Upon the dissolution of corporations, institutions and other entities for public interest or purpose mentioned in No. 2 of Article 44, their property and other assets shall be disposed of in pursuance of law or the charter creating them. If nothing has been specified on this point, the property and other assets shall be applied to similar purposes for the benefit of the region, province, city or municipality which during the existence of the institution benefits from the same. V.

CAPACITY A.

JURIDICAL

CAPACITY

ARTICLE 37. Juridical capacity, which is the fitness to be the subject of legal relations, is inherent in every natural person and is lost only through death.

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B.

CAPACITY

TO ACT

ARTICLE 37. Capacity to act, which is the power to do acts with legal effect, is acquired and may be lost. ARTICLE 38. Minority, insanity, or imbecility, the state of being a deaf-mute, prodigality and civil interdiction are mere restrictions on capacity to act, and do not exempt the incapacitated person from certain obligations, as when the latter arise from his acts or from property relations, such as easements. ARTICLE 39. The following circumstances, among others, modify or limit capacity to act: age, insanity, imbecility, the state of being a deaf-mute, penalty, prodigality, family relations, alienage, absence, insolvency and trusteeship. VI.

HUMAN RELATIONS ARTICLE 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. ARTICLE 20. Every person who, contrary to law, willfully or negligently causes damage to another, shall indemnify the latter for the same. ARTICLE 21. Any person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage. ARTICLE 22. Every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground, shall return the same to him. ARTICLE 23. Even when an act or event causing damage to another’s property was not due to the fault or negligence of the defendant, the latter shall be liable for indemnity if through the act or event he was benefited.

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ARTICLE 26. Every person shall respect the dignity, personality, privacy and peace of mind of his neighbors and other persons. ARTICLE 27. Any person suffering material or moral loss because a public servant or employee refuses or neglects, without just cause, to perform his official duty may file an action for damages and other relief against the latter, without prejudice to any disciplinary administrative action that may be taken. ARTICLE 28. Unfair competition in agricultural, commercial or industrial enterprises or in labor through the use of force, intimidation, deceit, machination or any other unjust, oppressive or highhanded method shall give rise to a right of action by the person who thereby suffers damage. ARTICLE 29. When the accused in a criminal prosecution is acquitted on the ground that his guilt has not been proved beyond reasonable doubt, a civil action for damages for the same act or omission may be instituted. Such action requires only a preponderance of evidence. ARTICLE 30. When a separate civil action is brought to demand civil liability arising from a criminal offense, and no criminal proceedings are instituted during the pendency of the civil case, a preponderance of evidence shall likewise be sufficient to prove the act complained of. ARTICLE 31. When the civil action is based on an obligation not arising from the act or omission complained of as a felony, such civil action may proceed independently of the criminal proceedings and regardless of the result of the latter. CHAPTER 1 GENERAL PROVISIONS WHAT

IS AN OBLIGATION?

An obligation is a juridical necessity to give, to do or not to do (Article 1156).

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WHAT a.

b. c.

d.

ARE THE ELEMENTS OF AN OBLIGATION?

An active subject known as the obligee or creditor – he is the possessor of a right in whose favor the obligation is constituted and who can demand the fulfillment of the obligation; A passive subject known as the obligor or the creditor from whom the obligation is juridically demanded – he who has the duty of giving, doing or not doing; The fact, prestation or service which constitutes the object or subject matter of the obligation and may consist of giving a thing, doing or not doing a certain act. The law speaks of an obligation as a juridical necessity to comply with a prestation. There is “juridical necessity” for non-compliance can result in juridical or legal sanction. The efficient cause or the vinculum or juridical tie which binds the parties to the obligation, and which may arise either from bilateral or unilateral acts of persons – this is the reason why the obligation exists.

Example: A promises to paint B’s picture as a result of an agreement. Here A is the obligor; B is the obligee; the painting of B’s picture is the object or prestation; and the agreement is contract which is the efficient cause. WHAT

ARE THE SOURCES OF OBLIGATIONS?

Obligations arise from: (1) (2) (3) (4) (5)

Law (obligations lex lege); Contracts (obligations ex contractu); Quasi-contracts (obligations ex-quasi contractu); Acts or omissions punished by law (obligations ex delicto); and Quasi-delicts (obligations ex quasi delicto) (Article 1157). RULES : •

•

Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions of this Book (Article 1158). Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith (Article 1159).

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• •

•

Obligations derived from quasi-contracts shall be subject to the provisions of Chapter 1, Title XVII, of this Book (Article 1160). Civil obligations arising from criminal offenses shall be governed by the penal laws, subject to the provisions of article 2177, and of the pertinent provisions of Chapter 2, Preliminary Title, on Human Relations, and of Title XVIII of this Book, regulating damages (Article 1161). Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title XVII of this Book, and by special laws (Article 1162).

NATURE WHAT

IS

THE

CHAPTER 2 AND EFFECT OF OBLIGATIONS

DEGREE

OF

DILIGENCE

REQUIRED

OF

A

PERSON

IN

THE

PERFORMANCE OF AN OBLIGATION?

Every person obliged to give something is also 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 (Article 1163). Notes: • •

• •

This article involves the prestation “to give”. The word “something” connotes a determinate object which is definite, known, and has already been distinctly decided and particularly specified as the matter to be given from among the same things belonging to the same kind. Example: If the object is a computer, it does not involve any kind of computer but a very particular computer such as the computer with serial number 7777. In case of a contrary stipulation of the parties, such stipulation should not be one contemplating a relinquishment or waiver of the most ordinary diligence. An example where the law requires another standard of care is that which involves common carriers. Article 1733 provides that common carries are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers. Article 1755 provides that common carriers is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with due regard for all circumstances.

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WHAT

IS THE DILIGENCE NEEDED IN THE PERFORMANCE OF ONE’S OBLIGATION?

The diligence needed is that which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. This is diligence of a good father of a family. 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 a family shall be required (Article 1173). However, if the law or contract provides for a different standard of care, said law or stipulation must prevail (Article 1163) provided that it should not be one contemplating a relinquishment or waiver of the most ordinary diligence IN

OBLIGATIONS TO GIVE, WHEN DOES THE CREDITOR ACQUIRE A RIGHT TO THE

THING WHICH CONSTITUTES THE OBJECT OF THE OBLIGATIONS AS WELL AS TO THE FRUITS THEREOF?

The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him (Article 1164). Thus, we must distinguish between the time when the creditor acquires a personal right to the thing and the fruits thereof, and the time when he acquires a real right thereto. After the right to deliver the object of the prestation has arisen in favor of the creditor but prior to the delivery of the same, there is no real right enforceable or binding against the whole world over the object and its fruits in favor of the person to whom the same should be given. The acquisition of a real right means that such right can be enforceable against the whole world and will prejudice anybody claiming the same object of the prestation. The real right only occurs when the thing or object of the prestation is delivered to the creditor. In obligations arising from contracts, the obligation to deliver arises from the moment of the perfection of the contract, unless there is a stipulation to the contrary. From this it is clear that before the delivery of the thing and the fruits thereof, the creditor has merely a personal right against the debtor – a right to ask for the delivery of the thing and the fruits. Once the thing and the fruits are delivered, then he acquires a real right over them, a right which is enforceable against the whole world. EXAMPLE:

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On February 1, 2005, A buys a mango orchard from X to be delivered on March 1, 2005. On the latter date, A shall have the right to the fruits of the mango orchard. If the property is delivered only on April 1, 2005, A can nevertheless ask that the fruits accruing since March 1, 2005 be likewise delivered to him. X cannot resist by saying that he is entitle to the fruits before the actual delivery on April 1, 2005. If, however, X sells the fruits on March 20, 2005 to B who does not know the previous sale to A and who immediately takes possession of the fruits, B shall have a better right over the said fruits. Considering that there is no delivery of the property to A on March 20, 2005, A has no real right over the said property at that time binding upon the whole world. A’s remedy is to seek damages from X in connection with the fruits. If however, the mango orchard has already been delivered, A has a real right binding upon the whole world. If X sells to B the fruits after the delivery to A, A can recover from B who in turn can seek damages from X. WHEN

DOES THE OBLIGATION TO DELIVER ARISE?

It depends - If there is no term or condition, then from the perfection of the contract. If there is a term or condition, then from the moment the term arrives or the condition happens. IN

OBLIGATIONS

TO

GIVE,

WHAT

ARE

THE

DIFFERENT

RIGHTS

WHICH

ARE

AVAILABLE TO THE CREDITOR?

We must distinguish between the rights which are available to the creditor when the obligation is determinate and those which are available to him when the obligation is indeterminate or generic. 1. When what is to be delivered is a determinate thing (in the sense that the object thereof is particularly designated or physically segregated from all others of the same class), the rights of the creditor are: a. The creditor may compel specific performance (compel the debtor to make the delivery (Article 1165); and b. To recover damages in case of breach of the obligation (Article 1170). 2. If the thing is indeterminate or generic, the rights of the creditor are:

Page 26 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

a. To ask for performance of the obligation (Article 1246); b. To ask that the obligation be complied with at the expense of the debtor (Article 1165, par. 2); and c. To recover damages in case of breach of the obligation (Article 1170). WHAT

IS THE EFFECT OF FORTUITOUS EVENT IF THE OBLIGOR DELAYS, OR HAS

PROMISED TO DELIVER THE SAME THING TO TWO OR MORE PERSONS WHO DO NOT HAVE THE SAME INTEREST?

If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery (Article 1165). IN

OBLIGATION TO GIVE, WHAT ARE THE DIFFERENT DUTIES OR OBLIGATIONS

WHICH ARE IMPOSED UPON THE DEBTOR OR OBLIGOR?

a. If the obligation is determinate, the duties which are imposed upon the debtor are the following: a. To deliver the thing which he has obligated himself to give; b. To take care of the thing with the proper diligence of a good father of a family (Article 1163); c. To deliver all its accessions and accessories, even though they may not have been mentioned. (Article 1166). d. To pay damages in case of breach of the obligation (Article 1170). b. If the obligation is indeterminate or generic, the duties which are imposed are: a. To deliver a thing that which must be neither of superior nor inferior quality (Article 1246); b. To pay damages in case of breach of the obligation (Article 1170). IN

OBLIGATIONS TO DO OR NOT TO DO, WHAT ARE THE DIFFERENT RIGHTS WHICH

ARE AVAILABLE TO THE CREDITOR?

1. In obligations to do: a) If a person obliged to do something fails to do it, the same shall be executed at his cost.

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b) This same rule shall be observed if he does it in contravention of the tenor of the obligation. c) Furthermore, it may be decreed that what has been poorly done be undone (Article 1167). 2. In obligations not to do: a. When the obligation consists in not doing, and the obligor does what has been forbidden him, it shall also be undone at his expense (Article 1168). IN

OBLIGATIONS TO GIVE OR TO DO, WHEN DOES THE OBLIGOR DEEMED TO HAVE

INCURRED IN DELAY?

Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation However, the demand by the creditor shall not be necessary in order that delay may exist: (1) When the obligation or the law expressly so declare; or (2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or (3) When demand would be useless, as when the obligor has rendered it beyond his power to perform. 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 moment one of the parties fulfills his obligation, delay by the other begins (Article 1169 par. 1). WHAT

IS MORA SOLVENDI; MORA ACCIPIENDI; MORA MORAE?

Delay or default committed by the debtor is known as mora solvendi. The delay is called mora solvendi ex re when the obligation is an obligation to give and mora solvendi ex persona when the obligation is an obligation to do. Delay or default committed by the creditor to accept the delivery of the thing which is the object of the obligation is known as mora accipiendi.

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Compensation morae occurs when in a reciprocal obligation, both parties are in default (here, it is as if neither is in default). Note: Delay in the performance of the obligation must either be malicious or negligent. Hence, if the delay was only due to inadvertence without any malice or negligence, the obligor will not be held liable under Article 1170. WHAT

ARE THE REQUISITES FOR MORA SOLOVENDI?

a) The obligation must be due, enforceable, and already liquidated or determinate in amount; b) There must be non-performance; c) There must be demand, unless the demand is not required; and d) The demand must be for the obligation that is due. Note: There is no mora solvendi in negative obligations (one cannot be late in not doing or giving). There is no mora also in natural obligations. WHAT

ARE THE EFFECTS OF MORA SOLVENDI?

1. If the debtor is in default, he may be liable for interest or damages; 2. He may have to bear the risk of loss; 3. He is liable for a fortuitous event (although damages may be mitigated if he can prove that even if he had not been in default, loss would have occulted just the same [Article 2215]) WHEN

IS THE OBLIGOR DEEMED TO BE IN DEFAULT?

For an obligation to become due, there must generally be a demand. Default generally begins from the moment the creditor demand the performance of the obligation. Without such demand, judicial or extra-judicial, the effects of default will not arise. Commencement of a suit is a sufficient demand. Consequently, an obligor is liable for damages for the delay not from the time the object of the prestation is to be delivered but from the time of extra-judicial or judicial demand. Note that Article 1169 is applicable only when the obligation is to do something other than the payment of money. In obligations for the payment of money, Article 2209 shall apply which provides that:

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“If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.” Hence, in obligation for the payment of sum of money, the interest replaces the damages. WHAT

ARE THE GROUNDS FOR LIABILITY IN THE PERFORMANCE OF OBLIGATIONS?

Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages (Article 1170). Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void (Article 1171). Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances (Article 1172). WHAT

DOES THE PHRASE

OBLIGATION AS STATED UNDER

“IN

ANY MANNER CONTRAVENE THE TENOR” OF THE

ARTICLE 1170

COVER?

It includes any illicit act or omission which impairs the strict and faithful fulfillment of the obligation and every kind of defective performance (Arrieta vs. National Rice and Corn Corp., 10 SCRA 79; Magat vs. Medialdea, L-37120, April 20, 1983)). WHAT

IS MEANT BY FRAUD OR DOLO?

Fraud or dolo consists in the conscious and intentional proposition to evade the normal fulfillment of an obligation. It is bad faith in the performance of an obligation oftentimes referred as malice. In contracts it is deceit which if substantial (dolo causante) may result in annulment of contract. WHAT

ARE THE KINDS OF FRAUD?

1. Fraud in obtaining consent (may be casual or merely incidental); 2. Fraud in performing a contract, which may either be: A. Casual fraud or dolo causante – Fraud in the performance of a pre-existing obligation;

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B. Incidental fraud or dolo incidente – Fraud in the perfection of contract. WHAT

ARE DISTINCTIONS BETWEEN INCIDIENTAL FRAUD AND CAUSAL FRAUD?

1. The first is present only during the performance of a pre-existing obligation, whereas the second is present only at the time of the birth of the obligation; 2. The first is employed for the purpose of evading the normal fulfillment of an obligation, whereas the second is employed for the purpose of securing the consent of the other party to enter into the contract; 3. The first results in the non-fulfillment or breach of the obligation, whereas the second, if it is the reason for the other party upon whom it is employed for entering into the contract, results in the vitiation of his consent; 4. Dolo causante or causal fraud in Article 1338 are those deceptions or misrepresentations of a serious character employed by one party and without which the other party would not have entered into the contract. Dolo incidente or incidental fraud in Article 1344 are those which are not serious in character and without which the other party would still have entered into the contract; 5. Dolo causante determines or is the essential cause of the consent; while dolo incidente refers only to some particular or accident of the obligation; 6. The effects of dolo causante are the nullity of the contract and the indemnification of damages; dolo incidente obliges the person employing it to pay damages. 7. The first gives rise to a right of the creditor or obligee to recover damages from the debtor or obligor, whereas the second gives rise to a right of the innocent party to ask for the annulment of the contract if the fraud is casual (dolo causante) or to recover damages if it is incidental (dolo incidente) (Vide Articles 1170, 1171, 1338 & 1344). WHAT

IS

NEGLIGENCE

OR

CULPA?

It is the omission of the diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of Articles 1171 and 2201, par. 2, may apply. 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 a family shall be required (Article 1173).

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HOW

IS FRAUD DISTINGUISHED FROM NEGLIGENCE?

a) In fraud, there is deliberate intention to cause damage or prejudice; while in negligence, although voluntary (not done through force), still there is no deliberate intention to cause damage; b) Liability arising from fraud cannot be mitigated or reduced by the courts; while liability due to negligence may be reduced in certain cases; c) Waiver of an action to enforce liability die to future fraud is void; while waiver of an action to enforce liability due to future negligence may in a certain sense be allowed; however, gross negligence can never be excused in advance for this would be contrary to public policy; but simple negligence may in certain cases be excused or mitigated. WHAT

IS THE TEST OF NELIGENCE?

The test by which we can determine the existence of negligence in a particular case may be stated as follows: Did the defendant in doing the alleged negligent act use the reasonable care and caution which an ordinarily prudent person would have used in the same situation? If not, then he is guilty of negligence. The law here in effect adopts the standard supposed to be supplied by the imaginary conduct of the discreet pater familias of the Roman law. The existence of negligence in a given case is not determined by reference to the personal judgment of the actor in the situation before him. The law considers what would be reckless, blameworthy, or negligent in the man of ordinary intelligence and prudence and determines liability by that (Picart vs. Smith, 37 Phil. 809). WHAT

IS THE GENERAL RULE FOR FORTUITOUS EVENT?

No person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable (Article 1174). EXCEPTIONS: 1. In cases expressly specified by the law – example, those found in Articles 552, par. 2; 1165, par. 3, 1170; 1268; 1942; 1979; 2147; 2148; 2159 (Civil Code); and 196, par. 6 (Family Code).3 ARTICLE 552 (Par. 2). A possessor in bad faith shall be liable for deterioration or loss in every case, even if caused by a fortuitous event. 3

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2. When it is otherwise declared by stipulation – thus, if the contracting parties expressly agree that the debtor can be held liable even in case of fortuitous events, such an agreement shall be binding. 3. When the nature of the obligation requires the assumption of risk – This is an aspect of what is known as the doctrine of assumption of risk. As applied to obligations, it refers to a situation in which the obligor or debtor, with full knowledge of the risk, voluntarily enters into some obligatory relation with the creditor. It ARTICLE 1165 (Par. 3). If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery. ARTICLE 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. (The obligor shall be liable for damages and he cannot escape liability (Nakpil vs. CA, 144 SCRA 596). ARTICLE 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it. ARTICLE 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event: (1) If he devotes the thing to any purpose different from that for which it has been loaned; cd i (2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted; (3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event; (4) If he lends or leases the thing to a third person, who is not a member of his household; (5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter. ARTICLE 1979. The depositary is liable for the loss of the thing through a fortuitous event: (1) If it is so stipulated; (2) If he uses the thing without the depositor's permission; (3) If he delays its return; (4) If he allows others to use it, even though he himself may have been authorized to use the same. ARTICLE 2147. The officious manager shall be liable for any fortuitous event: (1) If he undertakes risky operations which the owner was not accustomed to embark upon; (2) If he has preferred his own interest to that of the owner; (3) If he fails to return the property or business after demand by the owner; (4) If he assumed the management in bad faith. ARTICLE 2148. Except when the management was assumed to save the property or business from imminent danger, the officious manager shall be liable for fortuitous events: (1) If he is manifestly unfit to carry on the management;

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is based on the principle of violenti non fit injuria – no wrong is done to one who consents. This is illustrated by obligations arising from insurance contracts and workmen’s compensation acts. WHAT

IS A FORTUITOUS EVENT?

A fortuitous event is an event which cannot be foreseen, or which though foreseen, is inevitable. WHAT

ARE THE REQUISITES OF FORTUITOUS EVENT?

1. The cause of the breach of the obligation must be independent of the will of the debtor; 2. The even must either be unforseeable or unavoidable; 3. The event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and 4. The debtor must be free from any participation in, or aggravation of, the injury to the creditor. IS

THERE A DIFFERENCE BETWEEN FORTUITOUS EVENTS AND FORCE MAJEURE?

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. NOTE that when the object of the prestation is generic (like payment of a sum of money as a consequence of a loan contract), the debtor cannot avail of the benefit of a fortuitous event. (2) If by his intervention he prevented a more competent person from taking up the management. ARTICLE 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of money is involved, or shall be liable for fruits received or which should have been received if the thing produces fruits. ARTICLE 129. Upon the dissolution of the conjugal partnership regime, the following procedure shall apply: x x x (6) Unless the owner has been indemnified from whatever source, the loss or deterioration of movables used for the benefit of the family, belonging to either spouse, even due to fortuitous event, shall be paid to said spouse from the conjugal funds, if any.

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DOES THE CIVIL CODE PROHIBIT USURIOUS TRANSACTIONS? Article 1175 provides that usurious transactions shall be governed by special laws. The article in itself does not prohibit usurious contracts. However, it specifically provides that it shall be governed by special laws. A special law may prohibit usurious interest, allow it, or merely put a ceiling as to what can be the highest interest that can be legally imposed. X

IS INDEBTED TO

Y

IN THE AMOUNT OF

MONTHLY INSTALLMENBTS AND WITH INTEREST AT EFFECT IF

Y

P50, 000.0, PAYABLE 30% PER ANNUM. WHAT

IN TEN IS THE

WOULD BE RECEIVING PAYMENT OF THE PRINCIPAL WITHYOUT RECEIVING

FIRST THE INTEREST?

The receipt of the principal by the creditor, without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid (Article 1176, par. 1). WHAT IS THE EFFECT IF THE OBLIGATION IS PAYABLE FROM JANUARY 2004 OCTOBER 2004 AND X DID NOT PAY THE INSTALLMENT FOR JUNE 2004 BUT WHEN PAID IN JULY 2004, Y ISSUED A RECEIPT FOR JULY 2004?

TO HE

There is a presumption that the June 2004 installment has already been paid. The receipt of a later installment of a debt without reservation as to prior installments, shall likewise raise the presumption that such installments have been paid (Article 1176). NOTE that the presumption here is only prima facie. The presumption can be rebutted by strong evidence to the contrary. The burden of proof to show that the interest/installment has not been paid shifts to the creditor. WHAT

ARE THE RIGHTS AND REMEDIES WHICH ARE AVAILABLE TO THE CREDITOR IN

ORDER TO PROTECT HIS RIGHTS AGAINST THE DEBTOR?

a) Exact payment; b) Pursue the property in possession of the debtor to satisfy their claims (generally through levying by attachments and execution upon all the property of the debtor, except such as are exempt by law from execution), c) Exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person (accion subrogatoria); d) Impugn the acts which the debtor may have done to defraud them (accion pauliana) (Article 1177).

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NOTES: The third and the fourth remedies are merely subsidiary to the second. The above-cited rights are not absolute as the creditor cannot bring those which are inherent in the person of the obligor. Article1381 (1) which provides that a contract entered into by the debtor is rescissible if it were made in fraud of creditors when the latter cannot in any manner collect the claim due is another remedy. WHAT

IS THE RULE AS TO TRANSMISSIBILITY OF RIGHTS?

All rights acquired in virtue of an obligation are transmissible (Article 1178). EXCEPTIONS: a) If there has been no stipulation to the contrary. b) If the law provides otherwise. c) If the obligation is purely personal. CHAPTER 3 DIFFERENT KINDS OF OBLIGATIONS PURE WHAT

AND

SECTION 1 CONDITIONAL OBLIGATIONS

ARE THE DIFFERENT CLASSES OF OBLIGATIONS ACCORDING TO THE

CIVIL

CODE? The following is the primary classification of obligations under the Civil Code: a) Pure, conditional, and with a term (Articles 1179; 1179 – 1192; 1193 - 1198); b) Alternative and facultative (Articles 1199 – 1206); c) Joint and solidary (Articles 1207 – 1222); d) Divisible and indivisible (Articles 1223 – 1225); and e) With and without a penal clause (Articles 1226 – 1230). There are however other classifications of a secondary character which can be gathered from scattered provisions of the Code, such as:

Page 36 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

a) b) c) d) e) f) g) h) i)

Natural and civil (Articles 1156; 1424); Legal, conventional and penal (Articles 1158 – 1162); Real and personal (Articles 1156; 1163 – 1168); Determinative and generic (Articles 1163 – 1166); Positive and negative (Articles 1163 – 1168); Accessory and principal (Articles 1166, 1230); Unilateral and bilateral (Article 1191); Single and multiple (Articles 1199; 1206); and Individual and collective (Article 1207); WHAT

IS MEANT BY PURE OBLIGATION?

Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once. Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects of the happening of the event (Article 1179). Here, there are no conditions imposed, except if they are resolutory. WHAT

IS THE MOST DISTINCTIVE CHARACTERISTIC OF PURE CONDITIONS?

The most distinctive characteristic of a pure obligation is its demandability. This quality, however, must not be understood in such a way as to lead to absurd interpretations which would literally require the obligor or debtor to comply immediately with his obligation. A distinction must be made between (1) immediate demadability of the obligation; and (2) its performance or fulfillment by the obligor or debtor. Although the obligee or creditor can demand the performance of the obligation immediately, the quality of immediate demandability is not infringed or violated when a reasonable period is granted for performance. WHAT

ARE CONDITIONAL OBLIGATIONS?

Conditional obligations are those where the acquisition of a right or the extinguishment or loss of those already acquired shall depend upon the happening of an even which constitutes the condition. What characterizes a conditional obligation is the fact that its efficacy or obligatory force is subordinated to the happening of a future or uncertain event.

Page 37 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

WHAT

ARE THE KINDS OF CONDITIONAL OBLIGATIONS?

a) RESOLUTORY CONDITION - is one which is demandable at once, but the happening of an event would extinguish the obligation. This is because once the condition is established and acknowledged, the right immediately exists and therefore the obligation concomitant to the right can be demanded at once. However, once the future or uncertain event happens which constitutes the condition, it operates to discharge the obligation. The obligation is resolved or extinguished by operation of law (but such resolution can be made effective at some later date if the parties so stipulate in their contract, such as when the parties stipulate that resolution becomes effective only from the date of written notice thereof is sent) b) SUSPENSIVE CONDITION - is one where the happening of an event gives rise to an obligation. A suspensive obligation is not demandable at once. It can be demanded only upon the happening of the future or unknown event or a past event unknown to the parties, which constitutes the condition. Happening of a suspensive condition gives rise to the performance of the obligation. If the condition does not take place, the parties would stand as if the conditional obligation had never existed. c) POTESTATIVE – depends upon the will of the debtor. This is also called FACULTATIVE condition. d) CASUAL – depends on chance or hazard or the will of a third person e) MIXED – depends partly on the will of one of the parties and partly on chance or the will of a third person. f) CONJUNCTIVE – if all the conditions must be performed. g) ALTERNATIVE – if only a few of the condition have to be performed. WHAT

IS AN OBLIGATION WITH A TERM OR PERIOD?

That which necessarily must come whether the parties know when it will happen or not. A

AND

B

ENTERED INTO A CONTRACT OF LOAN, PROVIDING THAT

WHEN HIS MEANS PERMIT HIM TO DO SO. THE REMEDY OF

A

WHAT

IN CASE OF NON-PAYMENT BY

B

SHALL PAY

KIND OF OBLIGATION IS THIS?

WHAT

IS

B?

When the debtor binds himself to pay when his means permit him to do so, the obligation shall be deemed to be one with a period, subject to the provisions of article 1197 (Article 1180).

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According to Article 1197, if the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof. The courts shall also fix the duration of the period when it depends upon the will of the debtor. In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them. DISTINGUISH CONDITIONS.

BETWEEN

THE

EFFECTS

OF

SUSPENSIVE

AND

RESOLUTORY

In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition (Article 1181). Thus, a resolutory condition affects the obligation to which it is attached in a manner which is diametrically opposed to that of a suspensive condition. If the suspensive condition is fulfilled, the obligation arises or becomes effective; if the resolutory condition is fulfilled, the obligation is extinguished. If the first is not fulfilled, no juridical relation is created; if the second is not fulfilled, the juridical relation is consolidated. In other words, in the first, rights are not yet acquired, but there is a hope or expectancy that they will soon be acquired; in the second, rights are already acquired, but subject to the threat of extinction. A suspensive condition is also called a condition precedent while a resolutory condition is also known as a condition subsequent. A condition precedent is an act or event, other than a lapse of time, which must exist or occur before a duty to perform a promised performance arises. If the condition does not occur and is not excused, the promised performance need not be rendered. A condition subsequent is an event, the existence of which, by agreement of the parties, operates to discharge a duty of performance that has arisen. In case a contract involves a reciprocal obligation, the obligation of one is a resolutory condition of the obligation of the other, the nonfulfillment of which entitles the other party to rescind the contract. GIVE OBLIGATION.

THE

EFFECTS

OF

POTESTATIVE,

CASUAL

AND

MIXED

CONDITIONS

UPON

Page 39 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

Article 1182 provides that when the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take effect in conformity with the provisions of this Code. The phrase “when fulfillment of a condition” connotes a suspensive character of the prestation. There is the expectation of the existence or accomplishment of a duty to give or to render some service in the future. Thus: a) If the condition is potestative in the sense that fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void (Article 1182). This happens when the birth of the contract depends upon the sole will of the debtor. Hence, according to Article 1308, this is likewise prohibited and may make the whole contract invalid. However, if the potestative condition is imposed not on the birth of the obligation but on its fulfillment, only the condition is avoided, leaving unaffected the obligation itself. b) If the condition is potestative in the sense that its fulfillment depends upon the will of the creditor, the conditional obligation shall be valid. This is because the provision of the first sentence of Article 1182 extends only to conditions which are potestative to the obligor or debtor. Besides, the creditor is naturally interested in the fulfillment of the condition since it is only such fulfillment that the obligation arises or becomes effective. c) If the condition is casual in the sense that its fulfillment depends partly upon chance or upon the will of a third person, the obligation shall take effect (Article 1182). d) If the condition is mixed in the sense that its fulfillment depends partly upon the will of a party to the obligation and partly upon chance and/or will of a third person, the obligation shall be valid. IN

THE EVENT THAT THE CONDITION IS DECLARED VOID BUT THE OBLIGATION IS

STILL VALID, SHOULD THE OBLIGATION BE DECLARED PURE AND UNCONDITIONAL?

No, because in converting it into a pure and demandable obligation, an arrangement might be enforced which is not within the contemplation of the parties. Hence, the best solution is to consider the parties as having intended a period within which the valid obligation is to be complied with such that the creditor should ask the court to fix a period for compliance (Patente vs. Omega, 93 Phil. 218).

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SUPPOSE

THAT THE DEBTOR EXECUTED A PROMISSORY NOTE PROMISSING TO PAY

HIS OBLIGATION TO THE CREDITOR AS SOON AS HE HAS RECEIVED FUNDS FROM THE SALE OF HIS PROPERTY IN A CERTAIN PLACE, IS THE CONDITION POTESTATIVE OR MIXED?

The condition is mixed because its fulfillment depends not only upon the will of the debtor but also upon the concurrence of other factors, such as the acceptability of the price and other conditions of the sale as well as the presence of the buyer, ready, able and willing to purchase the property. SUPPOSE

THAT IN THE ABOVE PROBLEM, THE DEBTOR PROMISED TO PAY HIS

OBLIGATION AS SOON AS HE HAS RECEIVED THE FUNDS DERIVED FROM THE SALE OF THE PROPERTY IF HE FINALLY DECIDES TO SELL IT, WILL THAT MAKE ANY DIFFERENCE IN YOUR ANSWER?

Yes, in such case, the condition is potestative with respect to the debtor because its fulfillment would then depend upon his will. Consequently, the condition is void. The validity of the obligation is, of course, not affected, because the rule stated in Article 1182 to the effect that when the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation itself shall be void, is applicable only when the obligation shall depend for its perfection upon the fulfillment of the condition and not when the obligation is a preexisting one. WHAT

ARE THE EXCEPTIONS TO

ARTICLE 1182 (CONDITIONAL

OBLIGATIONS

DEPENDING UPON THE SOLE WILL OF THE DEBTOR ARE VOID)?

a) The rule is applicable only to a suspensive condition. Hence, if the condition is resolutory and potestative, the obligation is valid even if the fulfillment of the condition is made to depend upon the sole will of the debtor. This is because the position of the debtor when the condition is resolutory is exactly the same as the position of the creditor when the condition is suspensive. b) The rule that even the obligation itself shall be void is applicable only to an obligation which depends for its perfection upon the fulfillment of the potestative condition and not to a pre-existing obligation. Example, if the debtor binds himself to pay a previous indebtedness as soon as he decides to sell his house, although the condition is void because of its potestative character, the obligation itself is not affected since it refers to a pre-existing indebtedness. Thus, when the potestative condition is imposed on the fulfillment of the obligation, the condition alone is voided but not the obligation. c) A condition at once facultative and resolutory is valid though the condition is made to depend upon the will of the obligor.

Page 41 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

d) A resolutory condition that depends upon the will of a third person is not void. SUMMARY: a) If potestative (facultative) on the part of the debtor: If also suspensive – both the condition and the obligations are void. If also resolutory – valid. b) If potestative on the part of the creditor – valid. c) If casual – valid. d) If mixed – valid. WHAT

IS THE EFFECT IF IN AN OBLIGTION, IMPOSSIBLE CONDITIONS, ETC. ARE

IMPOSED?

Impossible conditions, those contrary to good customs or public policy and those prohibited by law shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof which is not affected by the impossible or unlawful condition shall be valid. The condition not to do an impossible thing shall be considered as not having been agreed upon (Article 1183). NOTE: It is very clear from the law that it is not only the condition which is annulled but the whole obligation itself. Thus, an obligation to give money as a loan only if it snows in the Philippines destroys the efficacy of the prestation. The condition annuls the prestation. This is also true if the condition is against good customs, public policy or is prohibited by law. Also, an impossible thing can never be done. Hence, to make as a condition the doing of an impossible thing is a useless stipulation which should not be considered as not having been agreed upon. The whole obligation which involves an impossible condition can be annulled. SUMMARY: 1. If the condition is to do an impossible or illegal thing – both condition and the obligation are void; 2. If the condition is not to do the impossible (negative) – obligation is valid but the condition is disregarded.

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3. If the condition is not to do an illegal thing (negative) – both condition and the obligation are valid. IN

OBLIGATIONS WITH POSITIVE CONDITIONS, WHEN DOES THE OBLIGATION DEEMED

EXTINGUISHED?

The condition that some event happen at a determinate time shall extinguish the obligation as soon as the time expires or if it has become indubitable that the event will not take place (Article 1184). If the period is not fixed in the contract, the court, considering the parties’ intentions, should determine what period was really intended (Vide Article 1185, par. 2). IN

OBLIGATIONS

WITH

NEGATIVE

CONDITIONS,

WHEN

DOES

THE

OBLIGATION

DEEMED EFFECTIVE?

The condition that some event will not happen at a determinate time shall render the obligation effective from the moment the time indicated has elapsed, or if it has become evident that the event cannot occur. If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been contemplated, bearing in mind the nature of the obligation (Article 1185). WHAT

IS

THE

EFFECT

WHEN

THE

DEBTOR

VOLUNTARILY

PREVENTS

THE

FULFILLMENT OF THE CONDITION?

The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment (Article 1186). This is known as constructive (or presumed) fulfillment. This generally applies only to suspensive condition. WHAT

ARE THE REQUISITES IN ORDER THAT CONSTRUCTIVE FULFILLMENT WILL

ARISE?

1. It must be made by the obligor; 2. It must be voluntarily made; and 3. It must actually prevent the performance of the condition. WHEN

DO THE EFFECTS OF THE FULFILLMENT OF A CONDITION IN AN OBLIGATION

TO GIVE RETROACT?

WHAT

ARE THE EXCEPTIONS?

Page 43 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

When a suspensive condition takes effect, the obligation becomes effective. The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation. This rule is applicable only to suspensive conditions because the efficacy of the obligation is merely suspended or held in abeyance until the condition is fulfilled. This is not applicable to resolutory conditions because the fulfillment of the event extinguishes the obligation; hence, retroactivity is not relevant. There is no retroactivity as to: a) Fruits or interests in reciprocal and unilateral obligations (unless there is contrary stipulation); b) Period of prescription. c) This principle of retroactivity applies only to consensual contracts. In real contracts, there is immediate delivery. In consensual ones, delivery may be made on another day. WHAT ARRE THE RULES IF THE OBLIGATION (1) IMPOSES RECIPROCAL OBLIGATIONS; (2) IF THE OBLIGATION IS UNILATERAL; (3) IN OBLIGATIONS TO DO AND NOT TO DO? a) When the obligation imposes reciprocal prestations upon the parties, the fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated. b) If the obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and circumstances of the obligation it should be inferred that the intention of the person constituting the same was different. c) In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been complied with (Article 1187). Fruits here refer to natural, industrial, and civil fruits (like rent) (Vide Article 442). WHAT

IS

THE

RIGHT

OF

THE

CREDITOR

BEFORE

THE

FULFILLMENT

OF

THE

CONDITIONS?

The creditor may, before the fulfillment of the condition, bring the appropriate actions for the preservation of his right (Article 1188, par. 1). “Appropriate action” here means to sue in court. Other appropriate actions that may be undertaken by the creditor:

Page 44 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

1. Ask for security if the debtor is about to be insolvent; 2. Ask the court to prevent alienation or concealment pendente conditionae. Note that the law says “preservation”, not preference over the creditor. BEFORE

THE HAPPENING OF A SUSPENSIVE CONDITION, WHAT IS THE RIGHT OF

THE DEBTOR IF HE PAYS BY MISTAKE?

The debtor may recover what during the same time he has paid by mistake in case of a suspensive condition (Article 1188, par. 2). IF

PAYMENT WAS NOT MADE BY MISTAKE, CAN THERE BE RECOVERY?

It depends. If the condition is fulfilled, there can be no recovery because of the principle of retroactivity. If the condition is not fulfilled, there should be a recovery (unless a pure donation was intended). SUPPOSE

THAT AN OBLIGATION IS SUBJECT TO A SUSPENSIVE CONDITION, BUT

BEFORE THE FULFILLMENT OF THE CONDITION THE OBJET OF THE OBLIGATION WAS LOST, OR IT HAS DETERIORATED, OR IMPROVEMENTS WERE MADE THEREON, WHAT IS THE EFFECT OF SUCH LOSS, OR DETERIORATION, OR IMPROVEMENTS IF THE CONDITION IS FINALLY FULFILLED?

When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the following rules shall be observed in case of improvement, loss or deterioration of the thing during the pendency of the condition: (1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished; (2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; (3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor; (4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case; (5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor; (6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary (Article 1189). NOTES:

Page 45 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

a) This article applies only if the suspensive condition is fulfilled and the object is specific (generic). b) The option (rescission or demand fulfillment) is given to the creditor, regardless of the degree of deterioration caused by the debtor. c) Improvement belongs to the creditor because once the condition is fulfilled, the effects of the conditional obligation shall retroact to the day of the constitution of the obligation. d) Improvement at the expense of the debtor, right of creditor like a usufructuary – A usufruct gives a right to enjoy the property of another with the obligation of preserving its form and substance unless the title constituting it or the law provides otherwise (Article 562). WHAT

IS THE MEANING OF

“LOSS”

AS CONTEMPLATED IN THE ARTICLE?

It is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered (Article 1189, par. 2). ARE

THE ABOVE RULES ALSO APPLICABLE IF THE CONDITION IS RESOLUTORY?

Yes, Article 1190 provides that in case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor, are laid down in the preceding article (Article 1189) shall be applied to the party who is bound to return. Thus, while the resolutory condition has not yet been fulfilled and the (thing) prestation is destroyed with the fault of the obligor, the obligation to return is extinguished. If the thing is lost through the fault of the debtor, he shall be liable for damages. If the thing deteriorates without the fault of the obligor, the impairment is to be borne by the creditor. If the thing deteriorates through the fault of the obligor, the creditor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case. If the thing is improved by nature, or by time, the improvement shall inure to the benefit of the creditor. Lastly, if the thing improves at the expense of the debtor, he shall have no other right than that granted to the usufructuary. However, in applying these rules, the “debtor” is the person obliged to return the object of the obligation in case of fulfillment of the condition, while the “creditor” is the person to whom the thing or object must be returned. WHAT

ARE THE EFFECTS WHEN A RESOLUTORY CONDITION IS FULFILLED?

Page 46 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

a) The obligation is extinguished (Article 1181). b) The parties, upon the fulfillment of said conditions, shall return to each other what they have received (Article 1190). c) The fruits or the interest thereon should also be returned after deducting the expenses made for their production, gathering, and preservation (Article 443). d) In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor, are laid down in the preceding article shall be applied to the party who is bound to return (Article 1190). e) As for obligations to do and not to do, the provisions of the second paragraph of article 1187 (the courts shall determine, in each case, the retroactive effect of the condition that has been complied with) shall be observed as regards the effect of the extinguishment of the obligation (Article 1190). WHAT

IS MEANT BY RECIPROCAL OBLIGATIONS?

Reciprocal obligations are those which are created or established at the same time, out if the same cause, and which result in mutual relationship of creditor and debtor between the parties. Reciprocal obligations are those which arise from the same cause and in which each party is both a debtor and a creditor of the other, such that the obligation one is dependent upon the other (Areola vs. CA, 236 SCRA 643). WHAT IS THE EFFECT IF ONE OF THE OBLIGORS IN RECIPROCAL OBLIGATIONS SHOULD NOT COMPLY WITH WHAT IS INCUMBENT UPON HIM? The power to rescind (more properly to resolve) obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period (Article 1191). This means that the implied power to rescind can only be enforced through court action, in the absence of stipulation to the contrary. The decision of the court is the revocatory act of rescission. In reciprocal obligations, the obligation of one is a resolutory condition of the obligation of the other, the non-fulfillment if which entitles the other to rescind the contract. Rescission or resolution here is predicated on the breach of faith by any of the parties to a contract that violates the reciprocity between them. CHOICES

OF THE INJURED PARTY:

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The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible (Article 1191). The options are alternative and not conjunctive. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law (Article 1191, par. 2). WHAT ARE ARTICLE 1191?

THE CHARACTERISTICS OF THE RIGHT TO RESCIND OR RESOLVE UNDER

1. It exists only in reciprocal obligations; 2. It can be demanded only if the plaintiff is ready, willing and able to comply with his own obligation and the other party is not. 3. The right to rescind is not absolute; thus: a. It must be based on a serious or substantial breach of an obligation as to defeat the object of the parties in making the agreement. A mere casual breach does not justify rescission of the contract. Example, if time is not of the essence in the agreement, a slight delay on the part of the obligor in the performance of his obligation is not sufficient ground for the resolution of the agreement (Tan vs. CA, 21 SCRA 284). b. If there is just cause for fixing the period within which the debtor can comply, the court will not decree rescission; c. If the property is already in the hands of an innocent third party who has lawful possession of the same. 4. The right to rescind needs judicial approval in certain cases as when there has already been delivery of the object; 5. The right to rescind is implied (presumed) to exist and, therefore, need not be expressly stipulated upon; 6. The right to rescind may be waived. NOTES: a) The article entitles the injured party to payment of damages, regardless of whether he demands fulfillment or rescission of the obligation (Areola vs. CA, 236 SCRA 643). b) In case a valid rescission is made, it creates an obligation to return the things which were the object of the contract. Thus, rescission

Page 48 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

can only be made when the one who demands rescission can return whatever he or she may be obliged to restore. SUPPOSE

THAT THERE IS A RESERVATION OF THE RIGHT TO RESCIND IN CASE OF

BREACH OF THE OBLIGATIONS, IS THERE A NEED TO ASK FOR JUDICIAL INTERVENTION IN THE RECISSION OF THE CONTRACT?

No, judicial intervention is not necessary for the purpose of obtaining a judicial declaration rescinding a contract where there is a reserved right to rescind (Luna vs. Abrigo, January 18, 1990). WHAT

IS THE EFFECT IF BOTH PARTIES HAVE COMMITTED A BREACH?

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 violated the contract, the same shall be deemed extinguished, and each shall bear his own damages (Article 1192). This means that if the violation can be traced to the parties and both of them committed the beach, the article penalizes the first violator only, if in fact or by evidence, such first violator can be determined. The subsequent violator will not be held liable. However, the liability of the first violator shall be equitably tempered by the court as the injury to the other party-violator might not have been so great had it not for the subsequent infraction of such other partyviolator. The law however states that if it cannot be determined which of the parties first violated the contract, the obligation shall be deemed extinguished, and each shall bear his own damages. SECTION 2 OBLIGATIONS WITH A PERIOD DEFINE

OBLIGATIONS WITH A TERM OR PERIOD.

Obligations with a term or period may be defined as those whose demandability or extinguishment are subject to the expiration of a term or period. WHAT

IS MEANT BY A TERM OR PERIOD?

A term or a period is an interval (or length) of time, which, exerting an influence of an obligation as a consequence of a juridical act, either suspends its demandability or produces its extinguishment.

Page 49 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

If it gives rise to the effectivity of the obligation, it is a suspensive period. If it extinguishes, it is a resolutory one. WHAT

ARE ITS REQUISITES?

a. Futurity; b. Certainty; c. Physical and legal possibility. DISTINGUISH

TERM OR PERIOD FROM CONDITION.

Term and condition may be distinguished form each other in the following ways: 1. AS TO REQUISITES – Whereas a term or period refers to an interval of time which is future and certain, a condition refers to a fact or event which is future and uncertain. 2. AS TO FULFILLMENT – Whereas a term or period is an interval of time which must necessarily come, although it may not be known when, a condition is a future and uncertain fact or event which may or may not happen. 3. AS TO INFLUENCE ON OBLIGATION – Whereas a term or period merely exerts an influence upon the time of the demandability or extinguishment of an obligation, a condition exerts an influence upon the very existence of the obligation itself. A condition causes an obligation to arise or to cease, but a period merely fixes the time or the efficaciousness of an obligation. 4. AS TO RETROACTIVITY OF EFFECTS – Whereas a term or period does not have any retroactive effects unless there is an agreement to the contrary, a condition has retroactive effects. 5. AS TO THE EFFECT OF WILL OF DEBTOR – When a term or period is left exclusively to the will of the debtor, the existence of the obligation is not affected, but when a condition is left exclusively to the will of the debtor, the very existence of the obligation is affected. GIVE

AND DEFINE THE DIFFERENT KINDS OF TERMS OR PERIODS.

1. SUSPENSIVE

OR RESOLUTORY

A. Suspensive period(ex die) - when the obligation becomes demandable only upon the arrival of a day certain; B. Resolutory period (in diem) - when the obligation is demandable at once, although terminated upon the arrival of a day certain.

Page 50 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

2. LEGAL,

CONVENTIONAL OR JUDICIAL

A. Legal period – when it is granted by law; B. Conventional period – when it is stipulated by the parties; C. Judicial period – when it is fixed by the court 3. DEFINITE OR INDEFINITE – Article 1193 states that a day certain is understood to be that which must necessarily come, although it may not be known when. Thus, a period is definite when a date or time is known beforehand, and indefinite when it can only be determined by an event which must necessarily come to pass, although it may not be known when WHAT

IS A DAY CERTAIN?

A day certain is understood to be that which must necessarily come, although it may not be known when (Article 1193, par. 3). IN

OBLIGATIONS

WITH

A

PERIOD

OR

TERM,

WHEN

DOES

THE

PERIOD

OF

PRESCRIPTION BEGIN?

The period of prescription commences from the time the term in the obligation arises, for it is only from that date that it is due and demandable. IF

THE HAPPENING OF A FUTURE EVENT IS FIXED BY THE PARTIES FOR THE

FULFILLEMTN OR EXTINGUISHMENT OF AN OBLIGAGTION, WHAT IS THE NATURE OF THE OBLIGATION?

It depends – If the event will necessarily come, although the date or time when it will come may be uncertain, the event constitutes a day certain; hence, the obligation is with a term (Article 1193, par. 3). However, if the uncertainty consists in whether the day will come or not, the event constitutes a condition; hence, the obligation is conditional (Article 1193, par. 4). STATE

THE RULES IN CASE OF LOSS, DETERIORATION, OR IMPROVEMENT OF THE

THING BEFORE THE ARRIVAL OF THE TERM OR PERIOD.

In case of loss, deterioration or improvement of the thing before the arrival of the day certain, the rules in Article 1189 shall be observed (Article 1194). Thus:

Page 51 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

(1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished; (2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; (3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor; (4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case; (5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor; (6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary (Article 1189). WHAT

IS THE REMEDY OF THE DEBTOR WHO PAID OR DELIVERED BEFORE THE

ARRIVAL OF THE PERIOD?

Anything paid or delivered before the arrival of the period, the obligor being unaware of the period or believing that the obligation has become due and demandable, may be recovered, with the fruits and interests (Article 1195). IN PERIOD?

OBLIGATIONS WITH A TERM OR PERIOD, FOR WHOSE BENEFIT IS THE TERM OR

Whenever in an obligation a period is designated, it is presumed to have been established for the benefit of both the creditor and the debtor, unless from the tenor of the same or other circumstances it should appear that the period has been established in favor of one or of the other (Article 1196). Consequently, the creditor cannot demand the performance of the obligation before the expiration of the designated period; neither can the creditor compel the debtor to perform the obligation before the expiration of such period. This rule, however, is not absolute. If it can be proved either that the tenor of the obligation or from other circumstances that the period has been established for the benefit of either the creditor or the debtor, the general rule is no longer applicable. However, the benefit of the period may be waived by the person in whose favor it was constituted. IF

THE

CONTRACT

DEMAND ITS FULFILLMENT?

DOES

NOT

PROVIDED

FOR

A

PERIOD,

CAN

THE

CREDITOR

Page 52 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

No, because an action for the court to fix the period has yet to be filed. In the meantime, no one can ask for the fulfillment of the obligation after the court has fixed the period for its compliance (Vda de Ungson vs. Lopez, L-10180, March 10, 1954). WITHIN

WHAT PERIOD SHOULD THE ACTION TO FIX THE PERIOD BE FILED?

It must be filed within ten (10) years, otherwise, it would prescribe (Gonzalez vs. Jose, 66 Phil. 369). WHAT

ARE

THE DIFFERENT

INSTANCES

UNDER

THE

COURTS ARE EMPOWERED TO FIX THE DURATION OF A TERM OR

CIVIL CODE PERIOD?

WHERE THE

a. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof (Article 1197, par. 1). b. The courts shall also fix the duration of the period when it depends upon the will of the debtor (Article 1197, par. 2). In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them (Article 1197, par. 3). c. If the debtor binds himself to pay when his means permit him to do so (Article 1180). Strictly speaking, however, this case properly falls within the purview of the second, because in such a case the power to determine when the obligation will be fulfilled is in effect left exclusively to the will of the debtor. NOTE: Article 1197 involves a two-step process. The court must first determine that the obligation does not fix a period (or that the period is made to depend upon the will of the debtor), but from the nature and the circumstances it can be inferred that a period was intended. This preliminary point settled, the court must then proceed to the second step, and decide what period was probably contemplated by the parties. So that, ultimately, the court cannot fix a period merely because in its opinion it is or should be reasonable, but must set the time that the parties are shown to have intended (Gregorio Araneta, Inc. vs. Phil. Sugar Estates Development Co., Ltd., 20 SCRA 330). WHAT

CIVIL CODE PERIOD?

ARE THE DIFFERENT INSTANCES UNDER THE

SHALL LOSE EVERY RIGHT TO MAKE USE OF THE TERM OR

WHEN THE DEBTOR

The debtor shall lose every right to make use of the period:

Page 53 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

(1) When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the debt; [Insolvency here need not be judicially declared.] (2) When he does not furnish to the creditor the guaranties or securities which he has promised; (3) When by his own acts he has impaired said guaranties or securities after their establishment, and when through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory; [Note that the debtor loses the benefit of a period even if the loss is through a fortuitous event.] (4) When the debtor violates any undertaking, in consideration of which the creditor agreed to the period; (5) When the debtor attempts to abscond (Article 1198). • HOW TERMS OR PERIODS ARE COMPUTED: When the laws speak of years, months, days or nights, it shall be understood that years are of three hundred sixty-five days each; months, of thirty days; days, of twenty-four hours; and nights from sunset to sunrise. If months are designated by their name, they shall be computed by the number of days which they respectively have. In computing a period, the first day shall be excluded, and the last day included (Article 13). SECTION 3 ALTERNATIVE OBLIGATIONS DEFINE

ALTERNATITIVE AND FACULTATIVE OBLIGATIONS.

Alternative obligations refer to those juridical relations which comprehend several objects or prestations which are due, but the payment or performance of one of them would be sufficient. Facultative obligations refer to those juridical relations where only one object or prestation has been agreed upon by the parties to the obligation, but the obligor may deliver or render another in substitution. NOTES: •

Under the Civil Code, there are only three prestations namely, (1) to give; (2) to do; and (3) not to do. Strictly speaking

Page 54 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

therefore, when the Code speaks of different prestations, it refers only to these three prestations. Hence, technically speaking, a person who is bound to give either a house, a car or a truck has only one prestation which is “to give”. But a person who is obliged to either deliver a house or to paint a picture has two prestations, namely, “to give” and “to do”. It appears however that the phrase “different prestations” in the law refers to both the strict sense and the looses sense of the word “prestation”. DISTINGUISH

ALTERNATIVE FROM FACULTATIVE OBLIGATIONS.

A. AS TO OBJECTS DUE – In facultative obligations only one object is due, whereas in alternative obligations several objects are due; B. AS TO COMPLIANCE – Facultative obligations may be complied by the delivery of another object or performance of another prestation in substitution of that which is due, whereas alternative obligations may be complied with by the delivery of one of the objects or by the performance of one of the prestations which is alternatively due; C. AS TO THE RIGHT OF CHOICE – In the first, the right of choice pertains only to the debtor, whereas in the second, the right of choice may pertain even to the creditor or to a third person; D. AS TO EFFECT OF FORTUITOUS LOSS - In the first, the loss or impossibility of the object or prestation which is due without any fault of the debtor is sufficient to extinguish the obligation, whereas in the second, the loss or impossibility of all the objects or prrestations which are due without the fault of the debtor is necessary to extinguish the obligation; E. AS TO EFFECT CULPABLE LOSS – In the first, the culpable loss of the object which the debtor may deliver in substitution before the substitution is effected does not give rise to any liability on the part of the debtor; in the second, the culpable loss of any of the objects which are alternatively due before the choice is made may give rise to a liability on the part of the debtor. WHAT

IS THE RULE IF THE OBLIGATION IS ALTERNATIVE?

A person alternatively bound by different prestations shall completely perform one of them.

Page 55 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

The creditor cannot be compelled to receive part of one and part of the other undertaking (Article 1199). Partial performance of the different prestations cannot be considered fulfillment of the obligation and therefore cannot be done unless the creditor accepts such partial performance as complete performance. Hence, if the obligor can either give a house and a car or paint two murals for the satisfaction of his obligation, he cannot give the car and one mural. The obligation will not be satisfied through partial fulfillment of several prestations. IN

ALTERNATIVE OBLIGATIONS, WHO HAS THE RIGHT TO CHOOSE OR SELECT THE

OBJECT TO BE DELIVERED OR THE PRESTATION TO BE PERFORMED AMONG THOSE WHICH ARE ALTERNATIVELY DUE?

In alternative obligations the right to choose or select belongs to the debtor. EXCEPTIONS: a) When the right has been expressly granted to the creditor (Article 1200); and b) When it has been expressly granted to a third person. The right of choice belongs to the debtor because he is the passive subject in an obligation. He, not the creditor, is the only obliged to give, to do or not to do. Any doubt as to whom the choice was given must always be interpreted in favor of the debtor. Only an express grant of choice can a creditor have the right to choose which prestation is to be performed. WHAT

IS THE LIMITATION ON DEBTOR’S CHOICE

(IF

THE RIGHT OF CHOICE HAS

BEEN GRANTED TO HIM)?

The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not have been the object of the obligation (Article 1200). WHEN

ARE THE PARTIES BOUND BY THE CHOICE OF SELECTION?

The choice shall produce no effect except from the time it has been communicated (Article 1201). Thus the parties are bound by the choice or selection from the very moment that it has been communicated by the party who has the right to make it to the other party.

Page 56 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

WHEN

DOES THE DEBTOR LOSE THE RIGHT OF CHOICE?

The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only one is practicable (Article 1202). Note that the law uses the word “practicable”. Practicable means capable of being done, or simply feasible (The New Lexicon Webster’s Dictionary of the English Language, 1987 Edition, Page 787). However, prestations that are not “practicable may also include lawful and possible prestations but, because of some special attendant circumstances which do not necessarily make them unlawful or impossible, they can be done. [Hence, if the debtor has the following alternatives: to kiss a highly contagious leper, to sing a song, or not to pay taxes, it is clear that the last alternative is not only impracticable but also unlawful. The first alternative, although not unlawful and not impossible, is nevertheless practicable. In this case therefore, the debtor loses his right of choice because only one prestation is practicable which is to sing.] WHAT

IS

THE

RULE

WHEN

THE

DEBTOR

CANNOT

CHOOSE

BECAUSE

OF

THE

CREDITOR’S ACTS?

If through the creditor's acts the debtor cannot make a choice according to the terms of the obligation, the latter may rescind the contract with damages (Article 1203). IN OBLIGATIONS WHERE THERE ARE THREE OR MORE OBJECTS WHICH ARE ALTERNATIVELY DUE, IF ONE, OR MORE, OR ALL OF THE OBJECTS ARE LOST OR DESTROYED, WHAT ARE THE EFFECTS OF SUCH LOSS OR DESTRUCTION UPON THE OBLIGATION AS UPON THE LIABILITY OF THE DEBTOR? It depends: A.

IF

•

If the loss is due to a fortuitous event:

RIGHT OF CHOICE BELONGS TO THE DEBTOR

–

a) If two or more objects remain, the obligation subsists retaining its alternative character; b) If only one remains, the obligation subsists, but it ceases to be alternative. c) If none remains, the obligation is extinguished.

Page 57 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

In all these cases, the debtor cannot be held liable for damages, applying the provisions of Articles 1174, 1262 and 1266. •

If the loss is due to the fault of the debtor: a) If two or more objects remain, the obligation subsists retaining its alternative character. The debtor in such a case cannot be held liable for damages because he can still comply with his obligation. b) If only one remains, the obligation subsists, but it ceases to be alternative. The debtor in such a case cannot be held liable for damages because he can still comply with his obligation. c) If none remains, the obligation is converted into an obligation to indemnify for damages. The indemnity shall consist of the last object to be lost plus or that service which last become impossible, consequential damages (Article 1204). Consequential damages are damages other than the value of the last thing or service.

B.

IF

•

If the loss is due to a fortuitous event, the effects are the same as where the right belongs to the debtor.

•

If the loss is due to the fault of the debtor:

THE RIGHT BELONGS TO THE CREDITOR

a) If two or more objects remain, the obligation subsists retaining its alternative character. If the creditor chooses any of those remaining, the debtor cannot be held liable for damages; however, if he chooses any of those which are lost, the debtor is liable for the value of the object plus damages. b) If only one remains, the obligation subsists, but it ceases to be alternative. In other words, it has become a simple obligation to deliver the remaining object or to indemnify for damages depending upon the discretion of the creditor. If the latter chooses the object remaining, the debtor cannot be held liable for damages; however, if he chooses any of those which were lost, the debtor is liable for the value of the object plus damages. c) If none remains, the obligation is converted into an obligation to indemnify for damages. The indemnity shall consist of the price of the object chosen by the creditor plus consequential damages (Article 1205).

Page 58 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

NOTES: •

•

•

Note that the debtor will not be liable in any way for reducing the alternatives from three to two alternatives, provided what remains are lawful, practicable, possible or consistent with the object of the obligation. Likewise, the debtor will not be liable for converting his alternative obligation to a simple one where there is only one lawful and possible prestation. The debtor may even cause the loss of one of the things, or render one of the services impossible. But when the debtor is responsible for losing or rendering impossible all his alternative prestations, the creditor is entitled to damages. IN

FACULTATIVE

OBLIGATIONS,

IF

THE

SUBSTITUTE

IS

LOST

OR

DESTROYED

THROUGH THE FAULT OF THE DEBTOR, IS HE LIABLE FOR DAMAGES?

If the loss or destruction took place AFTER the substitution has been made, undoubtedly, the debtor is liable for damages for the reason that once the substitution is effected by the debtor by duly notifying the creditor of such fact, the obligation is converted into a simple one with the substitute as the object of the obligation. •

If the loss or destruction took place BEFORE the substitution could be effected, it is believed that the debtor cannot be held liable. It does not affect the principal obligation and hence the debtor will not be liable.

JOINT

SECTION 4 AND SOLIDARY OBLIGATIONS

DEFINE JOINT AND SOLIDARY OBLIGATIONS.

When there is concurrence of two or more creditors or of two or more debtors in one and the same obligation, such obligation may either be joint (obligacion mancomunada) or solidary (obligacion solidaria). A JOINT OBLIGATION is an obligation where there is a concurrence of several creditors, or several debtors, or of several creditors and debtors, by virtue of which each of the creditors has a right to demand,

Page 59 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

while each of the debtors is bound to render, compliance with his PROPORTIONATE part of the prestation. A SOLIDARY OBLIGATION is an obligation where there is a concurrence of several creditors, or of several debtors, or of several creditors and debtors, by virtue of which each of the creditors has a right to demand, while each of the debtors is bound to render the ENTIRE compliance with the prestation which constitutes the object of the obligation. WHERE

THERE IS A CONCURRENCE OF SEVERAL CREDITORS, OR OF SEVERAL

DEBTORS, OR OF SEVERAL CREDITORS AND DEBTORS IN ONE AND THE SAME OBLIGATION WHAT IS THE NATURE OF THE OBLIGATION

–

–

IS IT JOINT OR SOLIDARY?

As a general rule, the obligation is JOINT. Article 1207 provides that: The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestation. WHAT

ARE THE CONSEQUENCES OF A JOINT OBLIGATION?

If from the law, or the nature or the wording of the obligations to which the preceding article refers the contrary does not appear – a) The credit or debt shall be presumed to be divided into as many shares as there are creditors or debtors, b) The credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits (Article 1208). WHEN

IS AN OBLIGATION SOLIDARY?

There is a solidary liability only: 1. When the obligation expressly so states; or 2. When the law requires solidarity; or 3. When the nature of the obligation requires solidarity (Article 1207). WHAT

ARE THE OBLIGATIONS WHERE THE LAW REQUIRES SOLIDARITY?

1. If two or more heirs take possession of the estate, they shall be solidarily liable for the loss or destruction of a thing devised or bequeathed, even though only one of them should have been negligent (Article 927).

Page 60 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

2. All partners are liable solidarily with the partnership for everything chargeable to the partnership under articles 1822 and 1823 (Article 1824). 3. Even when the agent has exceeded his authority, the principal is solidarily liable with the agent if the former allowed the latter to act as though he had full powers (Article 1911). 4. If two or more persons have appointed an agent for a common transaction or undertaking, they shall be solidarily liable to the agent for all the consequences of the agency (Article 1915). 5. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily (1945). 6. The responsibility of two or more officious managers shall be solidary, unless the management was assumed to save the thing or business from imminent danger (Article 2146, par. 2). 7. The responsibility of two or more payees, when there has been payment of what is not due, is solidary (Article 2157). 8. The responsibility of two or more persons who are liable for quasi-delict is solidary (Article 2194). 9. Several and subsidiary liability of principals, accomplices and accessories of a felony. WHAT

ARE THE DIFFERENT KINDS OF SOLIDARITY?

1. ACTIVE (among the creditors) – A tie or vinculum among several creditors of one and the same obligation by virtue of which each of them, in relation to his co-creditors, possesses the character of creditor only with respect to his share in the obligation, but in relation to the common debtor or debtors, represents all of the other creditors. The most fundamental effect of active solidarity is the creation of a relationship of mutual agency among the solidary creditors by virtue of which each creditor is empowered to exercise against the debtor or debtors not only the rights which corresponds to him, but also all the rights which correspond to the other creditors, with the consequent obligation to render an account of his acts to such creditors. 2. PASSIVE (among the debtors) – A ties of vinculum among several debtors of one and the same obligation by virtue of which each of the, in relation the common creditor or creditors, represents all of the other debtors, and in relation to his co-debtors, possesses the character of debtor only with respect to his share in the obligation. Here, each solidary debtor, insofar as the creditor or creditors are concerned, is the debtor of the entire amount; however, with respect to his co-debtors, he is the debtor

Page 61 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

only to the extent of his share of the obligation. Hence, the most fundamental effect of solidarity among the debtors is the liability of each debtor for the payment of the entire obligation, with the consequent right to demand reimbursement from the others for their corresponding shares once payment has been made. 3. Mixed (among the creditors and the debtors at the same time). WHAT

ARE THE CHARACTERISTICS OF JOINT DIVISIBLE OBLIGATIONS?

1. Each creditor can demand only for the payment of his proportionate share of the credit, while each of the debtor can be held liable only for the payment of his proportionate share of the debt (Articles 1207; 1208). 2. A joint creditor cannot act in representation of the other creditors, while a joint debtor cannot be compelled to answer for the acts or liability of the other debtors. 3. The demand for the fulfillment made by the creditor upon one of the debtors does not place the other debtors in default. 4. The interruption of the prescriptive period with respect to one debtor does not affect the rights of others. 5. The defense of one debtor is not a valid defense of the others. WHAT

IS AN INDIVISIBLE JOINT OBLIGATION?

It is an obligation in which the object is indivisible but the tie between the parties is joint who are merely proportionately liable. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility (Article 1210). STATE THE RULES IN AN INDIVISIBLE JOINT OBLIGATION. 1. The right of the creditors may be prejudiced only by their collective acts, 2. The debt can be enforced only by proceeding against all the debtors (demand must be made on all of them), 3. If one of the latter should be insolvent, the others shall not be liable for his share (Article 1209). 4. If there be joint creditors, delivery must be made to all, unless one is specifically authorized by the others. 5. Each joint creditor is allowed to renounce his proportionate credit. WHAT

ARE

THE

CHARACTERISTICS

WHICH

OBLIGATION FROM A JOINT DIVISIBLE OBLIGATION?

DISTINGUISH

A

JOINT

INDIVISIBLE

Page 62 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

Although in a joint indivisible obligation, the creditor cannot act in representation of the others and the debtor cannot be compelled to answer for the acts or liability of the others because of its joint character, yet, a joint INDIVISIBLE obligation is distinguishable from a joint DIVISIBLE obligation because of the presence of the following characteristics: 1. If there are two or more debtors, compliance with the obligation requires the concurrence of all of them, although each for his own share. Consequently, the obligation can be enforced only be proceeding against all of the debtors (Article 1209). 2. If there are two or more creditors, the concurrence of all of them, although each for his own share, is also necessary for the enforcement of the obligation. This is because the obligation is joint, and therefore, a creditor cannot act in representation of the others, and it is also indivisible, and therefore, not susceptible of partial fulfillment. IN

A JOINT INDIVISIBLE OBLIGATION, WHAT IS THE EFFECT IF ANYONE OF THE

DEBTORS SHOULD FAIL TO COMPLY WITH HIS UNDERTAKING?

If anyone of the debtors in a joint indivisible obligation should fail to comply with undertaking, the obligation is converted into one of indemnity for damages. However, the debtors who may have been ready to comply with what is incumbent upon him shall not contribute to the indemnity beyond the corresponding portion of the price of the thing or the value of the service in which the obligation consists. On the other hand, the debtor who failed or refused to comply with his undertaking shall pay not only his share of such or value, but also al of the damages suffered by the creditor or creditors as a result of the non-fulfillment of the obligation (Article 1224). DISTINGUISH

BETWEEN SOLIDARITY AND INDIVISIBILITY.

1. AS TO NATURE – Solidarity refers to the legal tie or vinculum, and consequently, to the parties of the obligation, whereas indivisibility refers to the prestation which constitutes the object of the obligation. 2. AS TO REQUISITES – Plurality of subjects is indispensable in solidarity, whereas it is not required in indivisibility. 3. AS TO EFFECT OF BREACH – In solidarity, when the obligation is converted into one of indemnity for damages because of breach, the solidary character of the obligation remains, whereas in indivisibility, the indivisible character of the obligation is terminated.

Page 63 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

CAN

SOLIDARITY EXIST ALTHOUGH THE CREDITORS AND DEBTORS MAY NOT BE

BOUND IN THE SAME MANNER AND BY THE SAME PERIODS AND CONDITIONS?

Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions (Article 1211). WHAT

ARE THE RULES IN SOLIDARY OBLIGATIONS?

a) Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudicial to the latter (Article 1212). b) A solidary creditor cannot assign his rights without the consent of the others (Article 1213). IN

SOLIDARY OBLIGATIONS, TO WHOM MUST THE DEBTOR PAY?

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). WHAT

IS THE EFFECT OF NOVATION, COMPENSATION, CONFUSION OR REMISSION

OF DEBT MADE BY A SOLIDARY CREDITOR?

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). IN SOLIDARY OBLIGATION, AGAINST WHOM MAY THE CREDITOR PROCEED? The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected (Article 1216). WHAT

IS THE EFFECT OF PAYMENT MADE BY ONE OF THE SOLIDARY DEBTORS?

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 (Article 1217).

Page 64 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

WHAT

IS THE RIGHT OF THE SOLIDARY DEBTOR WHO PAID?

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 (Article 1217, par. 2). STATE

THE RULE IF ONE OF THE SOLIDARY DEBTORS CANNOT PAY HIS SHARE TO

THE DEBTOR WHO PAID.

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, par. 3). HOWEVER: Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the obligation has prescribed or become illegal (Article 1218). WHAT

IS THE EFFECT OF REMISSION OF A SOLIDARY OBLIGATION EFFECTED BY A

SOLIDARY CREDITOR THE

CREDITORS

(1)

UPON THE OBLIGATION ITSELF,

THEMSELVES,

AND

(3)

UPON

THE

(2)

UPON THE RELATIONSHIP OF

RELATIONSHIP

OF

THE

DEBTORS

THEMSELVES?

1. UPON THE OBLIGATION – If the remission is total, the entire obligation is extinguished; if it is partial, the obligation is extinguished in that part or aspect to which the remission refers (Article 1215). 2. UPON THE SOLIDARY CREDITOR – The solidary creditor responsible for the remission shall be liable to the other solidary creditors for the shares in the obligation corresponding to them (Ibid). 3. UPON THE SOLIDARY DEBTORS – As far as the solidary debtors are concerned, the effects of remission may be summarized as follows: a. The remission made by the creditor of the share which affects one of the solidary debtors does not release the latter from his responsibility towards the co-debtors, in case the debt had been totally paid by anyone of them before the remission was effected (Article 1219). b. The remission of the whole obligation, obtained by one of the solidary debtor, does not entitle him to reimbursement from his co-debtors (Article 1220).

Page 65 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

WHAT

IS THE EFFECT OF THE LOSS OF THE THING DUE?

If the thing has been lost or if the prestation has become impossible without the fault of the solidary debtors, the obligation shall be extinguished. If there was fault on the part of any one of them, all shall be responsible to the creditor, for the price and the payment of damages and interest, without prejudice to their action against the guilty or negligent debtor If through a fortuitous event, the thing is lost or the performance has become impossible after one of the solidary debtors has incurred in delay through the judicial or extrajudicial demand upon him by the creditor, the provisions of the preceding paragraph shall apply (Article 1221). WHAT

ARE THE DEFENSES WHICH ARE AVAILABLE TO A SOLIDARY DEBTOR IF THE

CREDITOR PROCEEDS AGAINST HIM ALONE FOR THE PAYMENT OF THE ENTIRE OBLIGATION?

A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible (Article 1222).

DIVISIBLE DEFINE

SECTION 5 INDIVISIBLE OBLIGATIONS

AND

DIVISIBLE AND INDIVISIBLE OBLIGATIONS.

Divisible obligations are those which have as their object a prestation which is susceptible of partial performance without the essence of the obligation being changed. Indivisible obligations are those which have as their object a prestation which is not susceptible of partial performance, because otherwise the essence of the obligation will be changed. WHEN

IS A THING DIVISBLE OR INDIVISIBLE?

A thing is divisible when, if separated into parts, its essence is not changed or its value is not decreased disproportionately, because

Page 66 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

each of the parts into which it is divided are homogeneous and analogous to each other as well as to the thing itself. A thing is indivisible when, if separated into parts, its essence is changed or its value is decreased disproportionately. DISTINGUISH

BETWEEN INDIVISIBILITY FROM SOLIDARITY.

SOLIDARITY INDIVISIBILITY 1. Refers to the tie between the 1. Refers to the nature of the parties. obligation. 2. Needs at least two debtors or 2. May exist even if there is only creditors. one debtor and only one creditor. 3. The fault of one is the fault of 3. The fault if one is not the fault the bothers. of the others. GIVE

AND DEFINE THE DIFFERENT KINDS OF DIVISION.

The division of a thing may be: a. QUANTITATIVE – when the thing can be materially divided into parts and such parts are homogeneous to each other, such as when the parts are separated from each other as in the case of movables, or when the limits of the parts are fixed by metes and bounds as in the case of movables. This depends on quantity. b. QUALITATIVE – when the thing can be materially divided, but the parts are not homogenous to each other, such as in the partition of an inheritance. This depends on quality, irrespective of quantity. c. IDEAL OR INTELECTUAL OR MORAL – when the thing can only be separated into ideal or undivided parts, not material parts, as in the case of ownership. This exists only in the mind and not in physical reality. GIVE

THE DIFFERENT KINDS OR CLASSES OF INDIVISIBLITY.

Indivisibility may be: a. CONVENTIONAL - Indivisible by common agreement; b. NATURAL OR ABSOLUTE – indivisible by the nature of the object of undertaking; and c. LEGAL – indivisible as provided by law. DISTINGUISH

BETWEEN THE DIVISIBILITY OF AN OBLIGATION AND THE DIVISIBILITY

OF THE THING WHICH CONSTITUTES THE OBJECT OF THE OBLIGATION.

Page 67 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

The divisibility of an obligation refers to the PERFORMANCE of the prestation which constitutes the object of the obligation, whereas the divisibility of the thing which constitutes the object if the obligation refers to the PRESTATION itself. IF

THE THING WHICH CONSTITUTES THE OBJECT OF THE OBLIGATION TO GIVE IS

DIVISIBLE, DOES IT NECESSARILY FOLLOW THAT THE OBLIGATION IS ALSO DIVISIBLE?

SUPPOSE

THAT THE THING IS INDIVISIBLE, DOES IT NECESSARILY FOLLOW THAT THE

OBLIGATION TO GIVE IS ALSO INDIVISIBLE?

If the thing which constitutes the object of an obligation to give is by its nature divisible, the general rule is that the obligation is also divisible since it is evidently susceptible of partial compliance. This rule is subject to the following exceptions: a. That the obligation is indivisible by express provision of law; and b. That it is indivisible by intention of the parties (Article 1225). If the thing which constitutes the object of the obligation to give is by its very nature indivisible, the obligation is also indivisible since it is evident that it is not susceptible of partial compliance. This rule is absolute in character. The nature and effect of obligations are very much different from and do not affect the divisibility or indivisibility of the things that are the object of obligations in which there is only one debtor and only one creditor (Article 1223). WHAT

IS A JOINT INDIVISIBLE OBLIGATION?

It is an obligation where the object or prestation is indivisible but the parties are bound jointly. Example: A and B are jointly bound to give a specific car to C. WHAT

IS THE EFFECT OF NON-COMPLIANCE OF A JOINT INDIVISIBLE OBLIGATION?

A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does not comply with his undertaking. The debtors who may have been ready to fulfill their promises shall not contribute to the indemnity beyond the corresponding portion of the price of the thing or of the value of the service in which the obligation consists (Article 1224). WHAT OBLIGATIONS ARE DEEMED INDIVISIBLE?

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a. Obligations to give definite things; b. Those which are not susceptible of partial performance (Article 1225, par. 1); c. Those so provided by law; d. Those things which, though physically divisible, are intended by the parties to be indivisible (Article 1225, par. 3). WHAT

OBLIGATIONS ARE DEEMED DIVISIBLE?

When the obligation has for its object: a. The execution of a certain number of days of work; b. The accomplishment of work by metrical units; c. Analogous things which by their nature are susceptible of partial performance (Article 1225, par. 2); d. When the purpose of the obligation is to pay a certain amount in installment. IN

OBLIGATIONS NOT TO DO, HOW IS THE DIVISIBILITY OR INDIVISIBILITY THEREOF

DETERMINED?

In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each particular case (Article 1225, par. 4). WHAT

IS THE EFFECT OF ILLEGALITY OF THE TERMS OF A DIVISIBLE CONTRACT?

In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced (Article 1420). SECTION 6 OBLIGATIONS WITH A PENAL CLAUSE DEFINE

OBLIGATIONS WITH A PENAL CLAUSE.

An obligation with a penal clause is one with an accessory undertaking by virtue of which the obligor assumes a greater liability in case of breach of the obligation. WHAT

IS MEANT BY PENAL CLAUSE OR PENALTY?

A penal clause is an accessory obligation attached to a principal obligation by virtue of which the obligor is bound to pay a stipulated

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indemnity or to perform an agreed prestation for the purpose of insuring the performance of the principal obligation. It is a coercive means to obtain from the debtor compliance of the obligation. IN

OBLIGATIONS

CONSIDERED

AS

A

WITH

SUBSTITUTE

A

PENAL FOR

CLAUSE,

DAMAGES

WHEN

OR

SHALL

INTERESTS?

THE

PENALTY

WHAT

ARE

BE THE

EXCEPTIONS?

As a general rule, in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance (Article 1226, par. 1). In such a case, proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded (Article 1228). There are three EXCEPTIONS to the rule that a penalty clause shall not be a substitute for the payment of interest and damages: 1. If there is no stipulation to the contrary; 2. When the obligor is sued for refusal to pay the agreed penalty; and 3. When the obligor is guilty of fraud in the fulfillment of the obligation (Article 1226, par. 1). In all of these cases, it is evident that the purpose of the penalty is to punish the obligor. Consequently, the obligee can recover from him not only the penalty, but also the damages resulting from the breach of the principal obligation. MAY ANY PENALTY BE DEMANDABLE? No. The penalty may be enforced only when it is demandable in accordance with the provisions of the Civil Code (Article 1226, par. 2), and one which states that the penalty may be reduced if it is iniquitous or unconscionable (Article 1229). WHAT

ARE THE PURPOSES OF A PENAL CLAUSE IN AN OBLIGATION?

A penal clause has three purposes: a. Funcion coercitiva o de garantia – to insure the performance of the obligation; b. Funcion liquidatoria – to liquidate the amount of damages to be awarded to the injured party in case of breach of the principal obligation; and

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c. Funcion estrictamente penal – in certain exceptional cases, to punish the obligor in case of breach of the principal obligation. The second is compensatory, while the third is punitive in character; the first, on the other hand, is the general purpose regardless of whether the penalty is compensatory or punitive. WHAT

ARE THE DIFFERENT KINDS OF PENALTIES?

Penalty may be classified as follows: a. AS

TO ORIGIN:

a) Legal – when it is constituted by law. b) Conventional – when it is constituted by agreement of the parties. B.

AS

TO PURPOSE:

a) Compensatory – when it is established for the purpose of indemnifying the damages suffered by the obligee or creditor in case of breach of the obligation. b) Punitive – when it is established for the purpose of punishing the obligor or debtor in case of breach of the obligation. C.

AS

TO EFFECT:

a) Subsidiary – when only the penalty may be demanded in case of breach of the obligation. b) Joint – when the injured party may demand the enforcement of both the penalty and the principal obligation. IS

THERE ANY DIFFERENCE BETWEEN THE PENALTY IN OBLIGATIONS WITH A PENAL

CLAUSE AND LIQUIDATED DAMAGES?

As a general rule, there is none. In other words, the penalty in its compensatory aspect is exactly the same as the liquidated damages defined in Article 2226 of the Civil Code. In both cases, proof of actual damages suffered by the creditor is unnecessary. However, the penalty in its punitive aspect is different from liquidated damages. Thus, when there is a stipulation that the creditor can recover damages in addition to the penalty, or when the debtor is sued for refusal to pay the penalty, or when the debtor is guilty of fraud, it is clear that in such

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cases the creditor can recover not only the agreed penalty but also damages suffered by him. Imposition of the liquidated damages for breach of contract, such as in a building contract, bars any award for additional damages at large for the same breach (Navarro vs. Mallari, 45 Phil. 242). CAN

THE DEBTOR SUBSTITUTE THE PENALTY FOR THE PRINCIPAL OBLIGATION?

No. The debtor cannot exempt himself from the performance of the obligation by paying the penalty. He can only do so if the right has been expressly reserved for him (Article 1227). This is so because the payment of the penalty is merely an accessory obligation. It is not the principal obligation. CAN

THE CREDITOR DEMAND BOTH FULFILLMENT AND THE PENALTY AT THE SAME

TIME?

No. The creditor cannot demand the fulfillment of the obligation and the satisfaction of the penalty at the same time. He can only do so if the right has been clearly granted him. However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become impossible without his fault, the penalty may be enforced (Article 1227). WHAT

CODE OBLIGATION?

ARE THE DIFFERENT CASES UNDER THE CIVIL

REDUCE THE PENALTY WHICH IS ATTACHED TO AN

WHERE COURTS MAY

A contract is a source of obligation. It is the law between the parties, hence, neither the law nor the courts will extricate a party from an unwise or undesirable contract he or she entered into with all the required formalities and with full awareness of its consequences. One exception to this rule, however is the matter of penalties. Courts may reduce the penalty attached to an obligation: 1. When the principal obligation has been partly complied with by the debtor. 2. When the principal obligation has been irregularly complied with by the debtor. 3. When the penalty is iniquitous or unconscionable, even if there has been no performance (Article 1229). A penalty clause is construed against the one enforcing it. If it is so unconscionable that its enforcement, in effect, constitutes an undue

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deprivation or confiscation of the property of the obligor, the courts can strike it down as an invalid one. WHAT

ARE THE RULES IN CASE THE PRINCIPAL OBLIGATION OR THE PENAL CLAUSE

IS VOID?

1. The nullity of the penal clause does not carry with it that of the principal obligation. 2. The nullity of the principal obligation carries with it that of the penal clause (Article 1230). The penal clause, being merely an accessory obligation, does not invalidate the principal obligation in the event that such penalty clause is void or without effect. Being merely accessory to enforce the main obligation, such penal clause could never exist if the main obligation does not exist. Hence, the nullity of the principal obligation carries with it that of the penal clause. SUMMARY

ON RULES IN OBLIGATIONS WITH A PENAL CLAUSE:

1. The penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance (Article 1226, par. 1), EXCEPT if there is no stipulation to the contrary; when the obligor is sued for refusal to pay the agreed penalty; and when the obligor is guilty of fraud in the fulfillment of the obligation (Article 1226, par. 1). 2. The debtor cannot exempt himself from the performance of the obligation by paying the penalty, save in the case where this right has been expressly reserved for him. Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless this right has been clearly granted him. However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become impossible without his fault, the penalty may be enforced (Article 1227). 3. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded (Article 1228). CHAPTER 4 EXTINGUISHMENT OF OBLIGATIONS GENERAL PROVISIONS WHAT

ARE THE DIFFERENT MODES OF EXTINGUISHING OBLIGATIONS?

Obligations are extinguished:

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(1) (2) (3) (4) (5) (6)

By By By By By By

payment or performance; the loss of the thing due; the condonation or remission of the debt; the confusion or merger of the rights of creditor and debtor; compensation; novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code (Article 1231). HOW

ARE

THE

CAUSES

OF

EXTINGUISHMENT

OF

OBLIGATIONS

ACCORDING TO THE CIVIL CODE?

ORDINARILY a) b) c) d) e) f)

Payment of performance Loss of the thing due Condonation or remission of the debt or waiver Confusion or merger of the rights of creditor and debtor Compensation Novation (Article 1231) OTHER

a) b) c) d)

CAUSES IN

ARTICLE 1231

BUT GOVERNED BY OTHER CHAPTERS:

Annulment Rescission Fulfillment of resolutory condition Prescription STILL

a) b) c) d) e) f) g)

BY:

OTHER CAUSES:

Death of a party in case the obligation is personal Resolutory term Change in civil status Compromises Mutual dissent Impossibility of fulfillment Fortuitous event SECTION 1 PAYMENT OR PERFORMANCE DEFINE

PAYMENT.

CLASSIFIED

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Payment is a mode of extinguishing obligations which consists not only the delivery of money but also the performance, in any other manner, of an obligation (Article 1232). ` IF

A THIRD PERSON PAYS AN OBLIGATION, WHAT ARE THE RIGHTS WHICH ARE

AVAILABLE TO HIM?

If a third person pays the obligation with the knowledge and consent of the debtor, there are two rights which are available to him: a. He can recover from the debtor the entire amount which he has paid (Article 1236, par. 2); b. He is subrogated to all of the rights of the creditor (Article 1302, No. 2). However, if the payment is made without the knowledge or against the will of the debtor, there is only one right which is available to him: a. He can recover only insofar as the payment has been beneficial to the said debtor (Article 1236, par. 2). WHAT

ARE THE REQUISITES FOR A VALID PAYMENT?

A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be (Article 1233). WHAT IS THE EFFECT OF SUBSTANTIAL PERFORMANCE IN GOOD FAITH? If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee (Article 1234). WHAT

IS THE EFFECT IF THE OBLIGEE ACCEPTS PERFORMANCE KNOWING ITS

INCOMPLETENESS OR IRREGULARITY?

When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with (Article 1235). There is waiver and estoppel here. IF

THERE IS DEFAULT IN THE PERFORMANCE OF ONE’S OBLIGATION, WHAT IS THE

EFFECT OF THE ACCEPTANCE OF DELAYED PAYMENT?

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Rescission is impliedly waived. Failure to exercise the right of rescission after the debtor defaulted constitutes a waiver of such right. The continued acceptance of payments after the default places the debtor in estoppel. MAY

A

THIRD

PERSON

COMPEL

THE

CREDITOR

TO

ACCEPT

PAYMENT

OR

PERFORMANCE OF AN OBLIGATION?

No, as a general rule because there is no privity of contract between the third person and a party to a contract. This rule is, however subject to the following exceptions: a. When it is made by a third person who has an interest in the fulfillment of the obligation (Article 1236). Thus, a guarantor or a co-debtor can compel the creditor to accept payment or performance, since in this case, the payor is not a stranger to the obligation. b. When there is a stipulation to the contrary (Article 1236). In this case, the creditor waives his right to refuse to deal with strangers to the obligation. WHAT

IS THE EFFECT IF A THIRD PERSON PAYS ON BEHALF OF THE DEBTOR

WITHOUT HIS KNOWLEDGE OR AGAINST HIS CONSENT?

Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty (Article 1237). WHAT

IS SUBROGATION?

Subrogation means the act of putting somebody into the shoes of the creditor, hence, enabling the former to exercise all the rights and actions that could have been exercised by the latter. Subrogation transfers to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation (Article 1303). HOW

IS SUBROGATION DISTINGUISHED FORM REIMBURSEMENT?

a) In subrogation, recourse can be had to the mortgage or guaranty or pledge; in reimbursement, there is no such recourse. b) In subrogation, the debt is extinguished in one sense, but a new creditor, with exactly the same rights as the old one, appears on

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the scene. In reimbursement, the new creditor has different rights, so it is as if there has been an extinguishment of the obligation. c) In subrogation, there is something more than a personal action for recovery; in reimbursement, there is only a personal action to recover to the amount. Note however, that in both reimbursement and subrogation, there can be recovery of what the stranger has paid (Article 1236). WHEN

IS PAYMENT BY A STRANGER DEEMED A DONATION?

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 (Article 1238). WHAT

IS THE EFFECT OF PAYMENT MADE BY AN INCAPACITATED PERSON?

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" (Article 1239); thus: If a person has no capacity to give: a) Payment is not valid if accepted; b) Creditor cannot be compelled to accept it; c) The remedy of consignation is not proper. Exception as provided for in Article 1427: When a minor below eighteen and twenty-one years of age, who has entered into a contract without the consent of the parents or guardian voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith. TO

WHOM MUST PAYMENT BE MADE?

Payment shall be made, as a general rule, to: a) The person in whose favor the obligation has been constituted, or b) His successor in interest, or c) Any person authorized to receive it (Article 1240).

Page 77 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

WHAT

IS THE EFFECT IF PAYMENT IS MADE TO A PERSON OTHER THAN THOSE

ENUMERATED IN

ARTICLE 1240?

The payment shall not be valid; except: a) Payment made to a third person provided that it has redounded to the benefit of the creditor; b) Payment made to the possessor of the credit provided that it was made in good faith (Articles 1241, par. 2, and 1242). WHAT

IS

THE

EFFECT OF

PAYMENT

MADE

TO A PERSON

INCAPACITATED

TO

MANAGE OR ADMINISTER HIS PROPERTY?

Payment to a person who is incapacitated to administer his property shall be valid only: a) If he has kept the thing delivered, or b) Insofar as the payment has been beneficial to him (Article 1241, par. 1). WHAT

IS THE EFFECT OF PAYMENT MADE TO AN UNAUTHORIZED THIRD PERSON?

Payment made to a third person shall be valid insofar as it has redounded to the benefit of the creditor (Article 1241, par 2). MUST THE BENEFIT TO THE CREDITOR BE PROVEN? Such benefit to the creditor need not be proved in the following cases: (1) If after the payment, the third person acquires the creditor's rights; (2) If the creditor ratifies the payment to the third person; (3) If by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the payment (Article 1241). WHAT

IS THE EFFECT OF PAYMENT MADE TO THE CREDITOR BY THE DEBTOR AFTER

THE LATTER HAS BEEN JUDICIALLY ORDERED TO RETAIN THE DEBT?

Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid (Article 1243). The judicial order in this case may have been prompted by an order of attachment, injunction or garnishment

Page 78 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

CAN

A DEBTOR OF A THING COMPEL THE CREDITOR TO RECEIVE A DIFFERENT ONE?

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 (Article 1244, par. 1). 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 (Article 1244, par 2). UNDER

WHAT CIRCUMSTANCES MAY A DEBTOR COMPEL THE CREDITOR TO ACCEPT

A THING DIFFERRENT FROM THAT WHICH WAS AGREED UPON?

a) When the obligation is a facultative obligation. Here, one prestation has been agreed upon; but the obligor may render another in substitution of the same (Article 1206). b) When there is another contract entered into between the parties resulting in dacion en pago or novation; c) When there is a waiver made by the creditor as when he accepted a thing other than what was agreed upon. This constitutes estoppel. WHAT

IS DATION IN PAYMENT?

Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales (Article 1245) It is a mode of extinguishing an obligation whereby the debtor alienates in favor of the creditor, property for the satisfaction of monetary debt. WHAT

ARE THE REQUISITES FOR A VALID DATION IN PAYMENT?

a) Consent of the creditor (for sales presupposes consent of both parties) b) It must not be prejudicial to the other creditor; c) The debtor must not have been declared insolvent by judicial decree. WHAT THINGS?

MUST BE DELIVERED IN OBLIGATIONS TO GIVE INDETERMINATE OR GENERIC

When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither

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can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration (Article 1246). WHO

PAYS FOR THE EXTRAJUDICIAL EXPENSES REQUIRED BY THE PAYMENT?

The extrajudicial expenses required by the payment shall be for the account of the debtor. With regard to judicial costs, the Rules of Court shall govern. Exception: When there is stipulation to the contrary (Article 1247). MAY

A

CREDITOR

BE

COMPELLED

TO

PARTIALLY

RCEIVE

THE

PRESTATIONS

CONSTITUTING THE OBLIGATION?

The creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make partial payments (Article 1248). EXCEPTIONS: a) When there is stipulation to this effect; b) When the different prestations are subject to different conditions or different terms; c) When the debt is in part liquidated and in part unliquidated, performance of the liquidated part may be insisted upon either by the debtor or creditor; d) When a joint debtor pays his share or the creditor demands the same; e) When a solidary debtor pays only the part demandable because the rest are not yet demandable on account of their being subject to different terms and conditions; f) In case of compensation, when one debt is larger than the other, it follows that a balance is left; g) When work is to be done by parts. WHAT

IS MEANT BY LEGAL TENDER?

Legal tender, within the meaning of Article 1249, refers to such currency which may be used for the payment of all debts, whether public or private. It is that which a debtor may compel a creditor to accept in payment of the debt whether private or public.

Page 80 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

IN

MONETARY OBLIGATIONS, IN WHAT CURRENCY SHALL PAYMENT BE MADE?

The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines (Article 1249). This has been modified by RA 529 which provides that obligations incurred after June 16, 1950, which are for the purpose of payment a foreign currency or an amount of Philippine money to be measured by gold or foreign currency, shall be null, void and of no effect. However, in such a case, only the stipulation with respect to the currency is void. The creditor can still demand payment in Philippine legal tender measured at the exchange rate prevailing not at the time of payment, but at the time of contracting or incurring the dent. RA 529 has in turn been amended by RA 4100, which took effect on June 1964 which provides that in import-export and other international banking, financial investment and industrial transactions, the parties’ agreement a to currency in which an obligation will be paid is binding. CAN

A MONETARY OBLIGATION BE PAID WITH PROMISSORY NOTES PAYABLE TO

ORDER, OR BILLS OF EXCHANGE, OR OTHER MERCANTILE DOCUMENTS?

As a general rule, no, except: a) When they have been cashed or, b) When through the fault of the creditor they have been impaired, as when the check its lost its value. c) When the creditor is in estoppel or he had previously promised he would accept a check. In the meantime, the action derived from the original obligation shall be held in abeyance (Article 1249, par. 2). A check, even a manager’s check, is not a legal tender, therefore the creditor cannot be compelled to accept payment through this means. IN

CASE

AN

EXTRAORDINARY

INFLATION

OR

DEFLATION

CURRENCY SHOULD SUPERVENE, WHAT VALUE WILL BE THE BASIS OF

PHILIPPINE PAYMENT? OF

THE

In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary (Article 1250).

Page 81 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

Note that this article has no more application today. The article speaks of the inflation or deflation of the currency stipulated, meaning the currency other than Philippine legal tender as allowed by Article 1249. But since today, no foreign currency can be stipulated under RA 529, it follows that literally construed, Article 1250 cannot be made used of for the present. By analogy or extension, it may be possible to include the extraordinary inflation or deflation of the Philippine currency. WHERE

MUST PAYMENT BE MADE?

RULES: a) Payment shall be made in the place designated in the obligation. b) There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted. c) In any other case the place of payment shall be the domicile of the debtor. d) If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. e) These provisions are without prejudice to venue under the Rules of Court (Article 1251).

WHAT

ARE THE

SUBSECTION 1 Application of Payments SPECIAL FORMS OF PAYMENT?

a. Application (or “imputation”) of payment (Article 1252) b. Dation in payment (“adjudication en pago” or datio in solutum) (Article 1245) c. Assignment in favor of creditors (“cession”) (Article 1255) d. Tender of payment or consignation (Articles 1256-1261) DEFINE

APPLICATION OF PAYMENT.

Application of payment is the designation of the debt to which the payment must be applied when the debtor has several obligation of the same kind in favor of the same creditor. It is the phrase applied to show which debt, out of two or more debts owing the same creditor, is being paid. WHAT

ARE THE REQUISITES OF APPLICATION OF PAYMENT?

Page 82 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

a. b. c. d. e.

There must be two or more debts; There must only one debtor and only one creditor; There must be two or more debts of the same kind; All of the debts must be due; and The amount paid by the debtor must not be sufficient to cover the total amount of all the debts. WHAT

ARE THE EXCEPTIONS TO THE RULE THAT IN APPLICATION OF PAYMENT,

THER MUST BE ONLY ONE DEBTOR AND ONLY ONE CREDITOR?

The case of a solidary debtor who may have obligations other than the solidary obligation in favor of the creditor to whom payment is made is sometimes given as an exception. Although there is no question that such a debtor can designate the debt to which the payment must be applied, yet, this doe not constitute an exception because of the principle of mutual agency existing among the solidary debtors. A real exception is the one given in Article 1792. Under this article, if a debtor is indebted to a partnership and also to the managing partner at the same time and both debts are already demandable, such debtor, if he pays, may apply the payment to his debt to the managing partner, provided that such debt is more onerous to him. Here, actually there are two creditors since the personality of the partnership is separate and distinct from that of the partners. TO

WHOM DOES THE RIGHT TO MAKE AN APPLICATION OF PAYMENT BELONG?

As a general rule, the right to make an application of payment belongs to the debtor. (Similar to a case where the obligation is subject to an alternative obligation or prestation, the choice as to which debt the payment is to be applied is given to the debtor. For this purpose, the debtor must make a declaration as to which debt should the payment be applied.) 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 be applied. But even this does not really constitute an exception, because the debtor may either accept or reject the application (Article 1252). The rule on application of payment by the debtor must conform to the general rules on payment provided for from Articles 1232 up to 1251. Thus if the debtor makes a declaration as to the particular debt (from among a number of debts) to which his payment is to be applied, the creditor can validly refuse such declaration or application if the payment is to be applied to a debt which will only partially pay the particular indebtedness. This is so because according to Article 1233,

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payment must, as a general rule, be always completely delivered or rendered, and, according to Article 1248, the creditor cannot be compelled partially to receive the prestation in which the obligation consists. The debtor must apply the payment to an indebtedness which, through such application, shall be completely extinguished. IF

THE DEBTS ARE NOT YET DUE, MAY THERE BE APPLICATION OF PAYMENT?

Yes, but only: a. If the parties so stipulate, or b. When the application of payment is made by the party (which may either be the debtor or the creditor) for whose benefit the term has been constituted (Article 1252). How is application made? a. The debtor makes the designation (Article 1252, par. 1) b. If not, the creditor makes it, by so stating in the receipt that he issues (Article 1251, par. 2) c. If neither the debtor nor the creditor has made the application, or if the application is not valid, then application is made by operation of law (Articles 1253, 1254) WHAT

IS THE RULE IF THE DEBTOR ACCEPTS FROM THE CREDITOR A RECEIPT IN

WHICH AN APPLICATION OF PAYMENT IS MADE?

The law provides that if the debtor accepts from the creditor a receipt in which an application of payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract (Article 1252, par. 2). It must be noted that the debtor must not only merely receive the receipt but he must accept the receipt. Thus, if A is indebted to B for P1, 000, P2, 000 and P900, and A pays B P500 without mentioning as to which debt the P500 will be applied and if B is agreeable to any partial payment, and issues a receipt indicating that the P500 shall be applied to the P1, 000 debt, and A readily accepts the said receipt, A cannot later complain that the P500 should have been applied to the P2, 000 debt unless there exists a cause to invalidate the contract in connection with the indebtedness in the amount of P1, 000. This is based on the doctrine of estoppel. However, if the indebtedness has been obtained through fraud or intimidation which is a cause to annul the contract, the debtor is not estopped from questioning the application.

Page 84 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

ONCE

AN APPLICATION OF PAYMENTS IS MADE, MAY IT BE REVOKED?

No, unless both parties agree. Even if both parties agree, however, still the revocation or change in the application will not be allowed if third persons would be prejudiced. WHAT

IS THE RULE OF THE DEBT PRODUCES INTEREST?

If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered (Article 1253). This article is merely directory, and not mandatory. Although interest attaches to the principal, the payment of both principal and interest, in effect, constitutes two payment by the debtor. In fact according to the law, the receipt of the principal by the creditor without reservation with respect to the interest, shall give rise to the presumption that the interest has been paid (Article 1176). WHAT

IS MEANT BY LEGAL APPLICATION OF PAYMENT?

(WHAT

IS THE RULE IF

THE PAYMENT CANNOT BE APPLIED IN ACCORDANCE WITH THE PRECEDING RULES, OR IF APPLICATION CAN NOT BE INFERRED FROM OTHER CIRCUMSTANCES?)

a. The debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied. b. If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately (Article 1254). EXAMPLES: a. Where there are various debts which are due and they were incurred at different dates, the oldest are more onerous. b. When one bears interest and the other does not, the former is more onerous. c. Where one is secured and the other is not, the former is more onerous. d. Where the debtor is bound as principal in one and as guarantor or surety in another, the former is more onerous. e. Where the debtor is bound as a solidary debtor in one and as the sole debtor in another, the former is more onerous.

WHAT

IS PAYMENT BY

SUBSECTION 2 Payment by Cession CESSION?

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Cession or assignment may be defined as a special form of payment whereby the debtor abandons all of his property for the benefit of his creditors in order that from the proceeds thereof the latter may obtain payment of their creditors. Article 1255 provides: The debtor may cede or assign his property to his creditors in payment of his debts. This cession, unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned. The agreements which, on the effect of the cession, are made between the debtor and his creditors shall be governed by special laws. WHAT

ARE ITS REQUSITES?

In order that the debtor can avail himself of this form of payment, it is essential that: a. There must be plurality of debts; b. There must be more than one creditor; c. There must be complete or partial or relative insolvency of the debtor; d. There is abandonment of all debtor’s property not exempt from execution (unless exemption is validly waived by the debtor) in favor of creditors; and e. It must be accepted by the creditor. WHAT

ARE THE DIFFERENT KINDS OF PAYMENT BY CESSION?

Payment by cession may either be contractual (voluntary) or judicial. The cession referred to in Article 1255 is contractual, while the cession which is regulated by the Insolvency Law, and which may be voluntary or involuntary, is judicial. WHAT

ARE THE EFFECTS OF VOLUNTARY ASSIGNMENT?

1. The creditors do not become the owners; they are merely assignees with authority to sell (If ownership is transferred, this becomes a datio in solutum). 2. The debtor is released up to the amount of the net proceeds of the sale, unless there is a stipulation to the contrary (Article 1255, 2nd sentence). The balance remains collectible.

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3. Creditors will collect credits in the order of preference agreed upon, or in default of agreement, in the order ordinarily established by law. DISTINGUISH

BETWEEN DATION IN PAYMENT AND PAYMENT BY CESSION.

1. As to number of parties: Whereas in dacion en pago there may be only one creditor, in payment by cession plurality of creditor is essential; 2. As to financial condition: Whereas in dacion en pago the debtor is not necessarily in a state of financial difficulty, in payment by cession the debtor is in a state of partial or relative insolvency. 3. As to object: Whereas in dacion en pago what is delivered by the debtor is merely a thing to be considered as the equivalent of the performance of the obligation, in payment by cession what is ceded by the debtor is the universality of all his property. 4. As to effect: Whereas in dacion en pago the payment extinguishes the obligation to the extent of the value of the thing delivered either as agreed upon or as may be proved, unless the silence of the parties signifies that they consider the delivery of the thing as the equivalent of the performance of the obligation, in payment by cession the effect is merely to release the debtor for the net proceeds of the things ceded or assigned, unless there is a contrary intention. OTHER

DISTINCTIONS:

DACION EN PAGO Does not affect all the properties

CESSION In general, affects all the properties of the debtor of Requires more than one creditor

Does not require plurality creditors Only specific or concerned creditor’s consent is required May take place during the solvency of the debtor Transfers ownership upon delivery This is really an act of novation

Requires the consent if all the creditors Requires full or partial insolvency Does not transfer ownership Not an act of novation

SUBSECTION 3 Tender of Payment and Consignation DEFINE

TENDER OF PAYMENT AND CONSIGNATION.

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Tender of payment consists in the manifestation made by the debtor to the creditor of his decision to comply immediately with his obligation. It is the act of offering the creditor what is due him together with a demand that the creditor accept the same. Consignation, on the other hand, 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 the tender of payment. It generally requires a prior tender of payment. DISTINGUISH

BETWEEN TENDER OF PAYMENT AND CONSIGNATION.

1. Tender of payment is the antecedent of consignation; in other words, while the first is the preparatory act, the second is the principal act which will produce the effects of payment. The priority of tender of payment is the attempt to make a private settlement before proceeding to the solemnities of consignation. 2. Tender of payment is by its very nature extrajudicial in character, while consignation is judicial. STATE THE RATIONALE FOR CONSIGNATION. The rationale for consignation is to avoid the performance of an obligation becoming more onerous to the debtor by reason of causes imputable to him. ` WHAT

ARE THE SPECIAL REQUISITES OF CONSIGNATION?

In order that consignation shall produce the effects of payment, it is not only essential that it must conform with all of the requisites of payment, but it is also essential that certain special requirements prescribed by law must be complied with. The debtor must show: 1. That the debt is due; 2. That there must be prior tender, unless tender is excused; 3. 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 causes stated by law for effective consignation without previous tender of payment exists (Article 1256); 4. That previous notice of the consignation had been given to the persons interested in the fulfillment of the obligation (Article 1256); 5. That the thing or amount due had been placed at the disposal of judicial authority (Article 1258, par. 1) accompanied by proof that tender had been duly made, unless tender is excused;

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6. That after the consignation had been made, the persons interested in the fulfillment of the obligation had been notified thereof (Article 1258, par. 2). WHAT

IS THE EFFECT OF TENDER WITHOUT CONSIGNATION?

Tender of payment without consignation does not extinguish the debt; consignation must follow. WHAT

ARE THE EXCEPTIONS TO THE RULE THAT BEFORE CONSIGNATION SHALL

PRODUCE THE EFFECTS OF PAYMENT, IT IS ESSENTIAL THAT THERE MUST BE A PREVIOUS TENDER OF PAYMENT?

Consignation alone shall produce the same effect in the following cases: (1) When the creditor is absent or unknown, or does not appear at the place of payment; (2) When he is incapacitated to receive the payment at the time it is due; (3) When, without just cause, he refuses to give a receipt; (4) When two or more persons claim the same right to collect; (5) When the title of the obligation has been lost (Article 1256).

BE

WHEN PROVED?

MUST THE SPECIAL REQUISTES OF A VALID AND EFFECTIVE CONSIGNATION

Under the law, after the consignation has been made, it is required that the debtor shall notify the creditor and all of the persons interested in the fulfillment of the obligation of such fact (Article 1258). It is at this stage that three possible situations may arise: 1. The creditor may accept the ting or amount deposited. In such a case, the question of payment is settled altogether. The question as to whether the consignation is valid or not becomes moot. 2. The creditor may refuse to accept the thing or amount deposited. In such as case, the debtor shall then bring an action against him in order to compel him to accept said thing or amount. In order that such action shall prosper, all of the requisites of a valid and effective consignation must be proved. 3. The creditor may neither accept nor impugn the consignation because he is not interested, or he is not known, or he is absent. In such a case, the debtor shall then file a motion in court asking for the cancellation of the obligation (Article 1260). In order that such motion shall be granted, all of the requisites of a valid and effective consignation must be proved.

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WHO

BEARS THE EXPENSES OF CONSIGNATION?

The expenses of consignation, when properly made, shall be charged against the creditor (Article 1259). WHAT

ARE THE EFFECTS OF CONSIGNATION DULY MADE?

1. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation (Article 1260). 2. The running of interest is suspended. WHEN

MAY THE DEBTOR WITHDRAW THE THING OR SUM CONSIGNED?

As a matter of right: Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force (Article 1260). As a matter of privilege: If, the consignation having been made, the creditor should authorize the debtor to withdraw the same, he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be released (Article 1261). SECTION 2 Loss of the Thing Due DEFINE

LOSS OF THE THING DUE.

In its strict sense, “loss of the thing due” means that the thing which constitutes the object of the obligation perishes or goes out of commerce of man, or disappears in such a way that its existence is unknown or it cannot be recovered (Article 1189, par. 2). In its broad sense, it means impossibility of compliance with the obligation through any cause. In other words, it is synonymous with what other codes term “impossibility of performance.” This is the sense in which it is understood in Articles 1262 to 1269.

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The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation (Article 1264). WHAT

REQUISITES

MUST CONCUR IN ORDER THAT AN OBLIGATION SHALL BE

EXTINGUISHED BY THE LOSS OR DESTRUCTION OF THE THING DUE?

a) The thing which is lost is determinate; b) The thing is lost without any fault of the debtor. If the thing is lost through the fault of the debtor, the obligation is transformed into an obligation to indemnify the oblige or creditor for damages; c) The thing is lost before the debtor has incurred in delay (Article 1262). WHAT

ARE THE EXCEPTIONS TO THE RULE ABOVE?

1. When by law, the obligor is liable for fortuitous events, (Article 1262, par. 2). 2. When by stipulation, the obligor is liable for fortuitous events, (Article 1262, par. 2). 3. When the nature of the obligation requires the assumption of risk (Article 1262, par. 2 & 1174). 4. When the loss of the thing is due to the fault of the debtor (Article 1262, par.1) 5. When the loss of the thing occurs after the debtor has incurred in delay (Article 1262, par. 1 & Article 1165, par. 3). 6. When the debtor promised to deliver the same thing to two or more persons who do not have the same interest (Article 1165, par. 3). 7. When the obligation is generic (Article 1263); except when the generic thing is delimited, or when the generic thing has already been segregated or set aside.. 8. When the debt of a certain and determinate thing proceeds from a criminal offense, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it. (Article 1268). WHAT

IS THE PRESUMPTION IF THE THING IS LOST IN THE POSSESSION OF THE

DEBTOR?

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 (Article 1265).

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IN

OBLIGATIONS

CONSTITUTES

THE

DO,

TO

OBJECT

OF

WHAT

THE

IS

THE

OBLIGATION

EFFECT

IF

BECOMES

THE

PRESTATION

LEGALLY

OR

WHICH

PHYSICALLY

IMPOSSIBLE?

The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor (Article 1266); provided that such impossibility was not due to his fault and that it took place before he has incurred in delay. CAN

THE SAME RULE BE APPLIED TO OBLIGATIONS NOT TO DO?

In rare or exceptional cases, the same rule applies to obligations not to do, such as when the obligor is compelled to do that which he had obligated himself to refrain from performing or doing. In such cases, his obligation is extinguished applying the same principle invoked in Article 1266. WHAT

IS THE EFFECT OF DIFFICULTY OF THE SERVICE BEYOND THE PARTIES’

CONTEMPLATION?

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 (Article 1267). WHAT

IS

THE

RIGHT

OF

THE

CREDITOR

WHEN

THE

OBLIGATION

HAS

BEEN

EXTINGUISHED BECAUSE OF THE LOSS OF THE THING?

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 (Article 1269). SECTION 3 Condonation or Remission of the Debt DEFINE

CONDONATION OR REMISSION.

Remission is an act of liberality by virtue of which the oblige, without receiving any price or equivalent, renounces the enforcement of the obligation, as a result of which it is extinguished in its entirety or in that part or aspect of the same to which the remission refers. It is the gratuitous abandonment by the creditor of his right. WHAT

REQUISITES

MUST CONCUR IN ORDER THAT AN OBLIGATION SHALL BE

EXTINGUISHED BY REMISSION?

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In order that there will be a remission or condonation which will result in the total or partial extinguishment of the obligation, it is essential that the following requisites must concur: a) The condonation or remission must be essentially gratuitous; b) There must be acceptance by the obligor. It may be made expressly or impliedly; and c) The obligation must be demandable. WHAT

RULES GOVERN REMISSION AND CONDONATION?

One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation. (Article 1270) WHAT

ARE THE DIFFERENT KINDS OF REMISSION?

Remission or condonation may be classified as follows: 1. AS TO FORM – It may be express or implied. It is express when it is made in accordance with the formalities prescribed by law for donations. It is implied when, although it is not made in accordance with the formality prescribed by law for donations, it can be deduced from the acts of the obligee or creditor. 2. AS TO EXTENT – It may be total or partial. It is total when the entire obligation is extinguished. It is partial when it refers to the principal or accessory obligation or to an aspect thereof which affects the debtor, as for instance solidarity. 3. AS TO CONSTITUTION – It may be inter vivos or mortis causa. The first refers to that which is constituted by agreement of the obligee and the obligor, in which case it partakes of a donation inter vivos (See Article 725, et. seq.); the second, on the other hand, refers to that which is constituted of the nature of a donation mortis causa (See Articles 935, 936 and 937). WHAT

ARE EXAMPLES OF IMPLIED REMISSION?

1. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action which the former had against the latter. If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold it by proving that the delivery of the document was made in virtue of payment of the debt. (Article 1271)

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2. Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved. (Article 1272) 3. It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing. (Article 1274) WHAT

IS THE EFFECT OF RENUNCIATION OF THE PRINCIPAL DEBT?

The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force. (Article 1273)

DEFINE

SECTION 4 Confusion or Merger of Rights CONFUSION.

Confusion may be defined as the merger of the characters of creditor and debtor in the same person by virtue of which the obligation is extinguished (Article 1275). It is the meeting in the same person of the qualities of creditor and debtor with respect to one and the same obligation. WHAT

REQUISITES

MUST CONCUR IN ORDER THAT AN OBLIGATION SHALL BE

EXTINGUISHED BY CONFUSION?

In order that there will be a confusion of rights which will result in the extinguishment of the obligation, it is essential that the following requisites must concur: 1. The merger of the characters of creditor and debtor must be in the same person (Article 1275); 2. It must be placed in the person of either the principal creditor or the principal debtor (Article 1276); and 3. It must be complete or definite. The requisite that the merger of rights of creditor and debtor must be complete and definite does not mean that the extinguishment of the obligation should be complete or total in character; it merely means that whether the merger refers to the entire obligation or only a part thereof, it must be of such a character that there will be a complete and definite meeting of all the qualities of creditor and

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debtor in the obligation or in the part or aspect thereof which is affected by the merger. WHAT WHAT

IS THE EFFECT OF MERGER IN THE PRINCIPAL DEBTOR OR CREDITOR?

IS THE EFFECT OF CONFUSION IN THE PERSON OF THE GUARANTORS?

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

IS THE EFFECT OF CONFUSION IN A JOINT OBLIGATION?

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

COMPENSATION.

Compensation is a mode of extinguishing in their concurrent amount those obligations of persons who in their own right are creditors and debtors of each other. It is a figurative operation of weighing two obligations simultaneously in order to extinguish them to the extent in which the amount of one is covered by the amount of the other. WHAT

REQUISITES MUST CONCUR IN ORDER THAT AN OBLIGATION SHALK BE

EXTINGUISHED BY COMPENSATION?

The essential requisites of compensation are: 1. There must be 2 parties who, in their own right, are principal creditors and principal debtors of each other (Articles 1278, 1279, No. 1); 2. Both debts must consist in money, or if the things due are fungibles (consumables), they must be of the same kind and quality (Article 1279, No. 2); 3. Both debts must be due (Article 1279, No. 3); 4. Both debts must be liquidated and demandable (Article 1279, No. 4); 5. There must be no retention or controversy commenced by third persons over either of the debts and communicated in due time to the debtor (Article 1279, No. 5); 6. The compensation must not be prohibited by law (Articles 1287, 1288).

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GIVE

EXAMPLES OF COMPENSATION PROHIBITED BY LAW.

The compensation of the following are prohibited: 1. Debts arising from a depositum (except bank deposits, which are by law considered as loans to the bank) (Articles 1287, 1980). 2. Debts arising from the obligation of a depositary (Article 1287) 3. Debts arising from the obligations of a bailee in commodatum (Article 1287). 4. Debts arising from a claim for future support due by gratuitous title (Article 1287). 5. Debts consisting in civil liability from a penal offense (Article 1288). 6. Damages suffered by a partnership thru the fault of a partner cannot be compensated with profits and benefits which he may have earned for the partnership by his industry (Article 1794). WHAT

ARE THE DIFFERENT KINDS OF COMPENSATION?

Compensation may be classified into: AS TO CAUSE: 1. LEGAL – when it takes effect by operation of law from the moment all of the requisites prescribed by law are present. This is the fixed type which is regulated by Articles 1278 and 1279. 2. VOLUNTARY – when the parties who are mutually creditors and debtors agree to compensate their respective obligations, even though all of the requisites for compensation may not then be present. 3. JUDICIAL – when it takes effect by judicial decree. This occurs, for instance, where one of the parties to a suit over an obligation has a claim for damages against the other and the former sets it off by proving his right to said damages and the amount thereof (Article 1283). AS

TO EFFECT:

1. TOTAL – when the debts to be compensated are equal in amount (Article 1281); 2. PARTIAL – when the debts to be compensated are not equal in amount (ibid).

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HOW

IS

COMPENSATION

DISTINGUISHED

FROM

PAYMENT,

CONFUSION

AND

COUNTERCLAIM?

Compensation may be distinguished from payment in the following ways: 1. The requisites prescribed by law for compensation are different from those prescribed by law for payment, 2. Compensation takes effect by operation of law, whereas payment takes effect by act of the parties. 3. Capacity to give and acquire is not necessary in compensation, but it is essential in payment. 4. Compensation is, as a rule, partial, whereas payment is, as a rule, complete and indivisible. Compensation may be distinguished form confusion in the following ways: 1. As to number of persons, in compensation there must be two persons who, in their own right, are creditors and debtors of each other; whereas in confusion there is only one person in whom is merged the qualities of creditor and debtor. 2. As to number of obligations, in compensation there must be at least 2; whereas in confusion there is only one. Compensation may be distinguished from set-off or counterclaim in the following ways: 1. Compensation requires that the 2 debts must consist in money, or if the things due are fungibles, they must be of the same kind and quality; but in counter-claim this is not necessary. 2. Compensation, as a general rule, requires that the debts must be liquidated, but counter-claim does not. 3. Compensation need not be pleaded, whereas a counter-claim must be pleaded to be effectual. MAY

A GUARANTOR SET UP COMPENSATION WITH RESPECT TO PRINCIPAL DEBT?

Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor (Article 1280). This is an exception to Article 1279, par. 1, because a guarantor is subsidiarily liable, nor principally bound. WHEN

IS THERE CONVENTIONAL OR VOLUNTARY COmpensation?

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When the parties may agree upon the compensation of debts which are not yet due (Article 1282). Here the requisites mentioned in Article 1279 do not apply. WHEN

IS THERE JUDICIAL COMPENSATION OR SET-OFF?

If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof. (Article 1283) Pleading and proof of the counter-claim must be made. All the requisites mentioned in Article 1279 must be present except that at the time of pleading, the claim need not yet be liquidated. The liquidation (or fixing of the proper sum) must be made in the proceedings. MAY ANNULABLE?

THERE BE COMPENSATION IF ONE OR BOTH DEBTS ARE RESCISSIBLE OR

When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided (Article 1284). This is so because these debts are valid until rescinded or voided, hence compensation is allowed. WHAT

IS THE EFFECT OF ASSIGNMENT ON COMPENSATION OF DEBTS?

1. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation. 2. If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones. 3. If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. (Article 1285) WHEN

IS THERE COMPENSATION BY OPERATION OF LAW?

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. (Article 1286)

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This takes place 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. (Article 1290) WHAT

RULE

SHOULD

BE

APPLIED

IF

A PERSON SHOULD

HAVE

AGAINST

HIM

SEVERAL DEBTS WHICH ARE SUSCEPTIBLE OF COMPENSATION?

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. (Article 1289) SECTION 6 Novation DEFINE

NOVATION.

Novation is the substitution or change of an obligation by another, resulting in its extinguishment or modification, either by: 1. Changing its object or principal conditions, or 2. By substituting another in place of the debtor, or 3. By subrogating a third person in the rights of the creditor (Article 1291). It is one of the modes of extinguishing obligations through the creation of a new one effected by the change or substitution of an obligatory relation by another with the intention of substantially extinguishing or modifying the same. WHAT

ARE THE KINDS OF NOVATION?

Novation may be classified into: 1. AS

TO ITS ESSENCE

– it may be:

a) Objective or real – when it refers to the change either in the cause, object of principal conditions of the obligation (Article 1291, No. 1); b) Subjective or personal – when the substitution of another in the person of the debtor or to the subrogation of a third person in the rights of the creditor (Article 1291, Nos. 2 and 3). Kinds:

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a. Passive – when there is substitution of the debtor. b. Active – when there is subrogation in the rights of the creditor. c. Mixed – when there is combination of objective and subjective novation. 2. AS

TO ITS FORM

– it may be:

a) Express – when it is declared in unequivocal terms that the obligation is extinguished by a new one which substitutes the same. b) Tacit – when the old and the new obligations are incompatible with each other on every point (Article 1292). 3. AS TO ITS EXTENT OR EFFECT – it may be total or partial, depending upon whether there is an absolute extinguishment of the old obligation or merely a modification. WHAT

REQUISITES

MUST

CONCUR

IN

ORDER

THAT

AN

OBLIGATIN

SHALL

BE

EXTINGUISHED OR MODIFIED BY NOVATION?

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

A previous valid obligation; Agreement of the parties to the new obligation; Extinguishment of the old obligation; and Validity of the new obligation (Tiu Siuco vs. Habana, 45 Phil. 707). WHEN

CAN AN OBLIGATION BE IMPLIEDLY EXTINGUISHED BY ANOTHER WHICH

SUBSITUTE THE SAME?

In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. (Article 1292) The test of incompatibility between the old and the new obligations is to determine whether or not both of them can stand together, each having its own independent existence. If they can stand together, there is no incompatibility; consequently, there is no novation. If they cannot stand together, there is incompatibility; consequently, there is novation (Borja vs. Mariano, 66 Phil. 93;

Page 100 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

Guerrero vs. Court of Appeals, 29 SCRA 791; Millar vs. Court of appeals, 38 SCRA 642). SUPPOSE

THAT IN A SECOND AND NEW CONTRACT, THE DEBTOR ACKNOWLEDGES

OR RATIFIES THE OLD CONTRACT, IS THERE NOVATION?

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

THAT IN THE SECOND AND NEW CONTRACT, THERE IS A POSTPONEMENT

OF THE DATE OF PAYMENT OR AN EXTENSION OF THE PERIOD OF PAYMENT, IS THERE A NOVATION?

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

THAT IN A SECOND AND NEW CONTRACT, THERE IS ANOTHER METHOD OF

PAYMENT AGREED UPON, OR THERE IS AN ADDITIONAL SECURITY, IS THERE A NOVATION?

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

THAT IN A SECOND AND NEW CONTRACT, A SURETY BOND IS FILED, OR A

THIRD PERSON ASSUMES PAYMENT OF THE OBLIGATION AND THE CREDITOR ACCEPTS PARTIAL PAYMENTS FORM SUCH THIRD PERSON, IS THERE A NOVATION?

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

Page 101 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

WHAT ARE THE 2 FORMS OF NOVATION BY DEBTOR? DEFINE THEM AND GIVE THEIR ESSENTIAL

SUBSTITUTION OF THE PERSON OF THE REQUISITES.

There are 2 forms of novation by substitution: a. Expromision – If the substitution of debtors is effected with the consent of the creditor at the instance of the new debtor even without the knowledge or against the will of the debtor. There are two kinds of substitution by expromision: a) Substitution with the knowledge and consent of the old debtor; and b) Substitution without the knowledge or against the will of the old debtor. b. Delegacion – If the substitution of debtors is effected with the consent of the creditor at the instance of the old debtor with the concurrence of the new debtor. In other words, delegacion refers to the substitution of debtors effected when the original debtors offers and the creditor accepts a third person who consents to the substitution. REQUISITES

OF EXPROMISION:

a. The initiative for the substitution must emanate from the new debtor; and b. There must be consent of the creditor to the substitution. REQUISITES OF DELEGACION: a) The initiative for the substitution must emanate from the old debtor; b) Consent of the debtor; and c) Acceptance by the creditor. IN

EXPROMISION,

SUPPOSE

THAT

THE

NEW

DEBTOR

EVENTUALLY

PAID

THE

OBLIGATION WHEN IT BECAME DUE AND DEMANDABLE, WHAT ARE THE RIGHTS WHICH ARE AVAILABLE TO HIM?

According to Article 1293, payment by the new debtor gives him the right mentioned in Article 1236 and 1237. Consequently – a) If the substitution was effected with the knowledge and consent of the original debtor; and consequently, payment is made by the new debtor with or without the knowledge and consent of the original debtor, the new debtor cannot demand reimbursement form the original debtor the entire amount which he has paid

Page 102 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

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

DELEGACION,

SUPPOSE

THAT

THE

NEW

DEBTOR

EVENTUALLY

PAID

THE

OBLIGATION WHEN IT BECAME DUE AND DEMANDABLE, WHAT ARE THE RIGHTS WHICH ARE AVAILABLE TO HIM?

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

EXPROMISION, IF THE NEW DEBTOR IS UNABLE TO PAY THE OBLIGAION BY

REASON OF INSOLVENCY, CAN THE CREDITOR THEN PROCEED AGAINST THE OLD DEBTOR FOR PAYMENT?

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

DELEGACION, IF THE NEW DEBTOR IS UNABLE TO PAY THE OBLIGATION BY

REASON OF INSOLVENCY, CAN THE CREDITOR THEN PROCEED AGAINST THE OLD DEBTOR FOR PAYMENT?

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If the substitution was effected by delegacion, according to Article 1295, the right of action of the creditor can no longer be revived except in the following cases: a) When the insolvency of the new debtor (delegado) was already existing and of public knowledge at the time when the original debtor (delegante) delegated his debt; b) When such insolvency was already existing and known to the original debtor (delegante) when he delegated his debt. PURPOSE

OF THE TWO EXCEPTIONS:

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

IS THE EFFECT OF NOVATION ON ACCESSORY OBLIGATION?

When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent. (Article 1296) This Article applies to extinctive novation. If the novation is merely modificatory, the rules as to guarantors who did not consent are as follows: a. If the modified obligation is more onerous, they are liable only for the original obligation; b. If the modified obligation is now less onerous, the guarantors and sureties are still responsible. WHAT IS THE EFFECT OF NOVATION IF IF

THE

OLD

OBLIGATION

WAS

VOID,

OR

(1) (3)

THE NEW OBLIGATION IS VOID OR IF

THE

ORIGINAL

OBLIGATION

(2) WAS

CONDITIONAL?

a) If the new obligation is void, the original one shall subsist, unless the parties intended that the former relation should be extinguished in any may be agreed upon. (Article 1297) b) The novation is void if the original obligation was void, except when annulment may be claimed only by the debtor, or when ratification validates acts which are voidable. (Article 1298)

Page 104 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

c) 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. (Article 1299) DEFINE SUBROGATION.

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

2 FORMS CREDITOR?

ARE THE

OF NOVATION BY SUBROGATING A THIRD PERSON IN THE

a) CONVENTIONAL SUBROGATION – that which takes place by the agreement of the original creditor, the third person substituting the original creditor and the debtor (Articles 1300 and 1301). b) LEGAL SUBROGATION – that which takes place by operation of law (Articles 1300 and 1302). DISTINGUISH

BETWEEN

CONVENTIONAL

SUBROGATION

AND

ASSIGNMENT

OF

RIGHTS.

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

ARE THE DIFFERENT EXCEPTIONS TO THE RULE THAT LEGAL SUBROGATION

CANNOT BE PRESUMED?

Page 105 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

a) When a creditor pays another creditor who is preferred even without the debtor’s knowledge; b) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; and c) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter’s share (Article 1302) WHAT

IS THE EFFECT OF SUBROGATION?

If the subrogation is total, it transfers to the person subrogated the credit with all the rights thereto appertaining either against the debtor or, against third persons, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation. If the subrogation is partial, the same rule is applicable, but the creditor to whom partial payment has been made may exercise his right for the remainder. In other words, both the right of the subrogee and the right of the creditor shall co-exist. In case of conflict between the 2, however, the right of the latter shall be preferred (Article 1304).

TITLE II CONTRACTS CHAPTER 1 GENERAL PROVISIONS DEFINE

CONTRACTS.

A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service (Article 1305). A contract is defined as a juridical convention manifested in legal form, by virtue of which one or more persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to do, or not to do (Jardine Davies vs. CA, G.R. No. 12066, June 19, 2000).

Page 106 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

In its broadest sense, a contract has likewise been defined as an agreement whereby at least one of the parties acquires a right, either in rem or in personam, in relation to some person, thing, act or forbearance. DISTINGUISH

A CONTRACT FROM AN OBLIGATION.

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

ARE THE ELEMENTS OF A CONTRACT?

The elements of a contract may be classified as follows: a. ESSENTIAL – The essential elements are those without which there can be no contract. The elements are, in turn, subdivided into: a) Common – those which are present in all contracts, such as consent, object certain and cause. b) Special – those which are present only in certain contracts, such as delivery in real contracts or form in solemn ones. c) Extraordinary – those which are peculiar to a specific contract, such as the price in a contract of sale. b. NATURAL - The natural elements are those which are derived from the nature of the contract and ordinarily accompany the same. They are presumed by law, although they can be excluded by the contracting parties if they so desire. Thus, warranty against eviction is implied in a contract of sale, although the contracting parties may increase, diminish or even suppress it. c. ACCIDENTAL – The accidental elements are those which exist only when the parties expressly provided for them for the purpose of limiting or modifying the normal effects of the contract. They are called accidental because they may be present or absent, depending upon whether or not the parties have agreed upon them. Examples of these are conditions, terms and modes. WHAT A.

ARE THE CLASSIFICATIONS OF CONTRACTS?

ACCORDING

TO PERFECTION OR FORMATION:

a) Consensual – perfected by mere consent; example – sale

Page 107 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

b) Real – perfected by delivery; examples – depositum, pledge, commodatum c) Formal or solemn – those were special formalities are essential before the contract may be perfected; example – donation inter vivos of real property requires for its validity a public instrument. B.

ACCORDING

TO CAUSE OR EQUIVALENT OF THE VALUE OF PRESTATIONS:

a) Onerous – when there is an interchange of equivalent valuable consideration b) Gratuitous or lucrative – this is free, this one party receives no equivalent prestation c) Remunerative – one where one prestation is given for a benefit or service that had been rendered previously. C. ACCORDING TO IMPORTANCE OF ONE UPON ANOTHER: a) Principal – the contract may stand alone by itself; example, sale, lease b) Accessory – this depends for its existence upon another contract; example, mortgage where the principal contract is one of loan. c) Preparatory – here, the parties do not consider the contract as an end by itself, but as a means thru which future transaction or contracts may be made; examples, agency, partnership D.

ACCORDING

TO THE PARTIES OBLIGATED:

a) Unilateral – where only one of the parties has an obligation; example, commodatum b) Bilateral – where both parties are required to render reciprocal prestations; example, sale E.

ACCORDING

TO THEIR DESIGNATION:

a) Nominate – where the contract is given a particular or special name like commodatum, partnership, agency, sale, deposit b) Innominate – those which are not given any special name; they lack individuality and are not regulated by special provisions of law. These contracts shall be regulated by the stipulation of the parties; by the general principles of obligations and contracts, by the rules governing the most analogous nominate contracts, and by the customs of the place. Example:

Page 108 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

1) Du ut des - I give that you give. 2) Du ut facias – I give that you do. 3) Facio ut facias – I do that you do. F.

ACCORDING

TO THE RISK OF FULFILLMENT:

a) Commulative – where the parties contemplate a real fulfillment; therefore, equivalent values are given, like sale, lease b) Aleatory – where the fulfillment is dependent upon chance, thus the values may vary because of the risk or chance, like an insurance contract. G.

ACCORDING

TO THE TIME OF PERFORMANCE OR FULFILLMENT:

a) Executed – one completed at the time the contract is entered into, that is, the obligations are complied with at this time; example, a sale of property which has already been delivered and which has already been paid for. b) Executory – one where the prestations are to be complied with at some future time; example, a perfected sale where the property has not yet been delivered and where the price has not yet been given H.

ACCORDING

TO SUBJECT MATTER:

a) Contracts involving things (like sale) b) Contracts involving rights and credits (like usufruct or assignment of credits) c) Contracts involving services (like agency, contract of common carrier) I.

ACCORDING

TO OBLIGATIONS IMPOSED AND REGARDED BY THE LAW:

a) Ordinary – like sale b) Institutional – like contract of J.

ACCORDING

MARRIAGE

TO THE EVIDENCE FOR ITS PROOF:

a) Those requiring merely oral or parol evidence b) Those requiring written proof (like contracts enumerated under the Statute of Frauds) K.

ACCORDING CONTRACT:

TO THE NUMBER OF PERSONS ACTUALLY AND PHYSICALLY ENTERING INTO THE

Page 109 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

a) Ordinary – where two parties are represented by different persons, like sale b) Auto-contracts – where only one person represents two opposite parties but in different capacities L.

ACCORDING CONTRACT:

TO THE NUMBER OF PERSONS WHO PARTICIPATED IN THE DRAFTING OF THE

a) Ordinary – like an ordinary sale b) Contract of adhesion – like one prepared by a real estate company for the sale of real estate; or one prepared by an insurance company where the buyer or the person interested in being insured signifies his consent by signing the contract M. ACCORDING TO THE NATURE OF THE CONTRACT: a) Personal b) Impersonal WHAT

ARE THE DIFFERENT PHASES/ STAGES IN THE LIFE OF A CONTRACT?

a) PREPARATION OR GENERATION – where the parties are progressing with their negotiations; they have not yet arrived to any definite agreement, although there may have been a preliminary offer and bargaining. Negotiation covers the period from the time the prospective contracting parties indicate interest in the contract to the time the contract is concluded (perfected). b) PERFECTION OR BIRTH – where the parties have at long last came to a definite agreement, the elements of definite subject matter and valid cause have been accepted by mutual consent. The perfection takes place upon the concurrence of the essential elements thereof. c) CONSUMMATION – where the terms of the contract are performed, and the contract may be said to have been fully executed. The stage of consummation begins when the parties perform their respective undertakings under the contract culminating in the extinguishment thereof. WHAT

ARE THE BASIC PRINCIPLES OR CHARACTERISTICS OF A CONTRACT?

a) FREEDOM TO STIPULATE OR AUTONOMY OF CONTRACTS – the contracting parties are free to enter into a contract and to establish such stipulations, clauses, terms and conditions as they may deem convenient provided they are not contrary to law, morals, good customs, public order, or public policy

Page 110 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

b) OBLIGATORY FORCE OR CHARACTER OF CONTRACTS AND COMPLIANCE IN GOOD FAITH – once the contract has been perfected, it shall be of obligatory force upon both of the contracting parties c) PERFECTION BY MERE CONSENT as a rule d) BOTH PARTIES ARE MUTUALLY BOUND OR MUTUALLY OF CONTRACTS – the essential equality of the contracting parties whereby the contract must bind both of them e) RELATIVITY – generally, it is binding only between the parties, their assigns and heirs. WHAT

ARE THE LIMITATIONS UPON THE RIGHT OF THE CONTRACTING PARTIES TO

ESTABLISH SUCH STIPULATIONS, CLAUSES, TERMS, AND CONDITIOS AS THEY MAY DEEM CONVENIENT?

The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy (Article 1306). This is the principle of freedom to stipulate or autonomous nature of contracts. Freedom to stipulate terms and conditions is the essence if the contractual system provided such stipulations are not contrary to law, morals, good customs, public order, or public policy. This freedom also prohibits a party from coercing or intimidating or unduly influencing another to enter into a contract. WHAT LAWS GOVERN CONTRACTS? It is a rule that only laws existing at the time of the execution of a contract are applicable thereto and that later statutes do not govern contracts unless the latter is specifically intended to have a retroactive effect. A later law which enlarges, abridges or in any manner changes the intent of the parties to the contract necessarily impairs the contract itself and cannot be given retroactive effect without violating the constitutional prohibition against impairment of contracts. However, non-impairment of contracts or vested rights clauses will have to yield to the superior and legitimate exercise by the State of police power. WHAT REGULATED?

ARE

THE

KINDS

OF

INNOMINATE

CONTRACTS

1) Du ut des - I give that you give. 2) Du ut facias – I give that you do. 3) Facio ut facias – I do that you do Innominate contracts shall be regulated by:

AND

HOW

ARE

THEY

Page 111 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

1) The stipulations of the parties, 2) The provisions of Titles I and II of this Book, 3) The rules governing the most analogous nominate contracts, and 4) The customs of the place (Article 1307). WHAT

IS MEANT BY MUTUALITY OF CONTRACTS?

The mutuality of contracts refers to the position of essential equality which must be occupied by both of the contracting parties in relation of the contract. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them (Article 1308). CAN

THE DETERMINATION OF THE PERFORMANCE BE LEFT TO A THIRD PERSON?

The determination of the performance may be left to a third person, whose decision shall not be binding until it has been made known to both contracting parties (Article 1309). WHEN IS THE DECISION OF THE THIRD PERSON BINDING?

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

IS MEANT BY RELATIVITY OF CONTRACTS?

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

ARE

THE

EXCEPTIONS

TO

THE

PRINCIPLE

OF

RELATIVITY

(WHERE

A

CONTRACT MAY EITHER FAVOR OR PREJUDICE A THIRD PERSON)?

a) Where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision

Page 112 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

b)

c)

d) e)

f) g)

of law. The heir is not liable beyond the value of the property he received from the decedent (Article 1311). Stipulation Pour Autrui – where a contract contains a beneficial stipulation in favor of a third person provided he communicated his acceptance to the obligor before its revocation. (Article 1311, par. 2). In contracts creating real rights where third persons come into possession of the object of the contract, subject to the provisions of the Mortgage Law and the Land Registration Laws (Article 1312). Where the contract is entered into in order to defraud a third person, in which case, creditors are protected in cases of contracts intended to defraud them (Article 1313). Where the third person induces a contracting party to violate his contract. The third person who induces another to violate his contract shall be liable for damages to the other contracting party (Article 1314). This is called TORT INTERFERENCE. Where, in some cases, third persons may be adversely affected by a contract where they did not participate (Articles 2150, 2151). Where the law authorizes the creditor to sue on a contract entered into by his debtor (Accion Directa). WHAT

IS

MEANT

BY

STIPULATION

POUR

AUTRUI?

WHAT

REQUISITES

MUST

CONCUR IN ORDER THAT SUCH A STIPULATION MAY BE ENFORCED?

A stipulation pour autrui is a stipulation in a contract, clearly and deliberately conferred by the contracting parties as a favor upon a third person who must accept it. Before such a stipulation may be enforced, it is necessary that the following requisites must concur: That it must be for the benefit or interest of the third person; The stipulation must be a part, not the whole of the contract; That such benefit or interest must not be merely incidental; That the contracting parties should have clearly and deliberately conferred such benefit or interest upon the third person; e) That neither of the contracting parties bears the legal representation or authorization of the third party; and f) That the third person should have communicated his acceptance or interest to the obligor before its revocation (Article 1311, par. 2). a) b) c) d)

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

Page 113 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

WHAT

ARE THE REQUISITES FOR TORT INTERFERENCE?

a) Existence of a valid contract; b) Knowledge on the part of the third person of the existence of contract; and c) The interference of the third person is without legal justification or excuse. HOW

ARE CONTRACTS PERFECTED?

Distinguish: a) If the contract is consensual (Consensuality of Contracts) – Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law (Article 1315). b) If the contract is realReal contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation (Article 1316). MAY

A PERSON CONTRACT IN THE NAME OF ANOTHER?

WHAT

ARE THE EFFECTS?

No one may contract in the name of another, except when 1. He has been authorized or 2. Unless he has by law a right to represent him, or 3. Unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party (Article 1317). A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable (Article 1317, par 2.).

ESSENTIAL

CHAPTER 2 REQUISITES OF CONTRACTS

Page 114 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

GENERAL PROVISIONS WHAT

ARE THE ESSENTIAL REQUISITES OF A CONTRACT?

There is no contract unless the following requisites concur: (1) (2) (3)

Consent of the contracting parties; Object certain which is the subject matter of the contract; Cause of the obligation which is established (Article 1318).

This applies to consensual contracts. If the contract is real, a fourth requisite – delivery – is required, if the contract is formal or solemn, there must be compliance with the formalities required by law. When the law uses the word “concur”, it means that all the three (3) requisites must be present. The absence of one requisite negates the existence of a contract. SECTION 1 CONSENT WHAT

IS MEANT BY CONSENT?

As applied to contracts, consent signifies the concurrence of the wills of the contracting parties with respect to the object and the cause which shall constitute the contract. It is the concurrence of the will of the offerer and the acceptor as to the thing and the cause which constitute a contract. An offer is a manifestation of a willingness to enter into a bargain so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it. It is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract (Article 1319). WHAT ARE THE REQUISITES OF CONSENT?

In order that there is consent, the following elements must concur: 1. The consent must be manifested by the concurrence of the offer and the acceptance (Articles 1319-1326).

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2. The contracting parties must possess the necessary legal capacity (Articles 1327-1329) 3. The consent must be intelligent, free, spontaneous and real (Articles 1330-1346). The first is expressly stated in the Code; the second and third are implied. WHEN

ARE CONTRACTS PERFECTED?

In general, contracts are perfected from the moment there is a manifestation of the concurrence between the offer and the acceptance with respect to the object and the cause which shall constitute the contract (Article 1319, par. 1). However, if the acceptance is made by letter or telegram, we must distinguish. According to Article 1319, par. 2, the contract is perfected from the moment that the offeror has knowledge of such acceptance. The said article provides that “Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. An acceptance may be express or implied (Article 1320). WHAT ARE THE DIFFERENT THEORIES AS APPLIED TO PERFECTION OF CONTRACTS? There are actually four different theories which have been advanced in order to pin-point the exact moment when a contract is perfected if the acceptance by the offeree is made by a letter or telegram. They are: 1. MANIFESTATION THEORY – the contract is perfected from the moment the acceptance is declared or made. This is the theory which is followed by the Code of Commerce. 2. EXPEDITION THEORY – the contract is perfected from the moment the offeree transmits the notification of acceptance to the offeror, as when the letter is placed in the mailbox. This is the theory which is followed by the majority if American courts. 3. RECEPTION THEORY – the contract is perfected the moment that the notification of acceptance is in the hand of the offeror in such a manner that he can under conditions, procure the knowledge of its contents, even if he is not able actually to acquire such knowledge by reason of absence, sickness or

Page 116 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

some other cause. This is the theory which is followed by the German Civil Code. 4. COGNITION THEORY – the contract is perfected from the moment the acceptance comes to the knowledge of the offeror. This is the theory followed in the Philippines as provided by Article 1319 of the Civil Code. “X

SENT A LETTER TO

DAYS AFTER RECEIPT,

Y

X X’S

SENT

OF ACCEPTANCE REACHED

Y

AND OFFERED HIS HOUSE AND LOT FOR SALE.

TWO

A LETTER ACCEPTING THE OFFER, BUT WHEN THE LETTER RESIDENCE, HE WAS ALREADY DEAD.

WAS

THERE A

MEETING OF THE MINDS?”

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

THE ACCEPTANCE WAS COMMUNICATED TO THE AGENT OF

X

WHO WAS

ALIVE AT THE TIME HIS AGENT CAME TO KNOW OF SUCH ACCEPTANCE, IS THERE A BINDING CONTRACT?”

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

THERE IS AN OFFER AND THERE IS AN ACCEPTANCE WITH CONDITIONS, IS THERE

A PERFECTED CONTRACT?

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

ARE THE THINGS THAT MAY BE FIXED BY THE OFFEROR?

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

IS THERE ACCEPTANCE WHEN OFFER IS MADE THRU AN AGENT?

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

DOES AN OFFER BECOME INEFFECTIVE?

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An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed (Article 1323) The phrase “before acceptance is conveyed” means before acceptance has come to the actual knowledge of the offeror. WHAT

IS THE NATURE AND CONCEPT OF A CONTRACT OF ADHESION?

A contract of adhesion is one where its terms are prepared by only one party while the other party merely affixes his signature signifying his adhesion thereto. Such contracts are not void in themselves. They are binding as ordinary contracts. However, contracts of adhesion are construed against the party preparing such contracts. WHAT

IS AN OPTION?

It is a contract granting a person the privilege to buy or not to buy certain objects at anytime within the agreed period at a fixed price. The contract of option is a separate and distinct contract from the contract which the parties may enter into upon the consummation of the contract. Therefore, an option must have its own cause or consideration, a cause distinct from the selling price itself. WHAT IS THE RULE ON OPTIONS? When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised (Article 1324). Thus, we must distinguish between the effect of an option which is without a consideration and one which is founded upon a consideration upon the right of the offeror to withdraw his offer or proposal. If the option is without any consideration, the offeror may withdraw his offer by communicating such withdrawal to the offeree at any time before acceptance; if it is founded upon a consideration, the offeror can not withdraw his offer. Upon the expiration of the option period and the person given such option does not manifest his or her acceptance, the offeror may offer the intended contract to somebody else. DISTINGUISHED

FROM EARNEST MONEY:

Option money in an option contract must be differentiated from an earnest money. Earnest money is considered part of the price in a

Page 118 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

contract of sale and can be proof of perfection of the contract. However, it is not the giving of the earnest money per se but the proof of the concurrence of all the essential elements of the contract of sale which establishes the existence of a perfected sale. WHAT

IS

THE

RULE

WITH

RESPECT

TO

BUSINESS

ADVERTISEMENTS

AND

ADVERTISEMENTS FOR BIDDERS?

a) Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer (Article 1325). b) Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears (Article 1326). WHO

ARE INCAPACITATED TO GIVE THEIR CONSENT?

The following cannot give consent to a contract: a) Unemancipated minors; b) Insane or demented persons, and deaf-mutes who do not know how to write (Article 1327) ; c) Deaf-mutes who do not know how to write; d) Married women of age in cases specified by law; e) Persons suffering from civil interdiction; and f) Incompetents under guardianship (Rules 93-94, Rules of Court). The incapacity declared in article 1327 is subject to the modifications determined by law, and is understood to be without prejudice to special disqualifications established in the laws (Article 1329). Under the Family Code, emancipation takes place by the attainment of the age of majority and, unless otherwise provided, majority commences at the age of eighteen years. WHAT

ARE THE EXCEPTIONS TO THE RULE THAT A CONTRACT ENTERED INTO BY AN

UNEMANCIAPTED

MINOR

WITHOUT

THE

CONSENT

OF

HIS

PARENTS

OR

GUARDIAN

IS

VOIDABLE?

a) Where the contract is entered into by a minor who misrepresents his age, applying the doctrine of estoppel; b) Where the contract involves the sale and delivery of necessaries to the minor (Article 1489, par. 2); c) Where it involves a natural obligation and such obligation is voluntarily fulfilled by the minor (Articles 1426 and 1427);

Page 119 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

WHAT IS THE STATUS OF A CONTRACT ENTERED INTO DURING LUCID INTERVALS, IN A STATE OF DRUNKENESS OR DURING HYPNOTIC SPELLS, OR WHEN CONSENT WAS GIVEN THROUGH MISTAKE, VIOLENCE, INTIMIDATION, UNDUE INFLUENCE OR FRAUD?

Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable (Article 1328). Lucid interval is that period of time when an insane person acts with reasonable understanding, comprehension and discernment with respect to what he is doing. Contracts entered into a state of drunkenness may likewise be annullable. However, the intoxication must be of such character as to perpetuate undue advantage over the drunken person. A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable (Article 1330) WHAT

ARE THE VICES OF CONSENT?

a) VICES OF THE WLL - mistake, violence, intimidation, undue influence, or fraud (Article 1330) b) VICES OF DECLARATION – comprehends all forms of simulated contracts. WHAT

ARE THE REQUISITES IN ORDER THAT MISTAKE MAY INVALIDATE CONSENT?

In order that mistake may invalidate consent, it should refer to: a) The substance of the thing which is the object of the contract, or b) Those conditions which have principally moved one or both parties to enter into the contract. DEFINE

MISTAKE OF FACT AND MISTAKE OF LAW.

There is mistake of fact when one or both of the contracting parties believe that a fact exists when in reality it does not, or that such fact does not exist when in reality it does. On the other hand, there is a mistake of law when one or both of the contracting parties arrive at an erroneous conclusion regarding the interpretation of a question of law or the legal effects of a certain act or transaction. WHICH VOIDABLE?

OF THESE MISTAKES CAN VITIATE CONSENT RENDERING THE CONTRACT

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As a general rule, it is only a mistake of fact which will vitiate consent, thus rendering the contract voidable; a mistake of law, on the other hand, does not render the contract voidable because of the wellknown principle that ignorance of the law does not excuse anyone from compliance therewith. WHAT MISTAKES OF FACT WILL RENDER A CONTRACT VOIDABLE?

a) MISTAKE

AS TO THE OBJECT OF THE CONTRACT

(Error in re) – This may refer to:

1) Mistake as to the identity of the thing, or 2) Mistake as to the substance of the thing, or 3) Mistake as to the condition of the thing, provided such condition has principally moved one or both of the parties to enter into the contract; or 4) Mistake as to the quantity of the thing, provided that the extent or dimension of the thing was one of the principal reasons of one or both of the parties for entering into the contract. B)

MISTAKE

AS TO PERSON:

1) Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or qualifications have been the principal cause of the contract. 2) A simple mistake of account shall give rise to its correction (Article 1331). WHAT

IS THE RULE IN CASE OF INABILITY TO READ OR UNDERSTAND?

When one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former (Article 1332). WHAT

IS THE EFFECT OF KNOWLEDGE OF DOUBT OR RISK?

There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract (Article 1333). It does not therefore vitiate consent. IS

THERE ANY EXCEPTION TO THE RULE THAT A MISTAKE OF LAW CANNOT VITIATE

CONSENT RENDERING THE CONTRACT VOIDABLE?

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Mistake of law as a rule will not vitiate consent? There is however an exception to this rule. According to Article 1334, mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent. Three requisites are therefore necessary: a) The mistake or error must be with respect to the legal effect of an agreement; b) The mistake or error must be mutual; and c) The real purpose of the parties must be frustrated. WHAT

IS MEANT BY VIOLENCE AND INTIMIDATION?

There is violence when in order to wrest consent, serious or irresistible force is employed. There is intimidation when one of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants or ascendants, to give his consent. To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind. A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent (Article 1335). WHAT

ARE THE REQUISITES OF VIOLENCE AND INTIMIDATION WHICH WILL RENDER

THE CONTRACT VOIDABLE?

In order that consent is vitiated through violence, it is essential that the following requisites must concur: a) The force employed to wrest consent must be serious and irresistible; and b) It must be the determining cause for the party upon whom it is employed in entering into the contract. Intimidation, on the other hand, requires the concurrence of the following requisites: a) One of the contracting parties is compelled to give his consent by a reasonable and well-grounded fear of evil; b) The evil must be imminent and grave; c) Upon his person, property, or upon the person or property of his spouse, descendants, or ascendants.

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d) The evil must be unjust, an actionable wrong; and e) The evil must be the determining cause for the party upon whom it is employed in entering into the contract. DISTINGUISH

BETWEEN VIOLENCE AND INTIMIDATION.

a) While violence is external, intimidation is internal b) While violence prevents the expression of the will substituting it with a material act dictated by another, intimidation influences the operation of the will, inhibiting it in such a way that the expression thereof is apparently that of a person who has freely given his consent. c) Violence is physical compulsion, while intimidation is moral compulsion. WHAT

IS THE EFFECT IF VIOLENCE OR INTIMIDATION WAS EMPLOYED BY THIRD

PERSON?

Violence or intimidation shall annul the obligation, although it may have been employed by a third person who did not take part in the contract (Article 1336). WHAT IS MEANT BY UNDUE INFLUENCE? There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: a. the confidential, family, spiritual and other relations between the parties, or b. the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress (Article 1337). WHAT

ARE THE REQUISITES FOR UNDUE INFLUENCE TO VITIATE CONSENT?

a) Improper advantage b) Power of the will of another c) Deprivation of the latter’s will of a reasonable freedom of choice WHAT

IS MEANT BY FRAUD?

There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a

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contract which, without them, he would not have agreed to (Article 1338). WHAT

ARE THE DIFFERENT CLASSES OF CIVIL FRAUD?

Civil fraud may be classified as: a. FRAUD IN THE PERFECTION [OR CELEBRATION] OF THE CONTRACT (Article 1338, et seq.) – Fraud which is employed by a party to the contract in securing the consent of the other party. This may either be: 1) DOLO CAUSANTE OR CAUSAL FRAUD – refers to those deceptions or misrepresentations of a serious character employed by one party without which the other party would not have entered into the contract. 2) DOLO INCIDENTE OR INCIDENTAL FRAUD – Refers to those incidental deceptions and misrepresentations employed by one party without which the other party would still have entered into the contract. b. FRAUD IN THE PERFORMANCE OF THE OBLIGATION (Article 1170) – Fraud which is employed by the obligor in the performance of an existing obligation WHAT

ARE THE REQUISITES OF FRAUD

[DOLO

CAUSANTE] WHICH WILL RENDER A

CONTRACT VOIDABLE?

In order that the consent of a party to a contract is vitiated by fraud thus rendering such contract voidable, it is essential that the following requisites must concur: a) Fraud or insidious words or machinations must be employed by one of the contracting parties; b) The fraud or insidious words or machinations must be serious; c) There must be deliberate intent to deceive or to induce; d) The fraud or insidious words or machinations must induce the other party to enter into the contract, that is, the other party must have relied on the untrue statement and must himself not be guilty of negligence in ascertaining the truth; and e) The fraud should not have been employed by both of the contracting parties or by third persons. DISTINGUISH

BETWEEN DOLO CAUSANTE AND DOLO INCIDENTE.

Dolo causante (Article 1338) and Dolo incidente (Article 1344) may be distinguished from each other in the following ways:

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a) The first refers to a fraud which is serious in character, whereas the second is not serious; b) The first is the cause which induces the party upon whom it is employed in entering into the contract, whereas the second is not the cause; c) The effect of the first is to render the contract voidable, whereas the effect of the second is to render the party who employed it liable for damages. DOES

FAILURE TO DISCLOSE FACTS TO THE OTHER PARTY, EXAGGERATION IN

TRADE, EXPRESSION OF AN OPINION CONSTITUTE FRAUD WHICH WILL RENDER A CONTRACT VOIDABLE?

Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud (Article 1339). The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent (Article 1340). A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former's special knowledge (Article 1341). WHAT

IS THE EFFECT IF THERE IS MISREPRESENTATION BY THIRD PERSON?

Misrepresentation by a third person does not vitiate consent, unless: a) Such misrepresentation has created substantial mistake and b) Such misrepresentation is mutual (Article 1342). WHAT

IS THE EFFECT OF MISREPRESENTATION MADE IN GOOD FAITH?

Misrepresentation made in good faith is not fraudulent but may constitute error (Article 1343). WHEN

SHALL FRAUD MAKE A CONTRACT VOIDABLE?

[REQUISITES

FOR FRAUD TO

VITIATE CONSENT]

In order that fraud may make a contract voidable: a) Fraud should be serious, and b) Fraud should not have been employed by both contracting parties [the parties must not be in pari delicto] (Article 1344).

Page 125 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

This refers to causal fraud. If the fraud is merely incidental fraud, it only obliges the person employing it to pay damages. WHAT

IS MEANT BY SIMULATION OF CONTRACTS?

Simulation of a contract which is referred to as “vices of declaration” is the process of intentionally deceiving others by producing the appearance of a contract that really does not exist (absolute simulation) or which is different from the true agreement (relative simulation). Simulation is absolute when the parties do not intend to be bound at all, as when a debtor simulates the sale of his properties to a friend in order to prevent their possible attachment by creditors; while simulation is relative when the parties conceal their true agreement, as when a person conceals donation by simulating a sale of the property to the beneficiary for a certain consideration (Article 1345). WHAT

ARE THE REQUISITES FOR SIMULATION?

a) An outward declaration of will different from the will of the parties; b) The false appearance must have been intended by mutual agreement; c) The purpose is to deceive third persons. WHAT ARE THE EFFECTS OF SIMULATION?

An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement (Article 1346). SECTION 2 OBJECT OF CONTRACTS WHAT

IS MEANT BY OBJECT OF CONTRACTS?

The object of a contract may be defined as the thing, right or service which is the subject matter of the obligation which is created or established. WHAT

REQUISITES MUST CONCUR IN ORDER THAT A THING, RIGHT OR SERVICE

MAY BE THE OBJECT OF CONTRACTS?

Page 126 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

As a general rule, all things, rights or services may be the object of contracts. It is however, essential that the following requisites must concur: a) The object should be within the commerce of men; in other words, it should be susceptible of appropriation and transmissible from one person to another; b) The object should be real and possible; in other words, it should exist at the moment of the celebration of the contract, or at least, it can exist subsequently or in the future; c) The object should be licit; in other words, it should not be contrary to law, morals, good customs, public order or public policy; d) The object must be transmissible; e) The object should be determinate, or at least, possible of determination, as to its kind. The fact that the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new contract between the parties (Article 1349). WHAT

THINGS, RIGHTS OR SERVICES CANNOT BE THE OBJECT OF CONTRACTS?

a) Things which are outside the commerce of men, including future things; b) Rights which are intransmissible; c) Future inheritance except in cases expressly authorized by law; d) Services which are contrary to law, morals, good customs, public order or public policy (Article 1347); e) Impossible things or services (Article 1348); f) Objects which are not determinate as to their kind (Article 1349). If the parties enter into a contract with respect to the above contracts, the contract is void or inexistent. SECTION 3 CAUSE OF CONTRACTS WHAT

IS MEANT BY CAUSE OF CONTRACTS?

In general, cause is the why of the contract or the essential reason which moves the contracting parties to enter into the contract. In other words, it is the immediate, direct or proximate reason which explains and justifies the creation of an obligation through the will of the contracting parties.

Page 127 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

In particular: a) In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; b) In remuneratory ones, the service or benefit which is remunerated; and c) In contracts of pure beneficence, the mere liberality of the benefactor (Article 1350). DISTINGUISH

CAUSE AND CONSIDERATION.

In this jurisdiction, cause and consideration are used interchangeably. After all, causa is merely the civil law term, while consideration is the common law term. However, causa in civil law jurisdictions is broader in scope than consideration in Anglo-American jurisdictions. Many agreements which cannot be supported in AngloAmerican law for want of consideration can be enforced under the broader doctrine of causa. DISTINGUISH THE CAUSE FROM THE OBJECT OF CONTRACTS.

The cause must not be confused with the object of the contract. Of course, there can be no question about the difference between the two cases of remuneratory and gratuitous contracts; thus, in the first, the cause is the service or benefit which is remunerated, while the object is the thing which is given in remuneration, and in the second the cause is the liberality of the donor or benefactor. In onerous contracts, however, there is a tendency to confuse one with the other. Nevertheless, it is clear that the cause, for each contracting party, is the prestation or promise of a thing or service by the other, while the object of the contract, on the other hand, is the thing or service itself. Thus, in a contract of sale, the cause as far as the vendor is concerned is the acquisition of the purchase price, and as far as the vendee is concerned, it is the acquisition of the thing, or stated in a different way, the cause of the obligation of the vendor is the obligation of the vendee and the cause of the obligation of the vendee is the obligation of the vendor, while the object of the contract, on the other hand, is the thing which is sold and the price which is paid [Castan’s and Manresa’s view].

Page 128 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

DISTINGUISH

THE CAUSE OF A CONTRACT FROM THE MOTIVES OF THE PARTIES IN

ENTERING INTO A CONTRACT.

The particular motives of the parties in entering into a contract are different from the cause thereof (Article 1351). The differences between the two are as follows: a) Whereas the cause is the direct or most proximate reason of the contract, the motives are the indirect or remote reasons; b) Whereas the cause is the objective or juridical reason of a contract, the motives are the psychological or purely personal reasons; c) Whereas the cause is always the same, the motives may differ for each contracting party. d) The motive may be unknown to the other, the cause is always known. e) The presence of motive cannot cure absence of cause. IS

THERE ANY EXCEPTION TO THE RULE THAT THE PARTICULAR MOTIVES OF THE

PARTIES IN ENTERING INTO A CONTRACT ARE DIFFERENT FROM THE CAUSE THEREOF?

There is an exception to the rule and that is when the contract is conditioned upon the attainment of the motive of either contracting parties. In other words, the motive may be regarded as causa when it predetermines the purpose of the contract. WHAT

REQUISITES MUST CONCUR IN ORDER THAT THERE WILL BE A SUFFICIENT

CAUSE UPON WHICH A CONTRACT MAY BE FOUNDED?

In order that there will be a sufficient cause upon which a contract may be founded, it is essential that the following requisites must concur: a) The cause should be in existence (it must be present); b) The cause should be licit or lawful; and c) The cause should be true. Thus, contracts without cause, or with unlawful cause, produce no effect whatsoever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy (Article 1352). The same is true if the cause stated in the contract is false, unless it is proven that they were founded upon another cause which is true and lawful (Article 1353). WHAT

IS THE PRESUMPTION AS TO CAUSE?

Page 129 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary (Article 1354). WHAT

IS LESION?

It is inadequacy of cause, like insufficient price for a thing sold. WHAT

ARE THE RULES ON LESION?

As a general rule, lesion or inadequacy of price does not invalidate a contract. Lesion, however, may be evidence of the presence of fraud, mistake or undue influence. Exceptions (when lesion may invalidate the contract): a) When together with lesion, there is fraud, mistake or undue influence (Article 1355). b) In cases expressly provided for by law (Articles 13814 and 10985) CHAPTER 3 FORM OF CONTRACTS AS

A RULE, WHAT IS THE FORM OF A CONTRACT IN ORDER THAT IT WILL BE OF

OBLIGATORY FORCE?

Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present (Article 1356). We have therefore retained the “spiritual system” of the Spanish Civil Code by virtue of which the law looks more at the spirit rather than at the form of contracts. Hence, under our legal system, the form in which a contract is executed has no effect, as a general rule, upon its obligatory force, provided all of the essential requisites for its validity are present. 4

ARTICLE 1381. The following contracts are rescissible: (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; (2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; 5

ARTICLE 1098. A partition, judicial or extra-judicial, may also be rescinded on account of lesion, when any one of the co-heirs received things whose value is less, by at least one-fourth, than the share to which he is entitled, considering the value of the things at the time they were adjudicated. (1074a) aisa dc

Page 130 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

However, this principle merely applies to CONSENSUAL CONTRACTS. In certain form is required while a REAL CONTRACT requires delivery in addition to the essential requisites of a contract. FORMAL CONTRACTS,

WHAT

ARE THE EXCEPTIONS TO THE ABOVE RULE?

When Article 1356 speaks of contracts as being obligatory regardless of the form in which they may have been entered into, it does not include those contracts for which the law prescribes form either for validity or for enforceability. There are therefore exceptions to the general rule: 1. When the law requires that a contract be in some form in order that it may be valid or enforceable, or 2. That a contract be proved in certain way. In such instances, the requirement is absolute and indispensable and the right of the parties stated in the following article cannot be exercised (Article 1356). WHAT

ARE THE DIFFERENT KINDS OF FORMALITIES WHICH ARE PRESCRIBED BY

LAW FOR CERTAIN CONTRACTS?

Article 1358 enumerates certain kinds of contracts which must appear either in a public instrument or in a private document. The purpose of the requirement, however, is not to validate or to enforce the contract, but to insure its efficacy; in other words, the form required is neither for validity or enforceability but for CONVENIENCE of the contracting parties. Hence, the forms required by law for the execution of certain contracts may be divided into: 1. Those which are merely for CONVENIENCE (governed by Articles 1356 to 1358); 2. Those which are necessary for the VALIDITY of the contracts (governed by scattered provisions of the Civil Code and by special laws); and 3. Those which are necessary for the ENFORCEABILITY of the contract (governed by the Statute of Frauds). WHAT

IS THE RIGHT OF THE CONTRACTING PARTIES IF THE LAW REQUIRES A

DOCUMENT OR OTHER SPECIAL FORM?

If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract

Page 131 of 165 Notes on Prescription, Obligations and Contracts K.P. Dela Serna

has been perfected. This right may be exercised simultaneously with the action upon the contract (Article 1357). This article is applicable only when form is needed only for not for validity or enforceability. In other words, before the contracting parties may be compelled to execute the needed form, it is essential that the contract be PERFECTED (valid) (Article 1357) and ENFORCEABLE under the Statute of Frauds (Article 1356). CONVENIENCE,

The right to compel under Article 1357 cannot be exercised if the law requires that a contract be in some form in order that it may be VALID and ENFORCEABLE, because Article 1356 provides that that requirement is ABSOLUTE and INDISPENSABLE. WHAT

ARE THE FORMALITIES WHICH ARE MERELY FOR THE CONVENIENCE OF THE

CONTRACTING PARTIES?

The following must appear in a public document: (1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein are governed by articles 1403, No. 2, and 1405; (2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; (3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; (4) The cession of actions or rights proceeding from an act appearing in a public document (Article 1358). All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by articles 1403, No. 2 and 1405 (Article 1358). Note that the necessity for the public document in the contracts enumerated above is only for CONVENIECE, not for VALIDITY or ENFORCEABILITY. Formal requirements are for the benefit or third parties. Noncompliance therewith does not adversely affect the validity of the contract or the contractual rights and obligations of the parties thereunder (Fule vs. CA, G.R. No. 112212, March 2, 1998) WHAT CONTRACTS?

ARE

THE

FORMALITIES

WHICH

ARE

NECESSARY

FOR

THE

VALIDITY

OF

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These contracts may be classified as follows: 1. Those which must appear in writing; 2. Those which must appear in a public document; and 3. Those which must be registered. CONTRACTS

WHICH MUST APPEAR IN WRITING:

1. Donations of personal property whose value exceeds five thousand pesos. According to Article 748, the donation and the acceptance shall be made in writing; otherwise, it shall be void. 2. Sale of piece of land or any interest therein by an agent. According to Article 1874, if the authority of the agent is not in writing, the sale is void. 3. Antichresis. According to Article 2134, in contracts of antichresis, the amount of the principal and of the interest shall be specified in writing; otherwise, the contract shall be void. 4. Agreements regarding payment of interest in contracts of loan. According to Article 1956, no interest shall be due unless it has been expressly stipulated in writing. The validity of the contract of loan, however, is not affected. CONTRACTS

WHICH MUST APPEAR IN A PUBLIC DOCUMENT:

1. Donations of immovable property. According to Article 1749, the donation must be made in a public document. The acceptance, on the other hand, may be made in the same deed of donation or in a separate public document. If the acceptance is made in a separate public document, the donor shall be notified in authentic form and such fact shall be noted in both instruments. Noncompliance with any of these formalities shall render the donation void. 2. Partnerships where immovable property or real rights are contributed to the common fund. According to Articles 1771 and 1773, in a contract of partnership where immovable property or real rights are contributed to the common fund, it is necessary that the contract must appear in a public instrument and that there must be an inventory of the immovable property and real rights, signed by the partners, and attached to the public instrument; otherwise, the contract is void. CONTRACTS

WHICH MUST BE REGISTERED:

1. Chattel mortgages. According to Article 2140, by a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the

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movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mortgage. 2. Sales or transfers of large cattle. According to the Cattle Registration Act, no sale or transfer of large cattle shall be valid unless it is duly registered and a certificate of transfer is secured. CHAPTER 4 REFORMATION OF INSTRUMENTS (N) WHAT

IS THE DOCTRINE OF REFORMATION OF INSTRUMENTS UNDER THE

CIVIL

CODE? When the true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed (Article 1359). WHAT REFORMED?

REQUISITES

MUST

CONCUR

IN

ORDER

THAT

AN

INSTRUMENT

MAY

BE

1. There must be meeting of the minds of the parties; 2. Their true intention is not expressed in the instrument; and 3. Such failure to express their true intention is due to mistake, fraud, inequitable conduct or accident. 4. There must be convincing proof thereof; 5. It must be brought within the proper prescriptive period; 6. The document must not refer to a simple unconditional donation inter vivos, or to wills, or to a contract where the real agreement is void (Article 1366). If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument but annulment of the contract (Article 1359). WHAT

ARE THE DISTINCTIONS BETWEEN REFORMATION AND ANNULMENT?

The most fundamental distinctions between an action for reformation of an instrument and an action for the annulment of a contract are: 1. Whereas the first presupposes a perfectly valid contract in which there has already been a meeting of the minds of the contracting

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parties, the second is based on a defective contract in which there has been no meeting of the minds because the consent of one of the contracting parties has been vitiated. 2. Reformation does not invalidate a contract; annulment invalidates a contract. WHAT

IS THE RULE IN CASE OF CONFLICT BETWEEN THE

CIVIL CODE

AND THE

PRINCIPLES OF GENERAL LAW ON REFORMATION?

The principles of the general law on the reformation of instruments are hereby adopted insofar as they are not in conflict with the provisions of this Code (Article 1360). WHAT

ARE THE INSTANCES IN WHICH REFORMATION MAY BE ASKED?

1. When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, said instrument may be reformed (Article 1361). 2. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show their true intention, the former may ask for the reformation of the instrument (Article 1362). 3. When one party was mistaken and the other knew or believed that the instrument did not state their real agreement, but concealed that fact from the former, the instrument may be reformed (Article 1363). 4. When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist, the instrument does not express the true intention of the parties, the courts may order that the instrument be reformed (Article 1364). 5. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper (Article 1365). WHAT

INSTRUMENTS CANNOT BE REFORMED?

There shall be no reformation in the following cases: (1) (2) (3)

Simple donations inter vivos wherein no condition is imposed; Wills; When the real agreement is void (Article 1366). WHAT

IS THE EFFECT ON REFORMATION IF ONE OF THE PARTIES HAS BROUGHT AN

ACTION TO ENFORCE THE INSTRUMENT?

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When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation (Article 1367). WHO

ARE THE PERSONS WHO MAY ASK FOR REFORMATION OF INSTRUMENT?

Reformation may be ordered at the instance of either party or his successors-in-interest, if the mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns (Article 1368). The procedure for the reformation of instrument shall be governed by rules of court to be promulgated by the Supreme Court (Article 1369). CHAPTER 5 INTERPRETATION OF CONTRACTS RULES: 1. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former (Article 1370). 2. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered (Article 1371). 3. However general the terms of a contract may be, they shall not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree (Article 1372). 4. If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual (Article 1373). 5. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly (Article 1374). 6. Words which may have different significations shall be understood in that which is most in keeping with the nature and object of the contract (Article 1375). 7. The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily established (Article 1376).

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8. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity (Article 1377). 9. When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests. If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have been the intention or will of the parties, the contract shall be null and void (Article 1378). 10. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the construction of contracts (Article 1379). DEFECTIVE CONTRACTS WHAT

ARE THE FOUR KINDS OF DEFECTIVE CONTRACTS?

1. Rescissible – valid until rescinded; there is a sort of extrinsic defect consisting of economic damage or lesion. 2. Voidable – valid until annulled, unless there has been ratification. The defect is more or less intrinsic, as in the case of vitiated consent. 3. Unenforceable – cannot be sued upon or enforced, unless it is ratified. In a way, it may be considered a validable transaction, that is, it has no effect now, but it may be effective upon ratification. 4. Void – has no effect at all, it cannot be ratified or validated. The contracts provided above are in the decreasing order as to their effectiveness. CHAPTER 6 RESCISSIBLE CONTRACTS DEFINE

RESCISSIBLE CONTRACTS.

A rescissible contract is a contract which is valid because it contains all of the essential requisites prescribed by law, but which is defective because of the injury or damage to either of the contracting parties or to third persons, as a consequence of which it may be rescinded by means of a proper action for rescission. DEFINE

RESCISSION.

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Rescission is a remedy granted by law to the contracting parties, and even to third persons, to secure the reparation of damages caused to them by a contract, even if the same should be valid, by means of the restoration of things to their condition prior to the celebration of the contract. DISTINGUISH

RESCISSION OF CONTRACTS FROM RESCISSION OR RESOLUTION OF

RECIPROCAL OBLIGATIONS.

Rescission of rescissible contracts must not be confused with the rescission or resolution of reciprocal obligation under Article 1191 of the Civil Code. Although there are similarities both with respect to validity and effects, they are distinguished from each other in the following ways” 1. AS TO PARTY WHO MAY INSTITUTE ACTION: In rescission the action may be instituted not only by a party to the contract but even by third persons, whereas in resolution the action may be instituted only by a party to the contract. 2. AS TO CAUSES: In rescission there are several causes or grounds such as lesion, fraud and others expressly specified by law, whereas in resolution the only ground is failure of one of the contracting parties to comply with what is incumbent upon him. 3. AS TO POWER OF THE COURTS: In rescission there is no power of the courts to grant extension of time for performance of the obligation so long as there is a ground for rescission, whereas in resolution the law expressly declares that courts shall have a discretionary power to grant an extension for performance provided that there is just cause 4. AS TO CONTRACTS WHICH MAY BE RESCINDED OR RESOLVED: In rescission, any contract, whether unilateral or reciprocal, may be rescinded; whereas in resolution only reciprocal contracts may be resolved. WHAT

CONTRACTS ARE RESCISSIBLE?

The following contracts are rescissible: (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; (2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; (3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;

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(4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority; (5) All other contracts specially declared by law to be subject to rescission. (Article 1381) (6) Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. (Article 1382) WHAT

REQUISITES MUST CONCUR BEFORE A CONTRACT MAY BE RESCINDED ON THE

GROUND OF LESION?

Whether the contract is entered into by a guardian in behalf of his ward or by a legal representative in behalf of an absentee, before it can be rescinded on the ground of lesion, it is indispensable that the following requisites must concur: a. The contract must be entered into by the guardian in behalf of his ward or by the legal representative in behalf of an absentee (Article 1381, Nos. 1 and 2); b. The ward or absentee suffered lesion of more than onefourth of the value of the property which is the object of the contract (ibid); c. The contract must be entered without judicial approval (Article 1386) d. There must be no legal means for obtaining reparation for the lesion (Article 1385, par. 1); e. The person bringing the action must be able to return whatever he may be obliged to restore (Article 1385, par. 1); and f. The object of the contract must not be legally in the possession of a third person who did not act in bad faith (Article 1385, par. 1) WHAT

REQUISITES MUST CONCUR BEFORE A CONTRACT ENTERED INTO IN FRAUD

OF CREDITORS CAN BE RESCINDED?

Before a contract can be rescinded on the ground that it has been entered into in fraud of creditors, it is indispensable that the following requisites must concur: a. There must be a credit existing prior to the celebration of the contract; b. There must be fraud, or at least the intent to commit fraud, to the prejudice of the creditor seeking rescission;

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c. The creditor cannot in any other legal manner collect his credit; and d. The object of the contract must not be legally in the possession of a third person who did not act in bad faith. WHO

ARE THE PERSONS WHO MAY INSTITUTE AN ACTION FOR THE RESCISSION OF

A RESCISSIBLE CONTRACT?

The action for rescission may be instituted by the following: a. The person who is prejudiced, such as the person suffering the lesion in rescissory actions based on lesion, the creditor who is defrauded in rescissory actions based on fraud, and other persons authorized to exercise the same in other rescissory actions; b. Their representatives; c. Their heirs; and d. Their creditors by virtue of the subrogatory action defined in Article 1177. IN

RESCISSORY ACTIONS BASED ON FRAUD, IT IS ESSENTIAL THAT FRAUD OR THE

INTENT TO DEFRAUD MUST BE PROVED.

HOW

CAN THIS BE DONE?

Such fraud or the intent to defraud may be either presumed in accordance with Article 1387 or duly proved in accordance with the ordinary rules of evidence. The law presumes that there is fraud of creditors in the following cases: a. Alienation of property by gratuitous if the donor did not reserve sufficient property to pay all debts contracted before the alienation. b. Alienations of property by onerous title if made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission. (Article 1387) WHAT

IS THE EXTENT OF RESCISSION?

Rescission shall be only to the extent necessary to cover the damages caused. (Article 1384) WHAT

ARE THE OBLIGATIONS OF THE PLAINTIFF IN CASE RESCISSION IS GRANTED?

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Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. (Article 1385) WHAT

ARE THE INSTANCES WHEN RESCISSION CANNOT BE DEMANDED?

a. When the plaintiff who demands rescission cannot anymore return the thing; b. When the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss. (Article 1385) c. Rescission referred to in Nos. 1 and 2 of Article 1381 with respect to contracts approved by the courts. (Article 1386) WHAT

IS

THE

LIABLITY

OF

ONE

WHO

ACQUIRES

IN

BAD

FAITH

THE

THINGS

ALIENATED IN FRAUD OF CREDITORS?

Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them. If there are two or more alienations, the first acquirer shall be liable first, and so on successively. (Article 1388) WHAT

IS THE PRESCRIPTIVE PERIOD OF RESCISSION?

The action to claim rescission must be commenced within four years. For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former's incapacity, or until the domicile of the latter is known. (Article 1389) CHAPTER 7 VOIDABLE CONTRACTS DEFINE

VOIDABLE CONTRACTS.

Voidable contracts are those in which all of the essential elements for validity are present, but the element of consent is vitiated

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either by lack of legal capacity of one of the contracting parties, or by mistake, violence, intimidation, undue influence, or fraud. DISTINGUISH

VOIDABLE CONTRACTS FROM RESCISSIBLE CONTRACTS.

Voidable and rescissible contracts may be distinguished from each other in the following ways: a. In a voidable contract, the defect is instrinsic because it consists of a vice which vitiates consent, whereas in a rescissible contract the defect is external because it consists of damage or prejudice either to one of the contracting parties or to a third person (Articles 1381, 1390); b. In the former, the contract is voidable even if there is not damage or prejudice, whereas in the latter, the contract is not rescissibloe if there is not damage or prejudice; c. In the former, the annulability of the contract is based on law, whereas in the latter the rescissibility of the contract is based on equity. Hence, annulment is not only a remedy but a sanction, whereas rescission is a mere remedy. Public interest, therefore, predominates in the first, whereas private interest predominates in the second; d. The causes of annulment are different from the causes of rescission; e. The former is susceptible of ratification, whereas the latter is not (Articles 1381, 1390); and f. Annulment may be invoked only by a contracting party, whereas rescission may be invoked either by a contracting party or by a third person who is prejudiced. WHAT

CONTRACTS ARE VOIDABLE?

The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties: (1) Those where one of the parties is incapable of giving consent to a contract; (2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. (Article 1390) WHAT

IS THE PRESCRIPTIVE PERIOD OF ANNULING A VOIDABLE CONTRACT?

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The action for annulment shall be brought within four years. (Article 1391) This period shall begin: a. In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases. b. In case of mistake or fraud, from the time of the discovery of the same. c. And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. HOW

MAY A VOIDABLE CONTRACT BE CONVALIDATED?

There are 3 ways or modes of convalidating a voidable contract. They are: a. By prescription of the action for annulment (Article 1391); b. By ratification or confirmation (Articles 1392-1396); and c. By the loss of the thing which is the object of the contract through the fraud or fault of the person who is entitled to institute the action for the annulment of the contract (Article 1401) WHAT

IS MEANT BY RATIFICATION OF VOIDABLE CONTRACTS? WHAT ARE ITS

REQUISITES?

Ratification, or confirmation as it is known in the Spanish Civil Code, is defined as the act or means by virtue of which efficacy is given to a contract which suffers from a vice of curable nullity. Ratification or confirmation requires the concurrence of the following requisites: a. The contract should be tainted with a vice which is susceptible of being cured (the contract must be a voidable one); b. The confirmation should be effected by the person who is entitled to do so under the law; c. It should be effected with knowledge of the reason which renders the contract voidable; and d. The reason which renders the contract voidable should have already disappeared. e. The person ratifying must be the injured party.

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HOW

MAY RATIFICATION BE MADE?

Ratification may be effected expressly or tacitly. There is an express ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should expressly declare his renunciation of his right to annul the contract. On the other hand, there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right. (Article 1393) WHO

MAY EFFECT THE RATIFICATION?

Ratification may be effected by the guardian of the incapacitated person. (Article 1394) Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment. (Article 1395) WHAT

IS THE EFFECT OF RATIFICATION?

a. Ratification cleanses the contract from all its defects from the moment it was constituted. (Article 1396) There is retroactive effect of ratification, thus, once ratification has taken place, annulment based on the original defects cannot prosper. b. The action to annul is extinguished (Article 1392), thus the contract becomes a completely valid one. WHO

MAY INSTITUTE AN ACTION FOR ANNULMENT OF A VOIDABLE CONTRACT?

The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract. (Article 1397) There are therefore 2 different requisites in order that a person may institute the action for the annulment of a voidable contract:

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a. The plaintiff must have an interest in the contract in the sense that he is obliged thereby either principally or subsidiarily; and b. The victim and not the party responsible for the vice or defect must be the one who must assert the same. IF

A PERSON IS NOT OBLIGED PRINCIPALLY OR SUBSIDIARILY UNDER A CONTRACT,

WOULD IT BE POSSIBLE FOR HIM TO INSTITUTE AN ACTION FOR THE ANNULMENT OF THE CONTRACT?

As a rule, a contract cannot be assailed by one who is not a party thereto. However, the Supreme Court in several cases has held that a person, who is not a party obliged principally or subsidiarily under a contract, may bring an action for annulment of the contract if he is prejudiced in his rights with respect to one of the contracting parties, and can show detriment which would positively result to him from the contract in which he has no intervention (Singson vs. Isablea Sawmill, 88 SCRA 623, citing Teves vs. People’s Homesite and Housing Corp, 23 SCRA 1114 and De Santos vs. City of Manila, 45 SCRA 409).

IS

WHAT ARE THE OBLIGATIONS OF THE CONTRACTING ANNULED? WHAT ARE THE EFFECTS OF ANNULMENT?

PARTIES AFTER AN OBLIGATION

a. If the contract has not yet been complied with, the parties are excused from their obligation. b. If the contract has already been performed, the contracting parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law. c. In obligations to render service, the value thereof shall be the basis for damages. (Article 1398) WHAT

ARE THE INSTANCES WHERE THERE IS NO OBLIGATION TO MAKE ANY

RESTITUTION?

When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. (1399) WHAT

IS THE LIABILITY OF THE OBLIGOR IF HE CANNOT RETURN THE THING?

Whenever the person obliged by the decree of annulment to return the thing can not do so because it has been lost through his

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fault, he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date. (Article 1400) WHAT

IS THE EFFECT ON THE RIGHT TO ANNUL IF THE THING WHICH IS THE

OBJECT OF THE CONTRACT IS LOST?

The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings. If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff. (Article 1401) WHEN

MUST THE THING BE RETURNED?

As long as one of the contracting parties does not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him. (Article 1402) CHAPTER 8 UNENFORCEABLE CONTRACTS (N) DEFINE

UNENFORCEABLE CONTRACTS.

Unenforceable contracts are those which cannot be enforced by a proper action in court, unless ratified. WHAT

ARE THE KINDS OF UNENFORCEABLE CONTRACT?

a. Those entered into without or in excess of authority (unauthorized contracts); b. Those that do not comply with the Statute of Frauds; c. Those where both of the contracting parties do not possess the required legal capacity. DISTINGUISH

UNENFORCEABLE CONTRACTS FROM OTHER DEFECTIVE CONTRACTS.

In general, unenforceable contract may be distinguished from the other defective contracts in the following ways: a. FROM RESCISSIBLE CONTRACTS – First, unenforceable contracts cannot be enforced by a proper action in court, whereas rescissible contracts are valid and enforceable unless they are rescinded.

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Second, the former cannot be assailed by third persons, whereas the latter may be assailed by third persons who are prejudiced. b. FROM Voidable contracts – unenforceable contracts cannot be enforced by a proper action in court, whereas voidable contracts are binding and enforceable unless they are annulled by a proper action in court. c. FROM VOID CONTRACTS – There are some unenforceable contracts which are valid and, therefore, may produce effects, although they cannot be enforced by a proper action in court; void or inexistent contracts, on the other hand, do not produce, as a general rule, any effect whatsoever. Hence, unenforceable contracts are susceptible of ratification, whereas void contracts are not. WHAT

CONTRACTS ARE UNENFORCEABLE?

The following contracts are unenforceable, unless they are ratified: (1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers; (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: (a) An agreement that by its terms is not to be performed within a year from the making thereof; (b) A special promise to answer for the debt, default, or miscarriage of another; (c) An agreement made in consideration of marriage, other than a mutual promise to marry; (d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action, or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum;

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(e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (f) A representation as to the credit of a third person. (3) HOW

Those where both parties are incapable of giving consent to a contract (Article 1403).

MAY CONTRACTS INFRINGING THE

STATUTE

OF

FRAUDS

BE RATIFIED?

Contracts infringing the Statute of Frauds may be ratified either: a. by the failure to object to the presentation of oral evidence to prove the same, or b. by the acceptance of benefits under them (Article 1405). DISTINGUISH FROM EACH OTHER “CONFIRMATION”, “RATIFICATION”, “RECOGNITION” (OR “ACKNOWLEDGMENT”).

AND

Ratification is curing the defect of lack of authority in an authorized contract (entered into by another) (Articles 1317, 1405). Under the present Code, the term ratification is used to designate the act of validating any kind of defective contract. Confirmation is curing a defect of a voidable contract (Article 1396). It tends to cure a vice of nullity and ratification is for the purpose of giving authority to a person who previously acted in the name of another without authority (Luna vs. Linatoc, 74 Phil. 15). Recognition or acknowledgment, on the other hand, is merely to cure a defect of proof (Article 1405). In recognition, there is no vice to be remedied, such as fraud, violence, or mistake, so that the case is distinguished from confirmation. In Recognition, the person on behalf of another is duly authorized to do so, so the situation is different from ratification (Ibid). called

Under the new Civil Code, all three terms are now uniformly RATIFICATION. WHAT

IS THE REMEDY OF A PARTY WHEN THE CONTRACT IS UNENFORCEABLE AND

A PUBLIC DOCUMENT IS NECESSARY FOR ITS REGISTRATION?

When a contract is enforceable under the Statute of Frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under Article 1357 (Article 1406).

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WHAT

IS THE EFFECT IF BOTH PARTIES ARE INCAPACITATED, AND THE GUARDIAN

OF ONE OF THEM RATIFIES THE CONTRACT?

In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated (Article 1407). WHAT

IS THE EFFECT IF BOTH PARENTS OR GUARDIANS RATIFY THE CONTRACT?

If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception (Article 1407, par. 2). WHO

CAN ASSAIL UNENFORCEABLE CONTRACTS?

It is only the parties who can assail an unenforceable contract. It cannot be assailed by third persons (Article 1408). VOID DEFINE

OR

CHAPTER 9 INEXISTENT CONTRACTS

VOID AND INEXISTENT CONTRACTS.

In general, void and inexistent contracts may be defined as those which lack absolutely either in fact or in law one or some or all of those elements which are essential for its validity. In particular, void contracts are contracts where all of the requisites prescribed by law for contracts are present, but the cause, object or purpose is contrary to law, morals, good customs, public order or public policy, or they are prohibited by law, or they are decalred by law to be void. Inexistent contracts, on the other hand, are those contracts which lack absolutely one or some or all of thoser requisites which are essential for validity. DISTINGUISH

BETWEEN VOID AND INEXISTENT CONTRACTS.

Void and inexistent contracts may be distinguished from each other in the following ways : a) Void contracts refer to those where all of the the requisites of a contract are present but the cause, object or purpose is contrary to law, morals, good customs, public order or public policy, or the

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contract itself is prohibited or declared by law to be void ; inexistent contracts, on the other hand, refer to those where one or some or all of those requisites which are essential for validity are absolutely lacking (Liguez vs. Court of Appeals, 102 Phil. 577). b) The principle of in paru delicto is applicable in the first, but not in the second. Consequently, the first may produce effects (Articles 1411, 1412), but the second does not produce any effect whatsoever. WHAT

ARE THE CHARACTERISTICS OF VOID CONTRACTS

?

a. The right to set up the defense of illegality cannot be waived (Article 1409), and may be considered on appeal even if not raised in the trial court. b. The action or defense for their declaration as inexistent does not prescribe (Article 1410) c. The defense of illegality of contracts is not available to third persos whose interests are not directly affected (Article 1412) d. Cannot give rise to a contract ; thus ‘a contract which is the direct result of a previous illegal contract is also void and inexistent (Article 1422) e. Generally produces no effect. f. They cannot be ratified (Article 1409). DISTINGUISH

VOID

AND

INEXISTENT

CONTRACTS

FROM

THE

OTHER

DEFECTIVE

CONTRACTS.

A

VOID OR INEXISTENT CONTRACT MAY BE DISTINGUISHED FROM A RESCISSIBLE CONTRACT

IN THE FOLLOWING WAYS

:

a. A void or inexistent contract produces, as a rule, no effect even if it is not set aside by a direct action, whereas a rescissible contract is valid unless it is rescinded (Articles 1380, 1409). b. The defect of the former consists in absolute lack in fact or in law of one or some or all of the essentail elements of a contract, whereas the defect of the latter consists in lesion or damage to one of the contracting parties or to third persons. c. In the former, the nullity or inexistence of the contract is based on the law, whereas, in the latter its rescissible character is based on equity. Hence, an actin for declaration of absolute nullity or inexistence is not only a remedy but a sanction, whereas an action for rescission is a mere remedy. Public interest, therefore, predominates in the first, whereas private interest predominates in the second.

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d. The action for the declaration of the nullity or inexistence of a contract is imprescriptible, whereas the action for the rescission of a contract is prescriptible (Articles 1389, 1410) e. The nullity or inexistence of a contract cannot as a rule be assailed by third persons, whereas the rescissible character of a contract may be assailed by third persons (Articles 1381, 1382, 1409) A

VOID CONTRACT MAY BE DISTINGUISHED FROM A VOIDABLE CONTRACT IN THE FOLLOWING

WAYS:

a. A void or inexistent contract produces, as a general rule, no effect even if it is not set aside by a direct action, whereas a voidable contract is binding unless it is annulled (Articles 1390, 1409) b. The causes for the inexistence or absolute nullity of the former are different from the causes for the annulability or relative nullity of the latter (Ibid). c. The former is not susceptible of ratification, whereas the latter is susceptible of ratification. d. The action for the declaration of the nullity or inexistence of a contract is imprescriptible, whereas the action for the annulment of a contract is prescriptible (Articles 1391, 1140) e. The defense of inexistence or absolute nullity is available to third persons whose interests are directly affected, whereas the defense of annulability is not available to third persons (Articles 1397, 1421) A VOID CONTRACT MAY BE DISTINGUISHED FROM AN UNENFORCEABLE CONTRACT IN THE FOLLOWING WAYS: a. In a void or inexistent contract, there is in law or in reality no contract at all, whereas in an unenforceable contract, there is actually a contract which cannot be enforced by a court action unless ratified (Articles 1403, 1409). b. The causes for the inexistence or absolute nullity of the former are different from the causes for the unenforceability of the latter (Ibid). c. The former is not susceptible of ratification, while the latter is susceptible of ratification (Articles 1404, 1405, 1407, 1409). d. The former can be assailed by third persons whose interests are directly affected, whereas the latter cannot be assailed by third persons (Articles 1408, 1421). WHAT

CONTRACTS ARE VOID OR INEXISTENT

?

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The following contracts are inexistent and void from the beginning: (1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy; (2) Those which are absolutely simulated or fictitious; (3) Those whose cause or object did not exist at the time of the transaction; (4) Those whose object is outside the commerce of men; (5) Those which contemplate an impossible service; (6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained; (7) Those expressly prohibited or declared void by law. (Article 1409) These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived. In addition, we can also include: a. Those which are direct results of previous illegal contract (Article 1422); b. Those where there is no concurrence between offer and acceptance with regard to the object and the cause of the contract; and c. Those which do not comply with the required form where such form is essential for validity. WHAT

IS THE PRINCIPLE OF IN PARI DELICTO?

When the defect of a void contract consists in the illegality of the cause or object of the contract, and both parties are at fault or in pari delicto, the law refuses them every remedy and leaves them where they are. This rule, which is embodied in Articles 1411 and 1412, is what is commonly known as the principle of in pari delicto. It is a rule which is expressed in the maxims: “Ex dolo malo non oritur action” and “In pari delicto potior est condition defendentis”. The law will not aid either party to an illegal agreement; it leaves then where they are. WHAT DELICTO?

IS THE EFFECT IF BOTH PARTIES TO AN ILEGAL CONTRACT ARE IN PARI

When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto: a. They shall have no action against each other, and

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b. Both shall be prosecuted. c. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract. This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise. (Article 1411) WHAT

ARE THE EXCEPTIONS TO THE PRINCIPLE OF IN PARI DELICTO?

The exceptions to the principle of in pari delicto are the following: a. Payment of usurious interest. In such a case, the law allows the debtor to recover the interest paid in excess of that allowed by the usury laws, with interest thereon from the date of payment (Article 1413). b. Payment of money or delivery of property for an illegal purpose, where the party who paid or delivered repudiates the contract before the purpose has been accomplished, or before any damage has been caused to a third person. In such a case, the courts may allow such party to recover what he ahs paid or delivered, if the public interest will thus be subserved (Article 1414). c. Payment of money or delivery of property by an incapacitated person. In such a care, the courts may allow such person to recover what he ahs paid or delivered, if the interest of justice so demands (Article 1415). d. Agreement or contract which is not illegal per se but is merely prohibited by law, and the prohibition is designed to the protection of the plaintiff. In such a case, such plaintiff, if public policy is thereby enhanced, may recover what he has paid or delivered (Article 1416). e. Payment of any amount in excess of the maximum price of any article or commodity fixed by law. In such a case, the buyer may recover the excess (Article 1417). f. Contract whereby a laborer undertakes to work longer than the maximum number of hours fixed by law. In such a case, the laborer may demand for overtime pay (Article 1418). g. Contract whereby a laborer accepts a wage lower than the minimum wage fixed by law. In such case, the laborer may demand for the deficiency (Article 1419). WHAT

IS THE RULE IF THE ACT IN WHICH THE UNLAWFUL OR FORBIDDEN CAUSE

CONSISTS DOES NOT CONSTITUTE A CRIMINAL OFFENSE?

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If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed: (1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking; (2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply his promise. (Article 1412) WHAT

IS THE RULE IF THE CONTRACT IS DIVISIBLE AND THE ILLEGAL TERMS CAN

BE SEPARATED FROM THE LEGAL ONES?

In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced (Article 1420). WHO

CAN RAISE THE DEFENSE OF ILLEGALITY OF A CONTRACT?

The defense of illegality of contract is not available to third persons whose interests are not directly affected (Article 1421). TITLE III NATURAL OBLIGATIONS WHAT

ARE THE KINDS OF OBLIGATIONS?

DEFINE

EACH.

Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof (Article 1423). DEFINE

VOLUNTARY FULFILLMENT.

Voluntary fulfillment means that the debtor complied with the same even if he knew that he could not have been legally forced to do so. In the case of partial voluntary fulfillment, the balance cannot be

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recovered, since on said balance, there has not been created a legal obligation. HOW

IS UNDUE PAYMENT DISTINGUISHED FROM NATURAL OBLIGATION?

If a debt that has prescribed is paid not knowing it has prescribed, the payor can recover on the ground of undue payment. But if it is paid knowing that it has prescribed already, the payor cannot recover for this would be a case of a natural obligation. IS

THERE A JURIDICAL TIE IN MORAL OBLIGATIONS?

While there is a juridical tie in natural obligations, there is none in moral obligations. GIVE

EXAMPLES OF NATURAL OBLIGATIONS.

1. When a right to sue upon a civil obligation has lapsed by extinctive prescription, the obligor who voluntarily performs the contract cannot recover what he has delivered or the value of the service he has rendered (Article 1424). 2. When without the knowledge or against the will of the debtor, a third person pays a debt which the obligor is not legally bound to pay because the action thereon has prescribed, but the debtor later voluntarily reimburses the third person, the obligor cannot recover what he has paid (Article 1425). 3. When a minor between eighteen and twenty-one years of age who has entered into a contract without the consent of the parent or guardian, after the annulment of the contract voluntarily returns the whole thing or price received, notwithstanding the fact that he has not been benefited thereby, there is no right to demand the thing or price thus returned (Article 1426). 4. When a minor between eighteen and twenty-one years of age, who has entered into a contract without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith (Article 1427). 5. When, after an action to enforce a civil obligation has failed the defendant voluntarily performs the obligation, he cannot demand the return of what he has delivered or the payment of the value of the service he has rendered (Article 1428). 6. When a testate or intestate heir voluntarily pays a debt of the decedent exceeding the value of the property which he received by will or by the law of intestacy from the estate of the

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deceased, the payment is valid and cannot be rescinded by the payer (Article 1429). 7. When a will is declared void because it has not been executed in accordance with the formalities required by law, but one of the intestate heirs, after the settlement of the debts of the deceased, pays a legacy in compliance with a clause in the defective will, the payment is effective and irrevocable (Article 1439). TITLE IV ESTOPPEL (N) WHAT

IS ESTOPPEL?

Through estoppel an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. (Article 1431) It is a condition or state by virtue of which an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. WHAT

ARE THE KINDS OF ESTOppeL?

Estoppel may be: a. Estopple in pais (by conduct or equitable estoppel); This may be estoppel: a) b) c) d) e)

by by by by by

conduct or acceptance of benefits; representation or concealment; silence; omission; laches.

b. Estoppel by deed (technical estoppel (Article 1433); This may be estoppel: a) by deed proper (written instrument may also be in the form of a bond or mortage; b) by judgment as a court record. c. Estoppe by laches (Tijam vs. Sibonghanoy, 23 SCRA 29). DEFINE

EACH KIND OF ESTOPPEL.

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a. Estoppel in pais or by conduct is that which arises when one by his acts, representations or admissions, or by his silence when he ought to speak out, intentionally or through culpable negligence, induces another to believe that certain facts to exist and such other rightfully relies and acts on such belief, as a consequence of which he would be prejudiced if the former is permitted to deny the existence of such facts. b. Estoppel by deed is a type of technical estoppel by virtue of which a party to a deed and his privies are precluded from asserting as against the other party and his privies any right or title in derogation of the deed, or from denying any material fact asserted therein. On the other hand, estopel by record is a type of technical estoppel by virtue of which a party and his privies are precluded from denying the truth of matters set forth in a record, whether judicial or legislative. c. Laches, in general sense, is failure or neglect, for an unreasonable and unexplained length of time, to do that which, by exercising due diligence, could or should have been done earlier; it is negligence or omission to assert a right within reasonable time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it (Tijam vs. Sibonghanoy, supra; Heirs of Lacamen vs. Heirs of Laruan, 65 SCRA 605). It is therefore, a type of equitable estoppel which arises when a party, knowing his rights as against another, takes no step or delays in enforcing them until the condition of the latter, who has no knowledge or notive that the former would assert such rights, has become so changed that he cannot, without injury or prejudice, be restored to his former state. WHAT

IS THE BASIS OF THE DOCTRINE OF LACHES?

The doctrine of laches or of “stale demands” is based on public policy which requires, for the peace of society, the discouragement of stale claims and, unlike the statute of limitations, is not a mere question of time but is principally a question of the inequity or unfairness of permitting a right or claim to be enforced or asserted (Tijam vs. Sibonghanoy, supra). WHAT

ARE THE ESSENTIAL ELEMENTS OF LACHES?

The four (4) essential elements of laches are: a. Conduct on the part of the defendant, or of one under whom he claims, giving rise to the situation of which the complaint seeks a remedy;

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b. Delay in asserting the complainant’s rights, the complainant having had knowledge or notice of the defendant’s conduct and having been afforded an opportunity to institute a suit; c. Lack of knowledge or notice on the part of the defendant that the complainant would assert the right on which he bases his suit; and d. Injury or prejudice to the defendant in the event relief is accorded to the complainant, or the suit is not held barred (Miguel vs. Catalino, 26 SCRA 234 and cases cited therein). DISTINGUISH

BETWEEN LACHES AND PRESCRIPTION.

The defense of laches applies independently of prescription. Laches is different from the statute of limitations in that: a) Prescription is concerned with the fact of delay, whereas laches is concerned with the effect of delay. b) Prescription is a matter of time; laches is principally a question of inequity of permitting a claim to be enforced, this inequity being founded on some change in the condition of the property or the relation of the parties. c) Prescription is statutory; laches is not. d) Laches applies in equity; whereas prescription applies at law. e) Prescription is based on fixed time, laches is not. 6 f) While prescription is unavailing against a holder of a valid certificate of title, the equitable doctrine of laches may be applied against the plaintiffs for failure to assert their ownership for such an unreasonable length of time against its occupant. 7 WHAT

IS MEANT BY ESTOPPEL BY SILENCE?

Estoppel by silence or inaction refers to a type of estoppel in pais which arises when a party, who has a right and opportunity to speak or act as well as a duty to do so under the circumstanc4es, intentionally or through culpable negligence, induces another to believe certain facts to exist and such other relies and acts on such belief, as a consequence of which he would be prejudiced if the former is permitted to deny the existence of such facts. Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., 18 SCRA 1040, December 17, 1966, per Zaldivar, J. See also Heirs of Batiog Lacamen v. Heirs of Laruan, 65 SCRA 605, 609, July 31, 1975; Radio Communication of the Philippines, Inc. v. NLRC, 223 SCRA 656; June 25, 1993; Jimenez v. Fernandez, 184 SCRA 190, 196, April 6, 1990; Santiago v. Court of Appeals, 278 SCRA 98, August 21, 1997, per Hermosisima, Jr. J. 7 Republic vs. Court of Appeals, 204 SCRA 160 [1991]. 6

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On the other hand, estoppel by acceptance of benefits refers to a type of estoppel in pais which arises when a party, by accepting benefits derived from a certain act or transaction, intentionally or through culpable negligence, induces another to believe certain facts to exist and such other relies and acts on such belief, as a consequence of which he would be prejudiced if the former is permitted to deny the existence of such facts. GIVE

AN EXAMPLE OF ESTOPPEL BY SILENCE.

When in a contract between third persons concerning immovable property, one of them is misled by a person with respect to the ownership or real right over the real estate, the latter is precluded from asserting his legal title or interest therein, provided all these requisites are present: (1) There must be fraudulent representation or wrongful concealment of facts known to the party estopped; (2) The party precluded must intend that the other should act upon the facts as misrepresented; (3) The party misled must have been unaware of the true facts; and (4) The party defrauded must have acted in accordance with the misrepresentation. (Article 1437) One who has allowed another to assume apparent ownership of personal property for the purpose of making any transfer of it, cannot, if he received the sum for which a pledge has been constituted, set up his own title to defeat the pledge of the property, made by the other to a pledgee who received the same in good faith and for value. (Article 1438) WHAT

IS MEANT BY ESTOPPEL BY JUDGMENT?

Estoppel by judgment is merely a type of estoppel by record. It may be defined as the preclusion of a party to a case from denying the facts adjudicated by a court of competent jurisdiction. This type of estoppel must not be confused with res judicata. Estoppel by judgment bars the parties from raising any question that might have been put in issue and decided in a previous litigation, whereas res judicata makes a judgment conclusive between the same parties as to the matter directly adjudged (Phil. Nat’l. Bank vs. Barreto, 52 Phil. 818; NAMARCO vs. Macadaeg, 52 Off. Gaz. 182).

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WHAT ALIENATES

IS THE EFFECT IF A PERSON WHO IS NOT THE OWNER OF A THING SELLS OR

AND

DELIVERS

IT

AND

LATER

THE

SELLER

OR

GRANTOR

ACQUIRES

TITLE

THERETO?

When a person who is not the owner of a thing sells or alienates and delivers it, and later the seller or grantor acquires title thereto, such title passes by operation of law to the buyer or grantee (Article 1434). WHAT

IS THE EFFECT IF A PERSON IN REPRESENTATION OF ANOTHER SELLS OR

ALIENATES A THING VIZ A VIS THE BUYER OR GRANTEE?

If a person in representation of another sells or alienates a thing, the former cannot subsequently set up his own title as against the buyer or grantee (Article 1435). CAN

A LESSEE OR BAILEE ASSERT TITLE TO THE THING LEASED OR RECEIVED?

A lessee or a bailee is estopped from asserting title to the thing leased or received, as against the lessor or bailor (Article 1436). WHO

ARE THE PERSONS BOUND BY ESTOPPEL?

Estoppel is effective only as between the parties thereto or their successors-in-interest (Article 1439). TITLE V TRUSTS (N) CHAPTER 1 GENERAL PROVISIONS DEFINE

TRUST.

Trust may be defined as the legal relationship between one person having an equitable ownership over a certain property and another having the legal title thereto. WHO

ARE THE PARTIES TO A TRUST?

A person who establishes a trust is called the trustor (or settler); one in whom confidence is reposed as regards the property for the benefit of another person is known as the trustee (he holds the property in trust for the benefit of another); and the person for whose benefit the trust has been created is referred to as the beneficiary or

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cestui que trust (Article 1440). The trustor may at the same time be the beneficiary. GIVE

AND DEFINE THE DIFFERENT KIND OF TRUSTS.

Trusts are either express or implied. EXPRESS parties.

TRUSTS

are created by the intention of the trustor or of the

IMPLIED TRUSTS come into being by operation of law (Article 1441). They are those which, without being expressed, are deducible from the nature of the transaction as matters of intent, or which are superinduced on the transaction by operation of law as matters of equity, independently of the particular intention of the parties. They are ordinarily subdivided into resulting and constructive trusts. Implied trusts may be resulting or constructive. A RESULTING TRUST (bare or passive trust), in its more restricted sense, is a trust raised by implication of law and presumed always to have been contemplated by the parties, the intention as to which is to be found in the nature of the transaction, but not expressed in the deed or instrument of conveyance. A CONSTRUCTIVE TRUST, in its more restricted sense, as contradistinguished from a resulting trust, is a trust not created by words, either expressly or impliedly evincing a direct intention to create a trust, but by the construction of equity in order to satisfy the demands of justice. If a person obtains legal title to property by fraud or concealment, courts of equity will impress upon the title a so-called constructive trust in favor of the defrauded party (Ramos vs. Ramos, 61 SCRA 284). A constructive trust is not, therefore, a trust in the technical sense (Article 1456). DISTINGUISH

BETWEEN EXPRESS TRUST AND IMPLIED TRUST.

Express trust and implied trust may be distinguished from each other in the following ways: a) Express trust is one created by the intention of the trustor or of the parties, while an implied trust is one that comes into being by operation of law. b) Express trusts are those created by the direct and positive acts of the parties, by some writing, or deed, or will, or by words evidencing an intention to create a trust. On the other hand, implied trusts are those which, without being expressed, are deducible from the

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nature of the transaction by operation of law as matters of equity, independently of the particular intention of the parties. c) Thus, if intent to establish a trust is clear, the trust is express; if the intent to establish a trust is to be taken from the circumstances or other matters indicative of such intent, then the trust is implied (Cuaycong vs. Cuaycong, 21 SCRA 1192). d) No express trust concerning an immovable or any interest therein may be proved by parol evidence (Article 1443), while the existence of an implied trust may be proved by parol evidence. e) Laches and prescription do not constitute a bar to enforce an express trust, at least while the trustee does not openly repudiate the trust, and make known such repudiation to the beneficiary, while laches and prescription may constitute a bar to enforce an implied trust, and no repudiation is required unless there is a concealment of the facts giving rise to the trust (Fabian vs. Fabian, 21 SCRA 213). WHAT

ARE THE CHARACTERISTICS OF TRUST?

a. It is a fiduciary relationship. b. It is created by law or by agreement. c. It is one where the legal title is held by one, and the equitable title or beneficial title is held by another. HOW

IS TRUST DISTINGUISHED FROM STIPULATION POUR AUTRUI?

a. A trust may exist because of a legal provision or because of an agreement; a stipulation pour autrui can arise only in the case of contracts. b. A trust refers to specific property; a stipulation pour autrui refers to specific property or to other things. CHAPTER 2 EXPRESS TRUSTS WHAT

ARE THE FORMALITIES OF EXPRESS TRUSTS?

No express trusts concerning an immovable or any interest therein may be proved by parol evidence (Article 1443). Therefore: a. The requirement that the express trust be in writing is only for enforceability, not for validity between the parties. Hence, this Article may by analogy be included under the Statute of Frauds. b. By implication, for a trust over personal property, an oral agreement is valid and enforceable between the parties.

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c. Regarding third persons, the trust must be in a public instrument and registered in the Registry of Property, if it concerns real property. HOW

IS AN EXPRESS TRUST CREATED?

No particular words are required for the creation of an express trust, it being sufficient that a trust is clearly intended (Article 1444). An express trust is therefore created: a. By conveyance to the trustee by an act inter vivos or mortis causa (as in a will). b. By admission of the trustee that he holds the property only as trustee. WHAT

IS

THE

EFFECT

OF

THE

EXPRESS

TRUST

IF

THE

TRUSTEE

APPOINTED

DECLINES THE DESIGNATION?

No trust shall fail because the trustee appointed declines the designation, unless the contrary should appear in the instrument constituting the trust. (Article 1445) WHAT

IS REQUIRED IN ORDER TO CREATE AN EXPRESS TRUST?

Acceptance by the beneficiary is necessary. Nevertheless, if the trust imposes no onerous condition upon the beneficiary, his acceptance shall be presumed, if there is no proof to the contrary. (Article 1446) HOW a. b. c. d. e. f. g. h.

ARE EXPRESS TRUSTS ENDED?

Mutual agreement by all the parties Expiration of the term Fulfillment of the resolutory condition Rescission or annulment (as in contracts) Loss of the subject matter of the trust Order of the court Merger Accomplishment of the purpose of the trust CHAPTER 3 IMPLIED TRUSTS

WHAT ARE EXAMPLES OF RESULTING TRUSTS? a) There is an implied trust when property is sold, and the legal estate is granted to one party but the price is paid by another for the

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b)

c) d)

e)

purpose of having the beneficial interest of the property. The former is the trustee, while the latter is the beneficiary. However, if the person to whom the title is conveyed is a child, legitimate or illegitimate, of the one paying the price of the sale, no trust is implied by law, it being disputably presumed that there is a gift in favor of the child. (Article 1448) There is also an implied trust when a donation is made to a person but it appears that although the legal estate is transmitted to the donee, he nevertheless is either to have no beneficial interest or only a part thereof. (Article 1449) When land passes by succession to any person and he causes the legal title to be put in the name of another, a trust is established by implication of law for the benefit of the true owner. (Article 1451) If two or more persons agree to purchase property and by common consent the legal title is taken in the name of one of them for the benefit of all, a trust is created by force of law in favor of the others in proportion to the interest of each. (Article 1452) When property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to another or the grantor, there is an implied trust in favor of the person whose benefit is contemplated. (Article 1453) WHAT

IS AN EXAMPLE OF CONSTRUCTIVE TRUST?

a. If the price of a sale of property is loaned or paid by one person for the benefit of another and the conveyance is made to the lender or payor to secure the payment of the debt, a trust arises by operation of law in favor of the person to whom the money is loaned or for whom it is paid. The latter may redeem the property and compel a conveyance thereof to him. (Article 1450) b. If an absolute conveyance of property is made in order to secure the performance of an obligation of the grantor toward the grantee, a trust by virtue of law is established. If the fulfillment of the obligation is offered by the grantor when it becomes due, he may demand the reconveyance of the property to him. (Article 1454) c. When any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the purchase of property and causes the conveyance to be made to him or to a third person, a trust is established by operation of law in favor of the person to whom the funds belong. (Article 1455) d. If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes. (Article 1456)

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WHAT

IS THE PERIOD OF PRESCRIPTION OF AN ACTION FOR RECONVEYANCE OF

REAL PROPERTY BASED ON IMPLIED TRUST?

It depends: a) If the action for reconveyance involves the annulment of a voidable contract which became the basis for the fraudulent registration of the subject property, then the period of prescription is 4 years from the discovery of the fraud. This finds codal support in Article 1391, par. 4 of the Civil Code (Gerona vs. De Guzman, 11 SCRA 153; Fabian vs. Fabian, 22 SCRA 231; Carantes vs. Court of Appeals, 76 SCRA 514; Alarcon vs. Bidin, 120 SCRA 390). b) If the action does not involve the annulment of a contract, but there was fraud in the registration of the subject property, then the period of prescription is 10 years from the discovery of the fraud. This finds codal support in Article 1144, No. 2 (Bueno vs. Reyes, 27 SCRA 1179; Varsity Hills, Inc. vs. Navarro, 43 SCRA 503; Escay vs. Court of Appeals, 61 SCRA 360; Jaramil vs. Court of Appeals, 78 SCRA 420; Vda. De Nacalaban vs. Court of Appeals, 80 SCRA 428; Duque vs. Domingo, 80 SCRA 654). c) If the action involves the declaration of nullity or inexistence of a void or inexistent contract which became the basis for the fraudulent registration of the subject property, then the action is imprescriptible. This finds codal support in Article 1410 (Article Tongoy vs. Court of Appeals, 123 SCRA 718). d) If the action for reconveyance is in reality an action to quiet title and the legitimate owner of the subject property which was fraudulently registered in the name of another had always been in possession thereof so that the constructive notice rule cannot be applied, then the action is imprescriptible (Caragay-Lagno vs. Court of Appeals, 133 SCRA 718). CAN

A TRUSTEE ACQUIRE ABSOLUTE OWNERSHIP OVER THE PROPERTY HELD IN

TRUST BY ACQUISITIVE PRESCRIPTION?

Whether the trust is express or implied, as a general rule, the trustee cannot acquire absolute ownership over the trust by acquisitive prescription. However, if (1) he repudiates the right of the beneficiary; and (2) such act of repudiation is brought to the knowledge of the beneficiary, and (3) the evidence thereon is clear and conclusive, he may be able to acquire absolute ownership over the trust but only (4) after the lapse of the period fixed by law. HOW

MAY IMPLIED TRUST BE PROVED?

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An implied trust may be proved by oral evidence. (Article 1457)

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